Peadar Beirne: Rising labour costs put Australia’s construction sector on edge

The practice of benchmarking costs against previous projects has long been a tool used in the construction industry to provide the foundation for allocating budgets on new developments.

Changes to the construction landscape in Australia in the past 18 months have somewhat challenged the efficacy of such standardised approaches (if used in isolation), even with what was once considered an ‘acceptable’ allowance for price increases.

Where developers have sought to replicate a successful project within six to twelve months of practical completion, they have found cost escalations of 5-9% over initial projections, even as high as a 20% increase.

The drivers of these increases are many and complex, but among them is the rising cost of labour.

Labour — the growing risk factor

The fundamental economic principle of supply and demand is highly visible in Australia’s construction sector at present. When demand is greater than supply, prices rise, which is what is currently playing out in the current domestic labour market.

The Housing Industry of Australia reports that trade prices increased by 6.2% in the 12 months to March 2024.

According to skill priority surveys by the government of Australia over the past three years (2021-2023), building trades have consistently reported shortages, with vacancies on the rise. These include increased vacancies (online) for electricians surged by 56%, wall and floor tilers increased by 73%, and glaziers saw a 28% rise from January 2019 to January 2024.

This is, in part, due to skilled trades not being recognised on the Australian Government’s Skills Priority List, effectively reducing the flow of offshore labour.

Demand for construction workers in Australia is being driven by activity levels in infrastructure, energy and utilities and mission-critical sectors (including data centres). For skilled workers, long term public infrastructure projects are also appealing for their longevity.

In addition, an environment of economic uncertainty has continued to erode the confidence of employers with companies hesitant about hiring apprentices. In July, HIA’s executive director of future workforce, Geordan Murray told trade publication Building Connection that data showed construction trade apprentice commencements are down 17% compared with the same time last year.

Industry bodies have also pointed out that intakes of new trades students are not increasing fast enough to replace retiring workers.

Against this backdrop comes additional disquiet about recent union pay rise agreements that may lock in wage increases for trades working on Victorian and New South Wales construction projects.

In some instances, we have seen an uplift of 33% in subcontractor’s labour rates after they have signed their first enterprise bargaining agreement (EBA). Many builders have reacted to the current and anticipated increases in costs in labour by increasing margins in an effort to mitigate higher levels of project risk.

This has a knock-on effect with overarching project budgets. In addition, it can lead to increased project costs to complete, which if too high, could deter potential developers from investing on these shores.

How to accurately mitigate labour cost risks?

In the current climate, the best approach to accurately predicting project costs is to allow adequate uplifts to the labour component. This can be achieved by splitting labour and material costs and applying a differential risk profile. There are multiple data publications outlining the projections for both labour and material including Linesight’s latest Construction Market Insights Report

It also pays to implement more comprehensive competitive tendering processes to ensure best market rates. Competitive bidding can be an incentive for contractors to offer up cost-effective labour solutions such as more off-site manufacturing solutions or effective program solutions.

A third step is to analyse contractor and subcontractor networks to ascertain who is currently signed to an existing EBA and who is negotiating a new or revised EBA, and then ensuring the preferred sub-contractors have factored in these costs.

Conclusion

As costs continue to rise in the construction industry, it is more important than ever that companies adopt an over-the-horizon view that helps them make informed decisions on their project investments.

Optimising budgets, running effective tendering processes, gaining clear optics on labour charges and taking a new approach to cost benchmarking can help mitigate the impact of cost increases.

Peadar Beirne, Associate, Linesight, based in Sydney is a proactive, forward-thinking and highly motivated Chartered Quantity Surveyor with over 11 years’ professional experience. Peadar has earned two bachelor’s degrees in Quantity Surveying and Construction Project Management and obtained his chartership with the Royal Institution of Chartered Surveyors (RICS). He has worked on projects with multinational clients in Australia and the United Kingdom across a range of sectors including data centres, commercial, high-end residential and education.