Australia’s construction industry is in bad shape and suffers from poor risk allocation and an adversarial culture, a new report has found.
Based on a literature review, survey responses and in-depth interviews, the research conducted by the University of Melbourne in conjunction with the Society of Construction Law Australia and Australian Construction Industry Forum (ACIF) uncovered problems in how major projects are planned and delivered.
Whilst around half (50 percent) of those surveyed were optimistic about the future, 55 percent did not believe that Australia’s construction industry was healthy and sustainable (see chart above).
Furthermore, the research found that challenges existed in terms of a complex subcontract system, excessive regulation, a less smooth way of delivering projects by internationals standards, unsustainable profit margins, poor approaches to contracting and risk and a lack of suitably experienced personnel.
Moreover, it suggests that poor attitudes, practices and behaviours were driving up costs during the tender phase by between 7.5 percent and 20 percent, during project contracting phase by between 7 percent and 20 percent and during the contract administration phase by between 4 percent and 19 percent.
According to the report, the most biggest problems involve poor risk allocation and an adversarial industry culture.
On the first issue, it notes that several areas of concern have been recurring themes throughout research and literature over several decades.
These include a lack of formal project risk assessment, risk not being allocated to the party which is best able to manage it, risk clauses being varied from those in standard form contracts and risks being transferred to contractors and consultants which were difficult for them to manage.
Many of these themes were borne out during the surveys and interviews conducted as part of the research.
These found that:
- Risk allocation is often determined by lawyers, who often fail to consult those who deliver the project or who understand the project and who often fail to participate in meaningful dialogue about risk allocation
- Many contractors fail to understand or adequately assess relevant project risks whilst many principals fail to scrutinise how risks are allocated or to challenge their lawyer’s approach toward risk allocation.
- Contractors often fail to adequately price risk in the hope that these will either not manifest themselves or believe that they can ‘work the contract’ to improve their financial position.
- Government clients – often driven by Treasury – tend to strive for a ‘not to exceed price’ which drives an attitude of transferring as much risk as possible to contractors or consultants irrespective of who is best positioned to manage the risk.
- Tough risk allocation can add between 15 percent and 50 percent to project cost (according to various estimates) whereas a more balance allocation of risk in relation to subcontracts could deliver a five percent reduction of costs.
- Contracts issued by Standards Australia are outdated and onerous whereas NEC contracts and GC21 contracts adopt a more balanced approach to risk allocation.
- Risks which are most challenging and problematic involve those relating to subsurface risks/latent conditions, environmental risks, interface risks and uncapped liability.
- Clauses which are most often amended or added, by contrast, include those relating to design, liability limitation, damages relating to delays (including liquidated damages), workplace health and safety and programming.
The report also found challenges associated with an adversarial industry culture – a problem those interviewed say has plagued the industry for decades.
This is particularly prevalent in the public sector, where some public servants believe an adversarial approach is the only way to protect the public purse.
The culture in Australia, participants say, is often worse compared with that in other countries.
One consequence is that contracts are often pushed onto contractors and are not delivered under a collaborative approach.
Encouragingly, some are moving toward a better way of working.
Many project managers, those interviewed say, are not ‘head kickers’ but rather like to work in a collaborative manner.
Whilst attitudes of many tier one builders remained problematic, meanwhile, culture and practices are often better among second tier builders.
Professor John Sharkey AM, a commercial lawyer and Professorial Fellow at the University of Melbourne and co-author of the report, said the importance of Australia’s construction industry should not be underestimated.
“The construction industry in Australia generates over $360 billion in revenue, producing around nine per cent of Australia’s Gross Domestic Product,” Sharkey said.
“In 2019, over 1.15 million people were employed in the construction industry – that’s nine per cent of the Australian workforce. Governments at all levels spend a significant amount on construction and infrastructure and this amount is increasing.
“Given this landscape, it is appropriate to pause and consider the health of the Australian construction industry, particularly given the important role the industry will likely have for Australia’s economic recovery from the COVID-19 pandemic.”
Melbourne Law School Enterprise Fellow and co-lead author Mr Phillip Greenham said better practices would benefit both the industry itself and the community.
“Reducing the cost of construction can generate very significant benefits for the community, particularly in a time of high levels of government spending on construction and infrastructure,” he said.