What’s the Outlook for Civil Construction Costs in 2021?

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Find out if competitive pricing can continue.

By Andrew Ngo, Principal Engineer, PEAKURBAN

Several clients have recently approached us seeking our views on the outlook for civil construction rates across Southeast Queensland.  Whilst we are in a good position to share our observations of the market, we also thought it was worthwhile reaching out to several reputable civil contractors for their input. We found that they shared relatively consistent views and based on this we provide the following summary of the overall outlook.

  1. The Roads and Bridges Construction Index (Queensland) from the Australian Bureau of Statistics indicates that rates have contracted overall across a broad range of construction industries. However, for the most part rates are holding firm in civil land development projects despite this and the current heavy workload across SEQ.
  2. Advice from contractors is that while rates are likely to experience some increases , these aren’t expected to be significant.
  3. Notably, there have been some movements in specific rates that are driven by market conditions which have been unavoidable. These include:
    • Impacts on the supply chain of stormwater drainage pipes with one major supplier (Rocla) recently exiting the market. This is resulting in extended lead times (typically 4-6 weeks for smaller pipes and 8-10 weeks for large pipes) and presents the temptation for suppliers to push up prices. Some varying rate increases have been observed for stormwater pipes with a recent tender showing a modest increase of 3%. Other tenders have shown changes ranging from 10% to 30% however, contractors have clarified that this is attributed to the unavailability of pipe when they need them on site. This cost is more so attributed to extended construction programs as opposed to increases in supply costs. While it remains uncertain whether further increases will occur in 2021, we suggest the following ways to maintain competitive rates:
      • Seek acceptance of alternatives to concrete pipe from authorities e.g. fibre reinforced concrete pipe.
      • Consider contractors who have strong relationships and buying power with suppliers and can maintain competitive rates.
      • Early order of pipes to manage lead times.
    • Requirements from Urban Utilities in 2020 has increased the construction rates for sewer embedment by 8-10% for sites where dispersive soils are encountered. Early geotechnical investigations should be undertaken during design to determine if this can be avoided or not, and factored into the project budget accordingly.
  4. Contractors are pricing risk into projects based on the reputation and past dealings with the developer and engineer. However, PEAKURBAN have not observed any additional risk premium being priced into our projects in this regard.
  5. Contractors are generally willing to hold competitive rates where they can. However, the challenge in their ability to do so is driven by several key factors such as:
    • Ability to take on more or less risk based on incumbent site knowledge/experience. Generally, it is more cost effective for a contractor to work where they are located rather than to move into a new area with unknown risk. Particularly with a good client and engineer on the job.
    • Site geotechnical conditions and especially the presence of rock or unsuitable material. Undertaking site investigations is important and  it is always clearer to undertake cost comparisons when these unique items are separated out from the rate. If this is provided as a lump sum, a build up to assess value for money in the lump sum price should be undertaken.
    • Size and scale of the project and level of risk based on economies of scale e.g. rates applied for a large first stage may be difficult to hold for a future smaller stage.
    • Complexity of construction methodology for the project e.g. rates applied to open trenching in a greenfield site can’t be applied for more complex sewer works in an urbanised area or narrow road corridor around existing services.
    • Timely decisions by the project team to facilitate efficient utilization of their work crews on-site. This is especially reliant on timely decisions being made by both the developer and the Superintendent at the necessary times.
    • From time to time, omissions or mistakes occur in contract rates and cannot be reasonably held moving forward. Open and honest dialogue is necessary in these circumstances to correct any past errors and it is in the interest of all parties to do so.
    • Timely certification of progress claims and timely payment of invoices for cashflow.
  6. Contractors with good relationships with suppliers can continue to offer competitive rates so buying power remains very important.
  7. One contractor shared their insights with regards to the current State infrastructure spend levels being relatively low which has limited impacts on material supply. However, they are anticipating a ramping up of infrastructure projects in the northern corridor in 2021 which is likely to place some pressure on gravel pricing and supply costs in this corridor at that time.

With high current workloads, you would generally expect rates to rise or trend upwards significantly. In our view this is not being experienced as many contractors are still concerned about order books post COVID and what the ‘new normal” might look like. It’s our view that Contractors pricing will remain competitive as they seek to ‘lock in’ on good projects, with good clients and good engineers. Having approvals in hand before site works commence and preferably with tender, will take out scheduling risk and provide for more efficient, sharper prices.

In summary, overall costs have not increased significantly in 2020. Whilst there is some risk of costs increasing by circa 1.0%-1.5% should the current level of demand continue into 2021, Contractors who can manage risks more effectively are finding ways to hold rates and are therefore able to provide more competitive pricing to secure projects in 2021.

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