A sharp escalation in trade prices throughout Queensland and New South Wales is possible as strong activity in multi-residential construction drives underlying pressure on trade availability in a number of areas including formwork, partitions and linings and mechanical services, a new report has found.
In its Review of Construction Markets March 2015, quantity surveying outfit WT Partnership found that while contracting markets in South Australia, Western Australia, Tasmania and the Australian Capital Territory remained competitive, stronger levels of building work were driving a shortage of tradespeople in eastern seaboard market.
Price pressures were set to ease marginally, meanwhile, in Queensland and Victoria as newly elected governments in that state assess infrastructure priorities.
“The escalation pressures evident in the fourth quarter of 2014 are largely still prevalent in 2015,” WT said in its report.
“Currently, the significant development of multi-level residential projects, particularly in New South Wales, Victoria and Queensland is placing pressure on all trades. In particular the formwork, partitions and linings and mechanical services trades are currently vulnerable.
“With the persistent strengthening of residential projects and a healthy pipeline of future projects, we are aware of the potential for critical short term supply shortages and the potential sharp price escalation which may result from bottlenecks in supply.”
In its report, WT warned that trade capacity constraints are not limited to the red-hot multi-residential sector. In Brisbane, for example, subcontractors within the structural trades have found themselves in a strong position, with many now able to turn down difficult or complex projects in favour of less risky multi-residential work.
Moreover, contract prices in areas such as lifts and escalators, facades and bulk joinery are also under pressure as the rising dollar impacts material costs.
Still, the worst of the cost pressures are concentrated within the services trades, and are allowing subcontractors in these areas to demand higher rates.
“Our Sydney office is seeing the strong residential market impacting on escalation to the wall-linings trades with the impact also being felt in the health sector,” the report said.
“Nationally, services trades are showing signs of decreased competition particularly in mechanical services. Subcontractors are taking the opportunity to catch up on tight margins tendered in previous years and are being more selective in regard to the projects they choose to tender.
“This tightening market has resulted in a decrease in tender returns and an increase in spreads of tender pricing. Such market dynamics were unheard of over the past few years.”
On a state by state basis, according to WT:
As strong activity across almost all sectors continues, significant price escalation is occurring in New South Wales and especially Sydney as subcontractors take advantage of a wealth of project opportunities and are becoming increasingly choosy about the projects they take on.
Rates for structural trades such as formwork and post-tensioning are picking up, while WT says labour price increases of eight to nine per cent per annum are possible over the next four year in terms of formwork, reinforcement fixing, lift and escalator trades.
In the civil sector, meanwhile, the majority of tier 2 contractors have little or no spare capacity, and WT expects overall tender price escalation of six per cent in 2015.
In Victoria, a reasonable degree of tender price escalation is expected to continue as very strong activity in multi-residential construction has led to ‘bottlenecking’ of a number of key trades including reinforced concrete, façade and joinery subcontractors. This phenomenon is expected to continue in 2015 following the approval of a massive volume of new apartment complexes late in 2014. Whether or not this continues into the longer term depends largely upon the planning policies of the new government.
Moreover, pressure on prices is also occurring from an expected rise in prices of major building material elements such as facades, vertical transportation, mass produced joinery, specialist mechanical equipment and lighting.
Outside of building, the cancellation of the East West Link has left some capacity within the civil and infrastructure markets, though this is expected to be partially offset by the new State Government’s level crossing removal program.
Notwithstanding recent political dramas, confidence in the Queensland market continues to grow and stronger activity in the multi-residential market is creating a less competitive market for subcontractors and pushing up the price of structural trades including formwork, concrete, post-tensioning and reinforcement fixing, as well as mechanical service trades and finishing trades such as partitions and linings.
Because of this, significant overall tender price escalation is expected over the next three years notwithstanding the uncertain outlook for civil trades as the infrastructure program under the new government is not yet known.
Moderate tender price escalation is expected in South Australia as market conditions remain reasonably competitive for now, but this escalation is expected to pick up over the medium term as a number of projects as the Campbelltown Council Leisure Centre Redevelopment, the University of South Australia Great Hall, Sky City Casino, the Courts Precinct, the Adelaide University Health Precinct Building, the Second stage of the Adelaide Convention Centre, Vue Apartments start to increase demand toward the end of the year.
Notwithstanding the pull-back in the mining sector, the contractor market in Western Australia remains competitive amid a number of high-rise residential, accommodation and retail projects in Perth as well as hotel refurbishments. Reasonably strong tender price escalation of around three per cent per annum is expected in coming years as contractors continue to report shortages of bricklayers and formwork carpenters as well as a marginal increase in the cost of steel reinforcement and signs of tender escalation in the hydraulic and mechanical services trades.
Following several years of soft conditions, moderate price pressures are expected to emerge over the medium term within Tasmania amid a respectable mix of commercial, retail, public building and infrastructure projects, including the $365 million redevelopment of the Royal Hobart Hotel and a decline in subcontractor capacity. However, with almost all of the new activity being in centred around Hobart, limited price pressures are expected across other capitals.
In the Australian Capital Territory, tender price inflation remains subdued for now as contractors and subcontractors across most trades remain hungry for work and are "keenly responding to requests for pricing." However, modest tender prices and tightening in some trades are anticipated in 2016 and 2017 as a major urban renewal drive kicks into gear and projects including the ACT Law Court.