Combatting the Cost of Inflation, One Project at a Time

by Balfour Beatty

In the past year, construction owners have increasingly felt the impacts of the highest rates of inflation since 2008. While the reasons for the current inflationary period are complicated and multifaceted—stemming from tariffs, the coronavirus pandemic, global supply chain disruption, instability in the financial markets, an influx of consumer spending, government stimulus, and more—construction is inarguably one of the hardest hit sectors. 

To combat inflation and provide owners with greater cost certainty, Balfour Beatty is leveraging the expertise of our preconstruction and operations teams to collaborate with owners, architects, design teams, and trade partners to identify solutions early in the design process.

How Supply Chain Disruption is Contributing to Increased Costs

The coronavirus pandemic created a global workforce shortage that has disrupted supply chain manufacturing and transport of construction materials, resulting in widespread material scarcity and shipping delays. 

Balfour Beatty is navigating exceptionally long and unprecedented lead times on materials such as roofing, paint, exterior gypsum sheathing, rebar, PVC pipe, generators, HVAC equipment, and electrical components—with some items delayed more than a year. Suppliers have responded to the demand for materials by escalating costs. At Balfour Beatty, we observed a 28% increase in construction material pricing in 2021, with impacts on the total cost of construction ranging from 15% to 18%.

Under normal circumstances, trade partners develop project bid pricing based on the scheduled delivery of materials to the job site. They do not buy the materials at the time of the bid. In the current climate, trades cannot accurately project pricing and are struggling to confirm delivery times. Left unchecked, trades are escalating their pricing to insulate against risk.

A Proactive Approach and Early Planning

One of Balfour Beatty’s longstanding preconstruction best practices is working early in the conceptual phase of a project to collaborate with the owner, architects, designers, and trade partners. We add value to the design process by leveraging our market knowledge to inform the design on material selection, including potential cost escalation issues and long-lead delivery planning. 

For projects such as multifamily developments, in which meeting schedule deadlines has an immediate impact on owner profitability from unit leases or sales, delays in appliances or other critical equipment can be devastating. For decades, Balfour Beatty’s holistic, early planning preconstruction approach has equipped our clients and design partners with transparent information about current market conditions which in turn helps to inform better project decision-making, accurate pricing, and efficient scheduling. Over the past year, our preconstruction teams built on these best practices by also harnessing the power of alternative procurement and contracting methods to provide clients and trade partners with a significant advantage in managing cost escalation. 

To help our clients understand current pricing and trends, Balfour Beatty maintains a national Materials & Commodities Price Index that serves as a key cost forecasting tool for transparent project communication. Balfour Beatty preconstruction teams across the nation also utilize our industry-leading estimating technology, DESTINI Estimator, to compare current costs on Balfour Beatty bids throughout the U.S. 

“DESTINI helps our preconstruction departments compare information across diverse markets sectors and geographies,” said Eric Stenman, president, of Balfour Beatty US. “As they analyze the data, our preconstruction experts are constantly communicating with one another so that we can keep our fingers on the pulse of the market and relay information coming from our trade partners and suppliers.”

During the design phase, we seek to understand owners’ unique goals or circumstances driving project completion dates. Based on desired outcomes, our teams provide detailed and accurate cost escalation projections to guide and empower decision-making. By engaging design partners before we bid out projects, our teams also ensure trade partners base their estimates upon the most complete drawings—thereby reducing or, in many instances, eliminating the cost impacts of design modifications during construction. 

“On a recent adaptive reuse project, we watched bid pricing rise seven to ten percent with each new drawing design release,” says Amar Vel, senior vice president of preconstruction for Balfour Beatty in Atlanta, Georgia. “The owner accepted our recommendation to stop the bid solicitation process at 100% design development (DDs) and let the architect finish the drawings with all accepted value engineering ideas before procurement. This allowed us to provide complete information to our trade partners and lock inaccurate pricing.”

Balfour Beatty has always depended on strong trade partner and supplier relationships to help understand material costs and delivery times as well as the local, national, and global trends they are actively tracking. In response to inflation, we have further solidified the cost certainty we offer clients by aligning additional preconstruction and operations staff with trade partners during the planning phase. By seeking to understand which aspects of a project scope present concern, the maximum length of time pricing can be held, and whether that pricing includes escalation forecasts, we are well-positioned to strategically advise our clients throughout the entire project lifecycle.

Through alternative tactics such as early buy-out, we engage with trade partners to mitigate their concerns. Early buying empowers our teams to negotiate better pricing much earlier in the project. This offers a significant benefit to smaller contractors because they are paid upfront for materials instead of waiting until installation.

“On the recent MiraCosta College Allied Health project, Balfour Beatty collaborated with the owner, architect, and trade partners to procure exterior gypsum sheathing, rebar, generators, HVAC equipment, and electrical components early and store them on-site in a bonded warehouse. This ensured the material was available precisely when needed,” says Landon McQuestion, preconstruction director for Balfour Beatty in Southern California.

More than ever before, early collaboration is the critical component in completing projects on schedule and avoiding cost escalation during construction. By collaborating with our owners, architects, designers, and trade partners and using alternative procurement and contracting methods, we are deploying custom and innovative solutions for each project while forging even stronger industry relationships. 

National Processes Create Greater Cost Surety and Stability

Balfour Beatty’s in-house equipment warehouse service provides access and secured pricing to equipment that is exceedingly difficult and expensive to procure, including surveying materials, scanners, forklifts, small tools, temporary power, temporary heat, and more. 

By supplementing outside rentals with internal equipment, Balfour Beatty helps control costs while ensuring that projects remain on schedule. In addition, our national procurement team works with major construction material and equipment suppliers to establish national pricing agreements. This empowers Balfour Beatty project teams across the U.S. to leverage our national presence and volume to further protect clients’ budgets.

Through Balfour Beatty’s national processes and platforms and our relationships, we are sharing knowledge and engaging with owners, design teams, trade partners, and suppliers to minimize the impacts of this inflationary period, provide value to our clients and deliver projects that improve the lives of the people in the communities in which we are privileged to work.