CHRIS Palandri believes there has never been a more eventful time to be in the construction game.
On the one hand, the Multiplex regional managing director is facing a multitude of issues affecting his company’s bottom line, including rapidly rising construction costs, chronic labour shortages and supply chain disruptions.
On the other, he is experiencing a record year of revenue as the company dominates the state’s large-scale construction space.
In the year to December 2022, Multiplex expects to generate $1.3 billion, a 30 per cent increase on its 2012 record of just under $1 billion.
Mr Palandri is managing a workbook of pent-up projects that proceeded once the state recovered from the initial impacts of COVID, including Hesperia’s $250 million Murdoch Square and Blackburne’s $300 million One Subiaco development.
“[It’s] the strongest workbook that Multiplex has ever had in Western Australia, even bigger than when we were building Brookfield Place Tower One and Fiona Stanley [Hospital], Claremont Shopping Centre, and the Central Energy Plant in 2012,” Mr Palandri told Business News.
“I didn’t ever think we’d get to the sort of records of turnover that we’re at now … this is the biggest we’ve ever been.”
Mr Palandri said builders had never faced a convergence of so many issues in his more than three decades in the industry.
“Anything that could be a challenge has popped up all at once,” he said.
“I think it’ll get better, it always does, but we couldn’t have had many more issues thrown at us.”
The recent collapse of national construction giant Probuild and the failure of WA builders Jaxon and Pindan last year highlighted the high level of risk builders are exposed to.
Australian Bureau of Statistics figures show a 15 per cent increase in material costs associated with construction in the 12 months to March 2022, and the Housing Industry Association cites a 30 per cent rise in construction costs in the past 18 months.
Total shipping costs have risen by more than 600 per cent since the start of the pandemic, according to global container freight index the Freightos Baltic Index.
And as BGC Australia’s chief executive Daniel Cooper explained, supply chain disruptions and material shortages have made some products very difficult to procure.
“At the moment, there are global supply chain shocks everywhere,” Mr Cooper said.
“As the world re-emerged from COVID, demand … increased all at the same time and supply was unable to keep up.
“As a result of that, we’ve seen spot shortages in all materials, things like timber that we used to import no longer available, [there are] steel shortages and we’ve seen a staggering rise in shipping costs.”
Mr Cooper added that shortages in shipping containers and ships, coupled with excess demand, led to the rapid increase in import costs.
“Those costs have gone through the roof [and] even if you were able to source products, you possibly couldn’t get them shipped in in time,” he said.
Combined with severe shortages of skilled labour, these issues have led to significant delays in project completions, developments being shelved and builders struggling to stay afloat.
For BGC Australia, which has moved up to seventh place on Business News’ Data & Insights construction list, this has led to a shake-up of its approach to contracts.
“I don’t think anybody foresaw 15 to 20 per cent cost increases, and that’s really been a shock to the building industry,” Mr Cooper said.
“What it’s doing is turning the way we contract on its head.
“I think you’ll find very few builders will be doing lump sum contracts anymore.”
BGC is among the companies working with the Master Builders Association of WA on a reform package, which includes a revision of the way construction groups price jobs.
MBA WA executive director John Gelavis said the proposed changes would help address many of the elements the peak body saw as critical to the industry in the current environment.
“Through a pendulum of risk transfer and more onerous contracting requirements, WA builders are now carefully considering what projects they will tender on, based on the contract and if it is a fair and balanced agreement,” John Gelavis wrote in a recent column.
“We [have identified] changes to procurement models, tender processes, and contract terms, as well as the need to address the skills shortage as core elements to the proposed reforms needed for the industry to move forward confidently.”
The industry body is lobbying to include cost escalation clauses in contracts and weighing up changes to the fixed-price contract model.
Mr Gelavis acknowledged moves by the state government in its recent budget to provide rise and fall provisions for future government contracts, as well as $30 million in financial relief to assist head contractors with rising costs.
He welcomed Premier Mark McGowan’s recognition of the unprecedented conditions facing the sector and that the issues affecting the industry were out of builders’ direct control.
Viability issues
National developer Lendlease’s recent decision to pull out of its $1 billion Waterbank development in East Perth partly reflects the difficult conditions the industry faces.
Lendlease, which is constructing more than $1 billion of defence projects in WA, including HMAS Stirling, Henderson and Campbell Barracks, made the call earlier this month after more than a decade at the site.
As the company explained to Business News, no industry or market is immune to the impacts of supply chain disruptions and global uncertainty.
“We are constantly monitoring our supply chain and have contingencies in place to respond to changing market conditions,” Lendlease head of WA communities and development, Anthony Rowbottam, said.
He said the company was adjusting its build programs to accommodate any potential supply chain issues and looking to procure supplies and services as early as possible.
“Demand for construction professionals and skilled labour also continues to be an industry-wide issue,” Mr Rowbottam said.
Property Council of Australia WA division president Sandra Brewer said the undersupply of labour was the single biggest issue affecting the construction industry.
“It’s a risk that some projects may not see the light of day if we don’t address workforce shortages, and that includes projects with approved development applications,” she said.
“A lot of materials supply shortages will be worked through as companies do all they can to respond, but providing a workforce is what we have the greatest control over.”
Property Council research in January this year showed that 35 per cent of apartment projects with approved development applications would be delayed, representing 4,300 units.
“In speaking with our members, we are in no doubt this situation has deteriorated significantly,” Ms Brewer said.
Sydney-based ADCO Constructions picked up the University of Western Australia’s Forrest Hall project after Jaxon’s collapse last year part way through the project.
