The Top Five Reasons Why Your Construction Cost Estimate Is Likely to Blow Out
With house prices sky-rocketing in the past twelve months, many people are now looking at other options for getting into the residential property market.
While house and land packages are still popular, increasingly people are looking at substantially renovating their own properties, or even buying old properties and renovating or rebuilding.
These are all great options, but like anything, they come with their own set of risks and challenges.
For the uninitiated renovator or first time developer, there’s a multitude of hidden costs that can derail even the most cautious planner.
It’s hard to calculate an accurate construction cost if you don’t know what to look for.
So what are the top five things to be aware of?
- Interest rate increases
We’ll put this at the top, not because it’s the most important – although in some instances it may be – but because it’s the most topical right now.
With the recent decision from the Reserve Bank to move the cash rate from 0.10% to 0.35%, the cost to borrow money is going to escalate.
The major banks have already moved to increase interest rates.
This may impact your construction cost for any number of reasons.
It will increase your cost of capital if you’re borrowing to fund the project.
It may increase your contractor prices depending on their level of debt funding.
And if you encounter any delays (which we talk about more below), it will have an impact on your holding costs.
Of course, the whole reasoning for the RBA to increase the cash rate is to put a handbrake on the economy and slow the rate of inflation.
Which may have the result of reducing other components of the construction cost.
It already appears to have slowed down the housing market boom, however at this stage the evidence is all anecdotal.
Only time will tell if the measures have the desired effect.
- Cost escalation on materials
We wrote in an earlier article about the many, often complicated, reasons for the rising costs of building materials.
To recap briefly, the cost of timber and steel was already well on the rise during the pandemic, resulting largely from global logistical issues and shortages in the manufacturing sector.
This has since been compounded with the war in Ukraine generating economic sanctions on Russian oil. Not only that, the industry is further impacted by the fact that Russia is the largest exporter of soft timber globally.1 Sanctions on timber leads to higher prices on raw and finished materials.
Of course the rising prices at the petrol bowser has caused transport and logistics to become more expensive and concrete prices are spiking because the manufacturing process relies on cement, and making cement requires large amounts of energy in the heating process.
All these increases combined can have a substantial impact on the project cost. A good construction cost calculator needs to be flexible enough to allow for cost increases without producing an artificially inflated cashflow (in either direction) that shows the project to be unfeasible. Unless of course the numbers really don’t stack up.
- Inclement weather
It’s no surprise to anybody that’s we’ve experienced an unseasonably wet summer in many parts of the country.
According to the Bureau of Meteorology, this weather event has been part of the La Niña event that has impacted Australia for the past six months and is now said to be weakening.
La Niña means “little girl” in Spanish and simply refers to “a cold event”. In Australia, La Niña increases the chance of cooler daytime temperatures, reducing the risk of heatwaves and bushfires and tends to create wetter than normal conditions, increasing the frequency of tropical cyclones and flooding.
In addition to the devastating damage and flooding caused by the recent weather events, there has been significant stress placed on anyone trying to build or undertake a substantial renovation over the past six months. Not only has the ongoing weather caused extended construction delays, it has also had flow on effects for deliverability of materials, and supply issues for contractors with increased demand across the board.
All of this on top of an already struggling supply system as a result of two years of a global pandemic.
These delays almost inevitably lead to additional construction costs. If the house is not ready on time, you may have to live somewhere else for a period of time. You may have to store furniture or belongings, or even building materials.
If the property is an investment you may have additional holding costs and have an extended period without income.
- Delay on materials
If you’ve been to a grocery store recently it’s hard to miss the empty sections where your favourite grocery items used to be.
We’ve seen an improvement in the last couple of months but there are definitely still shelves with limited stock, largely due to issues with logistics and freight movements both into and around the country.
These logistics issues are not limited to grocery items. With restricted travel and border closures until very recently, this has had an impact on movement of raw materials leading to a backlog of deliveries which will take some time to overcome.
It’s a bit hard to finish a new build or even a renovation on time if you can’t get the garage door or floor finishes that you want, let alone the appliances that you had on special order from Germany, or even the marble tiles from Italy.
There’s an argument here for choosing locally made items as far as possible, but even then getting them shipped around the country in time can be problematic.
- Availability of contractors
I spoke to one person recently who is trying to book in repairs to their driveway following the floods. They’ve had an assessor attend after a four week wait, and it turns out the works are worse than thought. They had minimal inundation through their downstairs rumpus room which needs to be completely stripped. They tried to book in repairs only to find they can’t get a painter for another six months!
The national housing shortage is causing unprecedented demand for new housing stock, even before extensive repair work required to fix flooded houses, and contractors are proving difficult to pin down.
A shortage of skilled labour is not only causing delays on projects, but also leading to increased labour costs in a classic case of supply versus demand.
How can MCG help?
We write all this, not to scare you off building or renovating.
On the contrary, working on a new project can and should be an exciting time for all involved.
But you do need to be prepared with a realistic timeframe for the works, as well as a robust construction cost calculator to ensure you are forewarned and able to plan your cashflow.
That’s where MCG Quantity Surveyors can help.
MCG Quantity Surveyors are acutely aware of the current challenges faced by our clients when it comes to planning and assessing their property projects. We make it our priority to ensure our reports take into account all possible cost implications.
We may not be able to control rising prices or materials shortages, but we can definitely help you calculate your construction cost.
We think that’s a pretty important step.
Contact us now for an obligation free quote on 1300 795 170 or go to our website mcgqs.com.au for more information.
References
1 Merlehan, Adam “The real reason why construction giants Condev and Probuild collapsed” 22 March 2022 <SmartCompany.com.au>