Increase demand for materials and labour results in building blow out.

While many may assume the $770 million building blow out over the past year may be because of mismanagement or waste, the reason is a lot more innocent, writes Tom Minear.

The building costs on Victoria’s big projects have blown out by more than $770 million, due the rising demand and cost of materials.

Daniel Andrews talks a lot about not wasting a moment in government.

And with $107 billion worth of projects on the go, the Premier is also walking the walk.

The unprecedented building boom is at the heart of Labor’s political success in Victoria over the last five years.

But by keeping the pedal to the metal for so long, the Andrews Government might start to run out of gas.

As the Herald Sun reveals today, construction costs on major projects have blown out by $770 million in the last year.

The costs of projects, such as the Metro Tunnel, has increased over the past year.

This isn’t necessarily because of project mismanagement or waste. Instead, the cracking pace set by the government has fundamentally skewed the construction market.

As demand has soared, so has the price for building materials like concrete and steel. Labour costs are also increasing because there are only so many skilled workers to man every worksite.

With lots of major projects taking years to build, industry figures say the prices locked in when tenders were signed are now not enough to cover their costs.

With another three years still needed to complete the West Gate Tunnel project, the cost is likely to continue rising. Picture: Jake Nowakowski

The M80 Ring Road upgrade shows just how quickly the market has shifted.

Three years ago, Infrastructure Australia estimated it would cost $233.7 million to add 4km of extra lanes between Sydney Rd and Edgars Rd.

The contract was finally signed last month — for a whopping $518 million.

While the government is helping to expand quarries and train more workers, experts expect these cost pressures will only get worse.

There’s still another three years of work on the West Gate Tunnel and six years to go on the Metro Tunnel, and the North East Link, the airport rail link and the Suburban Rail Loop haven’t even started.

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It’s no wonder senior Labor figures are starting to fret about the state of the Budget.

Stamp duty receipts have improved through the spring auction season, but sales volumes remain 21 per cent down on the five-year average to 2017.

Consumer sentiment and retail spending indicators are dire, which Treasurer Tim Pallas is worried will dint the state’s GST revenue cashflow.

Ultimately, spending on infrastructure is one of the few tools in a state government’s arsenal to invigorate the economy — and now that is hampered by exorbitant project costs.

Victoria is supposed to be $1 billion in the black this year. It’ll take some clever maths and more than a little bit of luck to maintain that in next month’s mid-year Budget update.