March 2025
Construction managers often grapple with constant unpredictability, and material costs are among the most challenging and consequential variables.
In recent years, volatility has become more extreme and unpredictable, particularly for megaprojects. These projects are still expected to stay within budget despite being inherently vulnerable to sudden spikes in material prices due to the massive resources they require.
This volatility often stems from factors beyond a manager’s control, such as supply chain disruptions, demand surges or geopolitical events. Regardless of the cause, the effects are the same: inaccurate estimates, strained budgets and disrupted schedules.
Successfully navigating pricing volatility requires understanding of how it behaves and a proactive approach to cost management strategies.
Material Cost Volatility Causes and Effects
If there’s one thing that’s certain about material costs, they’re constantly changing.
Two terms often associated with these changes are inflation and material cost volatility. While they’re sometimes mistakenly used interchangeably, they refer to very different concepts.
Inflation is a steady, economy-wide increase in the cost of goods and services over time, affecting nearly every sector, including construction.
Material cost volatility refers to quick, unexpected spikes or drops in the prices of specific construction materials, such as lumber and steel.
Several key factors are generally understood to influence material cost fluctuations:
- Supply chain constraints, including transportation delays, manufacturing bottlenecks, labor shortages and material availability issues.
- Inflationary pressures that affect construction materials and other commodities and services like fuel, labor and transportation.
- Out-of-sync supply and demand triggered by natural disasters, severe weather, major infrastructure projects or unexpected economic shifts.
- Sudden surging energy costs impacting the production of essential materials like steel and cement.
- Geopolitical factors, including regional conflicts (e.g., the Russian-Ukraine war), import/export regulation changes, new tariffs and material sourcing restrictions.
These factors have two things in common. One, each involves a degree of uncertainty, whether in their timing, duration and/or severity. Two, each results in at least one of several predictable outcomes:
- Unreliable estimates. Wild price fluctuations make it difficult for estimators to deliver a precise estimate, which jeopardizes forecasts and creates budget constraints. This, in turn, can lead to insufficient contingency funding, delays as further funding is secured and even costly rework when adjustments to material choices or designs must be made mid-project.
- Budget overruns. When unaccounted for, material cost spikes can lead to some tough decisions: where and how to reallocate funds, whether to adjust the design and/or find alternative materials, and whether the project is even feasible.
- Schedule delays. Budget overruns and schedule delays go hand in hand. Like overruns, delays caused by the above material cost volatility factors can have far-reaching ripple effects. They can complicate labor allocation and coordination, throw off workflows, extend completion dates and drive up operational costs.
The effects of these volatility outcomes can be especially acute for projects that rely on just-in-time material delivery or government-funded projects subject to stringent financial oversight.
Key Strategies for Managing Costs Amid Volatility
So, how do you effectively control costs while navigating material pricing volatility and mitigating its impact? The key is using strategies that help you anticipate, manage and respond to sudden price shifts—while keeping estimates, budgets and timelines intact.
Collaborative Planning. Monitoring and managing fluctuating material costs can’t—and shouldn’t—be done in a vacuum. Bringing cross-functional stakeholders together early in the project—including owners, contractors, the procurement team and even suppliers—gets everyone out of the siloed mindset so they can better assess and plan for potential material cost risks in a coordinated way.
These risk-assessment discussions are essential to safeguarding against anticipated volatility. That means identifying and building a consensus around proactive ways to minimize the potential for financial surprises. Key considerations in the collaborative planning phase could include:
- What alternative sources are available for materials needed?
- Can purchasing agreements for bulk materials help lock in pricing?
- Which material price volatility factors mentioned earlier should be anticipated, and how can contingency plans be developed?
- How will price fluctuations affect the project in the short and long term?
- How will they impact procurement decisions and strategies and overall budgeting?
To answer these kinds of questions, stakeholders need real-time cost data.
This is where leveraging technology—such as cost management software—plays a vital role. With shared visibility into material pricing trends, teams can align strategies and respond more effectively to market shifts. Stakeholders can model cost scenarios, refine procurement strategies and adjust budgets proactively, which will reduce the risk of being caught off guard by sudden price changes.
Contingency Budgeting. Contingency budgeting isn’t just a proactive measure—it’s a necessity. Looking at data from past projects helps put this in perspective.
You know the chaos that can result when material costs fluctuate unexpectedly, forcing you to scramble to protect budgets and profit margins. A sounder approach? Analyze past projects that encountered cost volatility, identifying patterns and potential risks in advance using predictive analytics.
Predictive analytics leverages those projects’ historical data to forecast cost trends, helping teams anticipate price fluctuations before they occur. Taking this proactive approach enables them to adjust their budgets, procurement strategies and risk management plans with greater accuracy.
Some things to look for:
- What materials were most susceptible to price swings?
- What caused the fluctuations, and can similar factors be anticipated for the current project?
- How much did costs fluctuate, and what were the variances?
- Was a flat contingency fund budgeted, or was the contingency fund tailored to project-specific risks?
- If contingency funds fell short, how did that affect the overall budget?
Because projects are more complex, the 5-10% of the budget typically allotted to the contingency fund may not be enough of a safety net to cover the unexpected.
Again, cost management software is an indispensable tool here. Using past and current project data, predictive models can forecast potential cost escalations for the risks identified during planning, allowing contingency budgeting to be fine-tuned for targeted coverage and a reduced risk of shortfalls.
Real-time Cost Monitoring. A common thread across these planning and budgeting strategies is the technology that turns data into actionable insights—especially regarding real-time cost monitoring.
That technology focus is on cost management software for a good reason: it goes beyond traditional cost management methods that may be more familiar but cannot keep pace with rapid material price fluctuations. And that’s a crucial distinction given today’s more dynamic capital projects.
What makes real-time cost monitoring such a vital strategy is the continuous visibility into pricing trends and budget performance. The most effective way to do this is through business intelligence (BI) dashboards. They automatically track, consolidate and visualize raw cost data into easy-to-understand formats and flag issues when data points reach a certain threshold. This is where BI dashboards become a valuable decision-making tool.
• Does the dashboard show cost fluctuations or spikes that signal potential risks?
• How are these potential risks impacting estimates, and what updates should be made?
• How should procurement strategies and decisions be modified?
• What other adjustments should be made to protect budgets?
With real-time cost monitoring, teams can anticipate cost shifts and make necessary refinements before volatility disrupts the budget.
Managing Material Cost Volatility with Confidence
Material cost volatility may be a persistent challenge in dynamic capital projects, but it doesn’t have to derail budgets or timelines. The key lies in preparation and adaptability. By implementing collaborative planning, contingency budgeting and real-time cost monitoring strategies, construction managers can stay agile as they maneuver through pricing fluctuations and mitigate their impact.
Leveraging technology is essential to making these strategies most effective. For companies exploring their options, consider Contruent Enterprise, our lifecycle cost management software, which delivers the visibility, accuracy and insights needed to stay ahead of material cost volatility. Find out more or request a demo today.