In our latest Australian Construction Market Conditions Report, we argue that a quick fix to ongoing escalation is unlikely. But even if there’s no miracle cure, there are measures developers can take to mitigate the impacts of escalation and set a project up to navigate the conditions.
Set appropriate budgets and robust budget controls
In a market with high levels of escalation, it is more important than ever to develop a realistic budget from the start. There’s no point setting a low target budget and expecting a favourable tender result. Once you’ve determined a realistic budget, set robust cost control measures upfront so that design development stays within budget.
Bring proactive value management in at all key milestones during the design development. If value management becomes a reactive process after the project goes to tender, the benefit of spending time trying to recover cost overruns could be cancelled out by the associated escalation over that period.
Another crucial factor is establishing realistic contingencies and escalation allowances – and then monitoring against these throughout the design and construction journey. Escalation is a real cost, and it will occur, so make sure it’s appropriately budgeted for.
Choose your procurement method wisely
No particular procurement option holds the answer to escalation. The most important thing is not the procurement method itself, but that you land on a methodology that is appropriate to the size, nature and risk allocation of your project.
There is a place for early contractor involvement (ECI) on complex projects and where buildability is key, but we now have much more stability and predictability than in the volatile pandemic period when ECI really came to the fore.
The need to be working so closely with the subcontractor market to achieve your budget is now less pressing.
Allocate risk to the party best able to deal with it
Contractors are carefully considering risk profiles and pricing in risk. There have always been risks associated with contamination, latent conditions and inclement weather, but risks have increased around supply chains, procurement of materials, and of course escalation – particularly with larger, longer projects. Be clear about your project’s risks from the start and allocate risk to the party most able to deal with it.
Engage early with contractors
Engaging early with contractors ensures your project is on their radar and allows you to understand their pipeline to inform your timing to market. A well-timed tender with a right-sized tender list is key to a competitive tender outcome. Given the nature of the current market, one of the most important things in your go-to-market strategy should be demonstrating to potential tenderers that the project is a real job and is going to proceed. Contractors will have more appetite for your project and may be able to get better prices from subcontractors if they can be confident in the job.
Be clear about your ESD goals and their implications
It is becoming harder and more expensive to achieve an environmentally sustainable design (ESD) rating or certification, such as NABERS, GreenStar, Passivehaus, Climate Active and others. Be sure of what you’re trying to achieve and build it into the budget from the beginning.
If you are targeting an ESD rating it will likely involve carbon reduction. Once we exhaust the options for reducing carbon through clever design and rationalising the structure and façade, we’re left with choices of green materials, which are hard to come by and expensive in Australia. We have developed dashboards that allow us to work with our clients and the consultant team to analyse options and identify where carbon savings can be made without significant cost impact.
Consider new technologies
Construction has long been seen as a laggard in adopting new technologies, but there’s every reason to be enthusiastic about the rapid emergence of the digital era and its application in our sector. Construction has an immense opportunity to use BIM, automation and sophisticated tools such as digital twins to increase speed and accuracy, and put downward pressure on cost escalation. Getting ahead of the curve now means you can start reaping the benefits early and have an advantage when this new technology becomes the norm.
Where to from here?
We believe there’s room for guarded optimism that a combination of supportive fundamental drivers and construction sector investment can help to moderate ongoing escalation. In the meanwhile, consider the actions we’ve described here and reach out to us if you’d like support. There’s no substitute for trusted advice that comes from deep, real-world experience.
About the authors
Nicole Trumbull is a National Director at WT, based in Melbourne. She brings more than 20 years of experience in quantity surveying and cost management across residential, building, affordable aged-care retirement, retail, commercial, civic and more recently build to rent (BTR) and embodied carbon. As part of WT’s National Leadership Team, Nicole is focused on identifying new opportunities for service offerings and developing improved end-to-end services to clients.
Ian Menzies is a National Director at WT, based in Sydney. Ian brings over 30 years of experience in quantity surveying and cost management spanning residential, retail, hotel, education, and mixed-use developments. As part of WT’s National Leadership Team, Ian plays a key role driving strategic initiatives to enable business growth and create enhanced value for our clients.
