The lasting impact of COVID-19 on the Australian construction sector   

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Tiffany Emmett

Associate Director, Construction Economics

Three years on from the initial outbreak of the COVID-19 pandemic, many would consider this a challenge of the past for Australia’s construction industry. However, lasting legacies from the pandemic still influence the sector and are likely to continue for many years to come.

The COVID-19 pandemic significantly impacted both the global economic landscape and construction markets. The sector’s sensitivity to economic cycles and fluctuations meant that demand was heavily impacted by the sharp economic downturn and supply was impacted by disruptions throughout the chain. While many markets continued to operate at reduced capacity, many also came to a near standstill. 

Most construction markets have since recovered and are either back to, or above pre-pandemic levels of output. Despite this, the impact of the pandemic remains. Businesses have had to adapt to navigate within an environment of substantially higher risk, which has contributed to the development of tailored solutions that minimise and mitigate the impact of working in a more volatile environment. In this article, we explore some of the challenges created by the pandemic and how the industry has adapted to operating in a post-pandemic world.  

Contracts and risk management 

As the sector adjusts to a new normal (elevated costs, challenges in productivity and scheduling), stakeholders have taken the opportunity to proactively address the potential cost implications of COVID-19 related risks. Modifying standard forms and contracts with specific clauses tailored to transferring risks and the potential impact of COVID-19 or similarly disruptive events is one way risk management is being addressed.  

Across major projects, clients have resorted to addressing escalation concerns by passing down risks to contractors and their supply chain, resulting in increased contractor and sub-contractor solvency, as well as major delays and disputes. As a result, stakeholders are now actively assessing project conditions, and are more involved in the risk management process. The specialised risk expert who stakeholders who are more resourceful and are capable of managing the specific risks will take on the responsibility of mitigating risks in their area of expertise. Moving forward, it appears these changes will be the norm.  

During the pandemic, supply chain disruptions affected the ability of contractors to import relevant materials. As a result, a key risk management approach now includes contractor’s considering substitute materials that are subject to less supply chain risk. This is a common trend in the market, which will most likely be lasting.   

Risk management strategies also include early programme design. Clients are collaborating with stakeholders to identify areas of the construction programme that are most vulnerable to escalation and expediting works relating to these areas to minimise exposure to risk. Accordingly, more attention is now being paid to construction programme complexity to identify areas where risks can be mitigated either through programme acceleration or other forms of delivery including value engineering.  

Supply chain management 

The pandemic’s disruption of global supply chains, including the impact of transport restrictions and factory closures, has had growing repercussions on construction operations. There have been shortages of raw materials, subcontractors and labourers. Some supply chains suspended their production and distribution, which led to reported delays from contractors and rising costs associated with imported raw materials, as well as off-site construction components like cabinetry and internal fittings. 

Despite the recent spike in cost for many building materials, there are now signs that prices of many materials are stabilising and, in some instances, cooling. Global demand has slowed significantly off the back of high inflation and rising interest rates, which is easing pressure on supply chains and helping to stop price acceleration. Despite now seeing significant improvements since the onset of the pandemic, practices within the sector have adapted to ensure resilience to future supply chain disruptions.  

In addition to greater reliance on domestically source materials, many contractors now purchase materials in advance. Whereas pre-pandemic contractors would have typically ordered materials later to avoid negative cashflow, the new norm favours early ordering of materials to avoid escalation and ensure materials arrive on time. Buying materials earlier also usually results in cost savings and mitigates unknown exposure to shortages. 

Procurement structures are also being actively reviewed by many organisations to take advantage of opportunities to aggregate or package common commodity inputs to reduce overall cost. This involves long term contracts that can include the bundling of more than one service and/or commitment to future work at reduced cost. 

Labour shortages 

Labour shortages have been a persistent issue for the sector since the pandemic, as many migrant workers opted to return to their home countries. Additionally, with less young people entering the construction workforce than those retiring from it, the demand for labour has surged – leading to increased wages and overtime pay for construction workers. The escalation in labour costs continues to have substantial impact on budgets.  

Given Australia’s reliance on migrant workers, construction unions and organisations have laid the blame for skills shortages and drop in apprentice numbers on the government. While international borders have reopened and skilled migration is increasing, strong demand from the sector continues to outweigh supply. Moving forward, to address the ongoing challenges presented by labour shortages, stronger dialogue between unions and government is required to ensure that targeted migration programmes are implemented. The shrinking workforce also means that the industry needs to adapt and adopt digital technologies to increase productivity with a smaller workforce.  

The future of the sector   

Although the pandemic has triggered many undesirable outcomes throughout the industry, it has also resulted in several defining, and positive, features of the sector. Overall, it is evident that the construction industry must continue to adapt to new challenges and embrace trends that have become necessary to remain competitive and efficient. 

For further information contact:

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Tiffany Emmett
Associate Director, Construction Economics