inflation-factors-construction
Even though impacts of the COVID-19 pandemic have begun to stabilize, new global events are compounding supply and demand and further disrupting certain industries worldwide. The most recent event—the Russian invasion of the Ukraine—has rocked the international stage, causing increased prices and supply and labor shortages in many different categories including the transportation, production, and distribution of materials.
 

These issues are building upon volatility that has been in the industry since the pandemic hit. The Covid-19 pandemic, storm intensity and natural disasters related to climate change, and now the Ukraine-Russian war have become widespread risk factors affecting rising costs of materials and labor in construction and engineering projects. 

According to McKinsey & Co., despite typical finance organizations spending about 10% more time and resources on financial planning and analysis (FP&A) activities than it did a decade ago, teams and projects are still finding themselves a step behind. They elaborate that several trends have changed the playing field, referencing the increasing frequency and magnitude of economic volatility have put more pressure on traditional FP&A processes and teams, which are geared toward quarterly and annual cycles rather than real-time challenges. The same goes for construction and engineering firms’ projects and programs. 

The increase in prices is impacting seemingly everyone from individual consumers to multimillion-dollar companies, creating budgeting concerns for unanticipated prices. With significantly inflated prices for materials and supplies, construction sites are finding it increasingly more difficult to remain on budget. 

Construction Industry Impacted by Russian Invasion of Ukraine 

Russia invading Ukraine has impacted supply and demand for many vital building materials and supplies. Big ticket items used in construction were already more difficult to source and more expensive than pre-Covid years, but the Russian invasion has further exacerbated costs and supply availability of materials like aluminum, copper wire, oil, and gas. The prices are increasing, and the supply is decreasing due to sanctions and other foreign policy that is tightening the reins on Russian imports.  

Fewer materials available on the market is spiking pricing and an overall dependency on an international scale; construction across the globe is affected.  

How Climate Change is Impacting Construction Projects and Organizations 

More and more natural disasters and climate issues are negatively affecting projects’ and programs’ budgets and schedules. In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed a new climate rule in which publicly traded companies would have to report on climate-related risks in their reports. 

Greenhouse gases and carbon emissions, as well as metrics around the costs of moving towards renewable energy sources, as well as the risks related to the physical impact of storms, drought, and higher temperatures caused by global warming will become mandated if it passes. 

How ARES PRISM Helps Keep Construction Projects Keep Up with Inflation 

ARES PRISM project controls software has features that can help how budgets for new projects are impacted. PRISM Estimating software can help budget for new projects through its pricing databases for labor, materials, and process equipment. The pricing databases can easily be factored to address the latest price increases. The cost and carbon estimating and tracking software also provides features to predict future prices based on regression analysis. Unfortunately, a real threat to the industry is that these increased prices could result in some projects being cancelled or postponed. As a cost and carbon tool, ARES PRISM produces estimates for capital construction and carbon values, as well as whole-life estimates for design, operations and maintenance, decommissions, and sequestration. 

The PRISM G2 Cost Management module allows project managers to import approved project estimates data for setting up more accurate Control Account budgets. This may affect the funding provided to projects and how PRISM’s funding features can be used to manage that process. 

ARES PRISM Procurement Module manages the procurement process that includes the ability to compare prices of materials and equipment from multiple bidders and awarding purchase orders. The Procurement planning features help plan for shortages of materials and equipment requiring greater “lead” times, resulting in longer durations for completing projects, which would delay future revenues.  

The ARES PRISM Shipping features is available in our procurement module to manage and expedite the multiple deliveries per Purchase Order of materials and process equipment. 

ARES PRISM’s built-in change management helps identify potential changes to budgets and forecasts due to price increases. These potential changes could result in approved changes and an audit trail showing who the reviewers and approvers are. PRISM’s contingency drawdown features to track price changes to budgets and forecasts. 

ARES PRISM Software is the perfect solution to all the concerns that are impacting the construction industry. From budgeting concerns to predicting future forecasts in increased prices of materials and supplies, ARES PRISM Software wholly manages project costs to keep track of all budgeting needs whether prices nicely match the original project estimate or have wildly inflated since then.