HOW ARE INCREASING CONSTRUCTION COSTS DUE TO COVID IMPACTING PROPERTY

The cost of the average new build has hit its fastest increase in over 20 years – largely due to the increased cost of construction material and labour shortages. The situation with materials was at its worst from March until May, lengthening lead times and seeing prices soar. The worst of it impacts the domestic sector and this is expected to improve no earlier than the first quarter of 2022.

It is steel and timber, the most traded internationally, that have taken the hardest hit. However, there is also a risk with electrical and roofing components. In terms of infrastructure, data centres, industrial units, and distribution centres are at the greatest risk of issues due to the content of materials necessary and the steep rise in prices, as well as the material shortages. This has encouraged competitive bidding in certain sectors as contractors can’t always pass these additional costs onto their clients.

According to our own Ben Leonardi, residential building prices are expected to rise by 7.2% in 2021 and 3.8% in the third quarter of this year, outpacing the Consumer Price Index (CPI) for the same time by 3%. There is a shortage of competent labour and supply chain restrictions to blame for the high costs.

Trade labour shortages are caused by a number of factors, including ongoing insurance repair work due to recent natural disasters, the boom in residential dwelling approvals on the back of the HomeBuilder grant, the surge in renovations from property owners reallocating funds previously set aside for holidays and recreation, and the backlog of commercial construction work caused by COVID-enforced lockdowns of the construction sector.

International shipping delays and shipping container shortages have caused supply chains to be disrupted, and the economic recovery of the United States and parts of Europe has raised the competitiveness for commodities worldwide, particularly steel products and engineered timbers.

There are several risks with construction projects. There are supply chain management issues to prolonged lead-in times and price inflation. Investors should evaluate the risk of any construction project before choosing real estate to invest in. It’s important to consider which materials are at risk and how that could impact the overall project. Early procurement and proactive communication are necessary to keep projects on track.

Ultimately, costs have risen, and the material and labour issues could increase total project costs by up to 4%. It may stretch to an additional 3% for transportation and logistics issues. However, this all depends on the material required for the project and whether materials are coming from overseas.

Where to next? Ben says:

Total residential dwelling approvals peaked in March 2021, but residential building activity will continue for an extended period as the construction of 130,000 approved homes are completed. These record approval numbers will cause material and labour shortfalls and relative cost increases to continue well into 2023, with further delays on bespoke designer homes.

Commercial construction will be similarly affected by labour and material shortages. Tier 1 and larger scale Tier 2 construction firms will be able to procure labour due to existing relationships, CBA conditions, and materials through project procurement forecasting, albeit at a greater cost. Availability of labour and materials will more prominently affect small to medium-sized contractors.

Market volatility will cause contractors to risk-share by eliminating penalties from contracts and guaranteeing tenders for only 14-30 days rather than 90 days. More and more contractors will insist on entering into ECI (Early contractor involvement) agreements to ensure greater initial project design and procurement input. Unfortunately, the cost of these additional measures and cost mark-ups will ultimately be footed by the consumer.

If you want to find out more, get in touch with Ben at McGees Property 0468 586 357 or bleonardi@bne.mcgees.com.au   


*Disclaimer: This article is for general information only and should not be relied on as advice. You should consider your personal situation and seek advice that is specific to your circumstances before making any decisions based on this information.  If there are any issues you would like us to discuss with us arising from this article, please contact us*

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