May 2025
Leave it to inflation to put your cost management practices to the test.
Many construction leaders tend to see inflation as something to react to—usually once costs start climbing. But suppose you reframe it as an opportunity to see how your company performs under pressure. In that case, it can reveal where your workflows, technologies, planning methods or budget assumptions need shoring up to keep inflation from eating away at the project budget.
As the gradual upward creep in prices throughout the economy, inflation can have any number of causes—shifts in demand, volatility along the supply chain or unpredictable trade and tariff policies. It inevitably shows up as escalation—rising costs throughout a project’s budget.
When every resource, decision and change carries a cost, even small disruptions can have an outsized impact if you’re not ready for them. That demands ongoing adjustments—not just of spending, but of strategy. It’s no surprise that cost escalation is not just a budgeting concern but a real business risk.
Understanding Inflation in the Construction Context
Inflation frequently claims headline status in news cycles. And because construction depends on worldwide supply chains, skilled labor and high-demand materials sensitive to energy cost spikes, inflation inevitably shows up on the project balance sheet.
That creates added stress when trying to assemble bids, fine-tune budgeting or lock-in financing for a megaproject months away from on-site activity. And because many capital projects last several years, the compounding effects of inflation can quietly erode budgets and margins if left unchecked.
To get ahead of inflation-driven escalation, you need to know where pricing trends are headed. Two inflation indicators can help put cost escalation into perspective: the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI is industry-agnostic. It reflects the pricing swings for end-user (consumer) goods and services across the economy and most directly affects wages. On the other hand, the PPI is the heads-up for construction—it shows the ebb and flow of seller prices for materials at the time of production—before they’re purchased by procurement teams (or consumers more generally). So, changes in PPI typically precede shifts in CPI.
Actively monitoring these indicators can help construction leaders anticipate potential disruptions and respond before escalation begins mounting. It’s the first step toward building strategies into planning, procurement and contracts that can withstand inflation—rather than reacting after the fact.
Key Areas That Reveal a Project’s Escalation Preparedness
Materials: Rising costs for core materials like steel, cement and lumber shine a spotlight on procurement strategies.
- Is procurement caught in reactive mode?
- Is the supplier base diverse enough to accommodate hiccups?
- Were vendors prequalified?
- Was the right contract type used to optimize cost-effectiveness?
- Were risks distributed fairly?
- Were prices locked in before the project broke ground?
Skilled labor: Inflation surfaces just how proactive or reactive your workforce cost strategies are.
- Is there an emphasis on long-term retention, including training?
- Do wages account for cost-of-living fluctuations throughout the project?
- Has inadequate planning left you struggling to find labor in an increasingly competitive market?
Project financing: Inflationary pressures can impact interest rates—potentially creating gaps in funding and threatening ROI.
- Was escalation forecasted well enough to avoid scrambling for more funding partway through construction?
- Were favorable financing terms secured before inflationary trends caused shifts in rates or terms?
- Was a large enough contingency cushion budgeted to cover inflation-caused cost overruns?
Equipment and technology: Equipment breaks down. Technology ages. Over time, inflation can cause operating costs associated with equipment replacement and technology adoption costs to escalate.
- Is the cost of downtime from aging equipment greater than the investment needed to replace it?
- Can investments be made now in future-proof technologies—like digital procurement, building information modeling (BIM) and forecasting tools—that can improve efficiencies and minimize cost risk over time?
Strategies for Managing Cost Escalation Amid Inflation
Uncertainty surrounding inflation calls for proactive, deliberate and sound escalation management strategies. It’s more than cutting costs; it’s ensuring flexibility and responsiveness.
Build inflation into forecasting. Effective forecasting combines historical data, current industry benchmarks, and CPI and PPI inflation indicators to set budget expectations and contingency plans grounded in realism. But to stay ahead of escalation, forecasts must also account for pricing volatility and well-considered assessments of future risks, not just reflect the past.
Be strategic with early procurement. Timing is key. You want to lock in pricing before inflation drives it upward. Look for opportunities to purchase core materials that are most at risk of cost escalation—early and/or in bulk—before prices spike. Also, to avoid tying up too much capital or creating storage issues, work with suppliers to set progress-based milestones for when materials are procured and released.
Reassess contracts for risk allocation. Look at the contract types and terms that best protect the project budget against inflationary pressures. What looks beneficial in the short term (fixed-price, e.g.) may put more risk on one party as inflation increases. Using the CPI and PPI indicators as reference points for negotiating price escalation clauses can help objectively balance that risk for a fairer contract structure.
Strengthen supplier and subcontractor relationships. Managing escalation isn’t just about nailing down costs; it’s also about establishing relationships and maintaining open communication with a diversified portfolio of suppliers willing to negotiate and share risk. They’re more likely to be flexible with pricing adjustments and lead times that help offset delays from revisiting or renegotiating sourcing or funding.
Use technology to detect and respond sooner. Real-time visibility into how inflation affects project costs can make all the difference; and dashboards enable you to visually monitor cost behavior so you can see what you need to manage. Forecasting and earned value management (EVM) highlight when projects are veering from their cost targets—early enough to take action. Want to see where the budget stands? An integrated cost management platform lets you compare planned versus actual costs, see inflation’s impact clearly and forecast which adjustments will best keep the project’s costs and schedule on track.
How Solid Is Your Escalation Preparedness?
Inflation affects every facet of megaprojects. Rather than taking a wait-and-see approach to gauge its impact, construction leaders can turn inflation into an opportunity to strengthen their cost escalation strategy proactively. Developing a long-game approach—through accurate forecasting, early procurement, fair risk allocation, strong supplier relationships and smart investments in tools that provide real-time visibility and control—is how pragmatic leaders can stay ahead.
We’re happy to explore those strategies and how our technology solutions can support them. Contact us to learn more about how our solutions can protect project value—or request a demo today.