Global construction market outlook
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 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 gauging local market sentiment from our regional experts.
Increased construction costs have become a major concern for clients and contractors already feeling the pressure of supply chain bottlenecks, elevated energy costs and global trade sanctions. Escalating costs have the potential to see low-margin projects delayed or cancelled altogether, as profitability erodes. Market uncertainty also contributes to increased cost volatility resulting in higher risk premiums being added to prices, which in many instances is adding to inflationary pressures.
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 too, 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.
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.
These more immediate concerns add further complexity to delivery of Net Zero targets, and the additional costs and limited resources may exacerbate the challenges in meeting commitments in the years to come.
“The global PMO continue to support Shell as it navigates an uncertain economy. This report provides a tailored global view of construction industry performance, enabling enhanced capital planning.”
Alexandra Reilly, Global PMO Lead, London
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 initially arose as a result of 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. Engagement with the REOCIT team during this exercise also revealed unprecedented levels in lead times for selected AV and IT equipment, and these may affect full delivery of capital projects over the next 24 months.
“While we witness a recovery in capital spend across regions, there is a necessity to invest in technology for construction projects. To name a few, advanced data analytics, BIM, and user-based insights are gaining traction to bring efficiency, predictability and to enhance informed decisions.”
Shyam Murugesan, Offshore PMO Lead, Bangalore
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 may consider deploying new strategies, including:
- Taking a holistic approach to commercial strategies and procurements
- 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, partner engagements across all tiers of the supply chain, including our function REOCIT SMEs.
Global construction tendering conditions
Global construction cost performance -Temperatures rising, but global risks threaten to cool construction markets down
We asked 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. These could be valuable indicators on the pressures transferred through the local supply chains, the strength of competition in the construction contracting market, as well as likely construction cost inflation.[SP1]
Asia Oceania + Qatar has seen some movement in this area over the last 12 months, with Tokyo, Kuala Lumpur, and Singapore now all experiencing ‘hot’ tendering conditions. Australia, Brisbane and Perth have all moved from ‘warm’ to ‘hot’, while Melbourne remains ‘Warm’. Doha has moved from warm to hot as activity on new development projects increases to achieve the Qatar National Vision 2030.
Europe is another region where construction markets are heating up. 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. Madrid is the only market to be considered lukewarm, with Amsterdam having moved from lukewarm to warm.
North America has also seen a strong uptick in activity, with Houston considered ‘overheating’.
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.
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. Lagos here experienced the sharpest construction cost inflation in 2021 at 30.0 percent.
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.
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.
“This cost index will empower Real estate professionals with a better understanding of cost drivers and market conditions from the outset and so promote deeper and more insightful conversation with their business partners when planning projects.”
Katherine Collins, Central PMO Assurance and Reporting Lead, London
Construction labour costs
Movements in construction labour wages are heavily influenced by construction labour rates and our global market intelligence reveals that labour costs have increased in most regions, with some 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.
The loss of skilled migration during 2020-21 had a considerable impact on the availability of construction labour in Australia, which has subsequently pushed up labour costs, making it the most expensive region for construction labour. The below tree map shows the average labour cost per hour in USD for the regions strategically important to Shell.
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.. 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.
Construction wages in North America too are likely to increase, 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, 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.
Skilled labour shortage
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 continue to grow in most markets around the world.
The next key factor exacerbating 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 newfound priorities.
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.
In the US, for instance, 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.
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 digitalisation and an increase in technology use to be a key factor in the future of the industry.
Preliminaries and margins[SP1]
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. 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 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.
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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