[+] Construction Costs Stay High as Labour Issues Deepen

Builder David Caputo’s dealing with an unusual problem. Kapitol Group’s $850-million pipeline includes data centres, student accommodation, build-to-rent and high-rise commercial construction. In all these developments, the company’s co-founder and director needs to install lifts, lots of them. But suddenly, the lead time for the Chinese-manufactured product is nearly eight months. “You can get them but we’re adding another 8 to 10 weeks on top of the already 20-odd weeks in sourcing them and getting them into the country,” he said. “You can get them…we’re just waiting a lot longer.” The good news for people like Caputo is that 12 months after a global pandemic, supply chain issues, interest rate rises and an ongoing war in Europe, construction costs are finally easing. The bad news is that “easing” in this case means costs are no longer rising, or in some cases the rate of increase has merely slowed. They have not reversed. Costs are not going down. It is still as expensive as it was to build, and it is still difficult to get many projects to stack up. There are still unexplained delays in many products imported from abroad, projects are taking longer to complete and there is still a big problem with labour, particularly skilled labour. Sometime in the next couple of weeks CoreLogic will release its quarterly Cordell Construction Cost Index (CCCI) which tracks the cost to build a new home. The last release, back in July, showed costs had risen 8.4 per cent in the previous 12 months—the lowest cost growth since the year to December 2021. “From what we've seen in the last quarter, or probably in the past six months, things have certainly stabilised a bit,” says CoreLogic construction cost estimation manager John Bennett. ▲ Kapitol Group director David Caputo. He can source lifts for his multi-level projects, but it could be eight months before he sees them. “So, they weren’t going up, but they certainly weren’t coming down as well.” While next month’s report is likely to show costs further “easing” there is still plenty to be concerned about. Slattery Australia, the property and construction advisory firm that puts out its own national construction market update, agrees materials costs have eased over the past six months, in part due to shelved or delayed projects leading to reduced demand. The price of steel and reinforcing steel, for example, has plateaued according to Slattery director and quantity surveyor Barry Laycock, and he expects it to remain that way. However, Laycock is forecasting other key building materials—timber, plastic laminates and concrete—will rise over the next 12 months by between 5 and 6 per cent. Concrete prices, he says, will be driven up through the increasing requirement to achieve carbon off-sets. “The thing with the new green-star rating tool is that there's all sorts of points on offer for getting embodied carbon down,” he says. “And the best way of doing that, to get those points, is green concrete.” Green concrete uses waste material in the aggregate, such as slag and fly ash, which come from more sustainable sources to reduce embodied carbon in the concrete mix. “We’re going to see a real uptick in the consumption of green concrete,” he says, but concedes it is more expensive. ▲ Concrete and labour: Prices are on the move again as government infrastructure monopolises both, industry watchers say. “It's funny,” says CoreLogic’s Bennet, “in the sense that 12 to 18 months ago concrete was one of those ones that was moving but only moving a little…1 or 2, maybe 3 per cent at worst. “Whereas now, yeah, it’s definitely jumped. It’s certainly on the move. “And a lot of these increases seem to be random, so we can’t pick a trend or a particular type out of it.” Back at the coalface, Caputo has his own issues with concrete, specifically heavy conduit piping he needs for in-the-ground civil work. “You know we never thought we’d have a problem accessing concrete pipe,” Caputo said. “We used to be able to order concrete pipe and get it delivered to site within about four or five weeks. Now that's gone to 26 to 30 weeks’ lead time, and you're effectively paying near double for it.” The problem is not a new one. This time last year, Queensland-based KDL Property Group reported wait-times for concrete-reinforced pipes over 650mm in diameter—the size needed for storm-water drainage—were between 40 and 50 weeks. But that was Queensland 12 months ago. Caputo is ordering similar-sized concrete pipes from northern Victoria, now. He blames Victoria’s Big Build—the state’s $100-billion infrastructure program which plans to deliver more than 165 major road and rail projects, including the metro tunnel, the level crossing removal program, the suburban rail loop, and the West