Confidence in the property market has lifted to its highest level in four years following the upswing in the infrastructure development sector across Australia.
However, the growing demand from the infrastructure sector is creating pressures within the construction industry with personnel, plant and equipment as well as base materials such as cement, steel and aggregates showing a significant increase in cost.
The report, Construction Market Conditions 2018 by international cost and consultancy practice, WT Partnership reveals that the infrastructure boom will drive construction activity nationally with major projects underway in New South Wales and Victoria in the road, rail, water, ports, airports and telecommunication segments.
New South Wales, for instance, continues to experience record levels of investment in infrastructure and strong demand for residential, commercial and retail projects.
This significant investment, together with population growth and Australia’s ageing demographic, is driving activity in non-residential sectors such as education, healthcare and aged care.
However, the rising infrastructure boom has intensified cost pressures in the building sectors and is stretching resources, creating an industry-wide challenge.
Tender price escalation, therefore, is expected to be higher in the infrastructure sector with escalation rates generally around 4-5 percent compared to the non-infrastructure sector, which is forecast to trend at 3-4 percent in 2018.
Given the high construction activity levels in New South Wales, the escalation is forecast to continue at around 4.0 percent while the buoyant conditions in Victoria and ACT will see the escalation trending at 3.0 percent and 3.25 percent respectively.
Similarly, the increased construction activity in Tasmania has the escalation pegged at 3.5 percent. Other regions across Australia are expected to have tender pricing levels escalate at about 2.0 to 3.0 percent.
However, Peter Clack, director of construction cost consulting firm Ralph Beattie Bosworth and the immediate past president of the Australian Institute of Quantity Surveyors, warns that tender price escalation will be around 6.0 percent by the end of the year, given the cost pressures never seen before in the industry for close to four decades.
Major building projects are consequently at risk of cost blowouts, according to Clack, with serious shortages to be expected in the availability of structural trade workers such as concreters, steel workers, formworkers and fixers as they will be otherwise occupied in infrastructure projects. New South Wales, for instance, is currently facing significant trade pricing pressure across demolition, formwork, joinery and plasterboard trades.
In Victoria, the availability of specialist consultants, subcontractors, suppliers, plant and equipment is beginning to tighten and will only get worse this year.
Procurement of building materials is another area of concern with the large scale demand on materials, especially concrete aggregates, reinforcement and steel for infrastructure projects leading to cost escalation in other sectors of the industry.
The high demand from major infrastructure projects will push up prices of concrete and steel as well as lead to shortages.
Clack believes steelworks could go up by up to 50 percent from their current rate of about $6000 per tonne over the next 18 months.
Established developers will take the warning and be prepared to absorb these cost escalations but newcomers to the industry may suffer from cost blowouts to an extent that they wouldn’t be able to recover from the loss.
When builders don’t make allowances in their tender pricing for such potential escalations, they may end up with subcontractors reneging on committed prices.
Clack adds that a busy industry is a good thing but stakeholders need to be aware of the risks too.
Download the report at the link below.