Infrastructure Inflation Impacts and How Cost Planning Can Help

Infrastructure Inflation Impacts and How Cost Planning Can Help

It has been a little over two and a half years since the passage of the bipartisan Infrastructure Investment and Jobs Act (IIJA) provided a much-needed boost to the highway construction sector. In that same time, inflation has erased the boost it sought to provide.

In March, the Federal Highway Administration (FHWA) updated its quarterly index of highway construction costs. This showed that the National Highway Cost Index (NHCCI) increased by 6% in the July-September 2023 quarter over the previous April-June 2023 quarter. This was the 11th straight quarter of cost increases. The July-September 2023 NHCCI reflects a 69% increase in highway construction costs since the October-December 2020 quarter.

The damage done by inflation has been felt more heavily in the highway construction industry than across the general economy. The constant increase over these 11 quarters can largely be explained by the combination of higher asphalt and oil prices. The two biggest factors driving the quarterly increases are the price of asphalt (heavily tied to the price of crude oil), followed by the costs associated with grading and excavation (dependent on the price of diesel fuel). If you convert each quarter to what FHWA was getting for its money in October-December 2020, the contracts signed by FHWA have lost $47 billion of their buying power since that time. The IIJA has seen nearly one-fifth of its funding power lost to economic inflation. It’s still a historic bill, but the industry is not getting the bang for the buck we thought it would when it was passed.

What is the overall net impact of this loss of spending power? For Agency-Owners who have been dealing with the impacts of inflation since the pandemic, the answer is very apparent. They estimate the work, receive bids that validate the estimate, award the work, and then by the time the work is done, inflation has caused the original estimates to be way undervalued. This leads to multiple change orders, disputes, and claims. All of this is disruptive to budgets, schedules, and the overall health of an agency’s highway program and its relationships with its stakeholders.

Inflation and cost escalation are not new to our industry. History and the market dictate that prices will eventually level off and, in some cases, decrease. But navigating this period can be stressful for all stakeholders. Identifying and, more importantly, addressing challenges proactively is crucial to mitigating the impacts and stress of cost escalation on your projects.

Data Foundation

One of the most effective ways an owner can manage cost escalation is through cost planning and analysis. The ability to provide accurate cost estimates depends on the availability of high-quality data. During a project, a large amount of data is collected, analyzed, and reported by the stakeholders involved in planning and execution. This information is valuable not only during execution but also after completion when it can be incorporated in the decision-making of the next projects. The data collected becomes part of your data foundation. The current marketplace is very volatile, so it is important to keep your data accurate, complete, and up to date. Please read ‘The Foundational Aspects of Organizational Data Management’ blog for more information on treating data as an organizational asset and the foundational aspects for better data management processes.

Data Analysis

Another practical way to manage cost escalation impacts is to use an estimation method or combination of methods that can provide a reasonable understanding of market costs and conditions. Whatever estimation method is being used, a deeper dive into cost analysis in these times is essential. The standard parameters used to create project estimates need to be revised to focus on the volatility of the market. In addition, available ancillary data that already exists should be considered and utilized to increase the reassurance that the estimate reflects the current marketplace. Two areas of ancillary data would be (1) a state-of-the-art cost index that dives into trends of specific areas of construction (like asphalt or fuel noted above), and (2) a deeper analysis of change orders, cost overruns, etc. on existing projects compared to those from "older" projects that were sold in non-inflationary times.

It is also important to make sure that a thorough analysis of contractor bids received is a component of the cost-planning process. To ensure a competitive contracting environment, agencies must have effective and consistent bid review and award recommendation procedures. The procedures must be transparent in a manner that is publicly understandable, economically efficient, and legally defensible.

Process Standardization

To accomplish the tasks laid out above, an agency needs to have dedicated estimating software such as AASHTOWare Project Estimation in place. Cost estimation software enables standardization and reduces the time spent merging and analyzing the individual outputs from different sources. Furthermore, multiple stakeholders (designers, consultants, planners ) can make use of the same estimating tool. This functionality allows the central estimate group to check estimate data quickly and accurately from multiple sources. It also allows the ability to use different cost estimation methods such as parametric estimating that can provide an accurate cost estimate for projects or project features with little to no design work completed. This gives owners a better ability to forecast costs during the planning and scoping phases so that funds can be appropriately allocated.

As seasoned professionals in the construction industry, Infotech has been using our experience and resources to find different approaches to mitigate the risks of cost escalation during all phases of a highway project, beginning with the design and continuing through the bidding, procurement, and construction phases. If you’re interested in having a conversation about cost estimation strategies to get more ‘bang for your buck’ or how to best build your data foundation for high-quality, trustworthy information, feel free to contact us.