Global construction market outlook

Headwinds forming

on multiple fronts

Construction activity continues to increase across many markets, however increasing global market volatility and risk continues to challenge the industry. The continued interconnectivity of markets is clearer now than ever, as we see near universal inflationary trends founded on construction labour shortages, demand exceeding supply, and disruption in supply chains hitting costs and programs.

2022 has so far been a year of continued recovery and increasing activity levels for construction markets around the world. However, ongoing supply chain disruptions, worsening skills shortages and surging construction costs are generating some of the most challenging market conditions since the onset of the COVID-19 pandemic.

Since the beginning of this year, a whole new set of challenges have emerged, which are adding to the existing pressures that have been building over the past two years. The war in Ukraine, commodity price shocks, surging inflation, and COVID-19 lockdowns impacting Shanghai and Ningbo ports are the latest crises to impact construction markets.

The volatility being seen across global markets is significant and presents considerable downside risks for the construction sector. Whilst construction activity levels are currently showing resilience, we are seeing this impact construction projects across the world and may see this weigh on new investment in 2022.

In spite of these challenges, the appetite across the global construction sector remains strong with many organisations taking a proactive approach to managing these risks. Supply chain diversification, alternative contracting methods, and changed procurement strategies are just some of the strategies that are being adopted to try and mitigate risks.

Key challenges - Reinforced challenges

2020 was underpinned by the COVID-19 pandemic, supply chain disruption and a marked slowdown in activity. With many markets in 2021 accelerating out of recession and growing rapidly in a short period of time, the challenges once faced by the global construction sector are evolving. We asked our market experts, each located in a different part of the world, to rate the degree of impact that certain challenges are having on their local construction markets.

The top three challenges reported in this year’s survey are rising costs of construction, excessive lead times and skilled labour shortages. These constraints are having a significant impact on construction markets around the world and are a common theme when gaging local market sentiment from our regional experts.

Increased construction costs are becoming increasingly problematic for clients and contractors and have moved up from sixth to first place following a notable rise from 12th place in 2020. Supply chain bottlenecks remain in place, elevated energy costs and global trade sanctions have contributed further to rising costs. Escalating costs have the potential to see low-margin projects delayed or cancelled altogether, as profitability erodes. Market uncertainty also contributes, with increased cost volatility resulting in higher risk premiums being added to prices, which in many instances is adding to inflationary pressures.

Lead times are the second greatest challenge impacting construction markets around the world. Ongoing global supply chain disruptions, coupled with geopolitical issues, transportation chokepoints, and COVID-19 related shutdowns are having a considerable impact on supply, and creating lengthy delays for many construction goods. Of note, is the April to June lockdown in Shanghai, a global manufacturing hub, which has pushed out lead times for key materials, components and equipment sourced from there.

Despite falling from second to third place, skilled labour shortages continue to be a major concern across construction markets. The sharp rebound in construction activity, coupled with the delayed resumption of labour migration is limiting the availability of labour to complete the growing pipeline of work. A shortage of skilled labour results in greater competition in the market and pushes up wages.

Government red tape, bureaucracy and delayed approvals and COVID-19 public health measures/restrictions have fallen out of the top three challenges, moving to sixth and seventh respectively. Partly due to the significance of the top three disruptions, but also because of extensive vaccine rollouts and increased immunity.

One new challenge included in this year’s survey is Net Zero commitments, which sits in 12th position. Despite being overshadowed by other concerns, many respondents have commented on the additional cost and limited resources available to meet these targets. With a global focus on sustainable construction and carbon reduction, it’s likely that Net Zero challenges become more pronounced in the years to come.

The challenges are ranked on a scale of 1 to 5 where 1 is no impact and 5 is a significant impact

Top-performing sectors - A subtle shift

While 2022 may be dogged by market turbulence, the construction sector remains resilient and is busy in most regions. Those sectors benefiting from repositioning following COVID-19 continue to hold tight and lead the way, with a subtle shift in performance evident across several markets. In this year’s survey the top five performing sectors are:

While the top four performing sectors are the same as our 2021 survey, there has been a reconfiguration in their positioning. Industrial, manufacturing and distribution has moved from third to first position, led by the healthy growth in e-commerce and buoyant manufacturing sectors, particularly in pharmaceuticals and in advanced manufacturing segments, such as semiconductors.

