RC111 MarApr 2024 - Magazine - Page 20
2024 OUTLOOK
post-pandemic point. The most recent quarter-on-quarter 昀椀gures
reported a slight fall in activity, but sustained public sector infrastructure investment is likely to keep the sector buoyed and appetite
remains strong. This is on the back of Canada’s continually rising
population and the demand for new rail, road, and other infrastructure projects country wide.
By comparison, residential real estate construction activity has
been falling—responsible in large part for the overall sector contraction. Despite a recent uptick, residential GVA has reduced by 18.6
per cent since its post-pandemic peak—a result of high interest rates
and high build costs weakening investment appetites.
The picture is also not uniform across the 14 provinces. In 10
regions, investment in construction fell from Q2 to Q3 2023, and of
those that are growing, Alberta, Saskatchewan, and New Brunswick, are showing the most consistent upward trend. Like overall
construction activity, these trends are in large part the result of the
昀氀uctuations in the residential market. For other construction areas
2022, cumulative growth in construction activity (GVA) was evenly
matched by the sector’s employment growth. However, since that
point activity has weakened while construction employment growth
has remained strong—as 昀椀rms aim to address the longer-term skills
shortage by bringing new talent in. This means the gap between activity and employment has grown by 6.3 per cent since the pandemic, and there will need to be a recalibration of the market leading to
less pressure on wages.
Nonetheless, wages are often ‘sticky’ downwards meaning they
reduce more slowly than they increase. In addition, not all skills
and roles are easily transferable between construction segments or
geographic regions, meaning the impact will not be uniform across
provinces and types of work. Ultimately, this means labour costs are
unlikely to o昀昀er a swift resolution and will still contribute signi昀椀cantly to input costs for projects in 2024.
Turner & Townsend o昀昀ers an overall assessment of construction
cost escalation, which helps our clients and the sector plan for the
months and years ahead. These are representative
of Canada as a whole—and the headline statistics may not re昀氀ect regional variations or project-by-project speci昀椀cs. The estimates are based
on our prediction of national bid price escalation,
drawn from data analysis and market research.
Rather than focusing just on input costs—these
昀椀gures account for market conditions and other
commercial pressures and indirect factors. At time
of writing Turner & Townsend estimates bid price
escalation of between 2.5 and 3.5 per cent for 2024,
and between 3.0 and 4.0 per cent for 2025. This is a
reduction from 6.3 per cent in 2023 and 14.2 per cent in 2022.
For many, 2024 has by comparison looked like a welcome return
to stability. But with economic growth still rocky, the path for
construction clients is not yet smooth.
the lower residential activity could help to reduce general capacity
pinch points for suppliers—potentially making projects more viable.
Nonetheless, any softening of demand will not be quick to 昀椀lter
through—and to truly assess the cost pressures on construction for
the year ahead, it is important to dig down into the detail of recent
in昀氀ationary trends.
Cost pressures are easing
In a subdued economic environment, general Canadian in昀氀ation remains above target. However, it is moving in the right direction. The
Consumer Price Index (CPI) settled towards the end of 2023, with
the percentage increase on the year in both October and November
staying level at 3.1 per cent—likely to bring greater stability across
the economy.
In construction some material costs are alleviating. By November
2023, Canada’s Industrial Product Price Index (IPPI) for all items
was 5.6 per cent below the May 2022 peak—with the result that
many manufactured goods will have become less expensive. For
example, fabricated metal products have seen their costs fall by 3.9
per cent against their peak in June 2022.
However, construction materials in general are seeing greater
polarization than in some other sectors. This is partly due to the
industry still relying on a complex network of global supply chains,
many of which remain disrupted due to the challenging geopolitical
context and persistent knock-on impacts of the pandemic. Materials
where in昀氀ation is still markedly high including glass and glass products, which have seen a 12.7 per cent rise on the year to November
2023, as well as concrete bricks and blocks (9.5 per cent) and mineral
wool (7.4 per cent). This all means that the construction industry
may see a slower rate of overall price easing than some other sectors.
What could be more reassuring to those delivering major projects is that pressure on labour costs may be reducing. Until Q1
20 RENEW CANADA – MARCH/APRIL 2024
Collaboration for the future
Based on this, there are reasons to be cheerful. Nonetheless, businesses working in the infrastructure segment of construction can still
expect to be subject to a volatile market and supply chain disruption through 2024. Tackling this will take pro-active management
from clients, drawing on the latest insight and new approaches to
delivery.
Key to mitigating risk is to move towards closer and more collaborative partnerships with contractors and suppliers. Clients should
bring project teams closer together and be open to discussing and
sharing risk from the earliest stages. This will help to reduce weak
links and exposure to a project-critical points of failure such as possible supplier insolvencies. As part of this, engage with the supply
chain regularly to assess their future plans, and how they might
mitigate any challenges or dangers they are facing.
In practice this can mean revisiting the delivery models for
programs to ensure they are suited to this fast-changing, volatile
environment. The major projects of today need to 昀椀nd new ways of
working to tackle the multiple challenges faced. For example, new
management models beyond traditional Public-Private Partnerships
(P3), such as Progressive Design Build (PDB), Integrated Project
Delivery (IDP) or Alliance. Such models go further to share the risks
and bene昀椀ts discussed above within a partnership. These approaches can take greater project management and control, but tend to
result in wider pools of suppliers, better balancing of risk, more
collaboration, creativity, and less vulnerability.
These speci昀椀c procurement models will not be suited to every
client or every project, but the mentality that sits behind them: cooperating and sharing of risk and responsibility, will need to be at the
heart of successful projects in this new, more volatile world.
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