Construction cost inflation is poised to reaccelerate later this decade, potentially adding hundreds of millions of dollars to infrastructure project costs, according to a new study by Oxford Economics Australia.
The research firm’s latest Construction Costs and Inflation briefing reveals that while cost escalation has slowed from the unprecedented spike seen in FY2022 and FY2023, inflationary pressures persist in the sector.
Oxford Economics Australia forecasts construction cost growth to accelerate towards 4 per cent per annum by FY2028 and potentially higher as the decade concludes.
This level of escalation could add approximately $200 million to the cost of a multi-year $1 billion megaproject.
Thomas Westrup, senior economist and study co-author, explained: “Cost growth now is increasingly being driven by domestic factors.
“Without substantial improvements in construction industry productivity, this presents risks for a significant reacceleration in construction cost escalation later this decade”.
The study highlights a shift in the drivers of construction-specific cost growth from international factors, such as supply chain disruptions and commodity volatility, to domestic issues including productivity challenges, an impending building boom, and sustainability initiatives.
Adrian Hart, Director of Construction and Infrastructure at Oxford Economics Australia, emphasised the critical role of productivity improvement: “Improving industry productivity is critical not just to minimising escalation risks, but in actually delivering on the many infrastructure and housing promises targeted by the governments across Australia given limited market capacity.”
The research also points out that construction cost inflation has historically outpaced broader consumer price index (CPI) growth.
Since the 2000s, the engineering construction implicit price deflator has grown at an average rate of 3.7 per cent per annum, compared to 2.8 per cent for CPI.
Key factors expected to drive cost reacceleration include:
- The delayed impact of recent inflation on construction wages
- Strong demand for new housing, infrastructure, and other construction projects
- Potential short-term cost increases associated with adopting sustainable practices
- Ongoing global supply chain vulnerabilities
As the construction industry grapples with these challenges, the study underscores the importance of boosting productivity through more efficient risk allocation, better planning, enhanced skills training, and the adoption of modern construction methods.
With significant infrastructure and housing commitments on the horizon, the findings of this study serve as a crucial warning for both government and industry stakeholders to address potential cost escalation proactively.