By Chris Gallaugher, Senior Engineer, PEAKURBAN VIC
It is no secret that the combination of government grants, prolonged record low interest rate and COVID-19 induced lockdowns have spurred major activity in greenfield subdivision works. But what does this mean for Victorian civil construction costs and developers feasibilities? PEAKURBAN reviewed our tenders and canvassed construction and estimating managers from Melbourne’s contractors for their 6 – 12-month outlook on costs.
A few common themes emerged:
- The industry is as busy as it has been in recent memory though the number of tenders being released is starting to abate and significant uncertainty remains for what the market will look like in 12 months.
- The large availability of projects at tender phase has made contractors cautious that they do not win more work than they can successfully deliver.
- High demand and reduced supply have caused shortages on certain materials and is leading to increased lead times and increases in some prices. Some specific items mentioned:
- Reinforced Concrete Pipes – 10-week lead time.
- Certain models of electrical Kiosks – 10 – 12-week lead time.
- Steel columns used in retaining walls – large orders require as long as 12 weeks as they are being rationed by suppliers and being shipped from Europe in some cases.
- Plastic Resins used in plastic pipe products – there does not appear to be any lead time yet though minor items; sewer maintenance shaft covers are apparently very hard to source.
- Subcontractors are now much busier and require longer lead times to ensure contract programs are met.
- High operational tempo of ongoing infrastructure and subdivision projects means hiring of quality staff and skilled labour remains fiercely competitive. Labour is also scarcer within the North and West when compared to the Southeast due to the smaller population.
- Most projects out for tender and under construction are through the Northern and Western growth area corridors while the Southeast remains a bit quieter. In the past 12 to 18 months some traditionally south-eastern based contractors have shifted their focus to the North and West to move with the market. Despite the shift, all contractors expressed a keen interest in returning to the southeast to supplement their existing workloads.
So, what does all this mean for prices?
Over the next year the downward pressures of uncertainty, security of pipeline, and relationships with blue chip clients and projects will be pitted against the upward pressure from materials shortages, subcontractor availability, and good old-fashioned supply and demand. The only thing that remains certain is that the next 12 months will highlight the ever-present need for proactive consultants with strong relationships and tight contract administration practices.
A look at the Road and Bridge Construction Index for Victoria shows a constant upward trend from September 2020 to March 2021 of 0.55% per quarter. Despite the increases, most contractors have been able to “roll” rates on existing projects in the interest of securing their works pipeline and maintaining client relationships. Over the next 6 months should supply constraints continue, some Contractors felt they may need to increase their rates by as much as 3 – 5% which would substantially outpace the 1.1% increases expected in the road and bridge index. We expect that the increases will taper off in the tail-end of the 6 – 12-month window as contractors wait out to resolve the uncertainty of what will hopefully be a post-covid market.
On balance, we are of the view that 2-2.5% increases in prices wouldn’t be unexpected. This increase is attributable primarily to supply side constraints as competitive tension and the need to shore up order books will temper Contractor rate increases overall.
So, what can developers do to mitigate the risks from price increases?
In short, choose the right contractor, think strategically and negotiate the right contract terms.
We believe that the principles of contractor selection remain the same regardless of the type of market, but it is not one size fits all and not all projects are created equal.
Here are some tips:
- Optimise your negotiating position during the tender period. That’s where you have maximum buying power.
– Do you have any carrots you can dangle? Ongoing work? Multiple projects? Are you next to their other works? Are you a high profile project? Are you doing something cool with sustainability? Recycled materials in pavements?
- Negotiate various items with the Contractor with a view to improving the bottom line overall. These are not always related to the contract sum. Some recent examples PEAKURBAN has successfully negotiated:
– Some contractors will cashflow your project or finance it for a lower rate than your typical lender would propose.
- If they will not finance, then alternative payment arrangements might be possible e.g 90 day terms etc
– The project is basically 75% complete before you incur a single dollar of interest on your construction facility.
- Share the risk with the contractor – contractors will tend to load prices if they carry all the risk. Sharing the risk on earthworks or rock for example might result in lower contract values. Its critical of course to quantify that risk through proper, detailed planning during design so informed decisions can be made and tenders structured accordingly.
- Lump sum certain items such as subgrade improvement but incorporate risk management into design e.g early CBR testing to ascertain likely costs and value of the risk.
– The inclusion of a construction layer may cost a bit more, but potentially reduce the construction period and holding costs.
- Locked rates for X number of stages or X amount of time
– Utilise separable portions within the contract for subsequent stages and write this into the letter of acceptance to lock it in.
- One contractor offers $20,000 rebates for failed PowerCor audits.
– They understand the costs associated with prolonged interest costs at the end of the project. Very confident and very savvy.
- Some contractors have specialties i.e Medium Density sites or ability to self-perform instead of subcontracting sewer and water works – these may be beneficial to your specific project.
- If you are a smaller developer or have a smaller project then make sure to include some smaller contractors among the tenderers.
A strategic approach to Contractor engagement is essential at all times, particularly in an environment where supply side constraints are putting upward pressure on rates.
Communicate your requirements to your engineers and trust in their assessment. Melbourne has a lot of great contractors and we deal with them day in and day out. At PEAKURBAN we approach every project as a collaboration and selecting the correct contractor for your project will maximise success and commercial returns.