Material Escalation – The adverse impacts and how to manage these risks

Statistics South Africa has reported that the prices of materials used in the South African construction sector have increased by 13.2% year-on-year in February 2022 from an annual increase of 14.5% in January 2022.

In recent engagements with our members, it has been established that certain baskets of material prices have escalated drastically and have affected the profitability of projects.  Material price increases have adversely impacted numerous projects.

In the current economic climate, adverse material price impacts are expected, and contractors are advised to take steps to mitigate against them. The various factors affecting material prices include, inter alia, rising energy costs, transportation costs, supply and demand, crude oil price, exchange rates, import costs, inflation and raw materials costs.

Some of the steps that contractors may take are the following:

• Value engineering: The goal of value engineering is to provide the highest construction value at the lowest cost. Encourage the project team to hold a value engineering workshop at the start of the project through a study of alternative design concepts, materials and construction methods without compromising the functional and value objectives of your client.
• Prefabrication: Explore the option of prefabrication. The results may show a lower cost to transport some parts from a manufacturing company than to manufacture from raw materials. An example is a prefabricated wall.
• Material wastage: Material wastage contributes to the cost of sales on a project. Implement a lean construction model within the company or consider implementing a bill of materials to support the bill of quantities so that the correct quantities of material are purchased on a project.
• Material alternatives: This is part of the value engineering chain. Explore material alternatives and remember to obtain approval from the client or the project manager when implementing this, especially if the material proposed to be replaced has been included in the project specifications.
• Buying strategy: Implement a buying strategy at the start of a project by buying volatile commodities early and planning ahead. Dealing with the purchase of materials in advance as opposed to the last minute allows the contractor time to shop around and to buy bulk materials needed for the project, allowing for leverage to negotiate further discounts. This is cash flow dependent and the propensity of scope change on the particular project should also be taken into consideration.
• Consider negotiating a shared risk contract strategy with regard to escalation, for example, a PC sum for unforeseen escalation which caps the client’s risk to the amount of the PC sum.
• The contractor could also consider negotiating an advance payment on materials which could be used to purchase materials upfront, especially those which are susceptible to price volatility.
• Consider certain qualifications for quotes and or contracts based on material price increases.

A proactive stance is required to deal with these aspects. Should you have any further queries in this regard, please contact Master Builders KwaZulu-Natal.

Bilaal Dawood

Head: Membership Services