Costs associated with construction projects throughout Australia are set to rise further in the second half of this year, a new forecast suggests.

Releasing its July 2024 update, cost management and quantity surveying firm Rawlinsons Cost Management has provided an overview of current market and tendering conditions across each of the nation’ s eight capital cities.

All up, Rawlinsons expects output price escalation of between four and six percent across major capitals throughout calendar 2024.

In particular, according to Rawlinsons:

• Output price escalation of 4.0 percent is expected in Sydney and Hobart
• Output price escalation of 5.0 percent is expected in Canberra
• Output price escalation of 5.5 percent is expected in Melbourne and Perth
• Output price escalation of 6.0 percent is expected in Brisbane, Darwin and Adelaide.

In its report, Rawlinsons said that cost escalation has stabilised after two years of extraordinary output price growth.

However, whilst material price escalation has subsided, the focus of cost and project pressures has shifted to skilled labour availability.

“Cost escalation in most states and territories has largely stabilised,” the report said.

“We are seeing strong indications that the extreme material price increases experienced over the past few years have largely subsided. There are still a few anomalies to this, however contractors have the ability to estimate supply costs with more confidence and certainty and therefore reduce project risks.

“As discussed throughout this report, the biggest factor impacting cost increases at present is a skilled labour shortage, coupled with current industrial relation negotiations in most states. This will prove to be the needle mover on many projects going forward.

“The rate of escalation can vary dramatically from project to project and is driven by various factors including, but not limited to; labour availability, energy prices, finance rates, program, material costs, project scale, builders margin and supply chain procurement.”

In its update, Rawlinsons gave an overview of conditions across each major capital.

In Sydney, Rawlinsons says that overall conditions are subdued and that a contraction in construction output is expected across calendar 2024.

This is the case as a downturn in residential work has been driven by high interest rates, higher construction costs and ongoing labour shortages.

This has caused market sentiment to shift away from immediate pricing concerns and toward uncertainty surrounding future growth and diversification of projects outside of traditional sectors.

Notwithstanding this, some price pressures remain amid persistent shortages of skilled trades as well as localised pricing pressure on select materials.

Turning to Melbourne, Rawlinsons says that the market continues to be impacted by labour shortages, builder insolvencies, material price adjustments, prolonged construction timeframes and higher fees and charges.

This is despite the overall industry experiencing high levels of construction activity on the back of a large number of civil projects along with a good work pipeline in sectors such as industrial and health and aged care.

Significant challenges remain in the detached house sector, where activity levels are subdued and substantial increases in insurance premiums are set to come through over coming months.

In Brisbane, Rawlinsons says that the rate of construction cost increase has moderated compared with previous quarters during the latter part of 2023 and early 2024.

Overall activity levels remain strong. However, building approvals (both residential and non-residential) have eased back to pre-COVID levels and there has been a softening in tender activity over the past quarter.

This has led to an easing in the availability of contractors and skilled labour.

Nevertheless, labour cost increases are likely to be a driver of cost escalation in 2024 as new wage agreements come into effect.

Finally, in Perth, a degree of stabilisation has returned to the market and the rate of cost escalation has returned closer toward its historic annual average of between three and three-and-a-half percent.

However, the availability of trades remains a concern for contractors. This is particularly the case as retirements of skilled tradespeople will leave a knowledge gap that will take time to address notwithstanding stronger activity in apprenticeship commencements.

Another cost challenge in Western Australia involves current negotiations regarding industrial relations.

Whilst WA has historically avoided many of the trade union issues experienced in eastern states, a push is underway for new Enterprise Bargaining Agreements (EBA’s) to be put in place for many trades.

Predominately, this is expected to impact Tier 1 contractors. However, the effects will likely trickle down into the Tier 2 and 3 contractor space.

Forecast Tender Price Escalation: Calendar 2024

(Source: July 2024 Quarterly Update: Rawlinsons Cost Management)

Interesting Challenges with Build-to-Rent

In its report, Rawlinsons highlighted the growing build-to-rent (BTR) sector – a sector in which significant expansion is expected over coming years.

According to Rawlinsons, BTR affects the design and cost of developments in several ways.

As the developer will also be the long-term owner, there will be a greater focus upon operational and maintenance costs over the life of the asset in design specifications.

This will require more extensive consideration of hard-wearing and low maintenance materials as well as safe and efficient systems.

Another feature is the need to provide high-end amenities and spaces to create a sense of community and wellbeing. This might include swimming pools, yoga studios, wellness centres, high-end entertainment areas and co-working spaces.

From a cost planning point of view, Rawlinsons says that several strategies are needed for successful BTR developments.

For one thing, greater allowance needs to be made for several items.

These include:

• hard wearing and durable finishes in corridor spaces
• community amenity (hotel-like finishes, cabinetry/fitment, feature wall and ceiling finishes)
• hard wearing interior floor finishes, and
• maintenance access platforms and facade cleaning systems.

Throughout the building, a cost-benefit analysis is needed to determine the most suitable heating and air-conditioning systems.

Finally, Rawlinsons says that overall life-cycle costing should be undertaken at each design stage to inform both capital and operating cost considerations.

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