General inflation is only the latest driver of cost escalation that is hitting the construction industry especially hard – and particularly budgets set before the pandemic took hold. Pre-existing issues – supply chain disruption, materials, and skilled labour shortages – are now exacerbated by interest rate increases, and price volatility in oil and gas.
The confluence of factors has put unprecedented stress on both lenders and borrowers. In our over 40 years of serving the construction industry, BTY has helped both lenders and borrowers navigate severe inflation – and we are doing it again to help see projects through to success.
BTY’s experience gained in previous periods of severe cost escalation has added to our expertise in finding solutions. In 1980, inflation peaked at 14.7%[1] — and the U.S. prime interest rate reached 21.5%. By comparison, the rate of inflation in the U.S. at the beginning of March 2022 was 7.9%, a 40-year high.[2] The prime rate was 3.50% as of mid-March.[3] It is expected that inflation will peak at 8% to 9%.
There are three main Project Monitoring strategies we are using to help ensure projects can proceed even as costs and interest rates rise.
Restructuring Loans
The first is working with lenders and borrowers to restructure loans. They both recognize that cost escalation of up to 30% is unsustainable. BTY’s Project Monitoring services can review and/or verify borrowers’ price and cost increases that support loan re-submission applications and confirm the data is realistic with lenders. This can also support increases in loan amounts and extensions in repayment times.
Value Engineering
Continuing – and unpredictable – supply chain challenges can easily cause delays and put schedules at risk. Borrowers can explore design & specification adjustments, such as unit finishes or different materials. From there BTY can then review and verify costs of these substitutions. If they are close to being within budget, or if there is a significant cost increase with reliable figures, BTY can present these new costs to lenders for approval.
Establishing Appropriate Contingencies
As budgets are being set with currently available costs, BTY’s Cost Management and Project Monitoring experts can draw on our Market Intelligence database to recommend building in appropriate cost escalation given the current cost landscape.
Many of the lenders and developers we support find great value in our annual market analysis to help them anticipate and understand project impacts. Reach out to us if your team and project would benefit from BTY’s independent insights.
[1] https://inflationdata.com/articles/inflation-cpi-consumer-price-index-1980-1989/
[2] https://www.theguardian.com/us-news/2022/mar/10/us-inflation-increase-labor-department-report-latest
[3] https://primerate.fedprimerate.com/2022/03/usa-banks-banking-FOMC-March-16-2022-united-states-prime-rate-rises-to-3-point-5-percent.html
