What about inflation?

How inflation is impacting on the construction industry

There is a lot of talk about inflation at the moment and concerns over price rises. This is affecting individuals and businesses alike, with consumer prices in the EU jumping 7.8% in a year. Spain’s electricity prices have skyrocketed to an all-time high, but thankfully are now seem to be coming down and undershot the 9% estimate in a Bloomberg survey.

According to the National Statistics Institute, inflation in Spain was at a near 40-year high of 9.8% in March, but has come down to 8.7% in May. Some experts are predicting that this is close to the peak and that it should decline in the second half of the year, but the central bank has doubled its inflation projections for this year and the next, so all is not clear.

Businesses are feeling the pressure even more, as their product costs and energy costs have increased significantly. Price hikes have been seen in electricity, fuel and food, among others. In an industry like construction, where fixed price contracts are common, this is having a big impact on the profitability of these companies.

A study published in Science Direct revealed that “the inflation rate is neglected in most of the construction projects economics and budgeting, that causes the project cost to overrun as the building materials prices, labour wages, and machinery hire rates are changing annually.”

Issues with the construction industry is not simply bad news for the developers and the end users waiting for their completed build, but it is also one of the main sources of economic growth and development in the modern world and generates millions of jobs. In the EU it contributes 1700 billion USD to the GDP and therefore if inflation damages the industry, and job losses are caused, this will have a negative knock-on effect on the economy as a whole.

They explain that “inflation plays a vital role in the price increase of materials, labour, and machinery, which results in deviation of the initial and the final cost of the project. Construction costs are volatile, and the prices of materials and other costs are continuously fluctuating, creating volatility in economic growth.”

The paper concludes by suggesting that to avoid exceeding the agreed budget we need to develop a technique to factor in inflation during the budgeting process. We would agree that if inflation is due to remain high and indeed increase further, this must be accounted for to enable an accurate budget to be set. This is also something to be studied when undertaking the project feasibility study at the beginning of the project, to ensure the numbers stack up.

Inflation and the construction industry on the Costa del Sol

Unfortunately, the construction industry was already under pressure due to COVID, as the three-month lockdown caused a shortage of materials, and labour supply was affected by teams coming down with the coronavirus and therefore not being able to work. Find out how COVID impacted construction on the Costa del Sol on our blog.

Now they are really suffering from the increase in material costs, as well as the continued material shortages. Inflation seems to be the final straw for many of these projects and we are seeing that some developers want to halt construction temporarily while inflation is brought under control. However, contracts which penalise late finishing make this difficult to achieve. Unfortunately, we have to accept that there will be delays and overspending caused by inflation and the impact on the supply chain caused by the COVID pandemic and the war in Ukraine.

CEO of MDCI Mark Lawson comments, “Now, even more than ever, it is vitally important to conceive an effective strategy and plan for your project before calculating your cashflow requirements. These must be based on detailed strategic analysis and a realistic cost plan, with knowledge of the local market pricing. I would advise you take inflation into consideration, particularly on a complex and long build time, and factor this in to your contingency fund.

I was lucky enough to be taught these strategies by the very best in the market, learning from the Vice President of Resort Development at Marriott early on in my career. With this training and 23 years of experience of working in Spain, we have the skills to be able to advise our clients. We ensure they are aware of the ongoing costs of their developments and the realities of what you should expect to pay. Together we are able to put together accurate cost projections and account for every eventuality – including inflation.”

Controlling costs with Project Management

One of the best things you can do to control costs on your construction project is to hire a dedicated project manager. They will scrutinize every cost, minimise delays through good organization and planning, and establish watertight contracts to protect the client. All of these things can yield significant savings, pay for itself many times over and reduce the impact of inflation on your bottom line. Contact MDCI to find out how we can help you save money through professional project management.

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