International Construction Cost Commentary - Rider Levett Bucknall

Canberra
The volume of projects now entering
the marketplace has reduced to a more
sustainable level with the result that more
competitive tendering conditions are now
being felt. With the smaller selection of
projects available, local contractors and
sub-contractors alike are reducing their
overheads and margins in an attempt
to secure future workload, especially
since many Sydney-based companies are
venturing further afield into the Canberra
market. Despite continuing upward
pressure on material and labour costs,
overall prices increases are modest and
have been somewhat camouflaged by the
tighter tendering conditions and eroding
margins.
Contractor sentiment towards the state
of the market is apprehensive and there
are signs of reduced confidence in the
residential and commercial sectors.
However, the public sector continues
to provide a consistent stream of work,
somewhat offsetting the slowdown in
commercial sectors.
The immediate outlook is for extremely
competitive market conditions, offering
potential clients an excellent tendering
environment in the first half of 2009.
Darwin
The recent announcement that
international giant Inpex will be investing
$12bn in a new gas plant in Darwin in two
years time is keeping optimism high and
the economy buoyant in the NT. Front
end engineering and design for the plant
will be starting soon and a Govt. task force
has been formed to ensure adequate social
and economic infrastructure is put in place
in time for the influx of workers and their
families to Darwin over the coming years.
This coupled with intervention works in
remote communities, continuing works on
the Darwin City Waterfront Project, and
continuing and upcoming Defence projects
at all major NT Defence bases will see
tender prices continue their upward trend.
Notwithstanding the current global credit
crunch, with this scale of development
earmarked for Darwin, we expect the
construction industry to remain strong
over the coming period.
Melbourne
Several major commercial projects are
currently running through to completion
in the next six months, amidst an already
tightening overall construction market.
Tendering opportunities have become
scarce as developers have shied away from
marginal projects, due to inability to obtain
finance and lack of tenant certainty. All this
has given rise to cuts in contractor and subcontractor
margins, set alongside increasing
building materials and wages costs and
further fuelled by falling exchange rates,
rising utilities costs and industry awards.
There remains pent-up demand for
residential projects and developers are
exploring options, however these are
dependant upon the return of confidence
in the market and ability to obtain funding.
Industry clients with high liquidity of funding
will find excellent competitive tendering
conditions in the first half of 2009. The
public sector will be particularly well-placed
to obtain good pricing for projects.
Perth
The Western Australian economy is
probably better placed than most States in
Australia to weather the current economic
storms. However, the extent to which
China slows or slips into recession has
potential to initiate a further deterioration.
Most construction sectors have been
similarly affected by the slowdown and
forecasts are for very much reduced
consumer demand in the coming period.
One result has been that, although rents
are at an all time high, uncertainties in the
general economy and a more cautious
new State Government have led to the
cancellation of a number of major projects.
Whilst materials costs are anticipated to
continue rising, labour costs have levelled
and may even be falling in some specific
trades.
Overall, this is the first relief from a
prolonged period of price increases.
Tenders are beginning to show signs of
increased competitiveness returning to the
market.
Sydney
In addition to the global and national
economic problems, there is ongoing
uncertainty in the Sydney market for
both the short and medium term, due to
a State mini budget that raised property
and land taxes and reduced infrastructure
expenditure as well as the Federal proposal
for increased expenditure on undefined
capital works projects. Contractors are
very aware that the number of future
projects is diminishing. Current projects
are nearing completion and it is becoming
increasingly difficult to replace work in
hand, so Contractors and sub contractors
alike are now keen to look at all tender
opportunities. As a consequence, labour
cost increases are being absorbed within
profit margins and materials price rises
are being discounted as contractors
and suppliers look to secure works
commencing in the new year.
Reduced tendered margins are being
experienced and we expect this trend to
continue throughout 2009.
Auckland
Despite interest rate cuts since July, the
Auckland residential market remains flat.
Meanwhile, the other building market
sectors have now become similarly
affected, with demand and access to
development finance rapidly declining.
Only the infrastructure sector has been
unaffected by the downturn, with central
Government funded projects continuing
through the maelstrom. Local government
spending conversely is set to be slashed.
Despite weak demand, building materials
costs for contractors are rising, due
to general cost increases coupled with
the falling New Zealand dollar, which
is offsetting recent falls in international
commodity prices. Highly competitive
market conditions however are set to
remain, with contractors targeting margins
and overheads to secure a limited supply
of work.
The constraint on this process will be the
point at which deeper cuts into profit levels
become unsustainable.
Christchurch
General economic conditions in
Christchurch mirror those in Auckland,
although Christchurch has several
major projects currently either under
construction, recently commenced (AMI
Stadium and New Christchurch Civic
Building) or due to commence shortly
(Christchurch Airport Redevelopment).
Together, they have a combined value
in excess of $300 million, which will be
keeping the industry relatively busy well
into and possibly through 2009. However,
we are noting in recent tenders, greatly
increased competition and associated price
cutting in terms of margins.
These conditions are likely to persist in
the next period as tendering opportunities
continue to be adversely affected by the
lack of confidence in the market and
problems of financing. This is already
apparent in the small to mid-size project
end of the market.
Wellington
Wellington is also feeling the effects of
the credit crunch, but is coming off a 20
year high in construction volume. The
excess of labour supply thus created is
giving rise to competition and price cutting
in the context of fewer new tendering
opportunities. However, Wellington has
at least six major projects commenced
or about to commence, with a total
value of approx $200m. Further, two
major Wellington City Council (WCC)
projects are currently seeking consultant
submissions, with confirmation that they
will proceed, and there is also the new
sports stadium and extensions to the City
Art Gallery.
These projects plus others in mid
construction will keep the workforce busy
through 2009 and into 2010.
17
INTERNATIONAL CONSTRUCTION COST COMMENTARY: January 2009