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As Australia’s construction sector continues to navigate economic uncertainty, the conversation is shifting. While inflation and interest rates dominate headlines, industry leaders are turning their attention to a deeper, more persistent issue: shortage of labour. In this landscape of inconsistent costs, understanding the real drivers behind construction budgets has never been more critical.

The Australian construction industry continues to grapple with rising costs, but it’s not just about inflation, interest rates, or even materials. According to Darryl Bird, Queensland Partner, the most pressing challenge impacting budgets today is clear: labour. While interest rates and inflation get most of the headlines within the industry, Darryl explains that these economic factors are “compounding the problem that we’ve already got”. Construction costs were already under stress due to systemic issues, mainly, labour. He notes that issues like material supply, which caused disruption and uncertainty through COVID, is now something the industry is managing more effectively and has subsequently settled into “a new norm”.

BuildSkills Australia, the national skills body for construction workforce development, reported in March 2024 that 90,000 new tradespeople would be needed by the year’s end. However, Australian Bureau of Statistics (ABS) indicated that by November 2024, the industry only managed to hire over 50% of the target. Source: BuildSkills Australia, 2024; ABS, 2024

The market, he says, is adjusting to these new norms with greater resilience than during the disruptions of COVID. Inflation and global trade tensions are creating unpredictability in material access and pricing. But not all international trends are negative. As Darryl notes, U.S. tariffs on imports may offer unexpected advantages: “With a government focussed on turning towards more internal manufacturing, the application of international tariffs by the U.S. may provide opportunities for Australia to access more materials from countries like China and India.  It may actually have the reverse effect to what has been described to us in the press,” Darryl suggests.

Across the country, cost pressures vary by state and sector. Victoria’s residential market is showing signs of increased competition and more stable pricing. While residential markets like Melbourne are seeing competition return, Darryl points out that in Queensland, “we’re seeing the most risk going forward is in the upper end of town, in the more commercial construction space.” He adds, “The demand on the local contractor and labour pool in this space is where we’re going to see most challenges.” While the media focus at the moment is on productivity and getting more from our existing workforce, we need to be aware that workforce also need to expand to meet future demands.

The current cost risk isn’t from timber or steel, it’s from people. “Labour by far,” Darryl states, when asked about the industry’s top concern. While material price hikes are often visible and publicised, he warns that these figures are often misunderstood, “When you work material supply price increases through the entirety of a construction project or contract sum… the impact on the bottom line cost is watered right down.” In contrast, labour costs impact all trades, all projects and every site, and “remains a problem right across Australia… it’s not a challenge that can be quickly and easily solved.”

Adding to the complexity, Darryl explains that “it’s not just about direct labour cost, but also availability and the cost impost of getting labour and keeping resources on site … it can be difficult and unpredictable.” Unlike materials, which can be budgeted, managed and pre-ordered, labour availability can shift overnight due to competing projects and opportunities available to our contractor and subcontractor pool in this market. Whilst this challenge is difficult to mitigate completely, we must be prepared from project inception. “We observe a lot of time, effort and cost wasted in a development project exploring design concepts that are just not feasible in this market,” Darryl says. The key is early involvement of Quantity Surveyors who can provide data-led insights, cost-led design advice, and guide clients toward feasible delivery models from day one. “As a QS our value is best realised at that early stage… leveraging the data and experience we have to provide reliable cost information and alternatives at the very start,” he explains. Mitchell Brandtman is also increasingly called on to help navigate risk throughout construction. The earlier a QS is involved, the more opportunity there is to implement risk mitigation measures and avoid costly mistakes. If that opportunity for early engagement is missed: “The snowball’s already rolling down the hill…, the problems are there already,” Darryl warns.

One way the industry is looking to address labour shortages, is through the growth of Modern Methods of Construction (MMC), including modular and prefabricated systems. Whilst this sector once battled market acceptance and cost premium hurdles these challenges have eased, “MMC is becoming a much more attractive option than it once was… it’s becoming more popular because construction and manufacturing largely occurs in a warehouse, you’re not subject to rain, inclement weather conditions.” Local manufacturers are delivering high quality products that meet Australian standards and aesthetic expectations, and the cost gap between traditional and modular is narrowing. He emphasises that MMC doesn’t just mean full prefabricated buildings: “There’s modular components – wall and structural systems, bathroom pods, stair systems – that reduce on-site labour pressures.”

