COVID-19 and the impact on Australian construction projects

Supply chain disruptions

Over the last ten years, Australia has become more reliant on importing building materials and equipment from overseas, particularly China, due to their low cost and high efficiency. As factories in China were made to close over February and March to prevent the spread of COVID-19, manufacturing production significantly declined, as did the volume of exports.

Additionally, suppliers from other parts of the world slowed or stopped production output given the restriction of the movement of people and in some instances the forced closures of business to prevent the spread.

We asked contractors if the result of supply chain disruptions has had an impact on their projects. There were mixed responses to the degree of the impact but all contractors reported that there was disruption at some level.

Contractors reported delays between 4-12 weeks for certain imported building materials and parts, as a result of on-shore stock levels now being depleted and the disruptions to supply.

Materials most affected include:

• Aluminium
• Glazing
• Plumbing fixtures
• Carpet
• Tiling
• Lifts
• Mechanical and electrical parts

It is noted that the impact was more prominent on larger projects where a higher volume of imported materials are used to save cost and increase efficiency. On smaller projects, a lot of materials are sourced locally and therefore less impact has been felt.

Contractors also noted that it has been difficult to overcome these issues as their options include:

• Waiting for materials to arrive, which would delay the project schedule, or
• Source the materials locally, which would require them to pay a premium.

However, some products are only manufactured in particular countries, such as lifts and air-conditioning systems. In this instance, contractors said that their only option was to wait and in some cases had to pay an inflated cost.

"Product delays are a big concern. Whilst the whole product may not be manufactured in China, key components of it are and delays on these can hold by the delivery of the whole product."

It is noted that a large portion of the manufacturing workforce in China has now resumed production as factories have started to re-open. However, factories are not running at full capacity and there will be a backlog of orders to complete before normal operations resume.

Additionally, challenges remain with quarantine periods being imposed on imported goods. Most contractors advised that they are now factoring in logistical constraints and time delays into their schedules and applying extension of time wherever possible.

Tightly scheduled and multi-storey complex projects are reportedly the most impacted by supply chain disruption, particularly for projects that have key components such as lifts.

Material costs

Contractors were asked if they had experienced an impact on the cost of imported building materials and parts. Some contractors reported that they had received invoices for higher amounts for certain items, which were in response to supply chain constraints. Contractors also note they had seen an increase in cost for imported products due to a weaker Australian dollar.

While disruptions continue for imported goods, we asked contractors if they have tried to source materials locally. In some instances they had, however, the response was largely that to source domestically would come at a much higher cost and would likely still encounter delays. Therefore, most contractors choose to remain with their original suppliers.

Some contractors reported that material costs from China have been discounted to increase their output and make up for the downtime over February and March. As global demand for Chinese exports has slowed significantly, it appears Chinese manufacturers are responding to this by reducing some of their prices to maintain business and a place in the market. Other global regions may respond in the same way while global demand is weak.

A frequently mentioned concern is the weakening Australian dollar, which has resulted in a significant increase for imported materials and equipment. Some contractors have experienced a 15-20 percent increase in cost for goods imported from overseas due to the weakening Australian dollar.

Labour inputs

The most prominent impact for contractors is the labour input on construction projects. Given the social-distancing requirements imposed by the Australian Government, the number of trades on-site at any given time had to decrease and has forced contractors to reconsider how they operate.

Some contractors have implemented split shifting, which involves splitting the labour into two groups where they either work one week on and one week off or have a day/night shift. This method is also a safeguard option so that if one group contract COVID-19, the second group will be able to continue on the project. However, contractors reported that this has come at a cost, with productivity down considerably.

It was noted that productivity was down to just 60 percent in some instances because of social-distancing requirements.

Other changes include increased hygiene practices and the setup of additional site offices which have both been a cost to the contractor.

Contractors reported a mixed response from clients in regards to accepting an extension of time for lost productivity. Some contractors said their clients were accepting delay claims and some were standing firmly against them. Contractors consider this a critical issue as project schedules are almost guaranteed to run overtime and over budget and this would eat into profit margins.

“We are stuck in a position where we either put our workers at risk on-site or we risk being in breach of our contracts.”