ADCO Constructions state manager WA James Prattent said the company learned from the experiences of other builders and derived its success from careful planning and resourcing of projects.
He added that negotiation of fair and equitable contract terms and thorough internal reporting was important.
Mr Prattent confirmed that Forrest Hall, on which it is working with UWA, had reached practical completion.
Malaysian developer Victor Goh’s EQ West development at Elizabeth Quay’s lots two and three appears to be moving slowly, allegedly due to supply chain constraints.
While the concrete shell is largely complete, there are no walls or windows fitted to the structure.
Mr Cooper said the industry had hit capacity during the past 12 months, which had resulted in several jobs being put on hold.
“Jobs are being pushed out for multiple reasons. In infrastructure, they’re being squeezed out because of lack of workers and delays.In commercial and residential [some] projects are just not stacking up,” he said.
“With the cost escalations, only those projects that are incredibly financially [viable] are the ones that are going ahead, and those that are marginal are just being pushed back and repriced and requoted.
“All that opportunity that’s there really has been lost now, mostly due to the lack of labour and rising costs.”
He said developers’ demand for building projects was dissipating, as the costings no longer stacked up.
“Because the costs have gone up so much, they just don’t stack up anymore. Effectively what was a really strong order book is disappearing,” he said.
BGC Australia is building aged care facilities in Dalyellup and Carmel, as well as apartment developments in Shenton Park and Blackburne’s $75 million East Village apartments in Karrinyup.
Mr Cooper said the company would continue its focus on apartments, retirement living, government and commercial construction work.
Risk reduction
Georgiou Group is working on several major road projects including the Tonkin Gap, Leach Highway–Welshpool Road interchange and Mitchell Freeway, as well as St John of God in Subiaco and Inglewood’s Brightwater redevelopment.
The Osborne Park-based builder is also refurbishing the Midland Landgate building, which it acquired from the state government in March for $17.3 million.
Georgiou Group chief executive John Georgiou told Business News the company had a disciplined approach to the level of risk it took on.
“I’ve had clients say to me, ‘The geotechnical risk is yours, no matter what you find it’s yours’, and we’ve walked away from jobs, we said we’re not prepared to do that for a bunch of reasons,” Mr Georgiou said.
“We’re not gamblers, we’re engineers [and] we are supposed to use our engineering capability to manage risks.”
Mr Palandri agreed that risk mitigation was a key priority.
“I spend most of my time focusing on risk [which] at the moment is labour and supply chain,” he said.
“The margins in construction are low, they are thin, the contracts are onerous, and the propensity for things to go wrong is great.”
Mr Palandri said a prime example of a business-killing risk was taking on a project without factoring in issues such as ground contamination.
“We don’t take risk on things we have no idea what the cost is,” he said.
“It’s very easy for a builder to take on risks they shouldn’t take, just cross your fingers and hope that it’ll be okay; we don’t do that, we mitigate everything.”
Mr Palandri added that Multiplex changed its approach to pricing jobs over the past year by including clauses that allowed for cost fluctuations.
He said rather than a complete move away from fixed pricing, the company sought to isolate certain parts of the supply chain in its contracts.
“There are some elements that we haven’t been fixing … structural steel and reinforcing has probably where the most volatility has been,” Mr Palandri said.
“For most of the contracts we have now, we are not fixing those prices, but we have a mechanism in the contract where the price can move up or down.”
Multiplex is about 12 months into building Murdoch University’s New Academic Building, the state’s largest mass timber building.
Mr Palandri said there was high competition in sourcing the material for the project and it faced delays due to shipping issues.
“Given the much lower carbon emissions from timber buildings, the demand for timber buildings is going through the roof, particularly in Europe and the US,” he said.
Mr Palandri said there were 130 containers of timber shipped from Europe for the Murdoch development, at a time of high demand.
“The shipping delays that have been a part of this whole COVID experience has been the other thing that have been an issue for us,” he said.
“But we worked with Murdoch University, we pre-ordered [the timber], got it in as quickly as we can [and] got the design done.
“We have had some delays with a factory being closed in Europe and a lack of workers … [but] we managed to mitigate that and get it all over.”
Public confidence in the building industry has taken a hit following the collapse of large companies such as Probuild.
And the legal action construction giant John Holland has launched against the state government over the Perth Children’s Hospital development appears to have dented the government’s confidence, too.
Mr Palandri said issues such as these could lead people to forget the capabilities of the sector.
“Every now and again, something goes wrong,” he said.
“Something like a children’s hospital goes wrong and state government goes, ‘Can we actually do this?’ and sometimes they forget about all the things the industry has done really well.”
Future hope
Construction costs have been on an upward trajectory since the start of the pandemic but have slowed in recent months, and supply chain snarls are showing signs of easing, industry experts say.
For global construction group Multiplex, there appears to be a light at the end of the tunnel.
“It is better now than it was four months ago … I think things are improving in terms of supply chain and labour constraints, and building material costs escalation,” Mr Palandri said.
“It’s starting to become steadier … there may be continued escalation, I don’t see it coming at the same rate that it’s happened.
“The market just sorts itself out eventually.”
Mr McGowan said the state government’s campaign to attract skilled workers from interstate and overseas was gaining traction.
“The campaign has been so successful, we are now expanding it across the UK, Ireland and Poland to further boost awareness that WA is a great place to live and work, with opportunities in the construction and manufacturing industries,” he said.
The premier added that WA had the highest annual salary and lowest average mortgage compared with other states, which made it an appealing place for workers to migrate.
