Australia’s civil construction contractors are facing severe pressures on account of the recent surge in fuel prices and material costs, a new survey has found.

And businesses and considering pausing current projects, laying off workers and winding down operations.

Last week, the Civil Contractors Federation released the results of a new national survey of its members.

The survey explored the impact of the Iran War on the nation’s civil construction contracting businesses.

As at the time of release, responses had been received from 10 percent of the CCF’s 1,150 member companies. Operations of these companies spanned across areas such as roads, drainage, land development and subdivision, utilities, water and renewable energy.

The survey found that:

• Contractors are locked into fixed price agreements with little or no room to recover the latest surge in costs. On average, survey responded indicated that 80 percent of their contracts are fixed price contracts. Meanwhile, 69 percent of current projects have either not allowed any negotiation of interim solutions to address the surge in costs or have enabled limited negotiation (recovering up to 25 percent of costs) of such solutions.
• Civil construction contractors are experiencing deep impacts on their businesses from the current crisis. Among survey respondents, 75 percent are experiencing significant subcontractor price increases, 65 percent are experiencing cashflow challenges and 60 percent are seeing shortages of materials and/or increases in the cost of materials.
• Civil construction businesses are seriously considering difficult actions to cope with the current situation. In particular, 45 percent are considering downsizing their workforce whilst 30 percent are considering winding down operations within three to six months and 27 percent are considering pausing current projects to preserve cashflow.

(image source: Civil Contractors Federation)

The latest survey comes as Australia’s construction industry has been impacted by the surge in fuel prices which has occurred since the beginning of the Iran war on February 28.

The effect has been particularly severe for civil construction, which uses two and a half times as much diesel fuel as residential and commercial construction combined.

Apart from the direct fuel impact, price increase in the realm of between 35 and 50 percent have been reported for products which petroleum is a significant input.

These include bitumen and asphalt, explosives, PVC and polyethylene pipes, electrical conduits and geo-textiles.

In response, the CCF is calling for several actions from Commonwealth and state/territory governments.

These include:

• Targeted Commonwealth support for exposed projects. This would include provision of additional funding to infrastructure agencies in respect of projects that do not include rise and fall mechanisms so as to ensure that contractors are not forced to absorb unmanageable cost increases in respect of these projects.
• National adoption of rise and fall mechanisms. Within construction contracts ‘rise and fall’ mechanisms’ enable the contract price to be raised or lowered in response to fluctuations in key material or labour costs. These provisions aim for the impact (positive or negative) of any major unexpected surges or falls in construction price inputs to be shared among the contracting parties in an equitable manner. As part of its recommendations, CCF is calling for rise and fall provisions to be included in all new projects (both public and private). It is also calling for these provisions to be applied retrospectively in respect of existing projects. Ideally, CCF would like to see the national rollout of the Queensland Government’s Transport and Main Roads rise and fall provisions as a consistent standard across jurisdictions. This would be supported by Commonwealth funding to enable this to be implemented.
• Immediate cashflow relief through accelerated payments. This would include measures such as 14-day payment terms across government contracts to improve liquidity and keep contractors operating.
• Direct support for Local Government delivery. This would see targeted funding provided to councils in order to avoid the need for contractors to have to absorb the entire cost increase on existing local council projects.
• Stimulus measures to generate new activity such as first home buyer initiatives.
• A temporary uplift to fuel tax credit arrangements to increase the fuel tax credit to 52.6 cents per litre for off-road construction activity while maintaining fuel excise relief for households.

CCF CEO Nicholas Proud said the need for action should not be underestimated.

He adds that with civil contracts performing delivering infrastructure which is critical for new housing (housing subdivisions, roads, utilities, water etc.), any increase in contractor insolvencies would impact new housing delivery.

“Civil contractors in our survey released today are in dire need of cashflow relief and for the majority they simply need to get paid for the cost of doing these road, water, sewer, energy and subdivision jobs,” Proud said.

“A business should be able to deliver a project and get paid for rising costs rather than running at a loss.

“Outside of people seeing higher grocery prices, they see unleaded petrol now at $1.70 per litre and assume things are getting back to normal, but the acute impacts in this industry with diesel alone costing our businesses at least a dollar more than pre-crisis the situation is becoming desperate …

“ … The Federal Government had a budget in just under two weeks’ time and the cost of supporting this sector now will provide savings in the long term and the road, water, sewerage, energy, subdivision infrastructure will get built …

“ … Even just supporting the state governments to ensure the rise and fall costs of current projects will go a long way to get the jobs done to build the community enabling infrastructure and safeguard the capacity of the sector to deliver into the future.”

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