Construction Industry Weighs In on Top Three Risks in 2024

A crystal ball would be helpful right about now.

Surging interest rates, soaring labour and material costs and a dire shortage of skilled workers have created a formidable landscape for the construction industry in 2024. 

Many Australian construction professionals are contemplating a crucial question: What lies ahead?

The BCI Construction Outlook charts pipeline and sector-based trends from late 2021, facilitating forecasts through to Q3 2024. It offers a comprehensive view of the industry's challenges, opportunities and trajectory.

In a challenging, low-profit-margin landscape, the construction sector faces numerous challenges, including addressing a worsening housing crisis while adopting new practices to achieve ambitious net-zero climate goals.

As a preview, three critical risks have been highlighted from 2023’s comprehensive and complementary report.

Skilled construction worker shortage a major hurdle

Currently, labour shortages are at the forefront of most Australian builders’ concerns. An overwhelming 91 per cent of builders in Australia have pinpointed this issue as a major challenge affecting their business.

Robert Furolo, executive manager of corporate communications at Deicorp, told BCI Central that finding skilled individuals has intensified.

“[The lack of] labour and shortage of skilled workers represent the biggest risk to projects and risks like these need to be priced into the feasibility of projects,” Furolo said.

▲ Upskilling staff is one of the top three focuses over the next 12 months for Australian builders, architects and developers.

Growthbuilt general manager Adam Ashcroft said a significant subcontractor shortage across trades is impeding productivity and fueling escalation.

“Over the next 12 months, the scarcity of subcontractor labour will remain a challenge, impacting our ability to deliver projects within stipulated timelines,” Ashcroft said. 

Ashcroft highlighted that in order to reduce subcontractor risk, the construction firm conducts multiple interviews, emphasising the contractor’s commitment to understanding the project’s schedule and resource requirements.

“Our selection process prioritises the most suitable contractor for the project, which may not always equate to the most cost-effective option,” Ashcroft said.

Deepening housing crisis grips Australia

In the face of an unprecedented housing crisis, Australia struggles to cope with the surge in migration levels. This surge has led to an ambitious target of 1.2 million homes being delivered over the next five years. 

Two in five built environment professionals surveyed believe easing regulations could be impactful in addressing the housing crisis.

Architects primarily voted for government intervention in reducing interest rates and inflation, while most developers flagged increasing land releases as a solution.

▲ The evolving build-to-rent sector and increased medium-density development are seen as potential solutions for the housing crisis.

Although the Government has allocated $3.5 billion, the industry still feels a need for policy review and an assessment of the planning system to allow quicker delivery of a broader range of housing types.

Major asset managers and super funds are increasingly investing in build-to-rent (BtR). However, challenges like profitability and rising construction/material costs are key concerns for this asset class.

Jack Hutchinson, director of Hutchinson Builders, believes build-to-rent will have an impact, after witnessing major asset managers and super funds deploying capital in the sector.

“BtR still has the issue of building costs being really high. And so, to make their developments feasible, they need to up rents to pay for those increased building costs. At the end of the day, I think any new housing supply is a good thing,” Hutchinson said.

Builders on the brink as cost pressures mount

Escalating inflation, material costs and labour shortages have created a tense environment, exerting sustained pressure on fixed-price contracts and margin targets.

Unsurprisingly, four of five property developers warned that cost escalation is the key risk looming over the next year, closely followed by contractor insolvency. 

In 2023, construction insolvencies in Australia reached a nine-year peak due to escalating costs, including inflation, material expenses and labor shortages.

Sammut Group’s Allen Sammut reflected on the collapse of numerous building companies and how, even after a project has been secured, securing a builder is still proving difficult for many competitors.

▲ BCI Central interviewed Allen Sammut, managing director at Sammut Group, for his perspective among other leading Australian stakeholders in the built environment.

“Getting a job, getting the funding, getting the development approval, getting all of that is a risk, and it will always be a risk—especially planning risk and funding risk,” Sammut said.

“But then you get to that point, and you’re ready to start ... Now you’ve got to find a builder. And what’s the builder going to price it at?” 

BCI Central chief operating officer for Australia and New Zealand, Ashleigh Porter, said solvency in the sector would likely remain an issue over the next 12 months and could worsen if interest rates rise further and the economy slows. 

Despite the daunting environment, Porter noted that resilience and financial stability could turn adversity into opportunity with well-capitalised builders positioned to expand, seizing opportunities left in the wake of failed firms, a trend already witnessed in 2023.

Want to learn more about the current state of the Australian construction industry? Dive deeper by downloading your free copy of the BCI Construction Outlook.

The Urban Developer is proud to partner with BCI Central to deliver this article to you. In doing so, we can continue to publish our daily news, information, insights and opinion to you, our valued readers.