The Construction Industry Training Board (CITB) highlights the quantifiable benefits of modular construction, noting it can accelerate project timelines by up to 50% and reduce on-site labour by up to 80%. Source: CITB

Despite the challenges, Darryl sees signs of optimism, “I think the sentiment in the industry has certainly changed… people are more focused on solutions and tackling the industry challenges.” For developers, that means thoughtful designs, smarter delivery methods, early QS engagement, and close collaboration with all parties, “Looking at delivery partners that can solve problems or establish risk mitigation measures nice and early… the builder is a big part of that.” Asking, “What works for you? How does that work for us?… Having proactive and collaborative conversations with builders, subcontractors and suppliers about the collective challenges will enable the team to be better equipped to navigate issues like labour availability and volatility and create more certainty amongst the delivery team.” This approach leads to more thoughtful decisions, fewer surprises, and outcomes that help balance cost, time and quality. Alternate procurement methods, where “risk can be shared and addressed in an appropriate way” rather than transferred blindlyin a challenging market, is another opportunity identified by Darryl.

The message is clear, managing construction cost inflation in Australia isn’t just about tracking economic headlines. It’s about tackling the root cause, labour shortages, and planning smarter from the ground up and from project inception.

Cost overruns are one of the biggest challenges in all construction projects. From increasing material costs to unforeseen site conditions, maintaining financial control requires careful planning, proactive cost management, and the involvement of a Quantity Surveyor (QS) from the project’s inception. At Mitchell Brandtman, we understand that a successful project requires more than good intentions; it requires a strategic approach to cost planning and management.

Proactive Planning and QS Involvement

A project’s success is largely determined by being proactive during the early planning stages. A 2021 report by Infrastructure Australia found that Australian governments overspent by A$34 billion (21%) on transport projects completed between 2001 and 2015. Larger projects exceeding A$1 billion were especially prone to cost overruns, with nearly half exceeding initial budgets by an average of 30%. Engaging a QS from the outset can ensure the development of a realistic and accurate project budget to avoid these kinds of cost overruns. This means establishing an achievable budget from the beginning, providing accurate cost estimates throughout the design phases, and identifying potential financial risks while recommending solutions to mitigate them.

Queensland Partner, Maoibh Russell, explains: “It’s about being proactive with your planning and setting clear budgets early. This means talking to your quantity surveyor early, not just going straight to the builder to obtain a price. You need to have done an in-depth review of your project to set clear budgets from the start.”

One important tool in a Design and Construct contract scenario is to develop at an early stage the Principal’s Project Requirements (PPR), which establishes clear project goals and the Principal’s design expectations. This document helps stakeholders understand expectations, reduce uncertainties and improve cost control throughout the project lifecycle. “Cost overruns always come down to early considerations, and having a clear PPR that outlines the scope, level of fit-out, and what you’re trying to achieve is crucial.” says Maoibh.

Managing Costs and Contingency Planning

Material cost increases, labour shortages, and unforeseen site conditions can significantly impact project budgets. A well-prepared budget accounts for these variables by including an adequate contingency. Maoibh highlights the importance of planning for the unexpected: “Contingency is important across the board in every single project. We recommend approximately 5% as a minimum these days, ranging up to 10% for some civil projects where there is more risk in the ground and a lot of unknowns.”

In addition to contingency planning, value engineering services are crucial in managing costs. This process helps identify cost-effective alternatives without compromising quality or design. “As quantity surveyors, we can review designs and give suggestions on where we see potential cost savings due to material selections or more efficient design. For example, using the functional areas of a project, we can advise the client that their project may cost more than expected if it is sitting above the average functional area of comparable projects.” Maoibh explains, “We can advise on average, two-bedroom apartments have this unit area, have this balcony area, and have this basement that allows for this much car space per unit. And if your project is sitting above that average area, then your construction cost is going to be higher than what everyone else is paying for that type of product.”

When looking at residential projects, almost half (44.9%) of new dwellings cost more to build than they were approved. Apartments had the largest changes in the cost of construction, rising by 6.3% between approval and commencement (ABS, 2020). A common misconception is that overloading a project’s budget will prevent cost blowouts. In reality, impractical budgets can make a project financially unviable. If sufficient funds are not available, the project may stall or require drastic changes that affect quality and delivery timelines. Maoibh warns: “You don’t want to have too much fat in your budget because potentially that might make your project not stack up, and then you won’t proceed with it. You want a realistic, considered and accurate budget, not a conservative one that includes unnecessary allowances.“

Reducing Financial Risk

Collaboration between the QS and other project stakeholders is essential to reducing financial risks.

