The rate of cost and price growth which occurs throughout Australia’s civil construction sector is set to reaccelerate over the second half of the decade, a leading forecasting firm says.

In its latest report, Oxford Economics Australia says that cost inflation within the engineering construction sector has eased from the spike that was experienced during COVID.

But it forecasts that the rate of cost and price escalation will reaccelerate and will reach four percent per annum by 2027/28 before pushing even higher by 2030.

Adrian Hart, study co-author and Oxford Economics Australia’s Director of Construction and Infrastructure, says that cost and price escalation in civil and heavy engineering construction will outpace the general rate of inflation as measured by the consumer price index (CPI).

Hart said the effect on projects should not be underestimated.

“At Oxford Economics Australia, we see significant risks of cost escalation once more surprising on the upside in coming years – even if the RBA (Reserve Bank of Australia) is successful at quarantining CPI growth within its 2-3 per cent target band,” Hart said.

“From as early as FY2026 we are forecasting another ‘decoupling’ of construction cost escalation and the CPI.”

“Escalation of this magnitude (referring to the aforementioned forecasts for 2027/28 and beyond) could easily add $200 million in costs on a multi-year $1 billion megaproject. And cost growth will likely be even higher in states such as Queensland and Western Australia where growth in construction activity and demand will be strongest.”

The latest report comes as output prices and costs continue to grow across Australia’s civil construction sector – albeit with the rate of escalation having moderated since COVID and the outbreak of the Ukraine war (refer chart).

Furthermore, the rate of escalation appears to have reaccelerated over recent quarters (see chart).

According to Hart, the growth in costs is occurring as price declines for some key construction inputs are being offset by accelerating prices for other inputs.

This is occurring as international factors that were previously driving escalation have given way to domestic pressures which are associated with elevated levels of construction activity.

In particular, strong demand for construction labour and local construction materials is driving stronger growth in construction wage outcomes and prices for inputs such as quarry materials, cement and concrete.

Indeed, wage growth in the construction sector has accelerated from a low of 1.5 per cent in 2020 to four per cent at the moment (and higher again in some states such as Queensland), according to Wage Price Index data from the Australian Bureau of Statistics.

Meanwhile, prices for quarry products have risen more than 20 per cent over the same period.

In its report, Oxford said that the reacceleration of construction price escalation will be driven by several factors.

These include:

• The ongoing flow-through effect of recent inflationary pressures on construction industry wages. This will play out over coming years as more Enterprise Bargaining Agreements (EBAs) which are to be renegotiated over the coming 12-18 months will aim to claw back sharp falls in real wages which occurred during 2022 and 2023. This will incrementally ‘lock in’ relatively higher wage growth outcomes for several years.
• A substantial upswing in construction activity over the second half of the decade. This will result from ambitious targets for new housing as well as a significant pipeline of projects in in energy, water, transport, health and education. Beyond this, demand will be further underpinned by new investments across defence, the resources sector and the Brisbane Olympics. All this will likely increase demand-side price pressure on local construction wages and materials.
• Additional costs which are associated with the move toward greater sustainability in new construction. Whilst moves to reduce carbon emissions in construction are welcome, Oxford says that this could add to cost pressures at least in the short-term as lower carbon products are sought and sustainable processes such as material recycling are adopted more widely.
• Ongoing challenges as global supply chains remain relatively ‘thin’ compared with pre-Covid times notwithstanding improvement which has occurred over the past year. These could be prone to further disruptions and cost pressures arising from factors such as rising demand as the global economy reaccelerates later this decade or future shocks emerge such as geopolitical events (e.g. a ‘Middle East escalation’ scenario), increasing trade protections or even another pandemic.

To best manage ongoing challenges, Hart says that Australia’s construction sector must address its sluggish productivity performance.

According to Hart, costs associated with poor productivity now exceed $56 billion per annum.

He says that improvements are needed not just to manage escalation risks but also to deliver upon the massive pipeline of housing and infrastructure promises.

To do this, the industry needs to improve practices and take greater care during planning and delivery so as to avoid rework.

“For government and industry this requires more efficient risk allocation and procurement, better front end planning and coordination of the infrastructure pipeline, a heightened focus on education, training and skills retention in the construction industry and a ‘step change’ in the way government and industry implement known technologies (e.g. what’s referred to in the industry as Modern Methods of Construction such as modularisation and prefabrication) to boost productivity,” Hart said.

Enjoying Sourceable articles? Subscribe for Free and receive daily updates of all articles which are published on our site

Want to grow your sales, reach more new clients and expand your client base across Australia’s design and construction sector?

Advertise on Sourceable and have your business seen by the thousands of architects, engineers, builders/construction contractors, subcontractors/trade contractors, property developers and building industry suppliers who read our stories across the civil, commercial and residential construction sector