Developers want projects to go as fast as possible, but early contractor involvement in the initial design would offset further construction delays down the line. This is part 2 of a short series on this topic.
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The Australian government’s target to build 1.2 million new homes by 2029 will not and cannot be met because of deep problems in housing construction.
Sales based production and subcontracting contribute to task queueing problems and backlogs, which means there has been no sustained lift in detached housing output for 45 years.
When it comes to building apartments, it’s not a case of not lifting production, but rather it will not lift.
The good news is that the industry can lift production substantially in response to sharp increases in demand.
This is likely to reflect in the greater capacity of many developers and builders compared to detached house building. But production is literally turned on and off in response to market volatility, which means undersupply tends to be the norm.
If an oversupply emerges, it is the result of an unanticipated shift in demand, and any excess supply acts as a drag on new commencements. In Melbourne, for example, there are an estimated 8000 apartments from the mid-2010s boom that remain unsold.
As with detached houses, the time it takes to complete construction extends greatly during booms. This shows housing construction as a largely linear process where tasks are sequenced. Even short delays, such as scaffolding delivery, often create a queue for subsequent tasks. For example, tradespeople with other jobs may not be able to return for several weeks and materials booked on a just in time basis will require storage.
In a system reliant on extensive subcontracting, delays are inevitable. In boom times, there are increasingly unavoidable delays due to competition for construction resources and changes in demand. Known as sales or due-date based production – such production is inherently inefficient.
Scheduling challenges and queueing problems can cause project duration and costs to blow out. But there are other significant issues that drive the lengthy apartment construction duration and increase costs.
Developers bring equity to a project, providing, as the financiers put it, skin in the game. The developer funds site acquisition, initial design, the presales campaign and planning/development approval out of their equity.
Investment in design at this stage is minimised as there is a risk that the planning application will not be approved. Accordingly, design resolution is around 30 per cent at this point in the process. After gaining planning approval, the developer commences their presales campaign as financiers require a quota of presales to confirm demand for the product.
Construction funding is only released once the quota is achieved and the bank reconfirms that market conditions present minimal risk. The presale campaign can take a long time and is inherently more challenging for very large projects. Campaigns are, moreover, costly. Once the quota is achieved, the developer will then engage a head contractor (builder). Increasingly, developers utilise design and construct contracts, enabling them to shift all design resolution and the time and cost risk of construction to the builder.
The builder’s review of the initial design might reveal constructability issues. This is common as designers (architects, engineers, fire engineers) generally do not operate as integrated teams. Developers also drive a hard bargain on fees, putting pressure on consultants’ margins, which means consultants tend to minimise the work they do.
Finally, in most states and territories, designers are not required to warrant that their work meets the building code, so unless the builder is vigilant, problems with design are only detected once construction starts.
Design modification at this point can trigger a planning permit amendment, which then delays the project. The builder takes design resolution to around 70 per cent for the first building permit. Even though the builder is responsible for building code compliance, the pressure to manage costs often means design issues are not adequately addressed at the outset and manifest as clashes (spatial or functional conflicts between two or more building components) and defects.
Building permit applications can be staged and obtained as the building goes up. Designing on the go involves the potential for design clashes that require work on site to stop while the redesign occurs. Adding to this, the developer sometimes seeks design changes to better appeal to buyers as sales slow. Each affects scheduling and queueing. Therefore, lack of early design resolution is responsible for holdups in the preconstruction phase and during construction.
Early design resolution requires early contractor involvement (ECI) in the initial design, which adds time to the early development phase but would be offset by a reduction in later delays.
However, ECI is rare, as it requires the developer to spend their limited equity and risk wasting resources if the planning application is rejected or requires major changes. The developer needs the time between project launch and the release of construction funds to be as short as possible because a downturn in the market will see demand fall and offers of financing withdrawn.
While the developer wants the whole project to go as fast as possible, in practice, they trade off the construction efficiencies available through ECI, not to risk a downturn occurring between planning approval and construction start.
In the next part, we examine how the apartment development process is shaped by market volatility, delivering suboptimal outcomes.
This research was funded by the Australian Housing and Urban Research Institute.
