Intensive competition from second-tier contractors is likely to restrain increases in tender prices for major construction projects throughout the near term in Australia as builders in this segment compete for medium-sized projects in improving retail and residential markets, a new report on tendering conditions within the industry suggests.

Releasing its March 2014 Review of Australian Construction Market Conditions, building consultancy and quantity surveying firm WT Partnership says it expects modest tender price increases of between two and three per cent per year between now and 2017 notwithstanding the recent upturn in building activity as aggressive tendering keeps construction price escalation under control as head contractors move to shore up order books.

“The private construction sector is continuing to improve with significant activity in the multi-level residential market on the east coast,” WT Partnership’s managing director Nick Deeks said, adding that developer confidence was translating into further land and property transactions and the upsurge in commercial, residential, education and health activity was driving institutional players to invest in their assets to position them for future growth.

“However, tier one contractors are finding themselves in direct competition with a strong contingent of lean tier two contractors, especially at the $50 million to $150 million construction level. This is holding back construction escalation, keeping all but a selection of trades very competitive.”

The report says that while some cost escalation was emerging in enterprise bargaining agreements, intensive government scrutiny would alleviate some of the pressures in this area.

Beyond 2017, however, the report says upward pressure on tender prices could escalate as more tendered projects move into the construction phase, resources become stretched and builders become more selective about their projects and seek to rebuild margins.

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In terms of states, WT expects modest to firm price pressures in New South Wales, Western Australia and Queensland, with New South Wales expected in particular experiencing a big pickup in residential, retail and urban renewal developments and a notable resurgence in confidence in South-East Queensland.

Pricing conditions in Tasmania and the Australian Capital Territory, however, remain weaker amid a weak economy and stagnant population in the former and concerns about federal government finances and investment intentions in the latter.