Higher price & cost volatility; mitigating the cost effects of the current inflationary environment.

The following content was originally published April 2022 on IBM’s Category Insights Newsletter. 

The volatility of the current market has made the construction sector extremely skittish. 

In February of 2022, the Association of General Contractors published a Construction Inflation Alert wherein they cite record cost increases and reported many contractors “refusing to commit to pricing until time of shipment”. 

Price swings of 31% in the lumber market, 20% in aluminum, 31% in steel, and 97% in copper all within a period of 1 month to 1 year have made quoting the cost of materials a huge gamble.

Material volatility coupled with ever increasing labor costs, have made navigating the current market extremely difficult. 

Postponement of work

Strategies for mitigation of these extreme price swings must include a word on postponement of work.

Companies able to postpone or delay work may be well-served in doing so.  This option is especially compelling in light of the Russian invasion of Ukraine which will serve only to create even greater cost increases and fluctuations.

If the Russian conflict ends relatively soon and the world returns to work, all of this volatility will stabilize and material prices can be expected to come down, but that statement is extremely fragile.

According to an article published in January 2022 in the Washington Post, Vladimir Putin began mobilizing troops towards Ukraine in March of 2021. 

At the time of this writing, the Russian army seems undeterred and it is unlikely that Putin would invest such time and money only to turn back after a short invasion.

However, even if the Ukrainian/Russian conflict were to resolve quickly, It’s unlikely that supply chain constraints will resolve quickly. 

According to an article by Barrons (published on March 1, 2022) even after COVID restrictions are lifted, “normal supply-chain operations will take at least a couple of years to restore.”

In short, postponement of work may be the best alternative to avoiding cost volatility and inflation, but only if the postponement period can be for 1 year or more as we expect to be in the current environment through 2024.

Contracting Models

Alternatively, if postponing work is not possible, collaborative contracting models are a great option for dealing with market volatility.

Collaborative contracts allow for flexible pricing while creating opportunities for collaboration between parties.  These contract models are typically reimbursable cost contracts which rely on rate-based solicitations.

There are a number of ways of executing collaborative contracts.  Successful deployment of a collaborative contract is predicated on creating early engagement with cost transparency.

Some of the more advanced versions of collaborative contract require both parties to waive liabilities or even to form Single Purpose Entities (SPE’s), but these provisions are too elaborate for a typical Corporate Client. 

Fortune 500’s can still benefit from collaborative contracts while utilizing more conventional means of contracting.  These forms of agreement require careful crafting with provisions that neutralize risk for both parties.  ❖

You can download a pdf of the D&C portion of IBM’s Category Newsletter by clicking the link below:

Get the Newsletter

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.