Escalation of construction price costs is largely being controlled due to aggressive tendering by tier two construction contractors.

25 March 2014 — With the outlook for construction activity positive across most states, escalation of construction price costs is largely being controlled due to aggressive tendering by tier two construction contractors, according to WT Partnership’s Review of Construction Market Conditions to March 2014, which was released this month.

WTP managing director Nick Deeks told The Fifth Estate the competitiveness of the tier two firms has also been improved due to the takeover activities of the tier one firms.

“Tier two firms generally have lower overheads than the tier one firms, and their capability and resources have benefited from tier one firms shedding staff in duplicate roles such as project management following recent company takeovers,” Mr Deeks said.

“Staff made redundant have been finding engagement with the tier two firms, bringing their expertise with them.”

He also pointed out that the successful delivery of major projects by tier two firms had strengthened developer confidence in their abilities.

“The more they [deliver projects] and do it well, the less of a gamble it is perceived as for clients to go with them.”

An exception to the generally controlled price increases due to increased competition is the pricing of engineering services, which are under pressure as more projects, particularly in the commercial space, demand sustainability credentials for projects.

As cost planners and quantity surveyors, WTP have the inside track on what is being planned where and how much it is costing, and this insight forms the basis for the report.

“Australia is getting itself in position for a busy run [in terms of construction activity] for the next five to six years,” Mr Deeks said.

He identified New South Wales, Western Australia, Queensland and Victoria as the main areas of ongoing growth in construction activity, with steady flows of work in South Australia, a slowdown in the ACT due to uncertainty about government cuts to staff, and continuing low levels of activity in Tasmania.

Some of the major projects underway include 2000 apartments coming online in Western Australia, multiple major commercial projects including 80-level towers in Melbourne, 2300 hotel rooms in the pipeline in Queensland, and substantial infrastructure and numerous residential projects in New South Wales, including growing interest in adaptive reuse of Sydney’s C and D grade hotel stock for apartment projects.

“The private construction sector is continuing to improve with significant activity in the multi-level residential market on the east coast. Developers’ confidence is translating into further land and property transactions and the upsurge in Commercial, residential, education and health activity is driving institutional players to invest in their assets to position them for future growth,” Mr Deeks said.

The report states that the national average price escalation for construction costs for 2014 is expected to trend to the order of two to three per cent for 2015 through to 2017. Once more of the tendered projects move into the construction phase, WTP expects the volume of work will stretch resources within construction firms and place them in a position to be more selective and increase margins.

State by state, commentary in the report has the following highlights:

NEW SOUTH WALES

The New South Wales building industry continues to show signs of improvement in residential, commercial, urban renewal and education projects. Demand continues to rise in the wider Sydney and CBD rental markets and residential sales volumes are on the increase. The number of projects proceeding to tender across all sectors has continued to increase, with the first two months of 2014 being more positive than the same period for any of the last 5 years.

Forecast for escalations remain conservative at 2.5 per cent for 2014 rising to 4.5 per cent per annum for 2015 and 2016 and for engineering, rail and road construction 2.0 per cent for 2014, 3.5 per cent for 2015 and 4.0 per cent for 2016.

VICTORIA

The frenetic tendering experienced in late 2013 has stabilised as developers and contractors take stock and ready themselves for the year ahead. Demand and interest remain steady, but there is still a surplus of Tier 1 and 2 contractors seeking new opportunities.

The State Government is continuing planning for major infrastructure initiatives. There are various large scale commercial and retail projects in construction with a moderate amount of new projects planned. We predict cost escalation in Victoria for 2014 of 2.25 per cent, increasing to 2.75 per cent in 2015 and 3.0 per cent per annum for 2016 to 2017.

QUEENSLAND

The South East Queensland market is experiencing a notable increase in confidence which is driving new projects particularly in the residential and retail sectors. The last quarter saw increased activity in the South East Queensland tender market and this trend continues in the first quarter of 2014. Tender results continue to return competitive pricing but not at the cut-throat levels witnessed in previous years despite significant capacity in the industry. The pressure on costs reported in our November 2012 review are beginning to impact on pricing levels with head contractors lifting margin levels.

We continue to predict tender price escalation trending higher towards the end of 2014 at 2.2 per cent rising in 2015 to 3.0 per cent and to 4.0 per cent per annum in 2016 and 2017.

SOUTH AUSTRALIA

There is an air of optimism in the construction sector about the medium term in South Australia, which is no doubt helped by the upcoming State Government election in March 2014 and the $1.85 billion Royal Adelaide Hospital project currently under construction. There are some larger city apartment developments being marketed and feasibilities are being undertaken by retail developers. The State’s three universities have committed to large expansion/redevelopment projects.

We predict tender price escalation in the order of 1.0 per cent for 2014, with 1.5 per cent per annum for 2015 and 2016 and 2.0 per cent for 2017.

WESTERN AUSTRALIA

The overall outlook for the Western Australian construction industry remains positive for the year ahead. Growth is expected in most sectors, however we anticipate that we will continue to see aggressive tendering and tight margins as small to medium size contractors seek to maintain their position in the market.

The resources sector continues to be turbulent.

Our outlook for escalation for 2014 remains at 2.5 per cent as previously forecast however we have reviewed and increased our projection for 2015 to 3.5 per cent.

AUSTRALIAN CAPITAL TERRITORY

The uncertainty surrounding the Federal political environment continues to harm the confidence of the ACT property sector. The ACT economy has slowed due to the uncertainty created by the actual and proposed public sector cuts which has affected the demand for both residential and commercial construction.

It is anticipated that tender prices will continue to be keen for the remainder of 2014, with a forecast for cost escalation to remain at 0.5 to 1.0 per cent for the foreseeable future.

TASMANIA

The Tasmanian economy continues to struggle in the face of reduced GST revenue, high unemployment and low population growth. General sentiment in the State’s construction sector remains restrained despite the cautious air of confidence returning to the broader mainland market.

Tender margins are still extremely tight and we anticipate this trend to continue with tender price escalation in the order of 1.0 per cent for 2014 and 2015, rising to 2.0 per cent for 2016 and 2017.

The report can be downloaded here.

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