To assist the construction sector manage the effects of material and labour shortages and rising building prices, a new approach to flexibility and collaboration between developers and contractors has become necessary.
During July and August, the Maddocks Construction Pulse Survey asked a group of its construction clients how they are managing project deadlines and budgets in the face of ongoing labour shortages, rising costs, uncertain global events, and building material delays due to global supply chain disruptions.
Approximately half of those polled stated they were investigating alternate procurement methods such as early contractor participation, construction management, or other types of relationship contracting.
“There has been an immediate impact on construction projects already in delivery, with a spike in contractual claims for time and cost relief being made across all projects,” Sefton Warner, Maddocks Construction & Projects Partner said.
The main findings of the survey revealed:
- ‘The ‘hyper-escalation’ of building material costs is the greatest cause of concern for both principals and contractors, with one third of them adding that labour shortages and supply shortfalls were just as troubling.
- Almost 100 per cent (97 per cent) of respondents said they are concerned that ongoing challenges will cause the number of head contractor and sub-contractor insolvencies to rise, further impacting industry capacity.
- Project delays of between three and five months on active projects resulting from cost escalation and supply chain issues.
- One third (33 per cent) of survey respondents expressed a low level of confidence or no confidence in budgeting for current projects.
- While many said that material costs would eventually stabilise, 90 per cent said they had no choice but to continue with projects as planned.
Many respondents claimed that as a result of the construction industry’s issues, some contractors took on too much work, exacerbating the labour shortage.
“Financial pressures on contractors are causing some to walk away from projects mid-stream or, worse, enter into insolvency,” Anna Scannell, Maddocks Construction & Projects Partner added.
The challenging operating environment was also prompting some developers and contractors to look at more flexible and collaborative approaches to project delivery, including:
Early engagement: Engaging a building contractor early in the design development stage to provide buildability and design management services. This is usually achieved with a short form Early Contractor Involvement or Agreement.
Long lead items: Principals placing orders directly themselves for long lead items, regardless of whether by building contract award they will be principal-supplied items or novated to the building contractor.
Alternative contract structures: Considering alternative forms of procurement for the delivery phase, such as:
- construction management where a contractor co-ordinates the work of trade contractors selected and engaged by the Principal
- managing contractor where subcontractors are selected by the Principal, but engaged by the Contractor on an open book basis
- form alliances where the parties share collaboratively in the upside and downside of various project risks.
Just over half of survey respondents indicated they were now contemplating adding extra contingency amounts and duration to project budgets and building plans to manage supply chain risks.
Moving to early contractor participation and incorporating rise and fall clauses for certain components of project tenders were two common options for overcoming supply chain disruption.
There were also suggestions for lump sum contracts with better detailed design documentation to be released in order to achieve more realistic pricing from the market.
Respondents also emphasised the need of government and financial institutions demonstrating a better grasp of sector difficulties, such as the requirement for contractors to bear the risk of cost rises.