How Does Inflation Affect the Construction Industry

How does Inflation Affect Construction Industry

This summer, inflation reached forty-year highs.

The pandemic, combined with decades of lax monetary policy, created an economic situation where too much money is chasing too few goods and services. And now, the negative downstream effects of inflation are affecting nearly every industry in the country—the construction industry included.

That said, how is inflation shifting the landscape of commercial and residential construction on both a macro and micro scale?

Read on as we discuss inflations' impact on construction going into 2023.

Expect Rising Construction Costs

The most apparent issue with inflation comes down to rising costs. Put simply, it will likely be more expensive to build or renovate than compared to previous years.

While costs have risen across the board, three specific cost increases—directly related to inflation—will likely have the largest impact on prices.

#1 An Increase in Construction Material Prices

For most projects, materials will account for roughly 30%–60% of the overall costs. Rising prices of materials tend to eat into already thin project margins.

According to the Bureau of Labor Statistics (BLS) Producer Price Index of 2022, building materials prices leaped 20.4% YoY, totaling 33% since the beginning of the pandemic.

For example, softwood lumber and steel product prices have doubled, gypsum products are 20.8% higher YoY, and ready-mix concrete is 10% more expensive than in 2021.

But why have these materials' prices increased so rapidly?

It all comes down to the relationship between inflation, supply chains, and foreign dependence on construction materials. As Andy Choi from Marcum Accountants and Advisors notes

“The U.S. construction industry is heavily dependent on foreign construction materials such as steel and stone. Because COVID-19 is a global pandemic, it caused closures and delays at international factories that produce these materials. As a result, the supply of construction materials dramatically decreased in the U.S, and what remained became much more expensive.”

Factors such as these can significantly increase contractors’ exposure to liquidation and threaten a project’s quality and delivery schedule.

#2 Increase in Indirect Construction Inputs

Inflation is a global issue. As such, its ramifications also affect the energy market.

Following the oil production collapse of 2020, demand began to bounce back, but production lagged. Lack of supply with increased demand led to skyrocketing crude oil prices. Even before Putin’s invasion of Ukraine, gas had climbed to a $3.41 national average. But the ongoing, year-long war was the proverbial fuel on the inflationary fire, sending prices to historic levels.

The construction material supply chain issues discussed above have only been exasperated by inflationary energy costs. With the price of diesel hitting all-time highs of $5.16 a gallon, the increased cost to transport the goods has also been passed on to the consumer.

But it’s not just transport that’s impacted by rising fuel costs.

It’s also more expensive to rent, own, and run heavy machinery and power the energy-intensive machines that make vital construction materials like bricks.

#3 Increase in Labor Costs

Recent years also induced upheaval in the labor market.

Labor economists dubbed 2022 the “Great Resignation,” with nearly one in four Americans leaving their job. When surveyed, the most common complaints were:

  • Low pay

  • No opportunity for advancements

  • Feeling disrespected

  • Lack of benefits

The construction industry didn’t escape this trend unscathed.

On average, nearly 200,000 construction workers have left their jobs each year since 2021, which has contributed to an already ongoing labor shortage in the industry. This shortage of highly-skilled workers, combined with increased demand for their services, has led to rising labor costs in the construction industry.

Inflation also directly impacts workers, as it effectively reduces the value of their money.

As consumer prices for essential goods and services like food, fuel, housing, and energy climb, workers may feel the need to demand higher pay to keep up with the increased cost of living, thus creating a cycle of rising labor costs.

Build Smart With MFS Construction

Inflationary pressures have made construction a more costly and risky undertaking than in previous decades. Although the FED has been increasing interest rates to try and tamp down inflation, these forces are expected to continue in some shape and form throughout 2023.

If you have a construction project in the works, it’s important that you approach the process methodically and with realistic expectations on pricing and lead times.

To keep costs down and delivery schedules on time, you must partner with contractors who perform a proper cost analysis before bidding, embrace risk-sharing, and have the experience necessary to wade through these uncertain inflationary waters.

That’s where we can help. MFS Construction is a full-service general contracting and MBE/DBE-certified firm serving an array of clients. Our team can meet with you to plan, design, and build a project that is completed on time and within budget—no matter what is happening in the market.

To learn more about MFS Construction, contact us today.