Builders are facing massive cost increases as a result of the recent surge in fuel prices, a survey of builders in Victoria has found.

And there are warnings that construction companies may need to lay off workers, with apprentices in the firing line.

Master Builders Victoria (MBV) has outlined the key findings from initial feedback which has been received through a survey of its members.

The survey is exploring how the Iran War has impacted the state’s construction sector.

It highlights that consequences have been severe.

In particular, of the more than 100 MBV members who have provided early survey responses:

• Almost half have experienced overall cost increases of between six and ten percent since the beginning of the conflict, whilst a further one in five have experienced increases of more than 11 percent.
• Sixty-three percent are locked into fixed-price contracts which offer no mechanism through which to recover unexpected cost increases through price adjustments.
• One third are considering means through which to reduce costs. This includes cutting staff levels, with apprentices being identified as being in the firing line.
• Measures being adopted to manage the situation include batching deliveries, pre-purchasing materials, carpooling crews and moving to shorter projects.

Feedback from specific respondents demonstrates the gravity of the situation.

Peter Gleeson, who owns a demolition and rubbish removal business which employs around 20 workers, says his fuel and operating costs have increased by around $4,000 per week.

Having previously needed to absorb $300,000 in additional costs over COVID, he says he is unable to do so again and is considering shutting his business down.

Subcontractor business owner Steve Hassett talks of insurance increases, material costs, fuel surcharges and hikes in commercial rents.

He says he has been ‘hit from every angle’ and has been ‘beaten from pillar to post’.

Concerns nationally

The latest survey comes amid broader concerns about the impact of the conflict across the construction industry at a national level.

Whilst the biggest impact has been in civil construction (which is heavily reliant on diesel fuel and is vulnerable to surging bitumen/asphalt prices), the effect has also been felt in the building sector.

Across Australia, construction cost information provider Rawlinsons Cost Data indicated recently that prices of bitumen and asphalt have risen by 30 between 30 and 50 percent since the beginning of the conflict whilst those for plastic piping have risen by between 30 and 40 percent.

Meanwhile, substantial cost increases are evident for aluminium cladding (above 10 percent), structural and reinforcing steel (between 5 and 10 percent), laminated timber (between 5 and 10 percent), quarry products (5 percent) and glazing (between 9 and 10 percent).

Meanwhile, surcharges for concrete averaging $8 per cubic meter have been applied.

This is on top of the direct cost increase from higher fuel prices.

All this is happening as builders are generally unable to pass the increase in costs onto their customers in respect of their existing projects as many are on fixed price contracts.

This is especially the case in residential sector, where consumer protection laws generally force builders to offer fixed price contracts with limited or no adjustment for cost escalation.

In Victoria for instance, builders entering into residential contracts are generally required under the Domestic Building Contracts Act to offer fixed-price contracts.

Cost escalation provisions such as ‘rise and fall’ clauses are generally forbidden for contracts which are valued at $500,000 or less and are highly restricted for contracts which exceed this value.

As a result, whilst builders are able to allow for the surge in costs when bidding for new projects, they are generally forced to absorb these higher costs in respect of their existing work.

Action needed

Commenting on the survey results (from a Victoria-specific viewpoint), MBV CEO Michaela Lihou said that the gravity of the situation should not be underestimated.

Lihou says that the state’s ability to deliver 80,000 new homes per year in order to reach its statewide housing target of delivering 800,000 homes over the decade to 2034 is being put at risk by surging costs for plumbing, concrete, steel and electrical supplies along with a raft of new regulations.

(Unlike Queensland and New South Wales who have deferred the adoption of new building code changes until May next year, Victoria announced late last month that it would adopt the changes from May 1 this year.)

Lihou said that the findings relating to employment and apprentices are particularly concerning.

With a workforce of around 290,000 people or 8.4 percent of the state’s overall workforce, the building sector is Victoria’s fourth largest employer.

Meanwhile, any cutback in apprenticeships would jeopardise the state’s future skills pipeline, Lihou said.

In response, Master Builders has called on the government to work with the industry on several matters.

These include cost escalation clause protections, extensions of time on government projects and meaningful relief from current regulatory burdens.

“Victorian builders are resilient and innovative, but resilience should not be the price of survival,” Lihou said.

“There must be fair and practical mechanisms at a state level to address extreme, industry-wide cost shocks.”

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