Large influx of government projects and shortage of resources to put further pressure on costs

Feb 8, 2024.
2 Min read

Insights
Large influx of government projects and shortage of resources to put further pressure on costs

Q4 2023 Australia Report [Townsville]: The rollout of significant state government projects (health, defence and corrections) in Queensland is proving to influence the construction market in general; the industry is stretched across all layers (labour, subcontractors, head contractors and consultants) and there do not appear to be sufficient resources to adequately service the projects.

Construction periods are increasing as a result. The cost of labour is rising higher than inflation. As a result, although the rate of increase in construction cost is slowing, there will remain a considerable increase in 2024 and beyond.

All of this before the Olympic infrastructure has started its influence.

The region has seen tender submissions with an increased cost for preliminaries being presented by contractors. In addition to the resources discussed above, this can be attributed partly to risk tolerance and partly to costs in sourcing skilled labour and technical staff. This does vary depending on the type of project. Greater health and defence projects are coming online within the region which typically carry higher contractual expectations from tenderers and by extension higher preliminaries.

Private development is steady, however the driving force behind project tenders this quarter is seen from government projects. These projects are often at odds with their allocated budgets with funding often not adequately keeping up with rising construction costs.

Construction costs have risen significantly since 2020 (>30%) which has impacted contractors and sub-contractors on fixed price contracts and as a result there has been several significant insolvencies. This has caused a ripple effect through the market, further impacting on contractors that are not insolvent, but the loss of key sub-contractors results in financial stress on their affected projects.

Escalation insights

The rate of increase in escalation in 2023 has slowed however the large influx of Government projects and the shortage of resources will still see a large rate of escalation into 2024. Indeed, the resource shortage and the resultant labour rates is one that is not expected to be changed anytime soon and is the largest challenge to escalation coming down to normal levels.