Residential and social housing has moved from fourth to second position. Low interest rates, an increase in household savings and a change in lifestyle preferences have driven a synchronised surge in demand for housing across many parts of the globe. With interest rates on the rise across most economies to curb inflation, activity in this sector may soften over subsequent years.

Moving from second to third place is transport, with significant proportions of government stimulus spending over the past few years being directed into major infrastructure programmes. The Chuo Shinkansen line in Japan and the Tel Aviv Metro system in Israel are just a few of the projects brought forward to support their economies’ respective post-pandemic recoveries.

A notable change in this year’s survey was commercial office development, which moved from the 15th position in 2021 to the fifth position in 2022. This is a positive indicator that demand for commercial office space is returning, as corporates refocus their workplace strategies. A key trend driving the construction of office space is the growing demand for flexible workspaces and a hybrid working environment, with the workplace moving away from desk allocation to focus more on spaces that enable collaboration and high-quality experiences.

Moving from second to third place is transport, with significant proportions of government stimulus spending over the past few years being directed into major infrastructure programmes. The Chuo Shinkansen line in Japan and the Tel Aviv Metro system are just a few of the projects brought forward to support their economies respective post-pandemic recoveries.

Transport has moved from second to third position, with significant proportions of government stimulus spending over the past few years being directed into major infrastructure programmes to support the post-pandemic recovery.

Transport has moved from third to second position, with significant proportions of government stimulus spending over the past few years being directed into major infrastructure programmes in order to support the post-pandemic recovery.

Figure 4:

Top-performing construction sector, by activity levels - 2021 vs. 2022

Source: Turner & Townsend International construction market survey 2022

Supply-chain disruptions - Embattled supply chains

Global supply-chain disruption continues to be a key driver of rising costs and uncertainty across global construction markets. What was initially brought on by COVID-19 pandemic-related restrictions, has now turned into a much more complex issue.

Demand continues to outpace supply, amid record volumes of freight moving through global ports, which is placing enormous pressure on already constrained logistics networks. Many workers that were laid off at the start of the pandemic in anticipation of weak demand, have not returned to their jobs, which has left manufacturing and logistics industries in a deficit. Add to this major port congestion at some of the world’s largest ports, the war in Ukraine, and a shortage of shipping containers, and you have one of the greatest supply-chain crises seen in modern times.

In our survey, we asked respondents to provide insight into how their supply chains have performed over the last 12 months, and to share their views on the next 12 months. Of the 88 markets, 17.0 percent indicated that supply-chain disruptions have had a significant impact on their local construction market, 79.5 percent indicated a medium or high impact, and only 3.4 percent indicated there was little impact.

In our survey, we asked respondents to provide insight into how their supply chains have performed over the last 12 months, and to share their views on the next 12 months. Of the 88 markets, 17.0 percent indicated that supply chain disruptions have had a significant impact on their local construction market, 79.5 percent indicated a medium or high impact, and only 3.4 percent indicated there was little impact.

Respondents were also asked how much, in weeks, have lead times changed over the last 12 months. 94.3 percent of markets indicated that lead-in times had increased, with nearly a third of locations suggesting that long lead-in times over four weeks were common. Interestingly, markets across the Asia region were less susceptible to increases in lead-times. This is likely due to their closer proximity to major manufacturing hubs such as China and their existing trading relationships with one another.

As identified in our market challenges, increased lead times is one of the greatest tests the global construction industry is facing. Longer lead times are resulting in increased programmes on projects, which can be very costly for clients and contractors. Nearly half of all markets surveyed, indicated that construction programmes had increased by four or more weeks as result of these supply-chain challenges.

While these supply-chain disruptions have been vast and far-reaching across construction markets, the sentiment around the outlook was more positive. 37.5 percent of markets felt that supply chains were going to improve over the next 12 months, 38.6 percent felt that they would stay the same, and 23.9 percent felt that they would weaken.

