Soaring costs are undermining industry viability in construction

Paul McNeive

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February 24 2022 02:30 AM

We have been hearing for some time that rising construction costs are undermining the viability of development, and for a look at the “big picture” and some suggestions on how developers might alleviate cost pressures, I spoke with Stephen Ashe, Senior Director Europe, with global construction consultants Linesight.

The volatility in the market has been extraordinary. Tender prices peaked in the first half of 2007 and by 2011 had dropped by over 30pc. Several building contractors closed down and Mr Ashe told me that many contractors tendered for jobs at below cost prices, simply to maintain staff and cashflow. The subsequent recovery has been dramatic and Linesight are forecasting that rising commodity costs and pent-up demand will mean construction costs by the end of the year will have increased by approximately 65pc from their 2011 low.

Now, construction costs are back above the 2007 peak and this volatility is making life difficult for developers, financiers and contractors – especially when one considers that the life cycle of developments can be five years, or more, from site acquisition, through the planning process, to a finished building.

The pandemic has played a major role in the latter phase of this, driving a spike in material prices and an unleashing of pent-up demand. Steel, timber, copper, insulation and aluminium have all risen in cost by over 50pc.

Linesight see this effect moderating over the next two years, although it’s notable that in each of the three years before the pandemic, cost inflation was 6.3pc-to-7.5pc each year.

This inflation is undermining the viability of commercial schemes and housing. Another factor Mr Ashe points to is the migration of Irish contractors into the booming FDI sector, with a constant flow of work building data centres, pharma and high-tech buildings for less cost-sensitive clients.

The success of contractors in these sectors is seeing them securing increasing amounts of similar work in Europe, and becoming more selective about, for example, building houses in Ireland.

Mr Ashe expressed particular concerns about housebuilding, which he says is becoming unviable. “If developers aren’t making a profit, they won’t build,” he said. “There is a lot of stock held up at the planning stage and by judicial reviews, and costs keep rising.”

The viability of apartments is very challenging, Mr Ashe added. He detects a changing mood in the PRS sector, which he says is being pushed out of the market by changing policies. “They haven’t exactly been welcomed with open arms”.

Whilst the Ukraine situation poses a threat to energy prices and the cost of steel, there are options for the industry to alleviate rising costs, such as maximising the use of concrete instead of steel, which also avoids the 20-week lead time for delivery of structural steel.

Mr Ashe believes there is a “massive opportunity” in modular construction, to include pre-cast systems, pods, “brick-slip” systems and full, off-site, volumetric modular construction. One reason for this not happening in Ireland has been the lack of local suppliers, but the recent announcement by Latvian specialist Forta that they are establishing here will open up possibilities.

Other solutions lie in the big drive towards using better technology on-site and in the growing area of strategic supply chain management and procurement, by construction professionals.

Linesight’s latest Ireland report is on Linesight.com.