The $64 million question—literally—now with everyone I talk to in the industry is how to move forward from their current position, given they are probably having budget issues.
The way I’m handling that is by changing the way we source our construction pricing and also the way my team and I look at cost blowouts. I now see these as a positive.
A few years ago, if we had a 2% unexpected cost blowout on a project it would have been really stressful as it meant asking the funder for more money, looking for savings, stretching the contingency. In the last 12 months we’ve seen a consistent 15-25% construction cost increase across all projects. For example, one of our projects was $28 million 12 months ago and is now $36 million.
The attitude we’ve adopted is that just because your costs blow out or are coming in well over budget in this market, it doesn’t mean you don’t have a project or that the project is necessarily dead. It means you have a project closer to construction because you now have an accurate market indication of what the project will cost to build.
The upside of costs blowing out is that you actually have a realistic indication of where the market is at. A more real feasibility. And now you can make an informed decision on putting the project on hold, selling the site, working through the price rises, amending the design, or relaunching the project at a new price point.
Putting things on hold now amid labour and supply shortages is tempting and without doubt the right decision for some projects. A few developers are holding off and waiting for prices to come down.
Putting a hold on a project doesn’t necessarily mean things are going to swing back in your favour. The market may move again in ways we can’t predict just like it has done in the last 24 months. These prices may be the new normal.
One shift in thinking that has helped our clients is the realisation that the priority now on any project is not wait to do the competitive tender. The priority is to get the live construction data cost from the market as soon as possible. Pick a builder and enter into an ECI arrangement that works best for both parties.
With that data you can make decisions early on funding, approvals, contracts. It sets you up to make the right decisions later. The rationale is if you have to go to a price rise later in the project it would be harder to change strategy, harder to go back and get money for your sales, change your valuation and funding and address roadblocks when you have to change a design.
On the project mentioned earlier that increased from $28 to $36 million, we’ve amended the sales pricing and feasibility three times. As a result, we’ve also had to amend the design countless times (I think I saw 27 preliminary revisions the other day when I was in the job folder) and all this happened before we lodged the DA. Point being is that by getting the construction price we’ve saved the client by not getting the wrong DA or releasing an unviable project to the market.
12 months on, this project now has significant pre-commitment at financially viable sales rates, the right design and an accurate construction budget. Although the process has taken a little longer, it will get funded and it will get constructed.
