Productivity Challenge ‘Must be Cracked’ in Cost Escalation Crisis

“Productivity. That’s the egg we have to crack.” Niall McSweeney is at the coal face of costing projects and balancing out feasibilities. With more than 35 years in the industry, Altus Group’s head of development advisory for the Asia-Pacific says if we do not address productivity as a major input into the cost of projects, “we’re destined to have rising costs” in perpetuity. “We need to have a conversation about productivity, it needs to be challenged,” he says. According to the Australian Productivity Commission’s research report released last month, housing construction productivity has been stagnant for at least 30 years. Labour productivity in house construction has fallen by 25 per cent since 2001-02, while labour productivity in higher-density housing construction increased by 5 per cent over the same period. “Increasing the productivity of the construction process would lower construction costs—meaning more approved projects would be viable, increasing housing supply—even with no change in the size of the workforce, interest rates or the cost of materials,” the report states. ▲ Altus Group’s Niall McSweeney believes lean construction could help to improve construction productivity. The report indicates that key drivers of poor housing construction productivity are slow planning approvals, a lack of innovation within the sector, a fragmented home-builder market and a skilled-labour shortfall. This subsequent drag on the cost of construction has to be passed down to the consumer, which will lead to further housing affordability constraints. Housing data in a commissioned report by the Property Council of Australia revealed that if the nation can meet its 1.2 million new well-located homes target by the end of the 2029 financial year, it could have tangible deflationary impacts on the cost of housing. But, according to current forecasts, it’s facing a shortfall of 462,000 homes. McSweeney says markets including Queensland and Western Australia are heavily affected by the mining sector, which affects above-ground building capacity. “You go where you get paid the most and that has always been underground,” he says. Housing construction productivity decline Source: Productivity Commission ’ s Housing construction productivity: Can we fix it? report McSweeney says builders are also reticent to undertake residential development due to its high risk profile. The cost volatility of previous years, a diminishing labour pool, and significant risk exposure to subcontractor insolvency all weigh heavily on the residential construction industry. “There’s a big ripple effect if a sub-contractor falls over, it’s much more significant than a head contractor going under,” he says. “I think there needs to be more risk sharing within the industry.” Last week Sharvain Facades, which is involved in the Sydney Fish Market project , entered administration, reportedly owing millions of dollars. And more recently Roberts Co VIC, the Victorian arm of builder Roberts Co, revealed it had called in administrators, with managing director Emma Shipley saying the company could no longer “fund the losses incurred by Roberts Co (VIC) Pty Ltd” . ▲ An aerial view of the Sydney Fish Market. McSweeney says he believes that lean construction could help to bridge the gap that is wreaking havoc in the industry. “I think it has to be around modular, and off-the-shelf design and reducing waste,” he says. He says standardising products and creating product guides similar to those within the hotel industry, would help to reduce costs of delivery across the board. “But we have to improve our productivity, that’s the main way we’re going to get something to improve our cost of delivery,” he says. “At the moment you’re talking over $1 million for an entry level home, that’s way out of reach for a lot of people. “We need to improve productivity and standardise construction further. But it’s easy to say and very hard to do.” Construction cost outlook ▲ Construction cost escalation has varied significantly between different capital cities, according to Altus Group data. McSweeney says that although the economy is being shaped by macro and micro drivers, there was some good news in terms of building material costs. “If we do go through a recessionary cycle … we may see a slowdown on those big infrastructure and major projects, governments will try to be fiscally responsible.” This will free up some of the workforce to divert to other areas such as housing, he says. Material costs forecast “Anything that’s energy hungry is still going up, while anything that’s imported is either stable or falling,” McSweeney says. “While production of steel in China has tapered off, it’s still tracking along at a higher level.” Energy-intensive materials, such as concrete and bricks, continue to increase in price. But imported materials from China continue to decline, according to McSweeney, providing some relief for builders sourcing international products. But the slowdown and completion of major infrastructure projects across the country could also help to create more materials production capacity and ease the cost crunch, McSweeney says. Structural steel and rebar: Steel trading prices have fallen with weakening demand. Global steel production was down 0.8 per cent in 2024, although the World Steel Association expects to see a broad-based recovery, excluding China in 2025. Global steel demand is forecast to rebound by 1.2 per cent in 2025 but prices are expected to remain subdued. Concrete: Rising concrete prices reflect the material’s energy-intensive production process amid persistent energy cost pressures. The World Cement Association forecasts global cement demand is likely to decline to 3 billion tonnes a year by 2050, far below existing forecasts. Softening demand in the near term suggests prices may stabilise. Structural timber: Australia’s housing construction slowdown and high inventory levels have kept timber prices relatively stable, with minimal volatility anticipated in the primarily domestic market. Plasterboard: After a significant increase over the year, plasterboard prices have levelled off this quarter. With demand remaining weak, no further price hikes are anticipated. Bricks: Brick prices increased this quarter and annually. Surging energy costs have driven brick manufacturing cost hikes—as brick kilns are reliant on natural gas—and transport costs. Copper: Copper prices have stabilised this quarter after a period of significant growth. Demand remains strong, particularly in electrical equipment, wiring and electric vehicle manufacturing. Data centres are driving copper consumption. Diesel: Diesel prices have fallen to pre-pandemic levels due to lower global demand and increased production. This reduction provides some transportation and logistics cost relief. According to the Australian Institute of Petroleum, Australia has among the lowest diesel prices of all OECD countries.

Productivity Challenge ‘Must be Cracked’ in Cost Escalation Crisis

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