Arif Uzay joined Rider Levett Bucknall in 2002 as a cadet quantity surveyor, promoted to an associate in 2010 and in 2017 was appointed as a director. He is passionate about the built environment, diversity and inclusion within the construction industry, and contributing to change. Arif also demonstrates a comprehensive understanding of financial and cost management, specialising in conceptual estimating, cost planning, construction services and project procurement. He has considerable experience providing services for both the Government and the private sector on a broad range of construction projects and industries.
The Australian construction industry was impacted in 2020 by several unprecedented events. Initially, in early January 2020, bushfires ravaged significant regions of the country, followed by the growth of the COVID-19 pandemic. With borders across the country generally open, red spot covid outbreaks fought off, and with the latest GDP data indicating that the country has “turned the corner”, according to the RBA governor, where to now for the property and construction industry into 2021?
Victoria has experienced strong construction growth from 2018 to 2020. In particular, the 2019 and 2020 calendar years saw record levels of activity, at $59 billion and $57 billion respectively. The three major sectors—residential, non-residential, and engineering—all contributed to these record results.
While COVID-19 will affect future volumes of construction activity in Victoria, its impact is difficult to quantify. This difficulty arises as construction activity in 2021, and beyond, was already forecast to decline (particularly compared to the recent record highs) prior to the pandemic. Sectors classified as high performers in recent years have been most affected by the downturn. Activity within the high-density residential, office, hotel, and retail sectors are all predicted to decline in the short to medium term after significant new additions to supply. This is not surprising, given that these sectors are historically driven by strong net migration, influxes of international students, strong employment growth in the financial and service industries, and positive tourism activity—all of which have diminished since the outbreak of the COVID-19 pandemic in March 2020.
There is reason for optimism, with COVID-19 community transmission largely controlled in Australia, and the commencement of the vaccine rollout. However, the ‘working from home’ debate is still very much alive. While workers in most states have returned to the office in some capacity, commentators suggest that it will take some time for workplaces to return to ‘normal’.
All these factors are creating uncertainty in contractor tender pricing. Some factors are causing downward shifts in costs, with contractors and sub-contractors reducing margins while fighting to rebuild their pipelines of work. Other factors are expected to increase pricing, such as restrictions on the movement of labour and materials both nationally and internationally, and higher on-site costs due to COVID-19 site requirements.
However, the pressure on pricing eased through 2020 and into the beginning of 2021, and we are seeing a reduction in the escalation uplifts that were forecast 12 months ago, compared to that forecast now.
In general, Rider Levett Bucknall (RLB) contends that:
The industry will possess a latent capacity for projects during 2021 and into 2022, due to the forecasted falling levels of activity anticipated by the Construction Forecasting Council (down 7% in FY 2021)
Tender pricing will remain stable in 2021 and 2022, with modest increases in escalation expected. This could change quickly if demand intensifies or significant disruptions to supply chains occur (such as insolvencies, surges in material prices due to global trade conflicts, and lack of skilled trade personnel). However, current indicators suggest a more tepid path.
The commencement of significant infrastructure projects should not have a dramatic impact on the supply chain. The recent surge in infrastructure activity has not seen significant escalation within the sector based on Australian Bureau of Statistics (ABS) numbers. However, this was not the case in 2018; there was a significant spike when the Melbourne Metro, Monash Freeway Upgrade, and West Gate Tunnel Project were announced. The civil market now appears mature enough to maintain pricing stability as proposed new projects are tendered into the market.
RLB believes that COVID-19 specific inputs into construction costs are generating several opposing factors. Reduced construction volumes in some sectors have increased competition, resulting in a corresponding reduction in tender pricing margins. However, factors such as increasing material costs, volatile exchange rates, supply chain reliability, and changing work practices are lowering productivity and potentially increasing program durations—all of which are influencing costs.
Prior to the impact of COVID-19, it was anticipated that construction escalation uplifts across Victoria would range from 2% to 4% per annum over the coming years. With construction activity forecast to decline in 2021 and the impacts of the pandemic now apparent, RLB is forecasting a general escalation rate of 1.5% in 2021. The ABS-published Producer Price Index for the Building Construction industry saw a 1.2% increase in overall building costs during the 2020 calendar year. We feel that with the current Enterprise Bargaining Agreement (EBA) in place, foreign exchange rates stabilising, and a falling level of activity, contractors and suppliers will be looking to consolidate throughout 2021. This will be achieved by reducing margins and lowering their expectations of supply chain profits to ensure a stable supply of new work, which will in turn offset known material and labour supply increases.
RLB published escalation forecasts
Table 4 - Forecasted RLB published Tender price index (TPI) uplifts
