Over the last 12 months, Australia has seen significant cost increases across almost all sectors of the economy. This week’s inflation figure of +5.1% for the March quarter represents an increase in the CPI not seen since the introduction of the GST over twenty years ago.
Construction Costs Increases
The construction industry as well as the building industry has seen significant price growth across most states, due to a broad range of factors including a tight labour market, input cost increases and increased demand on the back of government incentives. Cost increases have typically started in residential construction, but the above factors are starting to influence all forms of construction.
This is emphasised by data released by the Australian Bureau of Statistics that shows that in the year to 30 September 2021 Australia saw a record value of construction work commenced, valued at more than $141.2b, this is up more than $10b on the previous record of $131.8b set in 2018.
The table below provides an insight on construction cost increases by State and construction type for the year ended 31 December 2021.
| STATE | OVERALL BUILDING CONSTRUCTION | HOUSE CONSTRUCTION | OTHER RESIDENTIAL CONSTRUCTION | NON-RESIDENTIAL CONSTRUCTION | INFRASTRUCTURE |
| NSW | 8.05% | 8.52% | 7.41% | 8.02% | 3.18% |
| VIC | 3.51% | 6.58% | 1.71% | 1.87% | 4.69% |
| QLD | 11.88% | 18.59% | 7.94% | 8.81% | 2.85% |
| SA | 7.32% | 14.59% | 3.05% | 3.19% | 7.32% |
| WA | 14.51% | 15.93% | 12.56% | 14.18% | 9.24% |
| TAS | 15.12% | 20.06% | 12.59% | 10.87% | N/A |
| NT | 4.45% | 7.00% | 2.51% | 4.03% | N/A |
| ACT | 3.37% | 9.88% | 1.46% | 1.71% | N/A |
The construction industry is subject to tight margins and these cost increases will have had a very real effect on the profitability of a range of projects.
However, it is not just a rise in costs that has impacted the construction industry over the last year.
The industry has also seen significant time delays to complete projects due to labour shortages and also a global supply shortage in many popular construction materials, such as timber, cabinetry, cement, some electrical components, steel and paints. Building material wait times during the pandemic for the above materials have at best doubled, to at worst extended by more than 10 times over pre-pandemic levels.
The inclement weather over the east coast since the beginning of the year will lead to delays to completion and put additional cost pressure on construction projects.
Furthermore, cost increases have not been limited to building construction. The table below indicates the variation in price growth across a selected number of categories in the Australian economy.
| CATEGORY | 12 MONTH CHANGE % |
| Aluminium Rolling & Extruding | 25.22% |
| Communication Equipment | 9.78% |
| Computer Equipment | 2.18% |
| Electrical Cable & Wire | 26.87% |
| Electrical Equipment | 9.71% |
| Furniture | 1.25% |
| Lifting & Material Handling Equipment | 10.41% |
| Machinery & Equipment Manufacturing | 5.90% |
| Prefabricated Buildings | 13.52% |
| Specialised Equipment & Machinery | 6.30% |
As with building construction, accompanying the cost increases for these and other product groups, customers have also experienced significant delays in delivery times for many of these products – for example, it has been reported that the wait times for some models of new light and commercial vehicles are up to 15 months from order.
Medium Term Outlook
It is expected that price increases will continue, and it is a reasonable expectation that increases will be around 5% or higher in the medium term.
It is expected there will also be more investment put into infrastructure developments in 2022, with the resulting diversion of materials and labour to this part of the sector.
Although government infrastructure spend will increase, many privately funded projects – particularly retail and residential projects – will continue to see delays to start times and completions.
Conclusion
COVID-19 and subsequent cost increases have impacted the construction sector in Australia in a number of ways, and these issues continue to have flow-on effects to many other industries and sectors in the economy.
In the last six months there has already been a number of high profile insolvencies in the construction sector. It is reasonable to expect that the flow on effect will filter down to the subcontractor market.
In further editions of InFocus we will focus on mechanisms available to assist subcontractors to mitigate their exposure to the failure of their principals.
At Hall Chadwick we are well placed to assist construction industry participants to navigate the challenges of the post COVID environment with respect to the following:
- Business reviews;
- Informal/safe restructuring; and
- Small business restructuring; and
- Formal restructuring by way of voluntary administration/deed of company arrangement.
Key Contact
Blair Pleash
