Construction outlook

Investment into Queensland construction remains highly cyclical – while major project activity is falling now, the QMPPR outlook indicates that Queensland could be heading into another boom period if currently unfunded projects proceed. While not as exaggerated as the resources-driven cycle of investment during the 2000s and early 2010s, sharp rises and falls in activity can present substantial challenges for the industry.

The key points discussed in this section are:

  • Queensland construction activity fell in work done terms in 2018/19, including residential, non-residential building and engineering construction. While non-residential building is now recovering, residential building and engineering construction work done is not expected to rise in annual terms until 2020/21.
  • There is currently stagnation across numerous key indicators within the construction industry. Employment has varied between 200,000 and 240,000 since 2006/07, wage growth has remained beneath 2% for the past five-years and productivity has declined in the past two years to levels seen at the beginning of the century.
  • Strong cycles in construction have a significant impact on corresponding construction costs. This fact that is worsened by the national bottleneck in transport construction activity that is expected in the short to medium-term. The increase in work done within Queensland over the next few years will present resource constraint issues – with the price indices used to measure growth in construction costs expected to accelerate.
  • Structural issues appear to exist within the Queensland construction industry. High volatility in work done creates uncertainty in the corresponding input markets. Furthermore, labour force wage growth, although a decline in real terms, has overtaken the growth in productivity. The impact of this uncertainty is then felt through the project pipeline, where a considerable amount of privately-backed projects are considered unlikely, have experienced delays or are yet to receive funding.

Trends in Queensland construction activity


Queensland construction activity reached record-high levels in 2013/14 with $68.7b work done (driven by exceptional resources investment), a figure yet to be surpassed by any other state.

Construction had begun to build-up from 2000/01 and work done underwent twelve years of consecutive growth – besides a small dip in 2009/10 – to reach the peak in activity. The volatile and cyclical nature of resources activity is a factor which continues to play a significant role in determining future construction outcomes for Queensland.

The construction peak in 2013/14 was also experienced in Western Australia, similarly benefiting from the resources investment boom, and both resource rich states have experienced sharp declines in the years following. Queensland work completed fell by a cumulative 43.1% in 2014/15 and 2015/16, the decline driven by the sequential completion of multi-billion dollar LNG projects and a beyond-uninspiring thermal coal market.

Productivity Risks

Finite budgets for infrastructure, coupled with relative scarcity of key skills and materials, means that the construction industry needs to be a lot smarter about the way it delivers projects, taking full advantage of new technologies (e.g. robotics, automation, prefabrication and modularisation) where possible to deliver the “biggest bang for the infrastructure dollar”. Transport megaprojects globally typically overrun budgets by between 20-45% on average according to recent research.[1] Bringing these overruns under control, and even beating budget estimates, means that funding will be available for more infrastructure projects.

Unfortunately, construction industry productivity remains on a downward trend, both in Queensland and nationally. Construction industry labour productivity in Queensland (measured as industry Gross Value Added per employee) has fallen 30% between 2013/14 (resources boom peak) and 2018/19. This poor productivity performance at the state level is also reflected in national multifactor productivity measures published by the ABS as shown in the Figure E9 with the index for the construction industry falling 17% since 2013/14, the lowest reading in nearly 20 years.

Figure E9: Multifactor Productivity Indices by Industry Sector, Australia (1989/90=100)

Multifactor Productivity Indices by Industry Sector

Studies have shown[2] that construction productivity could be significantly improved through the adoption of ‘lean construction’ principles.

Lean Construction looks to break down traditional project delivery silos and create an integrated system that flows from start to finish. It utilises a number of tools and processes from the manufacturing industry such as value stream mapping and 5S visual management but also incorporates industry specific tools such as the Last Planner system of collaborative planning.

Improving productivity performance will ultimately require a high degree of consultation between industry and government, and increasing use of collaborative procurement and contracting approaches. In reducing negative ‘silo effects’, integrated project delivery approaches will be increasingly required so that all team members – drawn from asset owners, contractors, subcontractors and suppliers – make the best decisions for the project rather than decisions that favour one team.

