Tender price escalation for major construction projects in Australia is set to intensify as trade shortages worsen and a booming apartment sector drives a shortage of subcontractor availability on major residential and commercial developments, a new report predicts.

In the report, quantity surveying outfit WT Partnership said activity within the construction sector was back on the rise notwithstanding the resource sector pull-back amid a strong pipeline of public sector infrastructure work and massive levels of private investment going into multi-residential developments.

According to WT, this was creating significant pressures on the availability of some trades and driving upward pressure on trade prices, with the impact spreading beyond the residential sector and into the commercial building space.

“Subcontractor capacity currently absorbed in residential construction is impacting on other sectors,” the report states.

“Recent market feedback from contractors working in the retail sector for example indicates difficulty in sourcing adequate subcontractor coverage. The trend of subcontractors, and increasingly main contractors, to be more selective in tendering continues and some of our offices are experiencing increased difficulty in sourcing sufficient and appropriate tender interest.”

In its report, WT said the economy remained subdued and an absence of pressures on inflation meant interest rates were likely to stay low for some time. The value of construction work done rose in the June quarter as a stronger building sector helped to offset the continued pull-back in resource related work.

In addition to the shortage of trades, cost pressures within the building sector are also stemming from persistent weakness in the Australian dollar, WT said, which could yet depreciate further if US interest rates rise.

State by state (According to WT):

Amid massive amounts of money going into multi-residential and infrastructure developments and a strong pipeline of work in office fitouts and upgrades, upward pressures on costs throughout New South Wales are extremely strong and tender price escalation of five per cent is expected to continue over the near term.

While prices for structural trades appear to have peaked, tier one contractors are reporting that those for finishing trades in areas such as ceilings, partitions and joinery are finding a new ‘norm’ at higher levels on the back of major projects.

Strong price escalation is also expected for Queensland, where a booming townhouse and apartment building market is absorbing capacity amongst all tiers of contractors and has created trade specific bottlenecks in areas such as formwork, concrete, post-tensioning, reinforcement fix, partitions and linings, painting, tiling and mechanical and electrical services. The Gold Coast in particular has a strong pipeline of work in the lead up to the Commonwealth Games, not least now that the federal government has agreed to help fund the Gold Coast Light Rail project.

In Victoria, WT says the market is difficult to read as recent tenders have seen some contractors show discretion toward the type of projects for which they bid but others display keener tendencies for new work. Such difficulties are being compounded amid a growing number of factors. Commentators are predicting a downturn in the market and uncertainty over the impact of new planning restrictions on high-rise apartments and subcontractor availability remaining challenged in some areas, though there are continued strong levels of apartment building approvals. Overall, modest to strong levels of tender price escalation are expected.

More modest levels of escalation are expected in the improving market of Tasmania, as well as Western Australia and the ACT. In Tasmania, contractor and associated subcontractor capacity in the tier-one segment of the market is likely to become saturated amid a healthy pipeline of new projects including the massive Royal Hobart Hotel and NRAS 430-bed student accommodation. With many subbies having left the market for better opportunities in other states during recent lean times, a shallow pool of available subcontractors is putting pressures on the supply of partitions and lining and electrical service trades.

While a growing pipeline of smaller projects in sectors like retail, hospitality and infrastructure looks likely to drive improving conditions in some areas of commercial building in metropolitan Perth, price pressures across WA will be restricted by the freeing up of contractors and tradespeople from work on major resource projects as well as the recent expansion of eastern state contractors into the Perth market.

Despite growing property sector confidence and a likely medium term improvement in detached house building following the recent release of more land, meanwhile, price escalation in the ACT is expected to be restricted as subcontractors remain hungry for work amid a subdued outlook across most commercial building sectors.

In other states, subdued market conditions and competitive pricing are expected to remain in South Australia in the short term, while no information or forecasts have been supplied for the Northern Territory.