The rising cost of building materials and how it’s affecting the Construction industry

Why are the costs of building materials increasing?

The fact that global construction demand has been increasing at an unprecedented rate, combined with the pandemic and logistical issues, has led to unprecedented shortages, delays, and higher construction costs across the board. The cost of materials on construction sites has reached an all-time high as a result of three major factors that contribute to the price hikes.

There are several factors that are challenging the supply chain and resulting in an inflationary situation, starting with strong demand and limited distribution. Among the factors responsible for the strong demand for our products is the fact that countries around the globe are investing in the construction of infrastructure as a way to revive their economies. In response to the pandemic, governments are repairing and rebuilding in order to respond better to the crisis. This increases the demand for construction materials.

Secondly, the producers of these building products have been experiencing reduced productivity due to health protocols and government regulations, which has caused work stoppages in the past and continues to happen today.

A shortage of shipping containers is also a problem. Construction materials may take weeks to arrive on a boat, even if they are produced on time. Because of Covid, ports around the world had to shut down for weeks, including some of the largest in the world. What is the explanation for this? The ports are unable to process the cargo at the current rate of arrival. Cargo rates have risen rapidly, notably between Asia and North America, due to a stockpile of cargo containers mixed with global demand.

The following are some of the key factors that have contributed to such significant increases in construction costs over the last year:

• HGV driver shortage and longer than usual lead times
• High demand for materials in other parts of the world
• Panic buying and stockpiling of materials by builders and contractors
• Reduced supply levels due to Covid restrictions and robust demand for new homes, construction, materials, and labour

What do the rising costs of building materials mean for the construction industry?

The rise in construction costs puts additional strain on contractors and developers, as well as lenders, during the construction phase. Contingency budgets have already been maxed out in the relatively early stages of some developments simply to cover the cost of increased materials and labour.

Rising costs are especially concerning for contractors who signed fixed-price contracts prior to major construction cost increases. They are in pain because they are unable to apply for additional payments under the terms of a fixed-price contract.

There have been examples of developers and contractors modifying their contracts and developers making additional payments to ensure that their contractor remains solvent and able to complete their development.

Ultimately, it would usually be more cost-effective to pay an existing contractor more than it would to let them become insolvent and then attempt to tender the remainder of a part-built development in the current market.

What alternative funding facilities are available for the construction industry?

Typically, companies will obtain bank loans for their projects, and sometimes funding from private equity (PE), Venture Capital (VC) and in some cases, sovereign wealth funds. However, with increasing restrictions and criteria to be met by banks, companies are seeking funding from elsewhere. Those who have strong business plans could benefit from our financial facility, Collateral Transfer. This facility makes use of Bank Guarantees which are utilised as collateral or security to obtain loans and lines of credit from banks and non-traditional lenders. However, construction companies wishing to benefit themselves from the Collateral Transfer Facility will have to produce a viable business plan with a strong exit strategy. 

How can IntaCapital Swiss SA assist the construction industry?

At IntaCapital Swiss, we facilitate funding for many construction projects across the globe – ranging from supporting the purchase of materials, equipment, land acquisition to general construction costs. With our expert team of financiers, we can offer new projects immediate working capital, subject to passing our due diligence, whether they fall under commercial, residential, infrastructure or leisure.

Find out more about how IntaCapital Swiss SA can facilitate multiple different facilities via our website: https://intacapitalswiss.com/news/construction/construction-funding-via-collateral-transfer/