With significant cost increases, it’s essential to choose the right contract.
Construction costs in Australia have risen exponentially and continue to rise. Recently, CoreLogic released a report that showed the national construction costs had increased by 7.3% over the 2021 calendar year. This rate is the highest annual growth for construction costs since March 2005.
Why have costs increased?
Supply chain issues have overwhelmed the construction industry over the past 2.5 years and we’re now experiencing the worst supply shortages of construction materials in 40 years.
There are several factors that have affected the supply chain issues and price increases we’ve seen, some of these include:
- COVID-19 pandemic.
When COVID-19 first hit us, everyone panicked and so many suppliers around the world wound back production because there were strong expectations that the pandemic was going to slow things down. But COVID-19 actually increased demand due to Government grants, infrastructure pledges, and commercial and residential construction projects that sped through approval processes to keep these industries going.
Construction materials costs are based on the current supply and demand of the industry. So when the supply becomes not enough to meet the demand, steel costs surged by up to 40%, and timber materials by up to 30%.
On top of that were the increased freight costs due to major container-availability issues as well as COVID-19 reducing the capacity of the ports together with shipping and transport bottlenecks.
- Global construction boom.
There have been construction booms in many countries globally, particularly in America which has eaten up a significant portion of the world’s supply of materials like steel and timber.
In Australia, for example, total apartment approvals increased by 78.3% in February alone. Shortages of building materials and labour have increased the price of residential construction in Australia by 7.3% last year.
When steel prices increased due to tariffs, the costs of steel-related products such as stairs, handrails, and decking experienced increases.
- Inability to import skilled labour.
Another factor increasing pressure on the industry is the skilled labour shortage across Australia with international and state border restrictions hindering people’s ability to apply for jobs here.
Construction is labour intensive and because of this, a large portion of construction costs are determined by labour expenses.
- Russia’s invasion of Ukraine.
With the events we’ve seen play out in Russia and Ukraine there’s been even more supply issues. Two of the main raw materials in construction are timber and steel.
Russia is the world’s 5th largest steel producer and Ukraine comes in at 14th for steel. And for timber, Russia accounts for 22% of the world’s wood trade in terms of volume. So, it’s inevitable that the disruption in that region causes disruption for the global construction industry.
- Recent weather-related events.
Extreme weather conditions including the bush fires in 2019/2020 and the excessive rain and flash flooding only aggravated the situation by impacting the demand for construction materials and transport arrangements.
Top costs for a construction project.
Construction cost consists of the raw material costs and shipping costs which may both vary according to the size of the project.
With materials being the top cost, it’s inevitable that a small unit price rise will have significant consequences for the project.
- Site Conditions.
Site conditions such as poor soil, uneven land, water bodies and environmentally hazardous spaces could increase the cost of a project.
Labour wages differ between states, and some can be charged on an hourly basis whereas others may be charged daily.
This said it’s crucial to understand the labour norms and accordingly estimate the construction cost.
Types of construction contracts.
- Unit Rate Contract.
For unit price contracts, the price is based on the estimated unit cost of the materials and is divided into stages by the construction trade e.g. carpentry, electric, plumbing etc.
Unit price contracts are usually the standard in subcontracting agreements.
- Cost-Plus Contract.
With these contracts, there are no fixed prices. If the materials like structural timber or metal products increase during the construction project, the cost of your project will increase as well.
- Fixed-Rate of Lump Sum Contract.
These contracts require project plans, designs, specifications, and schedules before the contractor can establish a price. Fixed-price contracts are sometimes referred to as a lump-sum contract and are seen as favourable in the construction industry when the scope is clear and there’s a defined schedule for the project.
Lump-sum is about how the project is priced rather than the payment terms. With these contracts, payment usually occurs on an installment basis such as monthly.
To modify a lump sum contract, suppliers must submit an order variation document that the contractor must approve along with any price changes.
A fixed-price contract is a contract where the agreed price for the job is unchanged throughout the project. It doesn’t matter if more time, materials, or labour must be used than first estimated, the price stays the same.
How FTI Group fits in with all this.
With all the different factors impacting the cost of a construction project, it’s overwhelming to know where to start in making smarter choices to reduce the costs without compromising quality.
A good place to start is if we take construction materials being the single highest cost for a construction project and investigate the types of contracts available from your suppliers.
FTI Group offers fixed rates for its Fast Tread® stairs, BlueDeck Composite™ metal decking and its range of ancillary products once the project is signed up. These rates are locked in for the duration of the project which helps with the certainty of costs for budgeting. A fixed-rate contract shields you from fluctuations in steel prices that may impact your project.