Inflation and price escalation can seriously affect construction projects. How can it be dealt with effectively?
A project might be priced today, but by the time materials are ordered, labour is secured, and works are carried out, the actual cost may have changed significantly. For Quantity Surveyors, this creates a major challenge. How do you keep control of cost when prices are moving?
What Is Price Escalation?
Price escalation is when the cost of labour, materials, plant, fuel or subcontract packages increases after the original price has been agreed.
This can happen for several reasons, including:
- Material shortages
- Labour shortages
- Fuel increases
- Exchange rate changes
- Tariffs and import costs
- Supply chain disruption
- High demand in the market
- Global events affecting availability
In construction, even small percentage increases can have a big impact because projects often involve large quantities and tight margins.
Why It Matters
Inflation can create problems for everyone involved in a project. If you’re the client, it can mean the project becomes more expensive than expected. For the contractor, it can mean the tendered price no longer reflects the actual cost of delivery. For subcontractors and suppliers, it can create cash flow pressure and increase the risk of disputes.
If the risk is not properly dealt with, it can lead to:
- Claims
- Delays
- Contractual arguments
- Reduced quality
- Supply chain failure
- Projects becoming financially unviable
That is why cost control needs to start before the contract is even signed.
Strategy 1: Understand the Contract
The first step is to check how the contract deals with inflation. Some contracts are fixed price, meaning the contractor takes the risk of price increases. Other contracts may include fluctuation provisions or price adjustment mechanisms.
The QS should understand:
- Whether inflation is recoverable
- Which materials or costs are covered
- How price changes are calculated
- What evidence is required
- Whether notice provisions apply
- Whether the risk sits with the client or contractor
A common mistake is assuming inflation can be claimed later, when the contract does not actually allow it.
Strategy 2: Use Risk Allowances Properly
At tender stage, inflation risk should be considered properly.
This may include:
- Contingency allowances
- Provisional sums
- Risk registers
- Inflation forecasts
- Early procurement allowances
- Sensitivity analysis
The key is to be realistic.
Strategy 3: Early Procurement
One of the best ways to reduce inflation risk is to secure prices early.
This might include:
- Placing orders for long-lead materials
- Agreeing fixed prices with suppliers
- Using letters of intent where appropriate
- Locking in key subcontract packages
- Monitoring lead times closely
Early procurement will not remove every risk, but it can reduce exposure to sudden price increases.
Strategy 4: Keep Clear Records
If price escalation becomes an issue, records are essential.
QSs should keep evidence of:
- Original tender prices
- Supplier quotations
- Market price data
- Correspondence
- Procurement dates
- Delivery delays
- Changes in scope or specification
Good records make it much easier to explain and justify cost movement.
Final Thoughts
Inflation and price escalation are not just accounting issues. They are commercial risks that need to be managed from the start. For Quantity Surveyors, the key principles are:
- Understand the contract
- Identify the risk early
- Use realistic allowances
- Procure key items early
- Keep strong records
- Communicate with the client and supply chain
Price movement may not always be avoidable. But poor cost control is. A good QS cannot control the market, but they can help the project respond to it properly.
