Construction Cost Inflation Risks, Opportunities and Credit Implications
Inflationary impacts on labor, building materials and machinery, high energy prices and rising interest rates are pushing construction costs higher than forecast. This brings both risks and opportunities to construction companies and building materials providers.
Analysts will comment on the credit implications of inflation on all aspects of construction from the public or private sector owner, to the construction company, to the materials and machinery suppliers. Higher input prices raise costs for public and private developers and owners, but also present an opportunity for higher margins for suppliers and constructors. New projects have materially higher pricing and longer schedules compared to just a couple of years ago in order to account for the high risk procurement environment. This reduces the impact of new government funding that will increase demand in some sectors across the country, balancing a potential slowdown in new private investment.
- Labor and materials cost escalation may continue longer than headline inflation
- Project cost estimating risks increase construction company project selectivity and margins
- Risks are not uniform across regions or by product at all times, requiring active management
- New projects include more cost risk sharing versus fixed price risk transfer as in the past
- Materials and machinery suppliers balance increased pricing power with customer relationships
- Government’s focus on infrastructure investment will continue to drive demand, but new funding will be less impactful owing to higher costs and longer development timelines
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