Rider Levett Bucknall’s 1st Quarter 2023 report on Australia found the construction sector in the country is facing a challenge in delivering ongoing projects, which were initially contracted under different circumstances that prevailed two to three years ago.
RLB Director Domenic Schiafone said Australia, like many other countries, has experienced sharp increases in construction escalation over the last two years.
“This has been due to a variety of factors, including sharp changes in material prices, labour costs, and other significant internal and external factors,” he said.
The increase in the number of mega-projects being built in Australia is one of the factors contributing to this challenge. A decade ago, only one transport infrastructure project (Brisbane’s Airport Link M7 and Northern Busway) worth over $5 billion was underway in the country. However, presently, there are nine such projects in progress.
In an effort to achieve an infrastructure-led recovery from the pandemic, Australian governments have accelerated the development of transport projects over the past three years. This has resulted in a strain on the availability and cost of labor and material resources, impacting all sectors of the economy, the report noted.
“Construction in Australia continues in the midst of a perfect storm – these combined stresses are causing increased construction costs, project delays due to shortages of labour and materials, and reduced margins for contractors,” Mr Schiafone said.
“The added rise in construction costs is placing pressure on developers who are struggling to align these increases with suitable rates of return, ultimately impacting project feasibility and delaying commencement of new projects.”
RLB’s offices have predicted a deceleration in escalation rates compared to the past two years, with 2022 being the year of peak escalation for most capital cities. However, these rates are still higher than the average of the past decade in Australia.
Though the volatility has subsided, there is still a risk of sudden cost increases, largely due to factors outside the control of the construction industry.
According to RLB, tender prices in Brisbane will drop from 10.5 per cent last year to 5.1 per cent this year, while those in Adelaide will go from 12.5 per cent to five per cent. Tender price growth will drop in Sydney from 6.9 per cent in 2022 to 3.9 per cent this year and in Melbourne from eight per cent to five per cent.
Perth tender pricing is forecast to drop from 9.4 per cent to 5.6 per cent, while prices in Townsville are expected to drop from 12 per cent to eight per cent.
“The end of the 2022 calendar year, and the start of 2023, have seen some cost inputs move the escalation needle a little to the left. Two of the highest profile escalation drivers—supply chain and material costs—appear to be stabilising,” Mr Schiafone said.
“Overall supply chain pressures appear to be improving markedly. Overseas shipping and freight costs have been reducing towards pre-pandemic levels. In addition, the cessation of China’s zero-COVID policy has eased costs and delays associated with the major exporter’s ports,” he said.
According to RLB’s report on Australia, to address the current economic challenges, developers and contractors will need to make changes in their future workload and procurement approaches. The focus will shift from relying on reputations and past performances to conducting more rigorous solvency investigations and allocating risks meticulously in contracts.
“The industry is seeing a number of contractors going into insolvency. As project costs increase, pressure on the full supply chain increases. With the large number of projects under construction, a profitless boom is occurring, and more companies are closing their doors,” Mr Schiafone said.