Australia is set to see further consolidation in the market for sub-contractors as oversupply in that segment of the market places continued pressure on sub-contractor tender prices, a new report has warned.
In its Review of Australian Construction Market Conditions July 2014, Quantity Surveying outfit WT Partnership said an oversupply in the subcontractor market meant fierce competition would remain at this level, especially as the effect of pressure faced by Tier 1 contractors from increasingly capable Tier 2 contractors in the $50 million to $150 million market continues to flow through into subcontractor tendering.
“We commented previously on the oversupply in the subcontractor market which was driving fierce competition at the subcontractor level,” WT said in its report. “This market trend continued through the first half of 2014 with the exception of select trades.”
“Consequently we have recently seen a number of financial collapses amongst subcontractors. With the number of tenders increasing and ‘stretched’ subcontractors ’going to the wall’, we anticipate the subcontract market to consolidate over the coming years.”
As volumes of work dropped away, a dearth of new projects in recent years has wreaked havoc on building industry profit margins as ferocious competition for scarce work caused tender prices to fall in some states even as costs continued to rise.
In the three months to May alone, around 428 companies operating in the construction sector went into insolvency according to ASIC data (though this data does not give any breakdown as to how many of these businesses were contractors or subcontractors), and that does not include unincorporated businesses such as sole traders or partnerships.
More positively, however, the report says stronger levels of building activity will underpin a modest rebuilding of margins going forward, with annual tender price inflation set to increase to almost four per cent per annum in some states from 2015 onward.
New South Wales will lead the way - and will continue to do so amid a massive infrastructure building program over the next decade - as projects such as Barangaroo and the Sydney Convention, Exhibition and Entertainment Precinct continue to place upward pressure on the cost of engineering services and structural trades. Builders are also set to regain modest levels of pricing power in Queensland and Victoria.
Elsewhere, more modest tender price increases are expected in other states, although builders will at least experience moderate improvements in conditions in most markets.