Rising construction costs and supply chain backlogs are combining with talent shortages and tendering conditions to put immense pressure on the infrastructure and construction sector.
Developers and contractors are struggling to meet budgets and deadlines. Some companies, as we know, have struggled to such an extent that they have collapsed.
The pain is far from over with a new market sentiment report produced by Arcadis and the Australian Constructors Association putting hard statistics to the anecdotes we’ve been hearing from across the construction industry for years.
Tempting as it may be to point the finger at external forces, we must first turn our gaze inwards.
The construction sector has long held a ‘she’ll be right’ attitude—expecting the market to provide. Well, the market no longer provides and it hasn’t for years.
Wafer-thin profit margins, restrictive and risky contracts, and an emphasis on short-term costs over long-term value are the hallmarks of a sector that we’ve all participated in creating. This has left us unnecessarily vulnerable to forces outside of our control.
We are at a point now that if costs continue to increase projects will become unaffordable and unviable from a business-case perspective. Going forward, we must focus on what we can control and rethink how we design and deliver projects.
One easy way to keep costs down is to make sure there are enough people in the marketplace to do the work. While the talent shortage might not be critical now, it will be if we do nothing.
This requires the sector to work with government to ensure the flow of international migration prioritises and speeds up the visa process for skilled workers right across the sector.
As an example, we have recently had a cost manager join the Sydney office from our UK business. The visa application was submitted at the start of February and he finally joined us at the beginning of June.
That’s a four-month period for one qualified individual—and a lot has changed in that short period.
Australia needs thousands of people to deliver the pipeline of work currently on the table. Delays in attracting overseas talent will therefore, undoubtedly, come with a price tag.
Another way to mitigate some of the cost increases could be through procurement. Sixty-six per cent of contractors surveyed indicated that design-and-construct methodologies were most common during the past 12 months.
This is a great way of ensuring a more streamlined and efficient project but there is still room to innovate significantly in this space.
Respondents also told us that 85 per cent of projects were still being competitively tendered, leaving little room for negotiated and collaborative approaches.
With this model, the allocation of risk is disproportionately skewed towards the contractor to carry increases in costs or delays in supply. Rise and fall mechanisms can help with this–but we haven’t found the right balance for what materials this should apply to and in what circumstances.
We also need to break out of our narrow view of procurement to invest more in design for manufacture and assembly (DFMA) to simplify designs for ease of construction, or modern methods of construction like precast flat panel systems and 3D volumetric construction (modular construction).
Spending more time upfront on the design—particularly from a quality, functionality and material perspective—is essential and increasingly critical.
It’s often the case that concepts and early-stage feasibilities are done extremely quickly to support a business case. Only after the business case has been given the green light, do we begin to identify omissions, errors and challenges.
For instance, architects and engineers may specify a material but there may be a long lead duration or a significant cost premium to procure in time.
This doesn’t just apply to high-end or expensive materials and components. Our market sentiment survey found that processed bar reinforcement, structural steel, cabling, and ductwork have seen some of the highest price rises in the past 12 months—some up by more than 50 per cent.
The contractor may have been able to absorb that risk and associated cost in the past but the risks and the costs are escalating exponentially and are far more numerous than in previous years.
Spending more money and time upfront during the design process should identify some of these constraints and challenges and offset what a project will have to spend later to rectify issues and deliver on time.
Once upon a time, big developments would have architects, engineers and contractors throwing themselves at an opportunity.
These days, everyone in the sector is taking a more measured approach to the kind of work they take on. Do they have enough people to do the job? Does it conflict with existing work? What does the profit margin look like and can they afford to do the work? Are the timelines feasible and what do supply chains look like? Do the sustainability outcomes on the project match with their company values and their own sustainability commitments?
Project owners need to warm up the market and sell the project just as much as consultants and contractors need to sell their skills to do the work.
This has always been the case and we have long advocated for early engagement with the market and contracting.
However, it is needed more now than ever to make sure that the market is ready for those large-scale projects and has the systems, people and materials in place to make the project a success.
State, territory and federal government entities have always used the construction sector as a vital instrument to stimulate productivity and confidence in the economy—particularly during those first couple of years of the pandemic. “Record investment” was the catchcry for many a budget announcement.
However, that record investment comes with a sting in its tail. While the contractors delivering individual infrastructure projects aren’t necessarily the same, those contractors are delivering multiple projects at once. There is an overlap of trades and of material supply.
In its current form, the volume and timing of work looks to be unsustainable. The solution isn’t to put the brakes on. It’s to take the time to understand where the market is in terms of capacity and to plan the timing of projects holistically.
That will require collaboration and transparency on a whole new level. Government departments and the private sector will need to collaborate with industry to understand not only the feasibility of a project, but the practicality of when the work can, and perhaps should, be done.
With an eye on the long-game and spacing out large projects to provide the time to design and deliver appropriately, project owners can take a significant amount of heat out of the construction sector and still deliver a valuable asset for their communities. It just might be on a different timeline.
From my perspective, the current challenges in the marketplace provide an opportunity to do things differently.
The desire is there—we’ve talked about collaboration, design outcomes and sustainability improvements for years. However, the will to change hasn’t been strong enough to permeate right across the sector.
There will never be a better time for the sector and our clients to embrace new and better ways of working than right now.
By looking at what we can control rather than reacting to what we can’t, we can create a construction sector that is more resilient in the face of external forces and continue to deliver real value and sustainable outcomes for our communities.
Arcadis Australia Cost and Commercial executive director