Just as New Zealand’s construction industry begins to show signs of recovery, a new pressure has quietly emerged. This time, it comes from costs, rather than demand.
The problem exposed by a pipe
In early April, construction companies began receiving notices that plastic pipe prices would rise by nearly 25%.
The situation in the Middle East has disrupted supplies of the resins used to produce materials such as PVC and PE. Most of these raw materials pass through the Strait of Hormuz. If that route is disrupted, cost increases are difficult to avoid, even when local production continues as normal.
For construction businesses, these changes will have a direct impact on projects. Many projects were tendered and awarded months ago, with prices already locked in. With material prices suddenly rising, businesses have no room to adjust their quotes and must absorb the increases themselves. Some contractors have even said that this 25% increase could amount to the entire profit on a project.
Costs have not risen out of nowhere
Looking only at this pipe price increase, it would be easy to see the problem as a sudden, isolated event.
But the data shows that costs have already been edging upwards.
Cotality’s latest construction cost index shows residential construction costs rose 1% in the first quarter of this year, slightly above the 0.9% recorded at the end of last year. Annual growth also climbed back to 3%, its highest level in more than two years.
Cotality chief economist Kelvin Davidson’s assessment is that industry activity is picking up. Following interest rate cuts, some projects that were previously unviable are moving forward again. New dwelling approvals have also returned to a two-year high of around 37,000 homes.
In other words, the industry is recovering. But costs are starting to rise alongside that recovery.
The industry’s pace is out of step with reality
A mismatch has emerged between the industry and the conditions it faces. On one hand, demand is gradually returning. Mortgage rates are lower than before, the population is still growing, and some projects are getting moving again. On the other hand, costs are proving less cooperative.
Fuel prices are rising, transport costs are increasing, and supplies of some materials are becoming less reliable. Even without a noticeable price rise, disruption to construction schedules brings additional costs in itself.
More immediately, the construction industry has only just emerged from a downturn, and profit margins are already thin. Any wave of cost increases will have an amplified impact.
The hardest part: price rises cannot always be absorbed
In theory, when costs rise, prices should follow.
But in construction, it is not that simple. Commercial projects, in particular, mostly use fixed-price contracts. The price is effectively locked in when the contract is awarded. If material prices rise midway through, it is difficult to ask the client for more money.
The result is that rising costs eat directly into profits.
For some large construction companies, the impact is even more pronounced. With large volumes of materials and long project timelines, even small cost changes can ultimately become substantial losses. Some projects may end up generating no profit at all, rather than simply earning less.
A new pressure is gradually taking shape
Taken together, these developments reveal a trend: project numbers are increasing and the market is recovering, but costs are rising again too.
The construction industry has been through an adjustment over the past two years. Just as conditions begin to improve, it faces a new variable. Uncertainty in the external environment is gradually filtering through via materials and transport.
Observations and reflections
Construction has always been highly sensitive to changes in economic conditions.
It responds quickly when the market is strong, and is often among the first industries to feel the pressure when conditions deteriorate.
This time, the situation is somewhat different. Demand is recovering, but costs are changing at the same time. Many of the pressures come from overseas and are not entirely within local control.
The next question is how long this wave of cost pressure will last.
If it is only a short-term fluctuation, the industry still has time to adjust its pace. But if energy and supply chain conditions remain unstable for an extended period, the implications for project pricing and development decisions will be deeper.
For developers and builders, this may mean reassessing risk.
Rather than each business absorbing the pressure alone, it may be better to discuss the problems openly.
How are you responding at this stage, when rising costs are offsetting the recovery?
Are you revising your pricing strategy or changing contract terms? Are you giving more thought to alternative materials, locking in prices early, or even controlling the pace at which you take on work?