Stakeholders also play a key role by providing documentation, including architectural, services, civil and structural engineering plans. Maoibh stresses the importance of complete documentation: “Complete documentation is key. If there’s poor coordination between consultants, like structural design clashing with the architectural design or services, it can lead to cost overruns. Building Information Modelling and clash detection can save a lot of money by resolving these issues early on.”

Maoibh reflects on a successful project: “A standout example is a Southbank [QLD] project in the early 2000s, where BIM was implemented. By using BIM and clash detection, potential issues were identified and resolved before construction began, resulting in no variations or unexpected cost blowouts.”

How a QS Prevents Cost Overruns

A well-managed construction project relies on strategic cost management throughout its lifecycle. A QS contributes by being involved early to establish a solid financial plan, providing contingency advice to account for unforeseen costs, offering continuous cost management throughout all project phases, and ensuring all necessary project considerations are included in the budget.

Maoibh sums it up: “The role of a quantity surveyor extends beyond just the early stages of a project. By staying involved throughout the design development, we can help keep costs in check and avoid major financial risks later in the project.” By using the expertise of a QS, stakeholders can reduce financial risk, improve budget accuracy, and ultimately deliver a successful project.

IS YOUR PROPERTY PROTECTED?

Understanding the Importance of Replacement Cost Estimates & Insurance

Staying informed about your property’s true replacement cost is a proactive step in protecting your asset. With the ever-changing landscape of construction costs and inflation, regular reviews of your property’s value are essential. Mitchell Brandtman can assist you in navigating this crucial aspect of property ownership, ensuring you’re adequately prepared for whatever the future holds.

Imagine the unimaginable: a fire, flood, or unforeseen disaster damages or completely destroys your property. In such challenging times, knowing that your insurance coverage accurately reflects the current cost to rebuild offers significant peace of mind. This assurance comes from having an up-to-date Replacement Cost Estimate, a service provided by our team at Mitchell Brandtman.

What is a Replacement Cost Estimate?

A Replacement Cost Estimate is a detailed assessment that determines the current expense required to replace an existing asset under today’s market conditions. For property owners, this means calculating the costs necessary to rebuild a home, commercial or industrial building in the event of damage or loss. Our team at MB will assess various factors, such as demolition costs, professional fees, and estimated construction cost, while accounting for potential price surges, to provide an accurate replacement cost value for insurance purposes.

Why is This Service Essential?

Over recent years, construction costs have experienced significant fluctuations. For instance, prices charged by building companies in Australia have increased by 32% over the last 5 years. Additionally, the country’s inflation has increased by an average of 3.7% annually over the past five years, peaking at 7.8% in 2022—the highest in four decades.

These economic shifts directly impact the cost of rebuilding your property, which is likely to be far higher than when you first insured it. Without an updated Replacement Cost Estimate, your insurance may no longer provide full coverage, leaving you financially vulnerable at a time when you need protection the most.

Who Benefits from a Replacement Cost Estimate?

Homeowners and Investors: Ensure insurance policies reflect the true replacement value of properties, safeguarding personal finances and investments.

Developers and Building Owners: Accurate insurance coverage is crucial to mitigating financial risks during and after construction.

Bodies Corporates and Strata Managers: Understanding replacement costs allows for the proper allocation of strata fees.

Why is this Important?

Mitchell Brandtman recognises the importance of timely and accurate Replacement Cost Estimates. Our team offers quick turnarounds and cost-effective services, providing you with a detailed breakdown of current rebuilding costs. This transparency benefits both you and your insurance provider, giving you the confidence that your coverage matches today’s construction market.

Contact us at 1800 808 289 or email us at bne@mitbrand.com

Discover how Mitchell Brandtman managed cost controls and claims validation for the complex Blues Point Tower remediation project. Our strategic approach ensured transparency, kept the project on track, all while meeting budget outcomes.

We are thrilled to officially welcome back Gary Thompson to MB as a consultant reintegrating into our Expert Opinion team, bringing with him 38 years of industry experience along with a wealth of specialist knowledge.

Gary, a former MB Partner, founded his own independent Expert Advisory Service in 2018 and has now returned to further strengthen our team. As a licensed contractor with extensive expertise across the industry, Gary’s insights and strategic approach will enhance our ability to deliver high-quality expert opinion services.

Alongside Caitlin Shields, Queensland Partner and Expert Quantity Surveyor, our team is set to continue delivering outstanding results. With over 19 years at MB, Caitlin’s deep understanding of all built form sectors, civil, and infrastructure projects—combined with her passion and attention to detail—has made her an invaluable leader in the industry.

Together, Caitlin and Gary lead our dedicated Expert Opinion team, reinforcing MB’s commitment to providing trusted, high-quality expert advisory services.