Is the cost inflation of recent years hitting your project especially?

Johan Appelqvist Head of Operations

Construction costs have increased dramatically since 2021, but the impacts of the increase on individual construction projects has been difficult to predict. Head of Operations Johan Appelqvist of Fimpec writes that a solution to this problem and source of conflict now exists, as Fimpec is able to offer a construction project’s various parties reliable and objective information on the impact of cost increases specifically on their project.

The construction industry has experienced considerable volatility in the past few years. Material costs in particular have spiked in an entirely unforeseen way since the start of 2021, often causing construction projects to go over budget, sometimes even to a great extent. The risks of the situation are now becoming clearer, as many projects whose plans and budgets were created before the spike in prices near completion – and at the same time, hand-wringing over the reasons for cost overruns has begun.

To reach a common ground in this type of situation, the parties need a baseline of accurate and concrete data. The building cost index reflects changes on a general level, but given that it is based on averages, it does not offer accurate information on individual construction projects. Construction projects differ vastly, for instance, in the materials used and the working methods applied.

Moreover, the price development in recent years has been highly exceptional. Price variations have been very rapid, and the prices of various construction materials have changed at different rhythms. Differences of a week or even a day in the timing of purchases of individual construction materials may have resulted in major variations in costs, making it even more difficult to determine the reasons behind an increase in costs.

In such situations, the client and the construction contractor often struggle to agree on what caused the rise in costs. Fimpec offers a reliable and objective data-based solution to this problem. Namely, we have developed a method for determining and presenting the reasons behind cost increases by rapidly and cost-effectively screening and analysing the financial transactions and other data mass of a project.

We break down the project into detailed parts, analyse the data and give a reliable and objective account of the causes for the increased costs

Determination of the reasons for the increased costs starts with an analysis of the project’s financial transactions. The analysis covers the entire project, from offer to final calculation. By comparing the data against the changes in market prices, we can produce independent and reliable information on how the price change has affected specifically the project in question.

In the analysis, we apply the expertise of our specialists in procurement, cost management and project information management, and use advanced methods to accelerate and partially automate the analysis. This is how we are able to produce a mathematical, thorough and independent report for a construction project’s various parties, rapidly and cost-effectively.

We are thus able to offer information about and insight into what has actually taken place in a project, at a low cost. This lays the foundation for finding common ground, supports conciliation and helps avoid often costly litigation. This is an opportunity worth seizing.

How the service works

The potential for disputes over the final costs of a construction project is best illustrated through a concrete example. In spring of 2023, a construction contractor asked us to look into the rise in costs related to a project to build a small-scale production plant. The offer on the project was made in autumn 2020, and cost changes in the construction industry were practically non-existent in the preceding two years. An agreement on the project was concluded in early 2021, when prices were also adjusted based on the situation at that time. There was no way the parties could have anticipated the steep price increases that lay ahead.

When the construction work wrapped up in autumn 2022, the budget had been overrun by a significant amount, as a result of which the contractor and the client began price negotiations. Of course, the client understood the situation and estimated the rise in costs to be 4 per cent, which the client proposed that both parties should cover equally. The contractor, however, was not happy with this proposal and estimated the increase in costs to be much higher. With no clear numbers to support this view, however, the contractor asked if we could bring some clarity to the matter.

Our analysis determined that in reality the increase in construction costs in this project was around 11 per cent. The reason for the major differences in the figures was the type of construction project and the timing of procurements. This particular project required much more steel and concrete than average, and the price of steel in particular had taken a steep upturn right at the time of its procurement. The impact this had on the increase in costs was thus much greater than what could have been estimated using the average figures.

The client and the contractor were able to continue their dialogue equipped with actual data gained through our analysis – which is the usual outcome. Eighty per cent of the expert statements we make lead to conciliation.

Johan Appelqvist
The writer is Fimpec’s Head of Operations, whose area of responsibility is cost management. Appelqvist has 18 years’ experience of project cost management and in the past five years has served as an expert in 15 legal cases involving contractual disputes.