Black Swans, Grey Rhinos: Surviving the Construction Jungle

It was the bevy of black swans that Australia’s construction industry didn’t see coming.

Not to mention a few rampaging grey rhinos.

It has always been a jungle out there but during the past few years the struggle for survival in the construction sector has intensified amid an oft-described “perfect storm” of events.

A pandemic, supply-chain issues, crippling shortages of building materials and skilled trades, skyrocketing shipping and transport costs, soaring inflation, rising interest rates.

The ensuing escalation in construction costs—the big ticket item on any developer’s feasibility—has been dramatic and, for a still growing list of industry casualties, the consequences dire.

“I think what we’ve learned from all this is that there’s always this risk of there’s something else going to happen,” quantity surveyor and Altus Group’s Asia Pacific president for cost and project management, Niall McSweeney, said.

Expecting the unexpected and putting a price on it is all part of the job for McSweeney and his colleagues at Altus Group.

But there are a couple of caveats.

So-called black swan events are one.

“You don’t know what you don’t know,” McSweeney said. “And that’s really what a black swan event is. It comes as a surprise and has a major effect. No one can see it coming … it just comes out of the dark and crashes into you.”

▲ Altus Group’s Asia Pacific president for cost and project management, Niall McSweeney.

The past few years had been full of surprises, he said.

Covid and the war in Ukraine are the two significant black swan events that have had a mammoth impact on markets and costs.

But on top of all that, there have been other events dubbed grey rhinos that also have hit the construction sector hard.

“The grey rhino is very hard to miss,” McSweeney said. “It’s this ginormous thing that’s just sitting there but everybody chooses to ignore it.

“But when it gets up and starts moving around it does an untold amount of damage.”

He cited the costly delays caused by last year’s flooding rains as a consequence of climate change that scientists had been foreshadowing for two decades.

“People were like, ‘Okay, we’re over the fires, we’re over the pandemic and now it’s raining’.

“The impact of that really came to a crescendo in the back half of last year when material prices were rising quite dramatically. If you were on a job you were supposed to be finished and it was dragging on by an extra three months, you got hit not only with the cost of the three months but also the increased cost of materials and labour … and a lot of the delivery partners struggled.”

Altus is a leading provider of asset and fund intelligence for commercial real estate. In Australia, they provide independent cost consulting and professional advisory services as well as feasibility software to property developers.

McSweeney said the events of the past few years had led to a higher engagement with industry in terms of understanding the actual cost of work and cost to complete.

“It’s all about cost and what’s happening with escalation… it doesn’t matter whether it’s public or private, they are all worried about what they didn’t see before,” he said.

“It’s all about making sure that they’re actually understanding what the costs are. It’s making sure they’re understanding what the risks are, pricing those risks adequately and making sure they’re informed. And basically ensuring that they’re actually managing it as they’re going through.

▲ The events of the past few years have led to a higher engagement with industry.

“There’s a lot of different levers that are actually influencing what’s happening in escalation … and there’s not one answer for everything because it varies dramatically on the asset class, the size of it, where it is, what the materiality of it is.”

McSweeney said there was “a lot of nervousness around the pause in market” at the moment. “We’ve just got to be careful the economy doesn’t slow too quickly,” he said.

Another spectre on the horizon was industrial relations as wage demands try to keep pace with inflation. 

“It’s about getting that balance right … that’s the Goldilocks effect. You can’t give everybody 10 per cent wage increases, if you’re on a fixed price. Somebody’s going to get squeezed and there is a breaking point.”

Insolvencies, he expects, will increase across the industry in 2023.

But the good news is he sees better risk apportionment on projects going forward and increasing stability in construction costs as the year progresses.

“And we see those costs normalising further going into 2024,” McSweeney said. 

“We have got past the pandemic panic, and with a strong pipeline of work, Australia’s construction industry is well placed to weather the storms ahead.

“People still need somewhere to live, we have an expanding population, and we have a migration policy to bring in an extra 200,000 people each year. They all have to go somewhere.”

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