Commentary prepared by Romas Paliulis, CEO of the general contracting and construction company Gilesta
According to data from Statistics Lithuania, from December 2021 to December 2022 the prices of construction cost elements increased by 17.5 percent. This topic is widely discussed, and developers as well as contractors explain the reasons, most of which are attributed to the war in Ukraine, inflation, and the resulting rise in construction material prices. But are these the only reasons behind the increase in construction costs? Very few talk about the price of construction work itself and how it is calculated, or that administrative costs alone can make up as much as one‑tenth of the total construction price. Could it be that the lack of flexibility and the failure to use digitalization tools among construction companies in the country leads to inflated construction costs?
The general formula for determining construction costs is simple: the cost of materials plus administrative expenses plus the company’s planned profit. All construction market players follow the same principle. The differences arise when we examine how much effort is or is not put into optimizing administrative costs and how much effort and what tools are used for project planning.
Although digitalization has become the norm in many industries, this is unfortunately still not the case in construction. Yet digitalization is a key component of a modern company — it helps forecast administrative expenses more accurately, detect errors on time, and calculate budgets more flexibly. Digitalization tools in construction enable companies to better understand potential price fluctuations and make the right decisions without inflating the final price just for the sake of feeling “safe.”
How does it work? Digitalization in construction allows companies to track price data in real time, forecast budgets using up‑to‑the‑moment information that affects not only material costs but also administrative expenses. For example, if a company that lacks technological capacity needs five analysts to handle data, a company using IT‑based tools can do the same work faster, more accurately and with fewer people — perhaps with just one or two specialists. This reduces administrative costs.
Moreover, with IT solutions, construction companies can process larger volumes of data in a much shorter time, break down material needs into the smallest possible components, and refine cost estimates with high precision.
If a traditionally operating construction company calculates costs using broad material groups based on market averages, digital tools enable breaking these groups down into specific materials and exact quantities in a short time. This helps determine the real cost of each material and prevents budget inflation “for safety.”
Digital tools also allow real‑time tracking of a company’s workforce: knowing which worker is doing what, when, and where, and quickly reallocating them to another project if needed. Digitalization also helps identify project errors before the end of a project, resolve them without major financial losses, and find more rational solutions while maintaining technical requirements.
All of this means that during the budgeting phase there is no need to create artificial safety cushions — that is, no need to increase margins or administrative costs out of fear of potential change, because IT tools make it possible to forecast accurate and optimized costs in advance, based on extensive historical data.
So why have only a few construction companies digitalized their processes?
The reasons are not difficult to find. First, many follow the principle: don’t fix what isn’t broken. Why change anything if doing things the same way as twenty years ago still works, profits grow, and the business performs well? However, when the entire market follows such logic, progress becomes impossible — and change can only be driven by market players themselves and by clients demanding more efficient cost calculation and planning.
Second, competence stagnation: construction companies that have been operating for many years know how to work the way they did when they started. Digitalization is a major step that requires updating knowledge, embracing new technologies, and developing modern competencies internally or externally. Unfortunately, this is not a simple process — the talent market lacks such skills, and they often must be developed from scratch.
Third, brand recognition has long meant everything in our market. If a company is well known and has a reputation for high‑quality work, it does not need to try harder to succeed. Many companies still rely on this approach. However, the situation is changing — and it’s only a matter of time before established players realize that high quality alone is no longer a competitive advantage, because almost everyone builds well now. To win competitive battles, companies must find something more to offer. Today that natural step is the digitalization of operations and processes in order to calculate budgets more precisely, use resources more efficiently, and make better‑informed decisions.
So yes — digitalization will bring major change to the construction sector, and the winners will be clients. We can only hope that this shift accelerates sooner rather than later, because it is essential for market progress and construction cost optimization.