Supply-chain disruptions are one of the key drivers of rising construction costs in the current market, due to the impact they are having on material and equipment prices, lead-in times, and project schedules. This is pushing organisations to undertake greater analysis of, and responsibility for, their supply chains and it is vital that this trend continues for the sector to navigate future crises.

Mitigating supply-chain risk

Increased activity levels are leading to a shift in power from client to supplier, transitioning from a seller’s market to a buyer’s market in some locations. To manage this situation and mitigate against rising costs, clients are deploying new strategies, including:

• Widening their geographic reach when procuring materials and equipment

• Committing to multi-year volumes with preferred suppliers at fixed rates

• Absorbing more risk by taking responsibility for logistics costs

• Using digital tools to make more informed procurement decisions

• Moving from ‘just-in-time’ to ‘just-in-case’ delivery models

• Promoting closer, and earlier, contractor engagement across all tiers of the supply chain

Global construction cost performance -

Temperatures rising, but global risks threaten to cool construction markets down

Construction activity has continued to strengthen, despite the industry facing tough challenges. This year’s survey highlights the complexities facing the global construction industry, shining a light on many labour and material pressure points. The year ahead will undoubtedly test the resilience of the sector across many markets. Yet confidence can be had in the industry’s adaptability and lessons learned from the COVID-19 pandemic in order to tackle further market uncertainty.

Each year, we ask our experts to rate the market temperature and tendering conditions in their local construction markets, to gain insight into the volume of construction activity underway. This enables useful conclusions to be drawn about the pressures being experienced in their local supply chains, as well as likely construction cost inflation.

Asia has also seen some improvement over the last 12 months, with Tokyo, Kuala Lumpur, and Singapore now all experiencing ‘hot’ tendering conditions. 10 markets were described as ‘warm’, while 7 markets were experiencing lukewarm tendering conditions. Macau was the only market where construction activity was expected to cool, while all other markets felt that the market would stay the same or get warmer.

North America has also seen a strong uptick in activity, with 7 markets considered ‘overheating’ and 6 markets considered ‘hot’. In 2021 there was only 1 market that was described as ‘hot’ and no markets that were ‘overheating’. The markets that are considered overheating are Austin, Houston, Phoenix, San Francisco, Montreal, Ottawa and Toronto. There are only three markets that are considered ‘Lukewarm’ in North America and no ‘cold’ markets.

In Australia and New Zealand, Brisbane, Perth, Auckland and Christchurch have all moved from ‘warm’ to ‘hot’, while Adelaide, Sydney and Melbourne remain ‘Warm’. All markets, with the exception of Christchurch were considered to be getting warmer.

As economies continue to recover from the downturn caused by the COVID-19 pandemic, construction activity is increasing around the world. Robust government stimulus is driving this in many markets, alongside the recovery of private sector activity. There were only three markets that felt their construction markets were getting cooler, which were Gaborone, Macau and Nairobi.

Africa also continues to experience pandemic induced challenges, with tendering conditions across all markets being described as cold or lukewarm. The construction sector continues to face an uphill recovery, with pressures continuing to emerge as volatility in the global market increases. While construction activity has largely remained subdued over the last 12 months, all markets except for Gaborone and Nairobi, were expected to get warmer over the next 12 months.

Markets where tendering conditions are considered cold or lukewarm typically experience high competition between contractors for work, which results in competitive, lower pricing. Markets where tendering conditions are hot or overheating have a higher number of projects underway, meaning there is less competition for work, order books are full, and consequently prices tend to rise.

Current tendering condition

Future market outlook

Click to expand the map below

Figure 7:

Global tendering conditions and market outlook

Source: Turner & Townsend International construction market survey 2022

By gauging local tendering conditions from our 88 surveyed markets, across 42 different countries, we can generate valuable conclusions relating to the strength of competition in the construction contracting market, which is often an indicator of likely cost pressures being faced in each location.

Over two thirds (34) of the markets in this year’s survey are considered hot or overheating compared with just nine in 2021. Additionally, Gaborone is the only market considered to be cold this year, down from six markets last year. There are only three markets that felt their construction markets were getting cooler, which were Gaborone, Macau and Nairobi.