In a positive step, the Queensland Government has developed and is consulting with industry on a draft lean construction policy that would seek to mandate the use of lean construction on all government funded projects above a certain size.


Outlook for Queensland construction activity


Total construction activity is currently weakening in Queensland, but work done is expected to enter a new growth period between 2020/21 and 2023/24.

This is an improved outlook compared to last year’s QMPPR, the upgrade driven mainly by improved activity in the engineering construction sector, which can also be observed in the major project pipeline. The increasing activity is driven by a mixture of improvements across each of the three major sectors: residential, non-residential building and engineering construction.

Residential building is expected to undergo a downturn until 2021/22, offset by major social and institutional non-residential building projects across health and entertainment. Looking beyond 2021/22, there is blanket increases in work done across the sectors – with engineering construction heavily supported by publicly funded transport infrastructure.

With respect to construction, the “two-speed” Australian economy will likely hold less weight during the first half of the 2020s with a strong synchronised upturn across most states anticipated. Australian Government funding packages for public infrastructure, an eventual recovery in the global economy and commodity markets and strong population growth has substantially improved the outlook for construction activity – especially in Western Australia, Queensland, Victoria and New South Wales. These exaggerated boom/bust periods of construction activity can be problematic for the Queensland industry due to strong competition for resources with New South Wales and Victoria, particularly with respect to labour and equipment.

Figure D1: Total Construction Work Done by State
$Billion, Constant 2017/18 Prices

Source: BIS Oxford Economics, ABS data

 

Figure D2: Queensland Construction Work Done by Segment
$Billion, Constant 2017/18 Prices

Queensland Construction Work Done by Segment

Source: BIS Oxford Economics, ABS data


Spotlight – Residential building


Residential work done in Queensland has continued to decline since 2017/18, with activity in 2019/20 expected to ease by a further 8.3%. This period of decline is expected to finalise in 2020/21, before a strong recovery (+12.6% average per annum) in the subsequent three years.

The outlook for residential building is driven by economic conditions, population requirements and the current housing stock. Excess housing stock due to an oversupply is responsible for the easing of activity in recent years, however, strong population growth in Queensland (expected to be on par with Victoria by 2020/21) is expected to create a dwelling stock deficiency that leads to a peak in commencements in 2023/24. Furthermore, while Queensland did not have the same downturn in property prices as some states, the easing of lending restrictions by APRA and rate cuts by the RBA should boost the property market which is expected to funnel through to commencements and construction work done from 2020/21.


Spotlight – Non-residential building


Non-residential construction is expected to pick up the slack from residential, with activity forecast to grow by 19.1% in 2019/20. The direction of non-residential building has been less consistent than the other sectors in recent years, with a year of growth followed by a decline and vice versa since 2014/15. This volatility is partly explained by major project timings – including the completion of the $950m Sunshine Coast University Hospital, $265m 480 Queen Street and $320m 1 William Street offices.

Beyond the current financial year, the outlook for non-residential building remains positive with activity climbing by an average of 6.9% per annum till 2022/23 before easing by 1% in 2023/24. This favourable outlook is mirrored in other states. The thick pipeline of major works has been generated by strong population growth, abundance of public funding for health projects and significant office building stock deficiencies.

Private sector funding levels for non-residential construction has driven projects such as the $1.2bn New Brisbane Casino and the $430m 80 Ann Street office buildings. Public sector projects focus on health and entertainment, including the $600m Sunshine Coast University Hospital, $300m Logan Hospital Redevelopment and the $400m Brisbane Live entertainment precinct.


Spotlight – Engineering construction


2019/20 likely marks the end of the engineering construction decline that began after the huge peak of activity in 2013/14. Work done is expected to decline by 4%, but then grow by 19.6% in 2020/21. The peak in activity in the first half of the 2010s was driven by oil and gas – three simultaneous LNG projects saw work done in oil and gas increase from $240m in 2008/09 to $24.3bn in 2013/14. The current positive outlook for engineering construction is again partly driven by gas expansion projects and sustaining work related to upstream gas movements to processing plants.

