Delivery under pressure as demand rises
Labour availability issues are intrinsic to the cost challenges the industry is facing. Skills shortages remain acute in many markets, with 73 percent of respondents pointing to a dearth of experienced life sciences construction contractors to meet demand in their region.
This shortage of labour reflects wider talent gaps across the life sciences sector at large; a recent survey by AON found that 71 percent of life sciences companies are looking to increase their labour force over the next 12 months, with one-third of them looking to increase headcount by more than 15 percent. These dynamics will continue to push labour costs upwards.
Data from our Life Sciences Benchmarking Club - a forum of major pharmaceutical companies, which shares data and best practices to improve project delivery - also reveals a significant increase in the cost of labour globally from last year to the present.
First-look data from our upcoming International Construction Markey Survey 2023 reveals that most regions have seen a general increase in labour costs over the last 12 months. North America remains the most expensive market for construction labour with the average wage sitting at $US70.00. Europe has placed second for most expensive construction labour, with the average general construction sector wage sitting at US$65.70.
In Asia, the majority of markets recorded a decline in construction wages, which is partly due to changes in the exchange rate and also due to cooling market conditions, with the average construction sector wage falling from US$16.35 to US$10.50. There are, however, two Asian markets where construction wages recorded a notable increase in the average hourly wage: Hong Kong, where the average construction wage increased by 18.4 percent, and Singapore, which recorded a 7.5% increase over the last 12 months.
However, labour dynamics are playing out differently across global markets. Investigation into labour rate variance indicates that more mature markets, such as those in Europe and the US, have seen a greater upward pressure versus emerging economies where labour rates remain comparatively lower.
Exacerbating the shortage of skills and rising costs of labour in hotspot markets are significant and growing pipelines of major projects that are being delivered over similar timeframes and looking to work with the same pool of experienced contractors.
In North America, we have seen an increase in the number of mega-scale manufacturing facilities – investments valued over $1 billion – not just in life sciences, but across data centres, logistics and wider industrials, with a strong uptick in battery giga factory projects in particular. Competition across sectors, as well as within life sciences, is further adding to the pressurised delivery environment.
Similarly in Asia, there are two mega-scale sites being built in Singapore alone, both on the same timeline between now and 2027. These programmes attract a large contingent of the workforce both domestically and from abroad, leading to a fight for the same resource pools.
However, the weight of the pipeline for the industry is focused on the delivery of medium-scale manufacturing projects – those between $100m and $500m – which still require significant capital investment and a robust major projects delivery framework to ensure their success.
Our Hive benchmark data set shows that on medium-scale projects, civil structural and architectural (CSA) scope – comprising substructure and special construction including cleanrooms, modules and interiors – can range from 16-36 percent of total direct cost (TDC*) of the project, with variances depending on the region. Although these ranges are evidently influenced by the total project scale as well as regional trends in construction costs, including material and labour shortages, they indicate a marked difference in cost levels between established and emerging markets.
*TDC is Total Direct Costs (includes: General Requirements, CSA, Building Services, Process Services, Process Equipment incl. Installation, Automation, other Equipment and Furnishings, excl. Site works and Benchtop equipment)
**CSA (Substructure, Shell, Special Construction incl. Cleanrooms, Interiors)
In Europe, CSA costs range from 19-36 percent of the total cost of the build – a higher range than other major markets globally. Europe has seen construction costs surge over the past three years, driven by supply chain and labour challenges as a result of the pandemic and, for the UK, the impacts of Brexit. In the past 12 months, supply chain strains have been exacerbated by the war in Ukraine, the impacts of which have been felt acutely across the continent.
However, such volatility has not yet put the brakes on investment. Europe has also continued to be a major focal point for life sciences construction activity with both domestic and international capital flows into key hubs. Similarly the US, despite cost escalation challenges, continues to dominate as the largest life sciences market globally.
In Asia, indicative total costs to deliver are comparatively lower when compared to other regions, with lower labour rates being a significant factor, although these vary across the region with Singapore and Hong Kong seeing more expensive labour rates than China, India and other developing economies. Singapore, China and India remain key manufacturing clusters in the region, and more research and development innovation hubs are emerging in Japan and South Korea.
With projects ramping up across the globe, the pressures of capacity and cost have led to a noticeable shift in two key areas:
1.
Towards a greater hunger for data and collaboration, allowing players in the industry to benchmark against the performance of their peers; and
2.
Towards diversification of contracting models with clients taking a more hands-on approach and a more balanced view of risk.
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