In the UK, all markets are described as warm, hot or overheating, which has improved from 2021 when all markets were either lukewarm or warm. Of note is Leeds, which has moved from warm to overheating in the last 12 months, supported by the unlocking of build-to-rent developments and growth in student accommodation. Additionally, all markets, except for Manchester, report that their local construction markets are getting warmer.

North America has also seen a strong uptick in activity, supported by a strong rebound from the private sector. There are seven markets that are considered overheating, and six markets are considered hot. In 2021, there was only one market that was described as hot and no markets that were overheating. The markets that are overheating are Austin, Houston, Phoenix, San Francisco, Montreal, Ottawa and Toronto. These regions have seen a strong rebound following the COVID-19 downturn, driven by both public and private sector investment. There are only three markets that are considered lukewarm in North America and no cold markets.

Europe is another region where construction markets are heating up. Of the 14 markets explored, Madrid is the only market to be considered lukewarm, and all others are considered warm or hot. Over the last 12 months, Berlin and Vienna have moved from being warm to hot, with Amsterdam having moved from lukewarm to warm.

While activity has increased from 2021, 71.4 percent of European markets feel that their construction market is going to ‘stay the same’ over the next 12 months. There are increasing concerns across European markets around what impact the Russian invasion of Ukraine will have on their market. This is bruising confidence and seeing organisations take a more cautious approach to investment while the uncertainty remains prevalent.

In Australia and New Zealand, Brisbane, Perth, Auckland and Christchurch have all moved from warm to hot, driven by robust public infrastructure investment. While Adelaide, Melbourne and Sydney also have large pipelines of work ahead, they remain warm for now, due to the spare capacity within these market’s supply chains. All markets, except for Christchurch, are getting warmer, suggesting that those hot markets may warm up and potentially overheat in time.

In the Middle East, Riyadh continues to experience overheating tendering conditions driven by the government’s plans to diversify the economy through the construction of infrastructure, energy and utilities projects. Doha has moved from warm to hot as activity on new development projects increases to achieve the Qatar National Vision 2030. Muscat has moved from cold to lukewarm, however the construction market is expected to stay the same over the next 12 months, while all other markets are expected to get warmer.

Asia has also seen some improvement over the last 12 months, with Kuala Lumpur, Tokyo and Singapore now all experiencing hot tendering conditions. Tokyo is seeing an increase in domestic private sector activity, while Kuala Lumpur and Singapore are seeing increased public sector activity in infrastructure projects such as transport and renewable energy projects.

Ten Asian markets are described as warm, and seven markets are experiencing lukewarm tendering conditions. Macau is the only market where construction activity is expected to cool over the next 12 months, while all other markets are expected to stay the same or get warmer.

South America is a region that was hard hit by the COVID-19 pandemic, and it continues to face ongoing challenges, which are impacting construction activity. While tendering conditions continue to remain warm in Bogota, Rio de Janeiro and São Paulo, they have cooled to lukewarm in Santiago, which now sits alongside Buenos Aires.

Africa also continues to experience pandemic-induced challenges, with tendering conditions across all markets described as cold or lukewarm. The construction sector is facing a difficult recovery, with pressures continuing to emerge as volatility in the global market increases. Construction activity has largely remained subdued over the last 12 months; however, all markets except for Gaborone and Nairobi are expected to get warmer over the next 12 months.

Construction cost inflation - Inflation inflammation

Markets where tendering conditions are considered cold or lukewarm typically experience high competition between contractors for work, which results in competitive, lower pricing and therefore, less cost inflation. Markets where tendering conditions are hot or overheating have a higher number of projects under way, meaning there is less competition for work, order books are full, and consequently prices tend to rise. However, this is not always the case, particularly considering the current volatile market conditions.

High construction material costs or labour shortages can lead to higher input costs and therefore, increase overall construction costs, even if there is only a modest amount of construction activity under way. This has been particularly prevalent in our findings in this year’s survey as the industry continues to face existing and new challenges.