New South Wales and Victoria have introduced new rules to alleviate some of the pressure on construction programmes to comply with the social-distancing requirements. These rules have extended the days of operation for construction sites to include weekends and public holidays. This should enable contractors to regain some of their productivity, however, contractors feel this will still not be sufficient enough to get back to full productivity levels. There are also reports of some builders pushing the government for 24-hour access to construction sites.

Trade and sub-contractors

Contractors stated that the impact of COVID-19 has hit some sub-contractors hard and fast with notable closures of some businesses. With several construction projects now in a holding pattern, the number of active projects has quickly declined. This has resulted in a shortage of work and for some sub-contractors and this loss of income has been detrimental to their business.

“This is having an impact on trades and sub-contractors across the board. We are unable to even contact some of our sub-contractors to get pricing as they have now closed their doors.”

Some concerns were raised by contractors about the loss of licencing that could occur as a result of trade and sub-contractor businesses going bankrupt. The legislation changes between states but in most cases when bankruptcy occurs the businesses license will be frozen for a period of time. Contractors are concerned that if a volume of sub-contractors face this issue there could be a shortage of labour after the COVID-19 pandemic.

Future projects

When asked about the impact of COVID-19 on future projects, most felt concerned about the future pipeline of projects, as many projects have now entered into a holding pattern. Largely, privately funded projects are most at risk due to the current uncertainty that is overshadowing the industry.

Lower consumer confidence results in weaker demand and reduced business investment and this could see projects, particularly in retail and residential, not to go ahead or be put on hold for some time.

“75-80 percent of projects in the retail sector have been put into a holding pattern to avoid the risk of downtime during construction.”

Contractors who work with government bodies have been working closely with their clients to bring construction schedules forward and underway as quickly as possible. Their focus is now on publicly funded health, education, entertainment and defence projects to see these commence quickly to help underpin activity levels, particularly in regional areas.

“We have been working closely with our key government clients to bring their construction schedules forward. This will help to maintain construction activity and could also mean some cost savings from the lower labour costs we are seeing right now.”

Construction costs

When asked about the outlook for the next 12 months responses varied across the board. Most feel that construction costs will decrease but some expect they will see an increase once the COVID-19 pandemic has been contained.

For contractors who anticipate a decrease, this was largely attributed to the reduction in the number of projects, which would reduce demand for labour and materials.

Depending on how severe the economy is impacted, new investment would be much weaker on the other side of the COVID-19 pandemic while businesses try to recover.

In the 12 months following the Global Financial Crisis (GFC) non-residential construction costs across Australia decreased by an average of 4.3 percent. Some contractors feel that this will be the case once the COVID-19 pandemic has been contained.

However, given the GFC was associated with a financial crisis, some contractors felt the recovery in this instance would be faster as credit is freely available and banks are in a much more stable financial position.

For contractors that felt construction costs would increase, it was due to the anticipated shortage of labour on the other side of the pandemic. With some subcontractor businesses already closing their doors, they anticipated that those left will increase their rates.

Looking ahead

The impact that COVID-19 poses on Australia’s construction industry will ultimately be determined by the extent of the outbreak on both the global and domestic economy. The Australian Government has classified construction as an “essential service” and every effort is being taken to ensure construction sites remain open.

Recent government stimulus including the $130bn ‘Job Keeper’ stimulus and the increased instant asset write-off stimulus should help to support businesses through this challenging time. Additionally, other measures are being taken on a state level including fast-tracking local and regionally significant development applications and extending work hours for construction sites.

While these measures offer some support to the construction industry, contractors remain nervous about the downturn ahead and the uncertainty overshadowing the industry.

Construction makes up nine percent of Australian GDP and will be essential in recovering the economy after the COVID-19 pandemic has been contained. Enabling projects in the pipeline to make it to construction as quickly as possible and for construction sites to continue to operate will be essential in underpinning the industry in the coming months.

Through these unprecedented times, we are making every effort to stay abreast of this rapidly escalating situation to understand how this will impact our clients and their projects. While we endeavour to provide the most up-to-date insights, given the rapidly changing nature of the COVID-19 pandemic, we note that the situation may have progressed from the time the information was obtained from the surveys and at the time of writing this report.