- Builders absorbed up to 25% cost increases
- Risk allocation remains a significant issue
- Labor shortages and costs will continue to escalate
Surging costs are making conditions incredibly difficult for the construction industry, which is being forced to absorb many of the higher prices according to a new survey.
The latest construction industry market sentiment report, by Arcadis and the Australian Constructors Association, found that builders are wearing the higher costs of construction which are amounting to between 10% and 25% of project budgets.
The survey found that only a quarter (24%) of respondents feel that the current commercial environment allocates risk between clients and contractors fairly and reasonably.
Australian Constructors Association CEO Jon Davies said every single surveyed contractor reported having to absorb material price escalation in 2022 that could not be recovered or offset in any way.
Cost escalations builders are absorbing
“Some contractors are hurting more than others with nearly half of the respondents stating that the unrecovered cost increases amounted to more than 10% of their project budgets, which could result in losses of many millions of dollars,” said Davies.
“Despite some improvement since the last survey, a significant 76% of respondents believe that the current commercial environment still unfairly and unreasonably allocates risk between clients and contractors.”
Jon Davies, CEO, Australian Constructors Association
“Risk allocation has been identified as the most significant barrier to innovation and productivity growth in the industry and, to put this into perspective, the industry’s productivity performance is at a 30-year low.”
Building inputs rise for the March quarter
According to the latest Producer Price Index (PPI) from the Australian Bureau of Statistics (ABS), one of the three main contributors to the quarterly increase was the output of building construction, due to continued demand in other and non-residential construction, ongoing skilled labour shortages and costs for materials. PPI rose 1.0% this quarter and is up 5.2% over the past twelve months.
The ABS figures showed input prices rose 1.6% in the March quarter, with the increases attributed to the rising costs of plasterboard, aluminium, glass, and copper materials in particular; the price rises were principally driven by high energy and transport costs, said the ABS. It was also noted the price rises have eased in recent quarters.
Sector breakdown
The Arcadis and the Australian Constructors Association survey also found that Australia’s total construction work value was $247.1 billion – an 11% increase from the previous year. While the market outlook remained consistent across most states, with Victoria cooling slightly and Northern Territory improving.
The hottest sectors in the construction industry are Defence (93%), Energy/Power (90%), Health (85%), Data Centres (73%), and Aviation (70%).
Commercial office activity has also declined, with 77% confirming a decline or stall. Health continues to outperform other sectors, with all respondents agreeing on its level of relative strength.
Rising cost of labour
While the report indicates material price inflation is beginning to moderate, the cost of labour is starting to increase significantly.
Matthew Mackey, Executive Director – Cost & Commercial Management at Arcadis said more than half of respondents rated trade labour capacity as severely constrained compared to only 20% last year.
“The industry expects that market will remain overheated in 2023, with a shortage of contractors relative to demand, and prices remaining high,” said Mackey.
“Based upon the responses received, Queensland and Western Australia are anticipated to be the hottest markets, while overall sentiment has fallen in Victoria compared to last year’s survey.
Labour costs to drive more inflation
Mackey said in terms of asset classes, Defence, Energy and Power, Health, Data Centres and Aviation are the strongest performers.
“Interestingly, enthusiasm for the Retirement Living sector has fallen since last year—with just 36% of respondents indicating that this is a rising market compared to 78% in 2022.”
“The latest data also indicates that pricing volatility for materials has started to ease, which some respondents noting that prices have fallen for specific items.
“While material pricing appears to be a softening picture, this is now being offset by increasing labour costs ahead of the next round of EBA negotiations.
“We therefore anticipate that labour costs will become a primary driver of the next wave of construction cost inflation.”
Davies said the industry is doing it tough as a result of having to absorb significant rises in material and labour costs.
“Government can help by compensating contractors undertaking government projects for these increased costs.
“It is not reasonable for government to pay less than it cost for a contractor to deliver a piece of infrastructure through no fault of the contractor especially given the cost to the economy of the current high level of industry insolvencies.”