We asked our experts in each market to indicate how much construction costs had increased or decreased over 2021 and what level of construction cost inflation they anticipate in 2022 and 2023. The results of this year’s survey were markedly different to our 2021 survey results, which highlights the enormous pressures facing construction markets and the impact they are having on construction costs.

In our 2021 survey, there were 11 markets that were expected to have construction cost inflation of 10.0 percent or more in 2021. In our 2022 survey results, there are 38 markets that suggested they experienced inflation of 10.0 percent or more. In 2021, The pace and degree at which costs have risen has been greater than anticipated in last year’s survey.

Lagos experienced the sharpest construction cost inflation in 2021 at 30.0 percent, followed by Nairobi, Mexico City, and Singapore, which all recorded inflation of around 15.0 percent. By region, South America had the highest average inflation at 14.4 percent in 2021, followed by Africa (12.3 percent), North America (9.4 percent), Europe (8.6 percent), Australia & New Zealand (8.2 percent), Asia (7.2 percent), and the UK (7.0 percent). The Middle East had the lowest average inflation at 3.7 percent. Riyadh was the exception to this, where construction cost inflation was 10.0 percent in 2021, due to the strong construction activity under way across the Kingdom of Saudi Arabia.

Rising building material costs have been one of the key drivers of higher construction cost inflation over the last 12 months. Global supply-chain disruptions, high commodity prices, higher shipping costs, and supply shortages have caused this strong price growth. Some of the key materials that we have observed significant price increases include structural steel beams, reinforcing steel, softwood timber for framing, copper pipe and copper cable.

The general view in this year’s survey is that construction costs still have further to climb over the course of 2022. However, some regions are expecting lower inflation in 2022 than compared with 2021 due to the high increases recorded last year. These regions are South America (8.9 percent), North America (8.1 percent), Asia (6.9 percent), and Australia & New Zealand (5.4 percent). While these inflation forecasts are lower than 2021, it should be noted that these are still considerably high levels of construction cost inflation for these markets.

The regions that are anticipating higher inflation in 2022 include Africa (13.3 percent), Europe (10.2 percent), UK (8.7 percent), and the Middle East (5.4 percent). Rising energy prices and ongoing supply-chain disruption against the backdrop of volatile market conditions are having a considerable impact on costs in these regions, which has already materialised into higher prices over the first half of 2022.

Challenges are continuing to emerge, which is creating enormous uncertainty in construction markets around the world. Heightened risk is being built into prices and the uncertainty of when these challenges will end has shaped the view across markets that costs are likely to continue to climb further in 2023.

It is evident in this year’s responses that there are no markets anticipating a fall in overall construction costs over the outlook. However, many markets are finely balanced. Rapid input cost escalation is translating into higher costs of project delivery. In some markets, this is starting to feed into a slower uptake of new work as firms are increasingly scrutinising cost viability, mulling over investment decisions and managing growing risk allowances.

Nonetheless, while we may see some cooling in prices across individual materials as global supply-chain disruptions ease and supply catches up with cooling demand, prices could remain elevated. Other factors like skills shortages and high-risk market conditions suggest that it may be unlikely to see overall construction costs fall in the near term.

International ranking - The most expensive global construction markets

Increasing inflationary pressures are also impacting the cost to build. Each year, we produce a global ranking of the average cost to build in each market. In 2022, the most expensive market to build is San Francisco at US$4,729/m². Tokyo has moved from first to second most expensive this year, closely followed by Osaka, which is a new addition in this year’s survey.

In our top 10, there are four markets in North America, including New York, which is ranked fourth, Boston in eighth position and Los Angeles in ninth position. We have seen a big shift in positioning for North American markets, which is primarily due to the strengthening of the USD, higher building material costs driven by supply-chain disruptions, and the region’s high labour costs.

Geneva and Zurich are ranked in fifth and sixth position, respectively, and are commonly featured in our top 10 most expensive cities to build due to their high labour costs.

Hong Kong has moved from second to seventh position, while London has moved from eighth to tenth position.

To calculate the most expensive market to build, we have converted all costs to USD and compared the average cost of all asset types within our survey, excluding recently added classes and fit-out data.

