Tender prices for major construction projects are set to continue to rise as the devaluation of the Australian dollar places upward pressure on material costs and the growing pipeline of work is seeing subcontractors and trade contractors become more selective in the type of projects which they choose to undertake, a new report says.

Quantity surveying outfit WT Partnership says the overall outlook for building activity is generally positive notwithstanding tighter lending standards being applied by the banks. That tightening comes amid a combination of improving demand for office space, continued roll-out of large-scale infrastructure projects, the likely reintroduction of the Australian Building and Construction Commission and the continued delivery of residential, retail and healthcare projects.

WT says tender prices are generally under pressure as strength in overall levels of building activity stretches the availability of certain trades, whilst the cost of some materials was being affected by the relatively low level of the Australian dollar.

“Tier 1 contractors, particularly in Sydney, continue to report challenges in attaining adequate subcontract and supplier tender interest and both the tier 1 and tier 2 contractors are reporting increased trade pricing cost when tender acceptance periods expire,” WT says in its report.

“The weakening Australian dollar continues to have an impact on cost escalation for some overseas sourced elements such as facades, lifts and mechanical and electrical plant. Exchange rate fluctuations are continuing to be heavily qualified in tender submissions for these elements.”

In terms of states, WT says tender price pressures are strongest in Queensland, New South Wales and Tasmania, with prices expected to rise by between four and five per cent throughout those states over each of the next three years.

On a state by state basis, according to WT:

  • In New South Wales, strong tender price pressures are set to continue as both Tier 1 and Tier 2 contractors are reporting high levels of enquiry. Infrastructure is the standout market, whilst the withdrawal of commercial stock for residential purposes is underpinning healthy levels of demand for office space.
  • Strong price pressure is also expected in Queensland, where a significant upturn in multi-storey building has seen shortages occur across a number of trades including tiling, partitioning, formwork and painting and contractors with healthy forward order books are able to be increasingly selective about the type of projects they accept.
  • The biggest mover is expected to be Tasmania, where an unprecedented volume of civil and commercial works in Hobart is set to drive upward movement in labour shortages and trade pricing.
  • In Victoria, pricing pressures are moderating with Tier 1 contractors reporting a slowdown in enquiries notwithstanding that Tier 2 and 3 contractors remain busy with metropolitan residential projects. The outlook for the second half of the year remains patchy as a confluence of state government and financier initiatives including reduced plot ratios, new apartment design guidelines, new taxes being levied upon foreign investors and tighter lending practices restrict demand for apartments but new foreign stamp duty surcharge exemptions in sectors such as commercial accommodation stimulates demand in this sector.
  • Pricing pressures in Western Australia are expected to remain moderate as the wind-back in resource sector work impacts the ‘real economy’ and Tier 2 and Tier 3 contractors are experiencing a situation of oversupply notwithstanding a reasonably active market across a number of sectors for Tier 1 contractors.
  • Likewise, pricing pressures are also soft in South Australia amid an extremely competitive market as Tier 2 and 3 contractors remain hungry for work in an environment of oversupply.
  • Pricing pressures remain moderate in the ACT and Tier 2 contractors report that the ‘trade’ market in keen for work. Going forward, the housing market is going to soften but there is a decent range of commercial and infrastructure projects around.
  • Tenders are expected to be extremely competitive in the Northern Territory over 2016/17 as work on the Ichthys gas project winds up and residential sector investment eases back.
  • Construction prices will continue to rise if nothing is done about construction costs. These are seperate subjects. Quantity Surveyors must be finding the transformations occurring in the global construction industry vexing as their traditional role as the adder-upper of traditional ways of building things evolves from trade based measures to elemental and component measures. Most quantity surveyors talk in price measures of output. They have little understanding of the non-price aspects of construction that drive the output construction cost. Quantity surveyors seem to delight in pointing to construction price indicies varying through the cycle where the bid prices may have margins ranging from 2 – 6 percent depending where the cycle is. This is no way to track construction effectiveness or productivity. A new set of non-price measures are needed which point to the effectiveness of the pre-construction inputs (here that includes designers, project managers, construction advisers et al). and then a construction effectiveness indice would track effectiveness of the management and workforce efforts once work starts on site. These combined would drive productivity improvement, lower costs and in turn, prices.
    Quantity surveyors are not keen to go down this path; they are both unprepared (skill) and emotionally (fear of taking lazy Tier 1 contractors on). Ask the supply chain why their prices are going up. They have to factor in the risks passed on to them by large contractors, the cost of contractor inefficiency before construction and during, the cost of EBA's not negotiated by them with enterprise wide effect and the perennial chestnut of payment certainty. The list of issues is endless and beyond the QS these days.

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