The Rising Cost of Construction and the Impact on Residential Building Projects
Rising construction costs driven by inflation, economic stimulus and supply chain challenges, have a major impact on material availability for builders of homes and pools. These factors put significant pressure on the builder’s margins and timelines. How are building companies managing these rising costs and what is the impact on the Australian economy?
The Pandemic and Increased Demand
Contrary to what one might think, the lockdown period in Australia had a big knock-on effect in the residential building industry. It experienced a mini-housing boom.
As many people were forced to work from home, the demand for a “home office” soared, leading to rapid renovations to account for this. As we were also forced to spend more time at home, more money was available. These factors lead to the need for better equipped homes, renovations to living and outdoor areas, and pool construction saw a rapid increase.
In the second half of 2020, the Australian Government introduced the Homebuilder Grant - a significant cash sum awarded to those who signed contracts to build a new home during 2020 and early 2021. With interest rates at record low levels, Australians rushed into the building market, leading to a major boom.
Demand vs Supply
Unfortunately with this great opportunity to the home building industry, multiple factors led, and continue to lead, to uncertainty in the building industry:
Post-Covid economic climate
Forest fires destroying resources
Material shortages - As construction companies shut down or closed, materials used in the home building industry, such as steel, timber products and others were no longer being produced, leading to short supply. Certain residential projects, like pool building, got delayed or ran over budget.
Supply chain challenges
Geopolitical instability
Commodity price inflation
Lack of skilled labour resources - Due to the decrease in immigration and closed border policies, the lack of affordable skilled labour, means the cost of local labour is on the rise, particularly as the demand for renovations and tradespeople continue to rise.
Labour strikes
So for the house-building industry, what should be a boom time is becoming a disaster.
A report from CoreLogic showed that national construction costs increased by 7.3% over the 2021 calendar year. Thanks to various market pressures an average escalation of 4-8% is further expected in the next six months. This could spell trouble for homeowners who are planning to renovate or build their new homes.
Furthermore the war in Europe has also impacted prices, specifically petrol prices which has made just getting materials to site more expensive. In terms of transportation, shipping prices are still under pressure, having risen by a jaw-dropping 300% in the previous year.
How Homebuilders Can Reduce the Impact of Rising Costs
Here are some tips to address this industry-wide issue:
Choose the most suited contract to use based on current circumstances and the scope of work. Both fixed-price or cost-plus contracts have their pros and cons. Review your budget against current pricing. Understanding the market is crucial to ensure your predictions do not take the wrong turn, causing you to lose money. Builders need to ensure they understand how the ‘rise and fall’ clauses in building contracts work to account for price fluctuations.
Constantly stay on top of building materials prices that you will use and factor any increases into the contract.
Try to shorten the time between signing the contract and starting building work to ensure calculations remain within scope throughout the project.
Make sure your clients are aware of market fluctuations and their impact on the building process, timeline and costs.
Supply chain challenges require adequate procurement strategies to the current market situation to ensure the building project stays on track.
Take labour supply challenges into consideration when costing a project.
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