As all costs are converted into USD, exchange rates will have an impact on each market’s ranking based on the strength of currency against the US dollar.

Calculating the effect of exchange rates

To undertake our analysis of the cost data in our survey, all costs are converted to a single currency, which is USD. While this is the most straightforward way of comparing costs across different markets, it means that exchange rates have an impact on costs and should be considered when drawing comparisons between markets.

In the current turbulent market conditions, exchange rates have fluctuated significantly and are likely to continue to remain volatile over 2022. High inflation, rising interest rates and fears around a global economic slowdown will continue to see demand for currencies shift. Since the Russian invasion of Ukraine, the USD has strengthened against most major economies, due to its safe-haven status and this may continue to remain strong while volatility persists.

Construction labour costs

Each year we explore construction labour rates across each of our markets to understand the movement in construction wages. Our findings from this year’s survey show that labour costs have increased over the last 12 months in most regions, with some regions seeing substantial growth compared with pre-pandemic levels. This supports the ongoing challenges construction markets are facing around worsening skills shortages in the construction sector.

Europe had the largest increase in construction wages since 2021, with average labour costs increasing by 22.4 percent to US$65.8 in 2022. When compared to 2019, average construction wages in Europe (excluding the UK) were US$44.4, which is a substantial increase over a three-year period. As high inflation continues to hit across European economies, as well as worsening skills shortages, we are seeing much sharper wage increases start to materialise in these markets.

Australia and New Zealand recorded an increase of 6.5 percent over the last 12 months and an increase of 28 percent since 2019. The loss of skilled migration during 2020-21 had a considerable impact on the availability of construction labour in these markets, which has subsequently pushed up labour costs, making it the second most expensive region for construction labour. The Middle East increased by 6.1 percent since 2021 to US$7.10.

While the UK appears to have had little change in the last 12 months when comparing in USD, although wages in local currency have increased. Low unemployment and high vacancies, stemming from increased construction activity, have enhanced skills shortages across the UK market, which is resulting in sharper wage inflation.

North America currently has the highest average labour cost at US$68.4 but has shown little movement from 2021. Construction wages in North America are likely to increase over the next 12 months, due to worsening skills shortages across the country.

Asia and Africa both recorded a fall in average construction labour costs from 2021 to 2022. While nearly all markets in Asia recorded an increase over the last 12 months, the addition of several lower-income markets in this year’s survey has brought down the average for the region. Africa, on the other hand, has experienced considerable market challenges following the COVID-19 pandemic, resulting in lower levels of construction and a surplus of labour.

Demand continues to outpace supply, amid record volumes of freight moving through global ports, which is placing enormous pressure on already constrained logistics networks. Many workers that were laid off at the start of the pandemic in anticipation of weak demand, have not returned to their jobs, which has left manufacturing and logistics industries in a deficit. Add to this major port congestion at some of the world’s largest ports including Shanghai and Ningbo, the war in Ukraine, and a shortage of shipping containers, and you have one of the greatest supply chain crises seen in modern times.

Skilled labour shortages

Skilled-labour shortages were evident long before the COVID-19 pandemic; however, since the spread of the virus and the restrictions that followed, skills shortages grew in most markets around the world. In this year’s survey, 79.6 percent of markets were experiencing skills shortages, 15.9 percent of markets were in balance, while only 4.5 percent of markets were experiencing a surplus in construction labour.

The next key factor adding to these shortages is ‘The Great Resignation’ that started in late 2021, where many workers preferences changed during the pandemic. This prompted a mass resignation of workers, where people changed their employers, their careers and even their industries to suit new found priorities.

In the US, the median age for construction workers is 43, and 40 percent of the total construction workforce is between 45 and 60 years old. In the UK, the number of employees in the construction industry above 60 is increasing more than any other age group. In China the majority of the construction workforce is between 40 and 60.

The construction sector has not been immune to this. Growing skills shortages and changes in employee preferences have prompted workers to demand higher pay and changed working conditions or they are seeking opportunities elsewhere. We expect this trend will continue for some time, while the global skilled worker deficit continues.

