Jon Davies, CEO, Australian Constructors Association looks into construction crisis, cost inflation and industry solutions.
By Jon Davies, CEO Australian Constructors Association
The headlines tell a depressing story of increasing failures of construction businesses caught in an escalating crisis. Covid caused significant delay and disruption to many projects and led to a massive increase in the number of projects as governments sought to stimulate the economy. The increase in work caused huge demand for workers, with Infrastructure Australia forecasting a 105,000 worker shortfall in the next 12 months.
Flooding events and ongoing wet weather on the East Coast further delayed projects and increased demand for workers – and then Russia invaded Ukraine. Oil prices skyrocketed and along with them the price of energy intensive construction materials like steel, cement and asphalt. Other material prices such as timber also increased as they became harder to source and took longer to arrive as supply chains buckled.
Double digit inflation for an industry with single digit profit margins was always going to be a recipe for disaster but more so for one that is required to lock in prices for projects that can take years to construct. This industry already accounted for almost 25 per cent of insolvencies in Australia and more worrying, is one whose workers are six times more likely to die from suicide than a workplace incident.
Hyper-escalation of construction costs for contractors locked into fixed price contracts is emerging as one of the biggest challenges and one that, if not addressed, could significantly impact on the ongoing sustainability of the industry. Service stations can increase prices within hours of the oil price going up and supermarkets increase the price of tomatoes within days of supply being disrupted, yet construction companies are expected to provide fixed prices that include for a range of unknown and unpriceable risks like inclement weather, material price escalation and diversion of utilities that don’t appear on any drawings. The industry is seeing examples of price rises over a 12-month period of up to 70 per cent and yet clients continue to expect fixed prices.
The industry cannot continue to bear the cost of these steep price increases – some costs will need to be passed on to halt the growing trend of insolvencies. The Australian Constructors Association’s latest report, Construction cost inflation – Ways to address an escalating issue, highlights the impact of increasing costs and calls on government to take action both in respect of current and future contracts to ensure that the contractor is not left out of pocket for what is an issue that is well beyond their reasonable control.
It is not in anyone’s interest for this situation to continue. When contractors fail the impacts ripple throughout the complex network of contractors, consultants, suppliers and sole traders that is the construction industry.
Capacity is lost, impacting the industry’s ability to deliver the governments’ pipeline of projects and therefore realise the associated economic stimulus.
Ultimately, this is a shared problem – government, contractors and the supply chain are in the immediate firing line, but company failures impact the wider economy. It is in the client’s best interests to work with the contractor as the cost of doing so will be far less than the cost and or delay to a project if the contractor fails.
Some government clients are starting to include provisions for cost escalation, known as ‘rise and fall’ provisions, which the Australian Constructors Association applauds. However, these are often limited to a particular type of contract or particular commodity when the problem is much more widespread. We need to fundamentally change a system that encourages contractors to compete against each other to price and take on unpriceable risk like material price inflation. To its discredit, the industry has been all too willing to participate in this system.
Going forward contracts should contain transparent mechanisms to ensure future fluctuations are dealt with fairly.
This also means contractors should not make windfall gains if price falls. Projects should not be deferred or cancelled as this can have unintended consequences worse than the problem trying to be solved. Asset owners can keep to budget by using pre agreed positive/negative variations to adjust the scope to account for material price fluctuations or other risks for that matter.
The industry needs to become more financially sustainable to properly focus on important issues such as improving productivity, sustainability and innovation.