Engineering construction activity is expected to continue growing until 2022/23 before a slight decline in 2023/24. The massive transport infrastructure boom throughout the nation plays a significantly role in the Queensland upturn in coming years – projects involving the Inland Rail, Cross River Rail, Bruce Highway and Pacific Motorway constitute a large proportion of upcoming work. The projects related to gas further contribute to the increasing activity – offsetting the sharp decreases in telecommunications and electricity work done.

Despite the improved outlook for engineering construction in Queensland, there are persistent signs of structural cracks with regard to investment in the sector. Notwithstanding weak construction labour productivity, the largest driver of engineering construction in Queensland is publicly funded transport projects. The existence of a ‘two-speed’ economy has become more apparent, but rather than discerning between different state economic performance, there has been the emergence of a strong disconnect between public and private investment. This trend continues to be seen in this year’s QMPPR, where public and private projects are evenly split in the pipeline, but an overwhelming majority of funded projects are backed by the public sector. This highlights the critical importance of finding ways to attract private sector dollars into public infrastructure in Queensland and gaining community acceptance.


Construction employment, wages, productivity and capability


Spotlight ­– Employment

Queensland construction industry employment has eased by 1.1% so far through 2019/20, following a surge in employment the previous two years. Employment is now sitting above 235,000 persons. An ongoing historical trend is that employment growth and decline does not necessarily match the underlying movements in total construction work done. While 2011/12 to 2013/14 saw record-high levels of construction activity, there was a corresponding decline of employment – where it held between 220,000 and 230,000. Similarly, 2018/19 saw the lowest levels of construction work done since 2006/07, however, employment sat at 236,100.

The offshore fabrication of building products, such as the imported modules that are used in the construction in LNG processing plants, can aid in explaining discrepancies between construction work done and industry employment. The recognised value of construction work done is heavily absorbed by the offshore fabrication, from which the modules are just assembled locally – a less labour-intensive requirement.  The resource constraints during the second phase of the boom led to higher usage of offshore fabrication, and therefore smaller labour force requirements between 2011/12 and 2013/14. Furthermore, the sectoral make-up of construction work will impact the corresponding employment – the employment growth in recent years has been driven by residential building activity, a segment with more intensive labour requirements.

Spotlight – Wages

Queensland construction wages (measured by construction industry Wage Price Index data) have seen muted growth since 2014/15, a trend which has continued into 2019/20. Wage growth increased to 1.7% in 2018/19, but the latest quarterly data indicates a slip back down to 1.5%.

This is a decline in real income within the construction sector since 2014/15, on par with the slowdown in construction activity that began at the same time. However, the current wage growth decline is more dramatic than the low growth figures in the early 2000s despite the current higher levels of work done. The construction industry typifies a broader structural problem within the economy – increasing employment without the expected corresponding wage growth.

Spotlight – Productivity

Queensland construction labour productivity has seen minute historical growth, with 2018/19 productivity returning to levels seen in the early 2000s. The figure above provides a time-series of construction labour productivity since 1997/98, highlighting the lack of growth in the 20-year time span, both nationally and in Queensland.

It seems likely that there has been little structural change in construction labour productivity in the past two decades, and the peak in productivity during the second phase of the resources boom can instead be attributed to two things:

  1. A possible understatement of employment growth in the industry between 2009 and 2013 due to a misclassification of construction workers as mining workers.
  2. The heavy usage of offshore fabrication for construction products in the peak period
    had less intensive labour force requirements while generating substantial boosts in the Construction Gross Value Added (i.e. the output of the domestic construction industry in Queensland, as opposed to “work done”).

