Every home and business has been hit by inflation. With rising costs across every industry, construction is no different. Our industry has been hit with high inflation rates, leading to various cost challenges in the sector. This has a knock-on effect on your cashflow and how you run your business.
In this blog, we’ll dive into the key areas of your business that inflation impacts the most: labour, material and plant expenses.
Labour Expenses
Inflation impacts everything, including the cost of living. As prices for everyday goods increase, your employees will naturally seek higher wages to keep up with their rising living expenses. Supply and demand may mean you have fewer block layers for example, but you may have more work, which means demand outweighs supply, leading to the price of a block layer going up.
It’s not just your on-site labour costs that increase—your administrative staff and higher-paid employees also feel the pinch. When a weekly grocery bill goes from €150 to €195, they may come to you asking for pay rises. This leaves you with two options:
- Absorb the cost: This means reducing your profitability and potentially losing your competitive edge.
- Pass the cost on to clients: You can raise your rates to maintain profitability, but this risks pricing you out of the market.
Material Costs
One of the main effects of inflation on construction is rising materials costs. From timber to steel to concrete, materials are becoming more expensive by the day. Many materials are sourced globally, meaning companies are either forced to absorb these rising costs or pass them on to clients.
For example, you might price timber at €400 per cubic meter when you start a project. Then, by the time you reach the roofing stage four months later, that timber costs €500 per cubic meter. This €100 increase eats into your profitability unless you’ve accounted for it upfront. The challenge for estimators is that you might lose the tender altogether if you overestimate.
Plant Expenses
The cost of hiring or purchasing machinery is also impacted by inflation and interest rates play a key role in this. Inflation and interest rates are closely linked—when inflation rises, so do interest rates influenced by the European Central Bank rates.
Just look at what happened between 2022 and 2024 in Europe when inflation soared and interest rates followed suit.
Higher interest rates mean variable machinery loans or business asset mortgages become more expensive. This can significantly increase your overhead costs and put pressure on your bottom line.
Overheads and Preliminaries
It’s not just the obvious costs like labour, materials and plant expenses that are impacted. Your everyday overheads also rise with inflation. Utility costs, like electricity, water and fuel, climb higher, along with insurance rates, stationery and vehicle expenses. Even the small things like oil for machinery or phone bills become more expensive, further squeezing your margins.
Project Delays and Uncertainty
Inflation also has the power to cause project delays. Governments or private clients may put off starting projects when costs become too high. If a project gets delayed, it could be because the cost of raw materials or labour is deemed too risky to take on.
Estimators need to stay on top of supply chain changes, but predicting future price hikes is challenging. We already saw it during COVID-19. If you predict too high, you might lose the tender. If you predict too low, you risk a serious hit to your profitability once inflation increases.
Final Thoughts
Inflation has a major impact on all areas of business. From labour and material costs to plant and overhead expenses, every aspect of your contracting business feels the sting of increased costs.
So how do you navigate it? The key is to stay informed, adjust your pricing strategies where needed and be ready to pass on costs when necessary. If you need support in calculating your costs and keeping up with rising rates, contact us today at Carroll Estimating to learn how our team of professional QS and Estimators can support you.