Construction projects throughout Australia continue to face significant cost pressures, a leading quantity surveyor says.

During a recent interview, Niall McAree, Director of quantity surveying firm Rawlinsons Cost Management, spoke with Sourceable about the outlook for cost and price escalation on construction projects throughout Australia.

The interview comes as Rawlinsons forecasted in April  that price escalation of between 4 and 6 percent would occur on construction projects across the nation’s capital cities in calendar 2024.

According to McAree, this is well below the 10-12 percent annual increases that were seen during COVID.

Nevertheless, it remains above the approximately 3.5 to 5 percent annual rates of price escalation which were common prior to the pandemic.

He says that this may be disappointing for some project owners and contractors, who may have hoped that costs and prices would drop back following the pandemic surge.

“We are coming off historical highs that have largely been driven by COVID and various impacts of that in delays in materials and huge price increases in materials like timber and steel,” McAree said.

“Toward the end of 2023, we started to see an easing of those cost pressures on material prices.

“Across Australia, we are forecasting price escalation of somewhere between four and six percent across 2024 …

“… So we are coming back toward a certain amount of normalisation (in price escalation) but we were starting from a very high point because of the COVID spike.

“I think there were hopes more than anything in the marketplace from clients and builders that we were going to see a bit of a decline.

“However, whilst things are stabilising, it (cost and price escalation) is still trending upwards.”

McAree’s comments come as the most recent Producer Price Index data published by the Australian Bureau of Statistics indicates that output prices for building construction increased by 1.6 percent in the March quarter and by 5.9 percent over the year to March.

This is well below the 12.8 percent annual price increase that was recorded during the peak of the COVID-era price boom over the twelve months to September 2022.

Nonetheless, it still represents a historically elevated level of price escalation.

In civil construction, output price increases have been more modest at 1.3 percent for the quarter and 3.7 percent for the year to March.

Since the COVID outbreak in March 2020, output prices have increased by 28 percent and 25 percent for building and civil construction respectively.

As mentioned above, Rawlinsons has forecast further output price escalation of between four the six percent across all Australian capital cities in calendar 2024.

In particular, across the calendar year, Rawlinsons has forecast output price increases of:

• 4.0 percent in Sydney and Hobart
• 5.0 percent in Canberra
• 5.5 percent in Perth; and
• 6.0 percent in Melbourne, Brisbane, Adelaide and Darwin.

(Forecast rates of output price escalation on construction projects in 2024. Source: April 2024 Quarterly Update, Rawlinsons Cost Management)

Pressures on Several Fronts

According to McAree, projects are under pressure in several areas.

First, there are challenges in terms of skilled labour shortages.

This has arisen not only on account of heavy workloads but also a significant number of existing worker retirements that occurred during COVID.

Meeting these challenges through skilled migration has been difficult on account of a constrained supply of workers internationally along with challenges in housing foreign workers in Australia.

Meanwhile, government efforts to beef up training and apprentice support will take time before having a material impact upon the current situation.

When combined with sluggish productivity improvements, the shortage of skilled workers creates further cost challenges in terms of increased project timelines.

On this score, McAree says that projects which may have previously taken ten to twelve months to complete might now take fourteen to sixteen months.

For private developers, this means an additional four to six months before their asset comes into operation and produces an income stream.

For head contractors, the extended project timeframes will lead to higher costs for preliminary and time related items. In turn, this leads into further price escalation as contractors need to allow for additional time and costs within their bids.

Next, labour related pressures are also feeding through into additional cost impacts through higher remuneration costs.

On this score, McAree says that a significant number of enterprise bargaining agreement negotiations between Tier 1 contractors and unions are leading to annual wage increases in the realm of between four and five percent.

This will have a knock-on effect to other contractors and will further add to project cost pressures.

Finally, there are challenges as a significant number of construction related insolvencies have led to a restricted pool contractors and subcontractors to work on projects.

Speaking about the situation in Western Australia, where Rawlinsons is based, McAree says that the pool of Tier 1 contractors is relatively small.

Of those who are operating in the market, their order books are relatively full and they are able to pick up work relatively easily.

This creates challenges for project owners in securing suitable contractors to carry out the work.

(Niall McAree)

Critical Strategies

To overcome these challenges, McAree says that several strategies can be adopted.

First, early engagement of contractors during project planning through early contractor involvement (ECI) can help in two ways.

Contractors who are involved in early design decisions will be able to provide input into important ‘constructability’ considerations which can then be incorporated into designs. This will help to ensure that designs are able to be efficiently constructed.

Beyond this, contractors who operate daily in the market may be able to provide realistic input into current market prices during the ECI process. This will help to establish realistic expectations regarding cost from the project’s inception.

Next, it is important to have realistic timeframes and cost estimates from the beginning of projects. When doing this, it is important to engage suitable planners, designers and quantity surveyors who have appropriate experience in terms of the project being undertaken. It is also necessary to engage in early discussions and testing of costings.

To help establish accurate cost expectations, a vital resource is the Rawlinsons Australian Construction Handbook. This provides a comprehensive and up-to-date library of construction pricing information and data sources across Australia.

Finally, in order to mitigate the labour shortage impact, McAree says that engagement with key trades is critical.

On this note, McAree says that the aforementioned ECI process provides an opportunity for contractors to engage with key trade contractors early on in relation to the project. This is important as subcontractors who are engaged at early project stages may become more readily invested with main contractors and may thus attach a greater priority to the project in question.

It is also important to ensure that contractors who are selected have positive working relationship as subcontractors may favour builders whom they trust in relation to payment and other matters.

Meanwhile, ongoing engagement with subcontractors throughout the project will enable early identification of problems and issues as they arise.

McAree says the importance of subcontractors should not be underestimated.

“Subcontractors will go where they think the best opportunities are and where the best job is,” McAree said.

“Like anything in life but definitely in construction, relationships in general are huge. And the relationship between the main contractor and subcontractor has probably never been as key as it is now.

“Some builders may have a bad reputation for payment and other matters. If you are a subcontractor, you are probably going to favour working with someone with whom you have a better working relationship and get paid on time.

“Sometimes, you (project owners) are a little bit at the mercy of a subcontractor. However, relationships are the key.”