Property Australia

The rising costs of construction

PROPERTY AUSTRALIA May 17, 2022

As a result of the post-COVID stimulus, supply chain challenges, contractor liquidations, extreme weather occurrences, geopolitical instability, and commodity price inflation, 2022 is shaping up to be another year of uncertainty for the construction sector.

Property and construction advisory firm, Slattery, is predicting a national average of four to eight per cent price escalation over the next twelve months, a distinct increase from its December update which forecasted a three to four per cent increase, thanks to various market pressures.

While this is a broad range, much will rely on local conditions and project type, with some locations feeling the squeeze more than others.

Smaller markets will continue to struggle to find credible supply chains and subcontractors, with Tasmania (12-15 per cent) leading the way, Perth (10-15 per cent) close behind, and Brisbane (6 per cent) ranking third.

Pricing will remain under pressure as the industry struggles to recruit labour resources and skill. Similarly, rises in steel and copper prices, as well as lumber shortages, will push up expenses over the next six to twelve months.

“There's a number of things that have all sort of conspired to, at one time, drive prices north,” Slattery Victorian Director Barry Laycock said.

“I think if we look at what's happened over the last two years, there's been a period of relative inactivity and now that people are no longer in lockdowns, they're out and about, people are returning to offices and to workplaces. 

“Clients, whether that be government in its various forms or private development, are now either looking at new developments or reinvigorating developments that may have been on the go slow or have been put on hold.”

From a construction perspective, Laycock believes many factors are putting upward pressure on prices, the first being the well-publicised material shortages.

“That's particularly prevalent for things like steel, in its various forms… because manufacturing of steel ramped down during COVID and it struggles to keep up with demand now that things are firing again,” he said. 

Also impacting prices are copper and timber, two materials in which prices have remained high.

The other price pressure is labour, or the lack thereof. 

“And that’s twofold,” Laycock said

“One is that there is a labour shortage because of a lack of immigration and that's something that's being felt across the country.

“And there's just been none of that movement of people to Australia to sort of replenish the stocks when people move around.”

The war in Europe has also impacted prices, specifically petrol prices which has made just getting materials to site more expensive, Laycock said.

In terms of transportation, shipping prices are still under pressure, having risen by a whopping 300 per cent in the previous year. According to Slattery's analysis, there are indicators that expenses are beginning to level down in this sector.

All these price pressures have made some firms wary of contractors of all sizes and their financial stability following the collapse of ProBuild, Privium and ABD Group.

“Builders tend to make good money in falling markets where they've locked in a price at one level, and then there's been a cool off in the market,” Laycock said. 

“But what is concerning at the moment, is that we are at a period from pricing last year or the year before where people were keen to secure pipeline. And they might be now trying to get materials and that cost has increased. And that's putting pressure on contractors’ stability.

“Certainly, the clients that we're talking to are now probably more wary than ever about their financial due diligence on their contracting pool. And it's tough for the contractors, because they're required to give a client, let's say 60 days validity on their price, but the subcontractors are only given 30 days. So, you've got this sort of window there where the tender process might drag on.

“And suddenly, the market moves - and it has been moving in very short-term windows.

“And what we're seeing is that contractors are now starting to carve out specific qualifications around the price of steel, around exchange rates, [and] around timeframes. And we've even heard mention of potential rise and fall contracts, which I don't think anyone's seen since the late 80s.”

To try and get in front of cost escalation, Laycock said some contractors are starting to stockpile materials, particularly reinforcing steel, and then they are only subject to labour variances. 

Slattery’s report notes that the biggest impact will be on longer-term projects with budgets that were set years ago. 

After the next twelve months, Slattery estimate that costs will revert to a long-term average of three to five per cent.