With construction cost escalation expected to remain elevated until at least 2027 across Australia, it’s simply not possible for health sector projects to ‘wait it out’. The pipeline of health projects is urgent and vast, and our growing communities can’t afford for these crucial infrastructure projects to fall behind or blow out.
Bodies such as Infrastructure Partnerships Australia are already sounding the alarm, with serious concerns about the ability of public and private developers to deliver excellence, complexity and scale at the right cost and on the right schedule.
However, even without a miracle cure for escalation (which is expected to remain around 5% per annum on average nationally), there are some measures that developers of health infrastructure can take to mitigate the impacts of escalation and set projects up to navigate the conditions.
A strong pipeline of larger, more complex projects pushes up costs
One cause of escalation remaining higher than expected is the very strong levels of construction underway across the country. Health sector construction has risen strongly over the last five years to a new long-term high in 2023/24 (~$8b in the construction components of projects started). This is expected to be matched or even exceeded in 2024/25 and remain high for several years, with a robust health construction pipeline in all capital cities (especially the larger ones) as well as in major regional areas, and a massive boom in health projects in Queensland. Strong activity is likely to mean very strong ongoing competition for health construction resources.
Another catalyst for cost escalation is the increasing size and complexity of health projects. This evolution is not unique to health, but health’s position at the forefront of the technology frontier, the rise of the life sciences and research sectors, and increased demand for new vaccines have filtered through to the health construction pipeline. With greater size and complexity come greater construction lead times, which prolong health construction and push up costs.
Is procurement the magic pill?
With a large portion of recent health projects in the public sector, there has been a limited selection of procurement methods implemented with a focus on subcontractor pricing, enterprise bargaining agreements, and material price hikes. This has put a strain on lump-sum pricing, and the inclusion of risk, contingency or uncertainty in contractor pricing. Public-private partnerships, for example, have been used only sparingly while private-led projects have been quite sparse. While the public project pipeline remains robust, increased scrutiny on public finances, especially in the eastern states, points to a future in which financing and procurement could see changes.
While NSW Government projects have adopted the GC21 Design Finalisation and Construct Contract, there may be opportunities to consider alternative procurement routes for complex projects that could result in more amicable risk sharing, best-for-project design decisions and better overall value for money.
In the Managing Contractor model, the contractor’s fees are set up front, with design and subcontractor tenders handled on an open-book basis. This reduces cost risk but increases administrative oversight, while a two-stage contract separates design development and construction, offering reduced risk and clearer scope for the developer.
In the Guaranteed Maximum Price (GMP) approach, the contractor’s fees and a maximum price are agreed on upfront, with any savings benefiting the developer. This provides cost certainty but potentially limits the contractor’s incentive to make optimal design decisions.
Ultimately, no particular procurement option can defeat escalation. The most important thing is not so much the procurement method itself, but that the methodology is appropriate to the size, nature and risk allocation of the project.
Given the specialised requirements of health projects and the expected competition for resources, it will also be important to engage early with contractors and subcontractors. A well-timed, well-planned and well-thought-through tender with a right-sized tender list will be crucial to a competitive tender outcome. A dream scenario for any developer.
Apportioning and managing risk
Infrastructure projects have always faced risks such as contamination, latent conditions and inclement weather. These risks persist, but others have emerged – such as supply chains, procurement of materials, availability of labour, and of course escalation. The larger and longer the project, the greater these risks become. In live health environments, there are extra risks, and these come with a premium price tag. For example, working in a live environment with multiple stakeholders may create complexities for staging and temporary works. Retaining parts of the existing building fabric could introduce spatial constraints, particularly for building services – or even result in non-compliance with the latest models of care.
Contractors are carefully considering risk profiles and pricing in risk, so it’s important to be clear about a project’s risks from the start and allocate risks to the party best equipped to manage them.
The following strategies can assist in anticipating, mitigating and managing some of the key risks:
- regular risk workshops with the project team to keeping risk registers up to date
- early engagement of the consultant team and subcontractor design teams to ensure constructability and management processes are checked for suitability
- inclusion of a strong change management team to ensure the end users are involved in the design process, mitigating the need for changes down the line.
Maximising productivity
Over the last few years, there has been a decline in productivity in the construction sector. While the contributing factors to that have been positive to workers, such as the introduction of a 5-day working week on building sites, it has also contributed to longer construction timelines and increased costs. With a booming pipeline of projects and ongoing skills shortages and labour constraints, there’s never been a more important time to discover how to achieve more with less.
Technological and process innovations such as BIM, automation, digital twins, and modular construction methods are becoming more accessible and offer opportunities for achieving greater speed, accuracy, and efficiency – which could help boost productivity and put downward pressure on cost escalation. It will also be important to reset the culture of the industry to improve retention of skilled workers, especially given the changing work expectations of younger generations.
In health care, early diagnosis and proactive intervention can often prevent further complications or deterioration. Securing tomorrow’s health infrastructure requires the same treatment, starting today.
About the authors
Linda Lodge is a National Director at WT. She is an experienced Chartered QS with over 16 years in the field. Linda is proficient in cost planning, estimating, and providing insightful advice on cost and design matters, and her expertise spans various sectors including health, residential, retail, commercial, fit-out, and education.
Damon Roast is WT’s Construction Economist. He has 24 years of experience across the consulting and in-house worlds, most of which has focused on construction and construction costs.
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