By Andrew Ngo, Principal Engineer, PEAKURBAN
A hot topic in November last year was the outlook for Queensland civil construction rates in 2021. This remains a hot topic so almost 8 months on we take the opportunity to revisit some of the predictions and look at what the rest of 2021 might hold. The original article can be found here.
- We again turn to the Roads and Bridges Construction Index (Queensland) from the Australian Bureau of Statistics. This index showed a modest +0.5% increase in the last quarter of 2020 and a further +0.3% increase in the first quarter of 2021. We have observed in recent tenders in May that rates have held firm in larger civil land development projects. However, there are early indications in June that supply chain disruptions and labour shortages may result in some cost pressures in the short term to medium term before correcting once supply chains stabilise in the long term. Contractors have advised that some increases are in the winds but remain focused on keeping costs down where they can.
- Despite some increases in supply costs, we have seen that pricing has remained competitive in 2021 with some very competitive tender offers still being made.
- Previous movements in rates:
- Impacts from the supply of stormwater drainage pipes (due to the Rocla shut down) are now flowing through to industry. Extended lead times are any ongoing problem that Contractors are continuing to manage. Since last year, the lead times have increased to 20-26 weeks for concrete pipes.Extended timeframes are caused by a reduced production capacity. The manufacturing process involves setting up moulds to produce pipes of varying sizes. Although several pipe sizes are produced in parallel, changing moulds requires a switching period and stretches out the supply times. This is compounded because the existing supply of pipes is absorbed by industry in between each switch and there is no stockpile of inventory to backfill orders.Contractors who plan well and are resourceful in their procurement processes will have a competitive advantage on projects. Authorities have also played their part and we have seen the following:– Authorities accepting of alternatives products including fibre reinforced concrete pipe (typically 6-10 weeks for smaller pipe up to 600mm diameter).
– Contractors pre-ordering pipes at the tender stage and prior to being awarded a project. There is low commercial risk because the pipes can be absorbed by industry demand should they be an unsuccessful tenderer.
– Some Contractors are procuring pipes from interstate and passing on the extra transportation cost to clients (~$5k per truckload).
– Larger Contractors are entering commercial arrangements with suppliers to potentially reduce lead times to 12 weeks.
– Contractors resequencing development works to facilitate later pipe installation in their construction program.
- A slight increase in costs is likely to occur for projects within Urban Utilities due to recent changes to the SEQ Code IPAM material supply list. This is the result of Urban Utilities requiring valve restraints for watermains. Urban Utilities are currently preparing further details for these restraints, and we will work with Contractors to confirm the costs once the detail becomes available. We have also requested that alternative arrangements be considered to keep these costs down.
- There are risks for price increases in the supply of sewer and water pipes due to a supply shortage in resin used to manufacture pipes. While this may increase pipe supply costs, we have been advised that this will only see a minor increase in rates because the pipe supply component is a proportion of the overall construction costs. This may be similar for steel and precast products.
- Retaining wall supply increases have occurred in June however, some Contractors are able to adjust costs that are within their control to offset these increases. We can also work with clients to look for opportunities to limit these impacts by adjust earthworks designs to reduce retaining wall quantities.
- The availability of logistical services and labour is impacting construction timeframes and having an impact on project costs. These increases may flow onto projects in the short to medium term before correcting over the long term.
- Contractors continue to be more selective in who they work with based on reputation and past dealings with the developer and engineer. Conversely, we have seen several new Contractors enter the market and it remains just as important to work with a reputable Contractor rather than an untested contractor who is offering a lower price.
- Contractors are holding competitive rates where they can. Key factors allowing them to do so are as follows:
- Incumbent site knowledge/experience and working with a good client and engineer on the job who are responsive.
- Site geotechnical conditions and especially the presence of rock or unsuitable material.
- Economies of scale and ability to draw out opportunities when working within a particular catchment.
- Complexity of construction methodology for the project.
- Timely decision making by the project teams
- Ongoing dialogue with all parties and focus on commercial outcomes.
- Contractors with good relationships with suppliers continue to have a competitive advantage as they lean on their superior buying power.
- State infrastructure spend levels have ramped up for infrastructure projects in the northern corridor in 2021. The competition to attract talent and skilled staff is the next big challenge for Contractors (and engineers alike). Whoever can keep experienced and skilled staff in their teams will continue to be the preferred Contractor.
In summary, last year we highlighted the potential risk of a minor increases of 1-1.5% based on the 10-year average of the Roads and Bridges Construction Index. This has been revised to 2-5% in the short to medium term based on feedback from Contractors. This is largely due to increases in costs of labour and other costs in the supply chain that Contractors were previously leveraging to keep costs down. However, Contractors are expecting this to correct in the long term.
While we have not observed significant overall increases in our May tenders, some increases are anticipated in the months ahead and we will continue to monitor this closely. Ultimately, the Contractors who continue to deliver value and keep a lid on these increases will be the Contractors that clients will continue to turn to.
Clients have played their part in managing scheduling risk by planning early and focusing heavily on having approvals in hand before site works commence.
Most Councils have come to the party by working closely with industry to consider alternative products, prompt attendance to site queries, and amending bond requirements for plan sealing. Some Water Authorities are struggling to keep up with industry output and it is critical that clients submit water applications well in advance to allow for the full assessment timeframe by the Water Authority.
Competition amongst Contractors remains fierce with several new players entering the market. It is important to continue working with reputable Contractors and resist the temptation to engage an untested Contractor who are competing on price alone. This may cost you more in the long run.
Contractors who can keep and develop a team of talented and skilled staff will have the competitive advantage in both cost and delivery.