In any construction or design project, you’ll encounter a series of price rises that can seem unpredictable. These price rises are often the result of a mix of known factors (things we expect but can't always control) and unknown factors (things that hit us unexpectedly). Understanding what might cause these price changes and how to prepare for them can make a significant difference in the financial success of your project.
What Are Known Unknowns?
In the world of project pricing, “known unknowns” refers to factors that we know could potentially impact costs, but we can’t predict exactly when or how they will do so. These factors can range from material price fluctuations to changes in labour availability or regulations. The best way to prepare for these unknowns is to plan, anticipate, and stay flexible.
1. Material Costs: The Supply Chain Conundrum
Material costs can fluctuate due to various factors, including:
- Supply chain disruptions: A global shortage of a particular material or component could lead to significant price increases. While it might be difficult to predict when such disruptions will happen, the potential for them is always there.
- Demand spikes: As demand for certain materials rises due to new trends or market needs, prices often follow suit. It’s important to stay informed about the broader market, especially if your project relies on trending materials.
- Shipping costs: International trade can add unpredictable costs, especially if tariffs or freight charges increase unexpectedly.
How to Mitigate the Risk
- Use contingency budgeting: Setting aside a portion of your project budget for material price rises is a wise strategy. A typical contingency is around 5-10% of the overall project cost.
- Establish long-term relationships with suppliers: Negotiating fixed prices or locked-in quotes can help protect your project from sudden price hikes.
2. Labour Costs: The Rising Wage Dilemma
Labour costs are another area where price increases are often due to "known unknowns." The availability of skilled labour can fluctuate due to factors like:
- Seasonal fluctuations: During peak seasons, demand for skilled labour rises, pushing prices higher. Conversely, in off-peak seasons, a shortage of workers might occur.
- Union agreements: If a union strikes or renegotiates wages, labour costs can rise unexpectedly.
- Health and safety regulations: New laws or stricter enforcement of existing ones can increase labour costs, as companies are forced to invest in additional training or equipment.
How to Mitigate the Risk
- Labour forecasting: Keeping a close eye on the labour market and anticipating potential skill shortages can help you plan for higher costs.
- Negotiate with contractors: Locking in rates for labour at the beginning of the project can protect you from sudden cost hikes.
3. Regulatory Changes: The Government’s Influence on Your Project
Government regulations are one of the most unpredictable elements in construction. Changes in zoning laws, environmental regulations, or health and safety standards can all lead to unexpected cost increases. For instance:
- Environmental laws: Stricter regulations for sustainable building practices may require more expensive materials or processes.
- Tax incentives or penalties: New incentives could reduce your overall costs, while penalties for non-compliance could increase them.
How to Mitigate the Risk
- Stay informed: Regularly review industry news and stay connected with professional organizations that monitor changes in regulations.
- Flexible design: Allowing room for design adjustments helps you adapt to changing regulatory environments without derailing the project.
Conclusion
Project price rises are inevitable, but by understanding and anticipating the known unknowns, you can take steps to protect your budget and keep your project on track. With proper planning, flexibility, and proactive strategies, you’ll be better equipped to navigate the financial challenges that come with any project.
By Kevin Knox