When you fork out around $200 billion each year for something, you obviously want value for money.
So given that investors, commercial businesses, households and taxpayers throughout Australia outlay around that much each year to build housing, infrastructure, commercial premises and community facilities, it is fair to ask whether or not we are paying any more than necessary for the build, if so, why, and what more can be done to improve efficiency and drive construction costs downward?
Generally speaking, most of the evidence suggests construction costs within Australian cities are nowhere near those of New York or Hong Kong. Nonetheless, they are on the high side of average amongst cities in developed and developing nations.
In the 2016 edition of its International Construction Costs report last year, international programme management consultancy Turner & Townsend ranked Sydney, Perth, Melbourne and Brisbane at 14th, 18th, 20th and 22nd in terms of most expensive places to build (in USD) in an average across six asset types involving 38 cities around the world. In March, built asset consultancy Arcadis ranked Melbourne as the 14th most expensive location from a construction cost perspective out of 44 cities which it studied. No other Australian cities were included in the Arcadis comparison.
Of course, it should be acknowledged that part of the reasons behind Australia’s relatively high construction cost lies in the fact that we are simply a high income country. Indeed, measured in purchasing power parity terms, office building costs in Brisbane Perth and Melbourne were in fact seventh, eighth and 14th lowest per square metre in the Turner & Townsend report. Despite this, several commentators feel there are several areas which are driving up costs from a structural perspective.
Peter Clack, President of the Australian Institute of Quantity Surveyors, said high costs in Australia are being driven by a number of factors. On large commercial projects, he says onerous conditions being forced upon builders through union based enterprise bargaining agreements add 30 per cent to on-site labour costs whilst onerous taxes and charges contribute to costs in the residential sector.
On public sector projects, a growing reliance on alliance based contracts under which risks and rewards are shared between state agencies and private sector partners has added substantially to costs as this model requires much greater complexity in upfront agreements. Moreover, courtesy of the high levels activity taking place amid the current boom in infrastructure and multi-residential work, he says the sector in Australia will reach a saturation point in its ability to deliver projects and will see enormous strains upon the supply of available consultants, contractors, subcontractors and materials.
Especially in light of this last factor, Clack says there is a real prospect that places like Sydney will see cost increases in the vicinity of 10 to 15 per cent per annum within one to two years.
Renowned construction industry advisor David Chandler has long argued that construction costs in Australia are at least 20 to 30 per cent above where they need to be in order for Australia to be competitive over a long period. Chandler believes there are several problems including embedded poor practices and resistance to change amongst groups with vested interests such as unions and industry bodies. He adds that the sector in Australia lacks a program of measurable cost and productivity improvement.
Chandler says that unlike Australia, countries such as China and India are not shackled by entrenched industry structures, whilst the sector in advanced nations such as Germany and Switzerland thrives because of an attitude where they embrace innovation.
Other commentators are more charitable. Gareth Robbins, a director with Arcadis Asia Pacific says Australia’s status as a relatively expensive place to build stems in large part from our status as a high-income and high wage country with a robust regulatory regime. Added to that, he says Australia’s geographic isolation adds to the lead time and cost associated with procuring materials from overseas.
Nevertheless, there are areas for improvement. For one thing, the Australian government could follow the lead of the government in the UK in terms of driving adoption of BIM on projects. Improvements could also be made in terms of informed buyer capability, which Robbins says would see clients become more empowered to demand innovation, change and best practice on their projects.
Anooj Oodit, managing director, Australia and New Zealand at Turner & Townsend says the ranking of Australian cities from a cost perspective has been helped in recent years by the lower value of the Australian dollar, which has made Australian building costs less expensive in US dollar terms.
Whilst Australia is good at delivering projects, Oodit says room for improvement remains. Pricing structures, he said, could shift away from an excessive focus on costs in a narrow sense to a broader focus upon outcomes, which will help to unlock greater levels of innovation. Greater use of technology in areas such as digitisation and robotics would further help to drive efficiency, he said.
Oodit says Australia has not suffered the same economic crisis as many other nations and therefore has not been subject to the same extent of pressure to drive cost effectiveness.
Going forward, Clack says tender documentation needs to be clearly written so that contractors can easily understand the scope of the work involved. This, he says, will avoid the situation in which contractors are uncertain about what they need to allow for within their bids and thus add a further margin into their tenders in response.
In addition, he says governments should plan infrastructure schedules carefully to ensure that adequate resources are available when required. Citing the Victorian government and its stated desire to complete 20 of the 50 rail crossings under its level crossing removal program by the end 2018, he says ambitious timetable rollouts like this place considerable pressure upon the industry in terms of its available resource and capacity to meet this schedule.
Australia is a relatively high cost environment to construct buildings and infrastructure.
With some sensible changes, there are things we could do in order to improve our performance in this area.