The latest construction industry market sentiment report, released by Arcadis and the Australian Constructors Association today, reveals that the recent inflationary crisis continues to have a severe and far-reaching impact on Australia’s construction industry.

Australian Constructors Association CEO Jon Davies said every single surveyed contractor reported having to absorb material price escalation in 2022 that could not be recovered or offset in any way.

“Some contractors are hurting more than others with nearly half of the respondents stating that the unrecovered cost increases amounted to more than 10% of their project budgets, which could result in losses of many millions of dollars,” said Mr Davies.

“Despite some improvement since the last survey, a significant 76% of respondents believe that the current commercial environment still unfairly and unreasonably allocates risk between clients and contractors.

“Risk allocation has been identified as the most significant barrier to innovation and productivity growth in the industry and, to put this into perspective, the industry’s productivity performance is at a 30-year low.”

While the report indicates material price inflation is beginning to moderate, the cost of labour is starting to increase significantly.

Matthew Mackey, Executive Director – Cost & Commercial Management at Arcadis said more than half of respondents rated trade labour capacity as severely constrained compared to only 20 per cent last year.

“The industry expects that market will remain overheated in 2023, with a shortage of contractors relative to demand, and prices remaining high,” said Mr Mackey.

“Based upon the responses received, Queensland and Western Australia are anticipated to be the hottest markets, while overall sentiment has fallen in Victoria compared to last year’s survey.

“In terms of asset classes, Defence, Energy and Power, Health, Data Centres and Aviation are the strongest performers. Interestingly, enthusiasm for the Retirement Living sector has fallen since last year—with just 36% of respondents indicating that this is a rising market compared to 78% in 2022.

“The latest data also indicates that pricing volatility for materials has started to ease, which some respondents noting that prices have fallen for specific items. While material pricing appears to be a softening picture, this is now being offset by increasing labour costs ahead of the next round of EBA negotiations. We therefore anticipate that labour costs will become a primary driver of the next wave of construction cost inflation.”

Mr Davies said the industry is doing it tough as a result of having to absorb significant rises in material and labour costs.

“Government can help by compensating contractors undertaking government projects for these increased costs.

“It is not reasonable for government to pay less than it cost for a contractor to deliver a piece of infrastructure through no fault of the contractor especially given the cost to the economy of the current high level of industry insolvencies.”

Download the report.

Key statistics

  • All respondents reported having to absorb material price escalation in 2022 that was unable to be recovered or offset in any way.
  • For nearly half of respondents, these unrecovered cost increases were more than 10% of project budgets.
  • Only 24% of respondents feel that the current commercial environment allocates risk between clients and contractors fairly and reasonably. This is an improvement on last year (which was 18%).
  • More than half of respondents rated trade labour capacity as severely constrained compared to only 20% last year.