The financial viability of development projects across the region has been tested these past few months, most recently in Victoria with construction site workers being pared back following the second round of restrictions. For projects in both design and construction, the industry is likely to see a rise in costs incurred as a result of lost productivity and project delays.
While a rise in outgoings is expected, principals are increasingly sympathising with contractors and consultants, in the face of previously agreed contract terms, to ensure the industry remains healthy. Developers are vigorously challenging increased costs affecting their bottom line; however, institutions are looking to accommodate flexibility with contractors in providing some time relief at no cost.
Despite potential contractual claims and disputes, we’ve seen immense camaraderie across the property industry and an underlying respect for those workers who have continued to work on project sites and within our communities.
We have seen many projects be placed on hold due to uncertainty, particularly following recent Stage 4 restrictions in Victoria, or lack of available funding. Project teams should consider cost escalation in their budgeting processes. This will invariably see a rise in trade and supply chain costs – which, in the short-term, we expect to be minimal.
Another thing the CBRE Project Management team has observed is cost reductions in contractors’ pricing of margin, preliminaries and overheads, due to the ultra-competitive tender market – with companies seeking to secure work into 2021 and beyond. We expect this level of competitiveness to continue well after the lifting of restrictions as pipeline revenue needs to be committed.
Should a client decide to delay a tender release and spend extra time refining the documentation or exploring alternative options in anticipation of the industry recovering, this will likely necessitate additional work and incur added costs from the consultants due to additional design resourcing and re-establishment. Because of this, we expect it to be challenging for consultants to maintain their assigned team as individuals will need to be redeployed to other projects that are proceeding. When the project comes off hold, there is a risk that the former project team is not available, and thus the historical IP sits with the former team(s).
Another risk to cost efficiencies is the instance of technology or material selections becoming redundant or obsolete. Should a project be held for 6-12 months, certain products may no longer be available – this would require re-selection and possibly incur consultant variations or increased material costs.
At present and in coming months, the timing of any tender releases could have an impact on the pricing received. The next half of the year will likely see stronger contractor pools and competitive pricing as builders and sub-contractors alike, fight to secure works and revenue leading into 2021.
We remain steadfast in providing timely insights and expertise during this unprecedented time.