Inflation remains a global concern as the Federal Reserve considers easing interest rate hikes. For building owners and developers, inflation has been a persistent challenge long before the Federal Reserve's recent action. Large construction projects are inherently susceptible to fluctuations in materials and labor costs, and their timelines span several years, making accurate forecasting of expenses extremely complex. Unlike many industries, where price adjustments occur more frequently, the long timelines of construction projects make them particularly susceptible to inflation. Developments conceived during periods of low inflation may be completed years after costs have changed dramatically. Forward-thinking owners closely track the prices of the specific “basket of goods” required for their projects in different regions to supplement general indicators such as CPI.
Inflation has hit the construction industry especially hard. Supply chain disruptions caused by the COVID-19 pandemic have driven material prices to record highs. While some costs have since eased, they remain high compared to pre-pandemic levels. Additionally, the cost of labor for skilled tradesmen essential to commercial development has also risen.
As a result, owners, builders and developers often find that traditional cost formulas grossly underestimate the expenses they will actually incur. To mitigate this, they are turning to real-time price tracking technology. “Historically, developers and building owners have based cost estimates for their next project on previous construction data,” explains Chris Rangeza, global technology evangelist at Procore Technology. This once reliable approach no longer works when costs rise sharply. “Inflation data is updated quarterly, so it doesn't lend itself to accurate, up-to-date calculations,” he adds.
To combat this, smart project owners and managers are diligently collecting data from current jobs to refine their forecasts. Though conceptually simple, effective implementation requires multiple teams to continually update systems of record. “Integrating all project data is a big hurdle,” Lengieza points out, “because timesheets, material invoices, and job milestones are typically not centralized.” Moving from spreadsheets to integrated software allows owners to use real-time information from each active project to fine-tune forecasts for future projects. The software can also analyze this real-time data to identify potential bottlenecks, alert managers to materials exceeding budgeted prices, and suggest alternative suppliers or materials to mitigate cost increases.
Leveraging construction data has benefits beyond more accurate cost estimates. Purpose-built software solutions can help minimize construction errors and improve jobsite safety. To get the most benefit, all involved parties must be enthusiastic about using the software. Procore research shows that the average user reduces lost work days due to accidents by approximately 26% compared to the industry average. Even more impressive, the most active users achieve reductions of up to 40%.
Collaboration software also offers advantages over traditional methods by providing stakeholders with valuable on-the-job visibility. Lenders and investors can monitor progress closely, streamline audits, and distribute funds in a timely manner. Insurance companies are recognizing the value of data-driven insights and extending premium discounts in exchange for sharing information about job performance and workplace safety. This transparency streamlines communication with investors, building trust and accelerating funding for the next stage of development.
Construction projects are notoriously prone to budget overruns. Unforeseen issues inevitably arise, causing expenses to rise. Inflation can be difficult to predict, but it must always be considered. Developers are employing processes to account for inflation and derive actionable insights from ongoing work. These tasks require advanced software and teams dedicated to its effective use. Fortunately, the benefits of software adoption in commercial construction go far beyond mitigating inflation, including fewer accidents, streamlined investor communications, and reduced insurance costs. As inflation subsides and interest rates decline, technology that is reshaping development decision-making will continue to provide value for years to come.