Why You Need to Understand Your Commercial Construction Cost Well Before You Break Ground
If you’ve been paying attention to your superannuation or share portfolio balance over the past few weeks you’ve probably noticed the Australian stock market has had a bumpy ride.
There’s many reasons for that, but one worth noting in relation to the property market is the current volatility in iron ore, steel and lumber costs.
We typically think of the property sector and the stock market to be mutually exclusive investment decisions (unless of course you’re investing in listed property trusts, and that’s a whole other topic).
The purpose of this article is not to talk about the stock market. There are plenty of resources and more qualified commentators to discuss that topic.
But whilst you might have noticed the fluctuations in the ASX, the follow on impact of these rising prices on the construction industry and commercial construction cost is sometimes a little harder to fathom.
In a recent article in the Australian Financial Review back on the 1st December 20211 , Rich Lister Harry Triguboff was quoted as saying “The building costs are going up a lot…It’s not a matter of the labour force asking for a 5 per cent increase. Iron Ore prices have come down, but steel has gone up. And it’s going up by a lot, not by 2 per cent – [but by] 10-20 per cent. It’s going up a great deal.
The same article noted property leaders, Dexus CEO Darren Steinberg and Lendlease CEO Tony Lombardo, addressing the rising costs of lumber and steel.
“This is going to put price increases on construction,” Mr Steinberg said.
Unfortunately recent media coverage of building companies struggling with solvency issues only highlights the difficulties in the development sector as a result of increasing commercial construction costs.
The other challenges of staff shortages and logistics delays that are being felt across all sectors as a result of COVID have only served to exacerbate the issues.
It’s more important than ever for anyone operating in the development space to have clear feasibility analyses and a robust commercial construction cost breakdown.
It’s not just the current cost of materials that need to be considered.
With heavy speculation that interest rate increases are becoming inevitable, it’s likely that the cost of capital will soon increase.
Not only that, there is current volatility in the retail, housing and commercial office sectors.
Return to work options and the ongoing debate regarding the take up of commercial office space has valuers scrambling to determine the correct metrics on which to base their assessments.
Retailers face a constant battle of staff shortages and COVID outbreaks impacting consumer demand.
It’s not all bad news though.
The housing market continues its strong trajectory, strengthened by opening boarders and the low interest rate environment.
Whilst it appears to have come slightly off the boil, demand is still strong and looks set to continue for some time yet.
So what does all this mean for commercial construction cost?
Developers can’t afford to get their budgeting wrong.
Whether it’s office, housing, retail, industrial.
There’s too much riding on it.
Before a project budget or feasibility for a proposed development is even considered, it is imperative that a preliminary cost plan be completed.
This report will typically be based on cost allocations per square metre of the Gross Floor Area (GFA) of the development. This is largely due to the preliminary nature of the design and documentation at this point.
The Preliminary Cost Plan will establish a working budget for each project element (substructure, columns, external walls, internal walls, floor finishes etc). The Plan forms a valuable assessment tool in the design decision-making process.
MCG Quantity Surveyors are acutely aware of the demanding and competitive nature of the construction industry. We make it our priority to ensure turn around times are consistently met and that our clients are kept up to date with the status of projects and reports.
We may not be able to control the stock market, but we can definitely help get a firm handle on your commercial construction costs.
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 Bleby, Michael “Rising costs a risk for developers and builders: Triguboff” 1 December 2021 <afr.com