Uncertainty in construction costs – where is inflation headed?
Market fluctuations have a significant effect on health care construction costs; over the last few years we have seen two extremes. After a long period of almost rock solid stability at three to four percent per year, increases of seven to ten percent per year shocked hospital leaders in the mid- ‘00s. Currently, construction inflation is dropping rapidly, and will likely continue to drop. Industries that thrived on rapidly escalating costs for commodities like mining and scrap metal dealers as well as skilled trade labor are struggling to adjust to this new reality. As consumers of these goods and services, hospitals stand to benefit from those struggles.
“Markets for recyclable materials have collapsed, with manufacturers buying less in the face of the worldwide economic downturn”, (The Press Democrat, “Recyclables stacking up”, 11-23-2008.)
Better management and new contracting models for construction projects can help to mitigate the uncertainty of construction costs. In the past, the owner (hospital) would be the stakeholder in a project that would have to take most if not all of the cost increases. A growing trend in construction uses performance-based contracts as well as integrated teams. In these situations all stakeholders in the process will be responsible for the evaluation of different options, cost comparisons and a balancing of priorities. With the performance-based contracts all parties share in the savings opportunities or unexpected costs caused by the uncertainty between the start and finish.