Slower than expected market conditions are causing both tier one and tier two contractors to compete against similar projects, particularly within the range of $50-$150 million, in the residential and retail markets.
The leaner tier two contractors are finding themselves better positioned to compete with lower operating costs and lower overheads leading to aggressive pricing as they strive to secure work in the long term.
These conditions mean that construction price escalation will remain under control, keeping all but a selection of trades very competitive. Nationally, we predict construction price escalation to rise just two percent this year before picking up to three percent next year.
The shift in tier 1 contractor focus is due to the slowdown in larger mining and resources projects so they are seeking other opportunities to fill their books.
Across the property industry, the private construction sector is continuing to improve with significant activity in the multi-level residential developments on the east coast.
Developer confidence is translating into further land and property transactions, driving institutional players to invest in commercial, residential, education and health developments and to position them for future growth.
We are also seeing Enterprise Bargaining Agreements (EBAs) continuing to contribute to construction cost escalation, however with government scrutiny this year, the impact is expected to decrease.
One area where we are seeing higher prices is building engineering services, as tenants are demanding more energy efficient buildings.
Overall we see optimism and confidence increasing. Key economic indicators support this with data released by the ABS on the 5th of March 2014, showing GDP increasing in the final quarter of 2013 from the flat levels seen since the September 2011 quarter.
As head contractors continue to shore up 2014 order books, pricing levels are not expected to increase dramatically this year. Once more tendered projects reach the construction stage, volume will dictate that resources are stretched and both contractors and sub-contractors alike will be in a position to be more selective, and increase margins.
Jason Thornley is Director of WT Partnership in Brisbane. WT Partnership is an international practice of property, project and cost management consultants in building construction, infrastructure and management of facilities.
