Communicating Inflation and Escalation Will Make or Break Your Career
Current project managers and decision makers have not grown up in an era of rising construction escalation and economic inflation. The last time that happened was in the early 2000s. Most of our current leaders did not have the rough experience of navigating those choppy waters.
To boost your career, communicating risk and uncertainty is as important as getting the fundamentals of escalation and uncertainty right.
We will discuss the first three bones of the Communicating with FINESSE fishbone diagram in this brief article on communicating inflation and escalation.
Frame the Communication
Start with the Definitions
Inflation is an economic term that indicates the increase in the price of goods and services over time. More precisely, inflation can be defined as a persistent rise in the prices associated with a basket of goods and services that is not offset by increased productivity. Inflation causes purchasing power to reduce. The Consumer Price Index (US) is one way to measure inflation.
Escalation refers to a persistent rise in the price of specific commodities, goods, or services due to a combination of factors that include inflation, supply & demand, technological changes, environmental impacts, and political effects. The ENR Construction Cost reports, including the Construction Cost Index (CCI) and its Building Cost Index (BCI), are based on labor, specific materials, and specific cities in the US and provide an indication of construction-specific escalation.
Inflation refers to the increased price of a basket of goods and services, while escalation refers to an increase in the price of a specified good or service. Inflation is one of the factors that cause escalation.
Establish the Boundaries
Validating “what is in” and “what is out” of the problem frame is important in both the analysis and the communication. For a theoretical project in Richmond, Virginia, are we considering escalation based on local sources, state resources, or national resources?
Are we examining supply chain impacts from our primary vendors, or are we examining deeper into the supply chain? Are we considering schedule impacts from our expectations of local labor conditions, or are we considering the range of state or regional labor impacts on our contractors?
Our problem frame must be documented if our communication is to be effective.
Illustrate the Communication
Sensitivity Analysis (Tornado Diagrams)
There are seven essential graphics in the Communicating with FINESSE fishbone. Sensitivity analysis, in the form of a tornado diagram, is one of those seven and is especially relevant to communicating escalation and inflation.
The tornado diagram receives its names by the visual image created from wider bars associated with input variables that have more impact on the output being located at the top. In contrast, the narrow bars associated with input variables with less impact on the output are shown at the bottom. Tornado diagrams are modified versions of a bar chart.
Two forms of a tornado diagram should be developed. The primary tornado diagram should show the potential impacts of escalation by class (pumps, motors, switchgear, labor, etc.) and the possible impacts of each class on the total construction costs. Secondary tornado diagrams by types within each class (centrifugal and positive displacement for pumps or mechanical, electrical, and general site for labor) depending on the context of the project.
Consideration of rare events must be incorporated into the communication and analysis. For example, how much of the variation in labor or material costs dues to supply chain issues were included in a base case analysis, and how much was considered a rare event? If and how the potential for rare events was incorporated into the model will be part of the communication.
Reduce the Noise
Balance the Content
The analysis of escalation and inflation is predominately symbolic (numbers, equations, calculations). Financial specialists, engineers, scientists, and other technical professionals think interpretatively in this manner. However, attorneys, policymakers, and non-technical professionals interpret issues narratively. The general public thinks more perceptually (touch, taste, smell, sound) in the form of how the issue touches them personally.
Too many numbers, too many words, or too many stories create noise for how any one group interprets an issue and trusts the communicator.
It takes work when it comes to discussing escalation, but a balanced approach is what it takes to be effective.
Do Not Become Distracted
There is a tendency to expand issues with complexity and uncertainty beyond the current project. Remember, anything outside the frame is potential noise. The war in Ukraine, the energy crisis in Europe, and Chinese threats again Taiwan are relative to global inflation. These issues may or may not be relevant to a drainage project in Richmond, Virginia. Letting the communication wander into global events is likely to generate noise when communicating local escalation impacts.
The takeaway is to be prepared to discuss issues outside the frame in Q&A but avoid being pulled into the trap of creating noise that distracts from the issue at hand.
The influx of federal money into new construction is colliding with a general economy in which prices are rising faster than they have in more than a generation. Even if inflation subsides in the general economy, escalation will continue to increase due to the abovementioned factors (supply & demand, technological changes, environmental impacts, and political effects).
Current project managers and decision makers have not grown up in an era of rising construction escalation and economic inflation.
Your career and your organization depend on you effectively communicating the effects of escalation and inflation. The Communicating with FINESSE fishbone diagram provides a framework for effective communication of information with high levels of complexity and uncertainty.