Contractors desperate to secure projects in a tightening construction market are lowering tender prices in the face of rapidly escalating material prices.

Research by national property and construction consultants Davis Langdon shows that the market is in a quandry that could lead to unsustainable contracts being let on some major projects.

Davis Langdon's managing director Mark Beattie said nervousness associated with the international economy along with the fallout of the credit crunch, have seen finance harder and more expensive to obtain.

"Industry participants have identified that this is impacting on the speculative commercial development sector locally, with some projects entering a holding pattern - deferred, delayed or otherwise on hold in the non-resource states," he said.

"There is also an identifiable two-speed economy actively influencing the construction industry within Australia.

"Resource-rich states have outperformed all expectations, but as mining giants start to retrench and retreat from some regions, we would expect that this too will change.

"The construction industry is experiencing a strange situation where in some sectors and states, specialist trades are unaffected by the economic concerns of international markets and have a strong workload going forward enabling them to be selective of their tendering.

"This in turn is promoting higher tender prices in these niche sectors as competition isn't as fierce.

"At the same time, a slowing market is emerging - particularly in the commercial sector - resulting in more competition and lower tender prices as the market responds to the need to secure long term workloads, largely as a risk mitigation strategy should the market take a further turn for the worse."

Davis Langdon's research found that during August, the hottest issue among the construction industry participants surveyed was significant material price escalation.

The most significant material escalations has been steel, with steel products associated with construction projects increasing on average by 60 per cent during the past 12 months.

The price of plastic has increased by 72 per cent during 2008 due to the compound effect of higher oil prices and diminished supply.

The price of copper doubled over a six month period from January 2006 and has remained volatile since, which has sustained higher prices particularly for electrical trades but also in equipment incorporated in mechanical services.

The considerable risk involved in the market is forcing sub-contractors in some key trades to factor cost escalations into their pricing, with a subsequent flow-on effect to the main contractors and tenders generally.

Environmental sustainability, wage pressures and skills shortages are contributing to price escalation.

This is compounded by the exodus of professional property and construction employees overseas where more competitive wages are offered, and an element of 'outsourcing by necessity' has crept up on the industry.

Mr Beattie said market volatility and the credit crisis has added a new risk dimension for industry consideration.

"We think there may be an element of opportunistic pricing contributing to escalation to counteract the largely unknown degree to which all of the above volatile issues may impact on contractors," he said.

"While the Government sector continues to feed work into the market, the recent credit crunch experienced overseas has had some impact on the markets here and has seen a softening in the commercial market sectors.

"This has led to projects with a duration of 18 months plus being viewed in a competitive way, with contractors keen to have these projects 'on the books' in a market perceived by some on the tipping point."

Several of the larger building services contractors surveyed indicated tender price increases of around 6.5-10 per cent over the past six months with all expecting similar growth over the coming six months.

Davis Langdon also conducted in-depth research interviews with leading sub-contractors during August 2008 who indicated a number of factors influencing their operation.

These included price escalation, forward workload, wage pressures, skills shortages, reduced competition and tender pricing.

"In isolation, each of these issues represents a significant challenge. However, in the current market the compounding of these issues is contributing to an unprecedented situation for both sub-contractors and major contractors," said Mr Beattie.