The price of delays in construction: when does cost planning become a cost burden?

Commentary from BCIS industry panels suggests some clients are prolonging cost planning and value engineering exercises as they look to manage rising project costs and respond to renewed inflationary pressures.

In the infrastructure sector, cost consultants said this is affecting the pace at which projects move forward. Members of the BCIS Civil Engineering TPI Panel reported that while funding constraints remain a factor in project delays, public sector clients spending longer seeking cost reductions before procurement is increasingly contributing to slower project progression.

The intention is to control costs, but extending these exercises can have unintended consequences. Longer pre-procurement periods may expose projects to further cost increases, reducing or outweighing any savings identified during the cost planning process.

This reflects the way construction costs typically behave. Although periods of disinflation, where costs continue to rise but at a slower rate, do occur, sustained deflation, where costs actually fall, is uncommon.

The movement of key BCIS indices over the last three decades illustrates this pattern.

Annual deflation in the BCIS General Building Cost Index and BCIS General Civil Engineering Cost Index has been rare, occurring only after significant economic shocks. The most severe followed the 2008/09 global financial crisis, when the sharp decline in construction activity reduced demand for labour, materials and plant, likely contributing to lower costs across the supply chain.

For most clients, delaying projects in the expectation that construction costs will fall is therefore a risky strategy. While periods of slower cost growth can occur, sustained deflation has been uncommon.

Of course, periods of weak demand for construction can counterbalance increases in input costs to some extent as increased competition among contractors may result in more competitive tender prices.

However, this benefit to clients can be limited and there’s no guarantee that market behaviour won’t shift quickly. Ultimately, upward pressure on the cost base over time is more likely to be reflected in project costs.

One delay can have a cumulative effect

Delaying procurement or extending early cost planning does not, in itself, mean project costs will increase. However, even a relatively short delay can expose a project to further delays beyond the client’s control.

For example, planning permission timescales may lengthen, contractor or subcontractor availability may change, or lead times for key materials and products may increase. Suppliers may also withdraw quotations before work is placed, requiring prices to be refreshed or procurement to begin again, while changes in regulation or policy could require designs to be revisited.

The key consideration is the wider context. Spending longer refining cost plans may appear low risk in isolation, but a relatively short delay can set off a chain of events that could extend project timescales by several months. By the time work proceeds, market conditions may have changed, and the project could face a different cost environment.

There is some protection against these risks. Tender prices typically respond to changes in contractors’ input costs with a degree of lag, meaning increases in the underlying cost base are rarely reflected immediately in tender prices. Demand, market behaviour and the form of contract used will also bear influence on the final cost.

In short, effective cost planning remains essential, but there is a balance to be struck.

Making efficient cost decisions

Effective cost management means making decisions using the best available evidence at each stage of the project life cycle, rather than waiting for the market to move in your favour.

BCIS provides a range of data and indices that help clients and cost professionals understand how costs are changing and have changed in different contexts. For example, historic project data can be used to assess cost movements in similar schemes while tools such as BCIS Schedule of Rates, BCIS Dayworks and BCIS Contract Percentages can be used to estimate a project’s cost profile.

BCIS tender price indices and studies can also be used to assess how tender prices have changed over time and the pace at which increases in contractors’ costs are feeding through into market prices at present, according to the latest data.

Where projects are exposed to significant price volatility, contractual mechanisms enabling index-linking can also help manage risk. BCIS Price Adjustment Formulae Indices (PAFI) provide an established basis for adjusting contract prices in response to changes in the cost of labour, materials and plant.

Rather than relying on broad contingencies to account for uncertainty, BCIS PAFI enable price adjustments to reflect measured movements in defined cost components where the contract provides for them. This can give both clients and contractors greater transparency over how cost changes are treated throughout the life of a project.

Even during periods of market volatility and macroeconomic uncertainty, robust cost planning remains possible when decisions are supported by reliable, up-to-date market evidence.

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