Construction Tender Prices Could Escalate 1

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Thursday, December 11th, 2014
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As building activity picks up, the latest report suggest that tender prices for work on construction projects are beginning to surge in some areas and locations.

In the November edition of its Review of Construction Market Conditions, project management and quantity surveying outfit WT Partnership says it expects modest average increases in overall tender prices for construction projects around the nation of 3.1 per cent, 3.5 per cent and 3.7 per cent in 2015, 2016 and 2017 respectively as contractors use the bargaining strength available through stronger forward order books to begin to rebuild margins.

It said, however, that evidence of upward spikes in certain areas were already beginning to emerge as a shake up within the sub-contractor market that brought about the cutthroat competition over recent years has significantly impacted capacity levels at the subcontractor level.

In New South Wales and Queensland, for instance, suppliers and subcontractors in areas such as concrete supply, reinforcement fix and formwork supply and fix are pulling in price increases of between 12 and 15 percent, according to WT.

Pricing of mechanical services, meanwhile, is subject to upward pressure following the financial failure of a number of subcontractors last year.

In its report, WT says thus far expectations of competitive tendering throughout the remainder of 2014 have proven to be correct.

“However, as we approach the end of the year, capacity in the head contractor and subcontractor market appears to be showing signs of decline,” the report says. “Currently, the pace of decline in contractor capacity and the subsequent effect on tender escalation differs significantly from state to state. Notwithstanding, as forward order books continue to improve for head contractors and subcontractors alike, the persistent competitiveness experienced over recent years is now changing.”

The information comes amid increasing signs of strength in the building and construction sector within Australia. While the overall dollar value of building and engineering work done is falling back as major resource projects move out of the construction phase, the value of residential and commercial building work done – which impacts a larger number of workers and firms compared with resource construction – was up by 5.8 per cent in the September quarter compared with the same quarter last year.

Moreover, with construction sector employment at near-record highs, workers and contractors across most trades are becoming more difficult to source albeit with few reports of extreme trade shortages outside of a few specific areas.

In its report, WT says it expects the broader tendering market to remain competitive, but adds that ‘spikes’ in prices may become more frequent and apparent.

“Notwithstanding leading market signals indicating a return of notable tender pricing escalation, which for now is applicable to select areas, projects and trades; the broader national tender market remains competitive,” the report says. “However, we anticipate increasing capacity constraints in the contractor and subcontractor market as demand continues to catch-up with supply.”

“We also anticipate increasing tender escalation generally in the short to medium term. In some instances and against certain trades or projects, more prominent pricing ‘spikes’, may occur in the short term as more pronounced and specific imbalances correct.”

On a state by state basis, according to WT, the outlook for tender price inflation is as follows:

NSW: Very strong pressure on prices and costs amid a significant ramp up of construction work. Tier 1 contractors are reporting rates rising in structural trades by between 10 and 15 per cent in the past three months. Prices for engineering trades and finishing trades are tipped to increase on larger projects.

Vic: Generally moderate price rises but some fear about ‘bottlenecking’ where a concurrency of demand could emerge. There are some shortages of reinforced concrete subcontractors with large project experience. Some contractors are looking to broaden subcontractor tender lists to maintain competitive overall pricing.

Qld: Strong tender price rises amid high levels of residential and commercial activity in the south-east and a growing number of tourism developments.

SA: Modest tender pricing power returning to quality established Tier 1 and Tier 2 contractors amid slightly improving volumes of work.

WA: Moderating price pressures and competitive tendering overall as resource work drops back and commercial office vacancies rise, but Tier 1 contractors are reporting some shortages in bricklaying and formwork trades and Tier 2 contractors are reporting rising costs for ceiling and partition subcontracts as well as demolition subcontracts.

Tas: Negligible pricing pressures as activity remains subdued despite recent signs of improvement.

ACT: Negligible pricing pressure as cutbacks in Commonwealth public service numbers impact demand for office space and capacity among subcontractors remains high.

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  1. Kendrick

    As a metal roofing and cladding contractor, it is nice to hear that cutthroat pressure is easing. All 2014 it has been, if your the cheapest you win. Having already secured a lot of work for 2015 we are tendering at our preferred price rather then minimum.

    I don't think that it is all bad for the consumer, you get what you pay for will become more true again and the cut throaters will be exposed.

    The price rises will follow on straight to the tradesman as pay rises have been fairly stagnant for nearly 10 years!

    I really appreciated this article and can't wait to read your next. Thanks Andrew