 

Figure D3: Queensland Construction Industry Indicators

Queensland Construction Industry Indicators

Source: BIS Oxford Economics, ABS data

 

Spotlight – Capacity and capability

A key risk for the major projects industry in Queensland is that growth in work done in the pipeline in coming years will be increasingly competing for skills and materials from other projects – both within and outside the construction industry – presenting capacity and capability risks to project timings and costs. Already, major projects in other states, such as Sydney Metro and Sydney Light Rail have seen a significant overrun in costs, while many projects across road and rail in Victoria and New South Wales have also been delayed.

Cost overruns represent a ‘double whammy’ for the construction industry – not only does it affect industry productivity, but it absorbs funds that otherwise could have been earmarked for other projects.

While there are many causes of cost overruns, including suboptimal approaches to procurement and managing risks, separate studies by BIS Oxford Economics for road and rail sectors indicate that there remains a national shortage of key skills to deliver all transport mega-projects as mapped out by the Australian and State Governments, particularly from 2021/22 as total construction activity lifts . Consequently, it remains likely that projects in the QMPPR may be delayed, or be delivered at a higher cost, than reported here. The result may be a smoother, less cyclical, pipeline (and higher delivery costs) as a consequence of market necessity rather than via an effective industry plan.


Queensland construction costs


The simultaneous increase in construction work done across major Australian states, including the expected growth in Queensland, is expected to create substantial cost pressure within the industry. The main driver for construction costs are the price of the required inputs, from which we can separate the effect of the local market and global market.

For the local market, historical peaks and troughs in Queensland construction work done has led to cyclical pressure on the corresponding cost of construction. Periods of high activity are an indication of higher demand for inputs – increasing the pressure on supply – and boosting prices up. Costs are further elevated when there are limits on supply, and thus greater competition for inputs. These limits can be driven by resource constraints such as labour skill shortages or material bottlenecks. The global market can impact construction costs through commodity markets, in which the Queensland construction industry will compete for material inputs internationally. Inputs such as steel, copper, oil and bitumen – where the price is determined in the global market – can lead to significant variances in construction cost that are independent from domestic activity.

Evaluating the trends in construction costs is done using two broad price series that are published by the Australian Bureau of Statistics (ABS). More information is readily available for the engineering construction sector and thus we generalise those cost trends to the rest of the industry due to the shared usage of construction materials, equipment and skilled labour. The two indices include:

  • The implicit price deflator (IPD) for engineering construction work done, which is derived by dividing current price (nominal) engineering construction data from the ABS by its corresponding constant price (real) data series. This effectively isolates changes in the price of construction, as opposed to changes in
  • The Road and Bridge Index (RBI) also published by the ABS as part of the Producer Price Index at the state level. The RBI is an output price index measuring changes in the prices (revenues) received by businesses undertaking road and bridge construction less any direct tax paid. Being an output index, the RBI takes account of contractor margins, and is available at the national level as well as for the five largest jurisdictions in Australia: New South Wales, Victoria, Queensland, South Australia and Western Australia.

Figure D4 illustrates the movements for the two indices above, particularly noting that the broad movements in prices match the domestic movements in Queensland construction activity. The cost impact of the second phase of the resources boom is captured by both the RBI and the ECA, where the moving average spikes for each measure between 2012/13 and 2013/14. This cost rise is associated with the peak in resources construction, including the commencement of huge LNG projects.

The pressure on input supply channels began to relax from 2014/15, following the decline in work done in the same period. This is reflected in the indices, where an actual decline in costs can be observed in certain periods till the first quarter of 2017. Furthermore, the global commodity markets played a role in this substantial cost decline – with supply in key commodities such as iron, coal and oil increasing. This increase in supply relaxed market tension and drove prices down.

Figure D4: Growth in Engineering Construction Prices, Queensland

Growth in Engineering Construction Prices

Source: BIS Oxford Economics, ABS data

 

Construction costs began to have a strong resurgence from the beginning of 2017, owing to significant spikes in the price of fuel, but this has died down in the past year with moving annual average readings for the RBI and engineering construction IPD declining from 4% in September 2018 to 1.6% and 3.5% respectively. Looking forward it seems likely that costs will rise again, following the large number of projects which are expected to come online in the eastern states of Australia.