Unprecedented hyper-escalation continues to impact Australian Contractors. We examine the causes, and how the industry can respond.
Over the last 3-4 years, the Australian construction market has seen astronomical escalation, with costs rising from 2021 to 2022 by as much as 60%. This hyper-escalation cannot be attributed to inflation alone, but to a unique combination of market conditions. The Australian Contractors Association defines hyper-escalation as “unpredictable, rapid price increases in key commodities combined with supply issues”.
The ongoing effects of Covid on global markets are well-documented. But while green shoots are starting to emerge elsewhere, in Australia, hyper-escalation is slowing recovery for an industry that should be booming.
Australia’s challenging location
Australia’s remote location has aggravated an already difficult situation – creating labour and trade shortages that continue to reverberate through the market. Trade route disruption, together with global inflation, have impacted almost every raw material, as well as fabrication and rigging costs. Although we are starting to see materials costs stabilise, the damage has been done. For example, steel costs went up by 60% from 2021 to 2022, and even though they are starting to come down, they still differ dramatically from when many projects were tendered two years ago.
Before Covid closed our borders, people moving to and from the country resulted in the Australian population growing by about 200,000 each year, which supported the burgeoning construction industry. As restrictions gradually relax, the shortage of skilled workers continues to take its toll.
This is coupled with a limited number of local sub-contractors supporting a growing number of projects. Unlike in other industries, sub-contractors have had to increase salaries to retain talent. This, on top of new best practice regulations coming into force (BPIC), means that although materials prices are starting to stabilise, sub-contractors are struggling – with consequences for the rest of the industry.
A booming market
The irony is that this hyper-escalation – a perfect storm of rising costs and labour shortages – comes at a time when the Australian construction market should be booming. In Brisbane alone there is $9.78 billion additional funding over six years for the Capacity Expansion Program, which will build three new hospitals, a new Queensland Cancer Centre and 11 hospital expansion projects across Queensland, delivering around 2,220 additional beds from 2024 to 2028. And the Olympics coming to the region in 2032 means there will continue to be a record amount of construction work to go around.
At Soben, we’re working with Contractors who tendered jobs pre-covid, before hyper-escalation was at the top of everyone’s agenda. They’re now seeing costs rise by 30-35% on original forecasts. Well-established Tier 1 Contractors may be able to absorb the cost, but many smaller contractors can’t take the hit. In recent years we’ve seen many go under, including Probuild, PlanBuild, Condev Construction, FSA Services Group and many more, exacerbating the already restrictive shortage of specialist sub-contractors available to support the market.
Alleviating the pain
So how can Contractors respond in a market teeming with infrastructure development, a shortage of skilled labour and the ongoing uncertainty of fluctuating material costs? There might not be a silver bullet, but there are steps Contractors can take to alleviate the pain:
1. Insist on granularity: In a market with continually fluctuating pricing, it is essential to engage a trusted partner who can provide advice based on detailed, live and accurate cost data.
2. Be hyper risk averse: It’s crucial to understand escalation impacts at pre-design stage. Obtain detailed cost plans to match different escalation scenarios and develop value engineering options early.
3. Lock in sub-contractors early: With limited specialised sub-contracting resource to go around, rapid arrangement of up-front works and contracting can have a significant impact on delivery timescales. We advise working exclusively with specialist sub-contractors during the pre-contract stage and, when the contract is awarded, issuing Letters of Intent as soon as possible.
4. Move fast: Speed is of the essence, meaning Contractors must focus on how to create efficiencies at every project stage. From production of designs to Bills of Quantities – work with partners who can move quickly. From Consultants to Sub-contractors, everyone will be working exclusively with the Contractor that approaches them first.
5. Collaborate: In the current market, where traditional lump sum or turnkey contracts are unpalatable – we are advising our clients on alternative contract models, that better reflect the current conditions. ECI (Early Contractor Involvement) contracts – that share the risk between a smaller pool of sub-contractors – are becoming much more common. We are seeing Contractors narrowing down their ecosystem early, and all parties working closely at pre-contract and tender stage to agree pricing and mitigate against escalation.
Whilst recovery will take time, for now we mustn’t lose sight of the opportunity. Australia – and especially, Soben’s home of Queensland – is entering into a golden age for infrastructure development. Challenging conditions and hyper-escalation of recent years have offered the opportunity for the industry to take stock – and regenerate. As borders re-open and a new wave of skilled workers enter the country, we should also be looking at how we can retrain and upskill Australians to support the coming boom. And what better time to examine fairer and more collaborative contract types, sustainable design, and innovative procurement strategies?
Where others might struggle to see the light at the end of the tunnel – we see plenty of reasons for optimism.
About Soben Australia
Soben provides comprehensive Quantity Surveying services. As well as our award-winning Bills of Quantities, we offer access to a suite of specialised services to the Australian market. Our advice service for Contractors covers pricing, escalation and contract types, using the most accurate live database of materials and labour costs in the Australian market. To find out more contact [email protected].