The Impact of Fixed-Price Contracts on Construction Costs
Fixed-price contracts are common practice in the construction industry, where the contractor agrees to complete a project for a predetermined price. While these fixed-price contracts provide certainty for both parties: the client knows the exact cost upfront, and the contractor has a defined scope of work. However, managing construction costs under a fixed-contract can pose its fair share of challenges. Contractors bear significant financial risks, as they are bound to complete the project within the agreed price, regardless of any unforeseen circumstances, changes to the construction plan, or rising costs of labor and materials.
This can lead to financial risks for contractors, especially when there are unexpected cost increases during projects. For example, if the price of building materials suddenly rises, contractors may have to bear the additional costs themselves, impacting their profitability. Such challenges require contractors to be meticulous and efficient in their project management. Fortunately, offshoring certain administrative and maintenance roles can help mitigate these challenges by reducing overall costs.
Rising Costs in the Construction Industry: Challenges and Solutions
The construction industry has faced rising costs in recent years, negatively impacting project budgets and profitability. A key driver of this increase is the growing demand for skilled labor. As the industry continues to grow, there is a shortage of skilled workers, leading to higher wages and salaries. According to ABS research in Australia, the Wage Price Index (WPI) rose by 0.8% for the quarter and 4.1% annually, after adjusting for seasonal changes. In the construction sector, the WPI increased by 0.7% for the quarter and 4.2% for the year.
Additionally, the cost of building materials, such as steel and concrete, has been steadily increasing. Factors such as inflation, supply chain disruptors, and global market conditions can drive up the overall costs of construction projects, making it difficult for contractors to manage their budgets effectively. To combat these challenges, construction companies can consider offshoring certain roles to countries with lower labor costs.
By offshoring administrative and maintenance roles, companies can access a pool of skilled professionals at lower wages. These strategies provide contractors with a cost-effective solution to mitigate rising construction expenses.
Offshoring in the Construction Industry: A Cost-Effective Solution
Offshoring within this industry involves transferring specific roles or tasks to overseas locations, such as the Philippines or India. This can include administrative tasks like project management, accounting, documentation, and maintenance roles such as equipment servicing and facility management.
One of the key advantages of offshoring in the construction industry is cost savings. By offshoring certain roles, construction companies can significantly reduce labor and operational costs, significantly lowering their overall project expenses.
Offshoring offers access to a broader talent pool, enabling construction companies to recruit skilled professionals not readily available locally. This can enhance the overall efficiency and effectiveness of construction projects, leading to improved project outcomes. It’s important to note that careful planning and management of the offshoring process are crucial. Meticulous preparation during the early stages of implementation is essential to ensure smooth operations and effective communication between onshore and offshore teams.
Maximizing Efficiency Through Offshoring Admin and Maintenance Roles
Offshoring certain administrative and maintenance roles in the construction industry can significantly improve efficiency in project management and operations. By offshoring tasks like project scheduling, documentation, and reporting to offshore teams, onshore construction professionals can focus on core business functions.
Similarly, offshoring maintenance roles such as equipment servicing, and facility management can ensure timely and cost-effective maintenance of construction sites and facilities. This approach can help prevent unexpected breakdowns and delays, ultimately contributing to the project’s smooth execution.
Moreover, offshoring these roles can also enable round-the-clock support and assistance. With offshore teams across time zones, construction companies ensure 24/7 resource availability, boosting project efficiency and responsiveness.
By leveraging offshoring for admin and maintenance roles, construction companies can optimize their resource allocation, boost productivity, and achieve better project outcomes.
Successful Implementation of Offshoring in Construction
Several construction and strata management companies have successfully implemented offshoring strategies to save costs and improve efficiency in their operations. HGS OSS worked closely with major strata management companies in Australia, which offshored their project management and documentation tasks to a dedicated offshore team in the Philippines.
By offshoring these roles, the company was able to reduce their costs and improve project turnaround time. The offshore team effectively managed project schedules, communicated with stakeholders, and ensured timely documentation, resulting in smoother project execution.
To learn more about our approach to offshoring and how we helped our clients build their own dedicated teams, contact us now today.
Citation
Bleby, Michael. “Rising Costs Add Burden to Weak New Home Construction.” Australian Financial Review, 27 Dec. 2023, www.afr.com/property/residential/rising-costs-a-threat-to-weak-new-home-construction-20231218-p5es5k.
HGS Offshore Staffing Solutions. “The Industry Demand for Data Entry Specialists.” HGS OSS, 17 May 2024, hgsoss.com/newsroom/the-industry-demand-for-data-entry-specialists/.
HGS Offshore Staffing Solutions. “Why You Should Hire Offshore Accountants.” HGS OSS, 25 Apr. 2023, hgsoss.com/newsroom/why-you-should-hire-offshore-accountants/.
McSweeney, Niall, et al. “Australian Construction Material Price Outlook – Q2 2024.” Altus Group, 4 Sept. 2024, www.altusgroup.com/insights/australian-construction-material-price-outlook/.
