Contractors locked into fixed price contracts are bearing the brunt of hyper-escalation of construction costs, and the Australian Constructors Association is calling on governments to help.
In a new report just released by the ACA, the problem is emerging as one of the biggest challenges for Australia’s third largest industry – construction.
“If not addressed, it could significantly impact on the ongoing sustainability of the industry and in the process, fracture Australia’s economy,” the ACA stated.
The Construction Cost Inflation report, published in July, demonstrates the impact of construction cost inflation and the flaws in current contracts that are costing contractors.
ACA CEO Jon Davies gave examples of price rises over a 12-month period of up to 70% while contractors’ clients expected 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,” he warned.
The construction sector accounts for more insolvencies than any other sector, according to the ACA, despite contributing to 8% of GDP.
“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,” Mr Davies stated.
He described the situation as a shared problem – government, contractors and the supply chain are in the immediate firing line, however, company failures impact the wider economy. Mr Davies cautioned governments, in particular, not to seek to secure projects for less than cost as the impact across the supply network is “considerable”.
The ACA is calling on 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.
In the future, contracts should contain transparent mechanisms to ensure future fluctuations are dealt with fairly, according to the ACA, meaning contractors also should not make windfall gains if prices fall.