According to the Construction Industry Federation’s (CIF) most recent construction outlook survey, nine out of ten construction companies said they are unable to accept fixed pricing contracts. The major reasons mentioned were the significant rise in raw material costs and the increased employee turnover rate. Let’s examine this in a little more detail below.
Fixed-Price Contracts
A contract with a fixed price for goods or services is known as a fixed-price contract. A fixed-price agreement outlines the project’s terms and the cost of the goods or services. In the construction sector, fixed-price contracts are generally appointed in public sector projects.
Simply put, the government announces projects, and bids are then made by builders and construction firms. These bids and offers are then evaluated by government-appointed officials, and the best options are selected. The terms are then finalized and a fixed-price contract is signed.
These fixed-price contracts perform exceptionally when economic factors and other variables are stable. However, when these external factors are unstable, these contracts become obsolete. This can happen during times of inflation, price hikes, and in unstable labor markets.
Key Findings of the CIF Survey
There are several major challenges identified by the construction sector. They include the increased costs of raw materials (88%), access to skilled labor (72%), and fuel shortages (68%). Given below are some stats and findings from the survey conducted.
Rising Material Costs
- 91% expect a rise in construction material costs over the next 3 months
- 85% expect to see the price of construction projects rise over the same period
- 98% of construction companies reported an increase in the cost of raw materials over the last 3 months
The biggest problem mentioned by construction firms is the increasing cost of raw materials. The costs of raw materials are constantly increasing, and recently, within very short time spans. This makes it almost impossible to pre-quote the overall construction costs.
These increased raw material costs are also paired with material shortage issues. Even with increased prices, the supply of raw materials has still decreased. This further hinders the construction process and results in delays and losses. Some construction firms believe that these raw material shortages and hyperinflated prices are a result of the Ukraine war. These firms reported that the Ukraine war has massively distorted the construction supply chain.
Increased Employee Turnover Rate
- 40% reported increased employee turnover in the last three month
- 39% are expecting an increase in turnover within the next three months
The second biggest concern reported by construction firms is an increased employee turnover rate and skilled labor shortage. Shortage of skilled construction labor has always been an issue. The re-introduction of Project Labor Agreement (PLA) rules worsened this issue by disqualifying the appointments of non-unionized construction workers. It becomes extremely difficult to retain skilled employees in such a risky sector, and that problem is multiplied by an acute labor shortage.
Possible Remedies
- 89% of construction companies want the government to include a reasonable and effective price variation clause in public sector contracts
- 75% believe that attracting more women to work in the industry can help with the employee turnover and labor shortage issue
The immediate and most important change proposed by the heavy equipment firms surveyed is to include an effective price variation clause in contracts. This will help firms deal with issues like sudden price hikes and labor shortages. Governments and construction firms will have to join hands and work together in these unstable times to successfully complete projects.
Most construction firms also believe that to alleviate this labor shortage and turnover issue, long-term strategies should be appointed such as attracting more women to the construction site. Female workers in the construction workforce account for less than 9% of the total. The focus should be shifted toward attracting and retaining more female workers in the construction industry.