Gate tunnel. “It’s just demand,” he says. “It’s very much just how busy the market is right now, and it’s directly related to the world's biggest number of infrastructure projects.” ▲ Major government infrastructure projects, such as the Big Build in Victoria, are continuing to cause problems in the private sector. Government infrastructure spending is not just a Victoria problem . New South Wales’ infrastructure spend has gone from an annual average of $14 billion in the five years to 2016 to an average of $23 billion since then. It is expected to peak at $30 billion in each of the next two years. For its part, Queensland plans to invest $88.8 billion over four years delivering “the state’s biggest transformational projects”. At about $6.9 billion the Cross River Rail is the biggest, but there’s the Queen’s Wharf project, the Gabba stadium re-development, and of course the 2032 Olympic Games. And there-in lies the rub, according to Matt Hemming, a partner and quantity surveyor with Mitchell Brandtman—labour. “Labour’s the biggest issue and that’s across the board, that’s a national problem,” he says. “Materials have settled, and while everybody knows they haven’t come back in price necessarily, everyone knows where they’re at. And there’s not the concern about the drastic, volatile jumps we were having.” But Hemming is Queensland ’based, where the labour shortages are particularly acute. “We've got a very limited choice,” he says. “And that limited choice is extremely busy. And, you know, they are very much in the space of picking and choosing jobs rather than having to compete heavily. ▲ CoreLogic construction cost estimation manager John Bennett and Mitchell Brandtman partner and quantity surveyor Matt Hemming. “So, while we’re seeing pockets of opportunity starting to open up at some of the sub-contractor levels, particularly the domestic side, that upper end—the multi-residential and commercial scale project side—is very difficult because we've got big projects sucking up labour and contractors. “If you’re looking at a project that’s $20 million and above, there are maybe three builders, that aren't too large, that are capable of doing it. “But none of those three have the capacity,” Hemming says, “and with all of this government work that’s out there? That’s a lot safer than the private development world.” Victoria’s Big Build currently employs 20,000 people, according to the government, and “for every 100 direct jobs on the projects, on average another 206 jobs are supported across the economy”. Caputo doesn’t have to be told; he sees it every day. “The labour skill,and the ease of access to labour just isn’t what it used to be,” he says. “You just can’t get what you need done with the same level of skill and with the same volume of people as we used to, say four years ago. “And what that does is to extend the programs— I reckon they are around 10 per cent longer in duration now—and that means everyone’s preliminary costs, from overheads to administration, obviously go up.” Slattery’s Laycock agrees. “If you’re a form worker or concrete pourer, you’re going to get more money on the West Gate tunnel, or metro tunnel, that type of stuff,” he says. ▲ Slattery Australia is forecasting key building materials, such as timber, plastic laminates and concrete, will rise between 5 and 6 per cent in the next year. “Electricians as well. They’ll be getting a lot of money doing the infrastructure type work, putting up lights in tunnels.” Slattery estimates the industry will experience a 6 per cent increase in the cost of labour throughout 2024. Laycock points to Enterprise Bargaining Agreements (EBA) that are currently running at about 5 per cent year. “So, 6 per cent is taking on the EBA plus a bit for shortage of labour,” he says. “We think 6 per cent is probably around the right sort of number for the moment.” In a recent survey of 21,000 engineers, design and advisory consultants Consult Australia—as the name suggests, the industry association representing consulting businesses—noted 60 per cent of respondents reported Australia-wide skills shortages were “having significant impacts on project delivery, project cost overruns, increased labour costs and overall supply chain issues”. That tallies with everything Hemming is seeing and hearing. “The pressure is going to continue to be on the market to deliver work,” he says, “and remember we’ve got the Olympics coming up here in Queensland, so I’m very optimistic when it comes down to what’s ahead in the pipeline. “But from a delivery perspective, what that’s going to do to building costs is to continue to put pressure on them. “It’s concerning.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Construction Costs Stay High as Labour Issues Deepen

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