The outlook for construction costs throughout Australia varies across different types of projects, a leader in cost and project management says.
In an interview following the release of his firm’s latest report on the outlook for construction costs, Niall McSweeney, President of Cost and Project Management, Asia Pacific at Altus Group, spoke with Sourceable about the outlook for construction costs across the nation.
According to McSweeney, the overall focus of construction cost pressures is shifting as material prices have mostly stabilised but pressure remains on labour availability and cost.
Beyond this, however, cost pressures vary across different project types.
Taking the example of an industrial building, McSweeney says the large footprint associated with these facilities means that costs associated with buildings of this type will be more sensitive to price movements in structural steel than is the case for costs associated with other construction typologies.
This is further complicated as an overall decline in structural steel prices as shown in official data, which primarily reflects falling prices for lower grade product coming out of China. For higher grade product which is manufactured locally, McSweeney says that prices are rising on account of higher production expenses driven by cost pressures associated with energy and labour.
Further, McSweeney cautions that broad estimates for likely cost escalation can be misleading. Say, for example, a generalised cost escalation range of between four and nine percent per annum is provided. This could have significant consequences where project owners proceed on the basis of a four percent expectation only to find that the actual rate of escalation that is incurred on their project is in fact six percent.
“I regularly get people asking, ‘what do you think is happening with escalation and how much do you think prices are going up?’”, McSweeney told Sourceable.
“I don’t agree with saying just one figure.
“I can give you a blended figure that says, ‘in general, across the whole market, escalation is likely to be …’. But the truth of the matter is that it will vary depending on what sector you are in, the size and composition of your project and your project location.”
McSweeney’s comments come as Altus Group recently released the second quarter edition of its Australian Construction Material Price Outlook.
Speaking about the overall outlook for construction across Australia, the report notes that there are several causes for concern. These include signs of a near-term slowdown in residential construction as indicated by weak building approval and other data; uncertainty as governments pause or cancel large infrastructure projects; and overall industry concern on account of high levels of construction insolvency and uncertain forward order books beyond the next six months.
Turning to costs, the report notes that material prices have largely stabilised (and have even fallen in some areas) following a period of intense escalation throughout calendar 2021 and 2022.
However, it says that the focus of cost pressures has now shifted on account of labour shortages for some categories of skilled workers.
In relation to specific materials, the report says that:
- Prices for structural steel and rebar are continuing to come off recent peaks on account of slowing global construction activity and greater supply of lower grade product from China. The greater Chinese supply reflects a slowing domestic real-estate market in China which is forcing Chinese steel producers to offload excess product onto international markets including Australia.
- Prices for structural timber are likewise contracting from recent peaks as supply has recovered following previous shortages that were caused by bushfires, COVID and the Ukraine War.
- An easing in the price of diesel over the past twelve months has provided further relief regarding cost pressures for materials that rely on fuel for production and delivery notwithstanding that fuel prices remain elevated by historic standards. This is particularly important for civil projects involving heavy machinery.
- However, substantial price pressures remain for concrete on account of the energy intensive nature of this product in terms of production and transportation.
- Pressure on brick prices remains (with a larger issue being a shortage of bricklayer availability) on account of a limited pool of suppliers and a trend back toward bricks on account of quality of technical considerations.
- Prices for plasterboard have risen strongly over the past quarter and year. The report warns that this could be one area where further budget adjustments may be required notwithstanding that COVID induced supply constraints have been resolved and that demand associated with housing related stimulus has eased.
- Steady price increases for copper could have significant cost and budget implications for copper components in electrical and plumbing material costs. The most notable impact of this is likely to be felt in large rail projects.
Notwithstanding the challenges referred to above, McSweeney says that the outlook for construction activity offers several areas of opportunity.
Chief among these is housing.
As mentioned above, the report notes that residential construction activity is likely to be subdued over the near-term.
Beyond this, however, McSweeney says the sector will be positioned for a significant rebound. This will be driven by strong population growth, changing demographics and an existing shortage of housing which can be seen through low rental vacancy rates.
He says opportunities will extend beyond private sector houses and apartments and will include student accommodation, public/social housing and aged care – especially affordable aged care. Opportunities will be evident for both build to sell and build to rent projects.
Turning to industrial, McSweeney says there are a significant number of projects around major population centres in Melbourne, Sydney and Brisbane. This is being driven by an active leasing market in which new product is being readily absorbed.
Particularly in Sydney where land is scarce, McSweeney talks of opportunities for multi-story logistics centres.
Next, there are opportunities in public sector buildings on the back of strong government investment. This includes significant investment in schools and public education along with major health projects particularly in Queensland. It also includes other building types such as justice centres and local government buildings such as libraries.
Turning to offices, McSweeney says there are opportunities to repurpose lower grade stock for other uses. This is the case as vacancy rates are high and companies are increasingly seeking higher grade stock in order to attract and retain suitable workers.
Finally, there is infrastructure. Whilst McSweeney acknowledges that there are a massive number of public sector projects underway, he cautions that there are significant challenges in project delivery. These include a shallow pool of contractors who have the capacity to deliver on huge megaprojects along with challenges in delivering projects on time in light of cost and resource pressures.
Speaking about costs, McSweeney says the labour pressures referred to above vary according to specific classifications.
In electrical, both trade and material price and availability are challenged on account of strong demand from infrastructure work.
Turning to other trades such as mechanical and air-conditioning, however, the building cycle has reached a point where prices are stabilising in some cities.
Asked about strategies to manage cost escalation risk, McSweeney encourages action in two areas.
First, it is important to engage with suppliers in order to understand what materials are likely to be available at the times in which they are likely to be needed. In some cases, advance material purchases could be considered.
In addition to being helpful for project owners, such engagement can also benefit suppliers as it may enable them to more effectively plan their production output to meet likely demand.
Exactly how this is done could vary according to different materials. For curtain walling, project owners may wish to identify, source and select what is available in terms of extrusions to ensure that the market will have sufficient capacity to deliver what is needed at the time that it is required. For structural steel, sections sizes and products could be selected ahead of time. For concrete reinforcing, project owners should understand forward capacity and identify whether or not their project will be competing against major transport developments that are going to absorb significant portions of available product.
Beyond this, project owners should speak with their quantity surveyors and obtain informed direction about what is happening in the market.
“Communication is key,” McSweeney said.
“It is important to engage with the market and to understand the potential that is out there so that you can identify what supplier production runs are going to be and ensure that your products will be available when needed.
“(In addition,) Always talk to your quantity surveyor so that they can assess the true mix of materials and provide advice about what is happening in the market.
“Do not try to do this yourself.”