The cost of lockdowns has caused national debts to soar, meaning that many countries have had to borrow to invest in infrastructure and energy transition. Thankfully, cheap international credit and a better-than-expected economic performance has enabled the Australian government to continue to invest in construction and infrastructure.
Driven largely by public sector spending, Australia’s construction sector has withstood the economic challenges posed by COVID19. Arcadis’ latest International Construction Costs (ICC) index, which analyses the cost of construction across 100 global cities, found that the total value of construction work in Australia completed by the end of 2020, comprising both building and infrastructure, fell by 1.6 per cent compared with the previous year. This is, bearing in mind the circumstances, a very good outcome. And while the residential and broader building sectors were the most affected, recording an overall decrease of 4 per cent, a continuous good performance in the infrastructure and engineering sectors, up by 1.7 per cent across last year, offset these losses.
The five key Australian cities covered by the report all remained stable relative to their positions in 2020. Sydney, by far the most expensive city for construction in Australia, rose one place to 29th but still compares favourably against comparable international cities including Seattle, Manchester, Auckland, Christchurch, Stockholm, and Dublin.
Perth was the biggest mover among Australian cities in the study, rising five places to 45th. Brisbane fell four places to 42nd, while Melbourne was level at 41st in the global rankings. Adelaide ranked 55th, sandwiched between the likes of Abu Dhabi, Dubai, Phoenix, and Miami.
Price rises expected
A solid pipeline of projects has been a boon for the sector but, because projects have not rolled out as quickly as anticipated, competition has stayed high, and prices have therefore not risen as far as they might have. In the second half of the year however, we expect the sector to be squeezed by higher prices caused by material supply constraints, rising commodity prices, skilled labour shortages (particularly with borders remaining closed) and rising wage costs.
The data shows that prices will rise most in Melbourne between now and 2021, with a 1.5 per cent increase this year and a 2.5 per cent rise each year after that. Sydney will see a 0.5 per cent gain this year followed by 2.5 per cent annual rises, while Brisbane will stay steady this year but then see 2 per cent and 2.5 per cent rises through to 2025, bringing cost pressures closer to those of larger cities (albeit with lower end-asset values). Brisbane is also in a tight position since local Tier 1 contractors have moved south to take up projects in buoyant Sydney and Melbourne.
Selecting projects on value
In our view, taking the right projects forward requires a new way of looking at value. Projects should be selected based on their benefits and affordability, while ensuring they deliver on client and stakeholder expectations around sustainability, social value, and the financial business case.
While economic conditions and societal expectations might have changed, sustainability still also remains particularly challenging. For developers, balancing a ‘net-zero’ future objective whilst also ensuring projects remain commercially viable and investable is tough. And the nature of this challenge is not equal to everyone – everyone is at a different stage of their ‘net-zero journey’.
Balancing these competing needs in an environment of rising prices will make project selection even more challenging in the second half of this year. Construction leaders requiring guidance on this could do worse than following the steps in Arcadis’ Five Point Plan:
- Prioritise objectives and define value: Record the main objectives and consider what the trade-offs are in delivering your objectives including, sustainability, productivity, and innovation.
- Detail the requirement: Develop a detailed understanding of the requirements and the direct relationship to the expected benefits and CAPEX/OPEX implications. Use this to develop a business case based on value drivers and create a value framework.
- Optimise the solution: Balance nice-to-have with must-have: Use cost and value drivers to fine tune the design, including the prioritisation of investment as well as the efficiency of construction and operation.
- Choose the most appropriate delivery route: Align procurement route and commercial and contract strategy to incentivise the value chain to leverage technology, manufacturing principles and innovation.
- Measure performance and success: Monitor progress in real time against the expected benefits, correct any divergence as soon as it arises.
The construction sector’s contribution to Australia’s cannot be understated and with big plans for an investment-led recovery, competition will remain high but expectations on value delivery will not lessen. So with prices set to rise, project selection discipline will be crucial.
By Matthew Mackey, National Director – Cost and Commercial Management, Arcadis