Construction Industry Not Out of the Woods: future impacts will bite

Recently announced federal government grants of $25,000 to ease the pressure on the housing and construction industry are aiming to boost demand in the construction sector and help keep builders employed.

As we have witnessed through other measures such as JobKeeper, JobSeeker and HomeBuilder the federal Government hopes these stimulus measures will ease a predicted downturn in construction demand, but how it will alleviate much of the structural and downstream issues impacting the industry – including the impact on insurance coverage, recovery times and related issues – is yet to be noted.

Given these circumstances the need for insurance valuations is even more important in this evolving environment, and ultimately how these issues will impact on building reinstatement values, indemnity periods and related issues such as property insurance and business interruption coverage in particular are key considerations.

Although it will take several months for the full picture of the impact of COVID-19 on the Australian construction sector to be known, the current issues are as follows:

Supply chain disruptions

In a recent survey by Ai Group [1], as part of their Performance of Construction Index of contractors all reported some level of disruption or delay to supply deliveries of between four to twelve weeks. The items particularly impacted include imported cabinetry, aluminium, glazing, plumbing fixtures, carpet, tiling, lifts and mechanical / electrical parts. This has resulted in either construction delays or increased costs as alternative supplies of these items have been sought.

Although supply has begun to ease as factories in China have started to re-open, these factories are not running at full capacity and as such delays are expected for the next six months or so.

Rising costs across the industry

Although construction has continued during COVID-19, all construction sites have had to implement social-distancing measures, which has resulted in fewer people being on-site at any point in time.  Based on feedback from a Turner & Townsend survey [2], this has resulted in a loss of productivity (some reports have stated that productivity on construction sites was down to 60 per cent of normal levels due to these measures), while increased hygiene measures and additional site facilities (for example, offices and lunchrooms) have all come at an added cost. Some State governments are trying to reduce the impact of this drop in productivity by allowing seven day and 24-hour operations at construction sites.

The cost of materials has also been an issue in the industry for a period of time not only due to supply chain issues but partly due to the weaker Australian dollar, with some contractors reporting earlier in the pandemic that some items had increased by between 15 to 20 per cent alone. However, due to weaker global demand for some imported items, some overseas manufacturers have responded by lowering their previous prices to try and increase demand.

Lastly, the overall cost of construction is having an impact. Based on Producer Price Index information from the Australian Bureau of Statistics [3], in the 12 months after the GFC non-residential construction costs across Australia fell by an average of 6.4 per cent.  Some analysts are predicting this could be the case again, but this will depend on how quickly the economy starts to recover.

Trades and sub-contractors

It has already been reported by several media outlets [4] that some companies and sub-contractors have already gone out of business, while several construction projects have also been put on hold. This has resulted in a shortage of work for some sub-contractors. The impact of sub-contractors going out of business is that when this does occur or they go bankrupt then they lose their business licences which can have a flow-on effect of delaying any existing projects they are working on.

Current and future project status

Although government infrastructure spend will increase, many privately funded projects have now announced delays to start times. We expect many of these projects will not start again until consumer confidence and unemployment levels improve. This will particularly impact on retail and residential projects. It is already reported by Turner & Townsend [5] that 75-80 per cent of projects in the retail sector have been put into a holding pattern, and this looks set to continue.

Structural and downstream impacts: future direction

COVID-19 has impacted the construction sector in Australia in a number of ways, and these issues continue to have flow-on effects to many other industries and sectors. Supply chain disruption, material and other costs and business disruption have wide-ranging effects, including on insurance values and recovery times, and associated insurance coverage, adding to a challenging time for the construction industry. Until key areas such as supply chain disruptions and rising costs are addressed either through an increase in overseas production, accessibility of materials, a stabilisation of the Australian dollar or through further government measures, we consider that the construction industry will continue in a period of uncertainty, in both the commercial and residential sectors.

Insurance markets are continuing to require and expect risk advice taking these issues into account when considering declaring a value so getting a clearer idea of impacts on building reinstatement, indemnity periods and related areas is key to progressing an accurate valuation.

We accept that the impact on construction demand and subsequent price impacts will not truly be known until many of the federal government’s employment packages finish. Given this uncertainty and the current hardening insurance market, one way to ensure your building assets are protected is to obtain a professional, dedicated insurance valuation.  Aon Valuation Services is a national practice that specialises in the undertaking of such assessments and would be happy to assist you with your requirements.

[1] Source: https://www.aigroup.com.au/resourcecentre/economics/performance-indicators/PCI/

[2] Source: https://www.turnerandtownsend.com/en/perspectives/covid-19-and-the-impact-on-australian-construction-projects/

[3] Source: https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6427.0Mar%202020?OpenDocument 

[4] Sources: https://www.theguardian.com/australia-news/2020/apr/23/fears-of-second-wave-of-job-losses-as-coronavirus-crisis-hits-australian-building-industry; https://www.abc.net.au/news/2020-05-08/coronavirus-downturn-leaves-rate-of-new-wa-homes-at-historic-low/12226192 ; https://www.commercialrealestate.com.au/news/coronavirus-will-increase-construction-failures-939825/

[5] Source: https://www.turnerandtownsend.com/en/perspectives/covid-19-and-the-impact-on-australian-construction-projects/