These factors are considerable and there is no quick solution to any of the above challenges. As construction activity continues to grow and skills shortages increase, we expect this will prompt some significant changes across the industry. Increased pay and changed working conditions for both developed and emerging economies are likely. We also expect digitisation and an increase in technology use to be a key factor in the future of the industry.

Source: Turner & Townsend International construction market survey 2022

When we compare this to our 2021 survey, labour availability has decreased significantly. In 2021, 64.4 percent of markets experienced skills shortages, 15.1 percentage points below 2022 returns. Fewer markets were in balance, or surplus, falling by 9.7 and 5.5 percentage points from 2021 to 2022 respectively.

While international borders have reopened and migration has returned to most regions, there is still an overwhelming deficit in construction skills. There are several factors that are driving skills shortages in the construction industry.

Increased demand has certainly played its part as activity outstripped supply following the COVID-19 recession and its resulting redundancies. In addition to this, many workers’ preferences changed during the pandemic, known as ‘The Great Resignation’, as discussed in the Global Economic Outlook. This has prompted a mass resignation, where people are changing their employers, their careers and even their industries to suit new-found priorities.

The construction sector has not been immune to this. Growing skills shortages and changes in employee preferences have prompted workers to demand higher pay and changed working conditions or they are seeking opportunities elsewhere. This trend is expected to continue for some time, while the global skilled worker deficit continues.

Another key factor impacting the construction sector is the ageing population. In construction markets around the world, the demographic of construction workers continues to grow older, with fewer young people choosing construction as a career.

Whilst demand is relatively fluid, supply is restricted, and the ability to recruit, train and mobilise new construction labour takes time, leaving a systemic shortfall. Increasing the pool of available labour is a critical challenge facing the construction industry today and in the future. The industry will need to take an innovative and considered approach to how they encourage and incentivise more young people to enter the construction sector to grow its workforce.

Preliminaries and margins

Each year, we ask our respondents to provide a guide on typical margins and preliminaries in their local market. Preliminaries and margins make up a portion of total construction costs, which means any changes in them can have an impact on the overall cost.

Our respondents were asked to indicate what the typical preliminary percentage is on a medium commercial project (5,000m² GFA). Preliminaries will often vary significantly by region and country, which can be attributed to different types of construction, local building standards and the complexity of building sites.

In 2022, the average percentage of cost for preliminaries has increased across all regions except for Africa. Asia has had the highest increase with average preliminaries increasing from 10.0 percent to 11.6 percent. South America was second, which was up from 9.3 percent to 10.6 percent, followed by Europe, moving from 11.3 percent to 12.3 percent in 2022.

Christchurch recorded the largest increase in preliminary costs, which has increased from 13.0 percent to 18.0 percent in 2022. Christchurch is a market that continues to feel the impacts of supply-chain constraints due to its smaller size and limited pool of available workers, which has increased its exposure to risk and pushed up preliminary costs. In Singapore, preliminary costs have increased from 13.5 percent to 18.0 percent in 2022. This is due to contractor’s requirements to comply with safe management measures imposed by the government to limit the spread of COVID-19 (e.g. regular swab tests, more stringent accommodation, and transportation arrangements for migrant workers).

In many instances, preliminary costs are rising because of higher-risk premiums being built into contracts, given the ongoing volatility being experienced across global markets. Additionally, increased requirements to adhere to COVID-19 safety measures have also added to preliminary costs.

Respondents were also asked to indicate what typical margins are on a medium commercial project (5,000m² GFA) in their local market. Unlike preliminaries, the change in margins was mixed across the regions. Average margins in Australia and New Zealand and the Middle East have increased with both markets experiencing stronger levels of construction activity and tendering conditions are getting warmer, allowing profit margins to be increased.

Interestingly, the average margins across Europe, North America and South America have declined. While many of these markets are experiencing stronger levels of construction activity, margins aren’t increasing, and in some markets are being lowered. It’s likely that due to the recent volatility in the market, contractors are keen to firm up their future pipelines and are therefore keeping profit margins low to win work. However, this does come with its risks and low profit margins in a market where prices are rapidly rising can lead to an increase in insolvencies.

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