The Australian Constructors Association (ACA) has released a new report highlighting the adverse impact that construction cost inflation is having on contractors locked into fixed price contracts.
The report outlines that escalating costs are emerging as the biggest challenge for Australia’s third largest industry, and could significantly affect its ongoing sustainability.
ACA CEO, Jon Davies, said the industry is seeing examples of price rises of up to 70 per cent over a 12-month period, and yet clients continue to expect fixed prices.
“The industry cannot continue to bear the cost of these steep price increases—some costs will need to be passed on to halt the growing trend of insolvencies,” Mr Davies said.
“This is a shared problem— government, contractors and the supply chain are in the immediate firing line, but company failures impact the wider economy.”
Mr Davies said governments must take action in regards to current and future contracts, to ensure that contractors are not left out of pocket for an issue that is well beyond their reasonable control.
“Construction underpins the economy— contributing to eight per cent of GDP– and yet it accounts for more insolvencies than any other sector,” Mr Davies said.
“It is in the client’s best interests to work with the contractor as the cost of doing so will be far less than the cost and/or delay to a project if the contractor fails.
“Governments, in particular, should not seek to secure projects for less than cost as the impact across the supply network is considerable.”
The ACA is calling on the Federal and State Governments to compensate contractors for projects suffering from major price increases regardless of whether the contract terms provide for such relief.
“Major projects are often entered into years before they are completed and no one could have foreseen the current environment and priced for it,” Mr Davies said.
“Going forward, contracts should contain transparent mechanisms to ensure future fluctuations are dealt with fairly. This also means contractors should not make windfall gains if prices fall.
“Projects should not be delayed or deferred as this can have unintended consequences that are worse than the problem trying to be solved. Asset owners can keep to budget by using pre-agreed positive/negative variations to adjust the scope to account for material price fluctuations or other risks for that matter.
“The industry needs to become more financially sustainable to properly focus on important issues such as improving productivity, sustainability and innovation.”