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    Competition from tier two construction contractors keeps cost down

    Nathan Johnson

    Aggressive tendering is controlling construction prices as activity improves for contractors, according to newly released market report.

    WT Partnership explains in their Review of Construction Market Conditions to March 2014, that it is aggressive tendering that is controlling the escalation of construction price whilst tier two contractors are benefiting from an increase in construction activity in the residential market.

     “The private construction sector is continuing to improve with significant activity in the multi-level residential market on the east coast.  Developers’ confidence is translating into further land and property transactions and the upsurge in Commercial, residential, education and health activity is driving institutional players to invest in their assets to position them for future growth,” said WT Partnership’s Managing Director Nick Deeks.

    On the other hand, tier one contractors are now facing stiff competition from a strong contingent of lean tier two contractors, especially at the $50 million to $150 million construction level. This is also holding back construction escalation, keeping all but a selection of trades very competitive. 

    Enterprise Bargaining Agreements (EBAs) have continued to contribute to construction cost escalation however with Government scrutiny this year, the impact is expected to decrease. 

     According to the review, we can expect the national average tender price escalation for 2014 to trend in the order of 2.0 per cent and 3.0 per cent for 2015 through to 2017, not a dramatic increase. The WT Partnership’s media statement suggests that once more tendered projects move into construction phase, the volume of work will start to stretch resources within construction firms and place them in a position to be more selective and increase margins. 

    The following is a state by state commentary in the report from WT Partnership:

    NEW SOUTH WALES

    The New South Wales building industry continues to show signs of improvement in residential, commercial, urban renewal and education projects. Demand continues to rise in the wider Sydney and CBD rental markets and residential sales volumes are on the increase. The number of projects proceeding to tender across all sectors has continued to increase, with the first two months of 2014 being more positive than the same period for any of the last 5 years.

    Forecast for escalations remain conservative at 2.5 per cent for 2014 rising to 4.5 per cent per annum for 2015 and 2016 and for engineering, rail and road construction 2.0 per cent for 2014, 3.5 per cent for 2015 and 4.0 per cent for 2016.

    VICTORIA

    The frenetic tendering experienced in late 2013 has stabilised as developers and contractors take stock and ready themselves for the year ahead. Demand and interest remain steady, but there is still a surplus of Tier 1 and 2 contractors seeking new opportunities.

    The State Government is continuing planning for major infrastructure initiatives.  There are various large scale commercial and retail projects in construction with a moderate amount of new projects planned.  We predict cost escalation in Victoria for 2014 of 2.25 per cent, increasing to 2.75 per cent in 2015 and 3.0 per cent per annum for 2016 to 2017.

    QUEENSLAND

    The South East Queensland market is experiencing a notable increase in confidence which is driving new projects particularly in the residential and retail sectors. The last quarter saw increased activity in the South East Queensland tender market and this trend continues in the first quarter of 2014. Tender results continue to return competitive pricing but not at the cut-throat levels witnessed in previous years despite significant capacity in the industry. The pressure on costs reported in our November 2012  review are beginning to impact on pricing levels with head contractors lifting margin levels. 

    We continue to predict tender price escalation trending higher towards the end of 2014 at 2.2 per cent rising in 2015 to 3.0 per cent and to 4.0 per cent per annum in 2016 and 2017.

    SOUTH AUSTRALIA

    There is an air of optimism in the construction sector about the medium term in South Australia, which is no doubt helped by the upcoming State Government election in March 2014 and the $1.85 billion Royal Adelaide Hospital project currently under construction.  There are some larger city apartment developments being marketed and feasibilities are being undertaken by retail developers. The State’s three universities have committed to large expansion/redevelopment projects.

    We predict tender price escalation in the order of 1.0 per cent for 2014, with 1.5 per cent per annum for 2015 and 2016 and 2.0 per cent for 2017.

    WESTERN AUSTRALIA

    The overall outlook for the Western Australian construction industry remains positive for the year ahead. Growth is expected in most sectors, however we anticipate that we will continue to see aggressive tendering and tight margins as small to medium size contractors seek to maintain their position in the market.

    The resources sector continues to be turbulent. 

    Our outlook for escalation for 2014 remains at 2.5 per cent as previously forecast however we have reviewed and increased our projection for 2015 to 3.5 per cent.

    AUSTRALIAN CAPITAL TERRITORY

    The uncertainty surrounding the Federal political environment continues to harm the confidence of the ACT property sector. The ACT economy has slowed due to the uncertainty created by the actual and proposed public sector cuts which has affected the demand for both residential and commercial construction.

    It is anticipated that tender prices will continue to be keen for the remainder of 2014, with a forecast for cost escalation to remain at 0.5 to 1.0 per cent for the foreseeable future.

    TASMANIA

    The Tasmanian economy continues to struggle in the face of reduced GST revenue, high unemployment and low population growth. General sentiment in the State’s construction sector remains restrained despite the cautious air of confidence returning to the broader mainland market.

    Tender margins are still extremely tight and we anticipate this trend to continue with tender price escalation in the order of 1.0 per cent for 2014 and 2015, rising to 2.0 per cent for 2016 and 2017.

     Download the full report here:

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