“If I could demolish two words from our industry language, it would be ‘that’s market.’”
So declared Alison Mirams, chief executive officer of Roberts Co, in her keynote address at a Property Council of Australia breakfast held in Melbourne on April 28.
Mirams is CEO of Roberts Co – a Sydney based tier one construction company which was founded in 2017 to not only succeed commercially but to help drive better practices and an improve operating culture across the construction industry. Operating across the commercial, multi-residential and public building sectors, Roberts Co recently took over five Melbourne based projects of collapsed builder Probuild.
In her quote above, Mirams was referring to a need for the industry to move away from contracts that require builders to work on the basis of unsustainable margins and to accept an allocation of risk beyond that which is reasonable or fair (more on this below).
Her address was given during a briefing about how developers, builders and others can address challenges that arise from rising costs on projects. Other panellists included Jason Lourensz, Acting Regional Manager, Developments Services (Southern Region) at commercial property development and funds management firm ISPT, Kate Frear, Director, Woods Bagot and Andrew Pitney, Partner at Maddocks. The session was hosted by Andrew Lowcock, Victoria Deputy Executive Director, Property Council of Australia.
The briefing came as the construction sector both in Victoria and Australia-wide faces pressures including a shortage of materials and trades and spiralling costs for materials and labour.
In its latest report, the Australian Bureau of Statistics says that output prices for building construction rose by 2.9 percent during the March quarter and 10.1 percent for the year to March – the highest quarterly price increase in 25 years of ABS data.
On the cost side, the ABS says the average price paid for materials to build a detached home rose by 15.4 percent over the year to March. This has happened on account of average cost increases for steel and timber products of 42.1 percent and 20.6 percent respectively along with strong price increases for many other products (refer article in link above).
According to Mirams, the situation on the ground may be even more severe compared with what the above data suggests.
During her presentation, Mirams indicated that:
- Costs for reinforcement have increased 74 percent in one year from $1,10 per tonne to $2000 per tonne. Fixed wholesale prices are no longer offered. One recent quote was fixed to 4pm on the day it was issued.
- Having previously sat at around $2,000 to $3,000 per container, the price of shipping containers increased to $16,000 in December. There is talk about it hitting $20,000 per container.
- In electrical services, prices for copper cables and cable trays have risen by 60 percent and 50 percent over the past twelve months amid a shortage of stock. There is also a global shortage of chips required for the drivers for light fittings.
- Mechanical services contractors are reporting increases of 15 percent in materials for pipework and ductwork and a ten percent in freight costs.
- Amid increases in copper and freight costs, hydraulic services are reporting similar increases.
- Plasterboard subcontractors are reporting 25 to 30 percent increase in supply of studs and plasterboard over the past twelve months.
- PVC, timber and structural steel prices have increased on average around 30 percent. Roofing product prices increased 35 percent last year.
- Supplies will be further impacted by the war in Ukraine and current extreme lockdowns in China. A shortage of nickel due to Russian sanctions will increase the cost of stainless steel, increasing fuel prices will have a knock-on effect on shipping, haulage, delivery costs and diesel for site plant.
- Courtesy of constrained global supply, some materials are not available no matter what you want to pay for them.
Beyond the immediate situation, Mirams says the industry suffers from structural and cultural issues which compromise its long-term sustainability.
Regarding structural issues, Mirams talks of contractors being forced to accept net margins of five percent on projects. This often sinks to below three percent once overheads are added in.
At the same time, contractors are often asked to assume responsibility for liabilities which is beyond what is reasonable. Many times, Mirams says contractors are made to agree to contractual terms though which they need to provide 100 percent of the contract sum or worse if the project goes bad.
This, Marims says is not sustainable and has contributed to an industry average of 1,550 insolvencies per annum over the past nine years.
At any rate, contractual terms which pass excessive risk onto contractors may be limited in their effectiveness as a risk management tool for clients as clients remain exposed to project risk in cases where their builder becomes insolvent.
She says such practices have been common for some time.
“We have reached a point where contractor risk profile has ballooned to an unacceptable place – accepting risk and liabilities well beyond what Is reasonable or decent,” Mirams said.
“If I could demolish two words from our industry language it would be ‘that’s market’.. Just because the builder signed up to an aggressive term at some point in the past, does not mean it should become a standard part of how we work together…
“… By compelling contractors to take on all this additional risk, we are eroding margins and stifling innovation in our industry. We starve ourselves of the resources necessary to drive new initiatives and ideas.”
On the cultural issues referred to above, Mirams says there are ongoing problems with the industry’s lack of ability to attract and retain female staff along with its poor performance regarding workplace mental health.
On the former issue, the industry as of February this year employed approximately seven men for every woman on its books – a figure which has barely moved for decades.
On mental health, Mates in Construction says that around 190 construction workers throughout Australia take their own lives each year. This is more than six times the number which typically die from a workplace accident.
Part of the problem, Mirams says, can be seen through long working hours and six day working week. Apart from serving as a barrier to greater gender diversity in the workforce, this limits worker time spent with families and impacts family life along with the ability of partners to also have a career.
What Must be Done?
In terms of what is either being done or needs to be done, panelists point to several areas.
1. Earlier Contractor Invovement and More Collaboration
Speaking of his experience at ISPT, Lourensz says the firm is now involving builders earlier in the process.
Ten years ago, he sad developers would work with cost planners and would delay thinking about going to tender until later. Often, agreement for leases would be signed with important tenants before the construction market had even been broached.
Now, ISPT is involving the builder in working together with the developer and cost planner to help determine the budget to which the firm is trying to design.
According to Lourensz, such an approach helps not only to establish a more accurate cost estimate and incorporate buildability considerations into design but also establishes a spirit of trust and cooperation from the project’s inception. This helps to ensure that all parties have a common understanding of project objectives from the outset and to resolve issues or concerns which arise during project delivery.
2. Fairer and More Collaborative Contracts
From a legal standpoint, Pitney says one promising development has been a more collaborative approach to contracting and more flexible contract terms.
He cautions, however, that this is being driven by commercial necessity more so than an outbreak of goodwill. Such approaches are also confined to limited areas such as supply chains.
Examples of such practices include:
- Tenders which allow for provisional rather than fixed pricing based on supply items. This amount is then firmed up either pre-contract or on placement of contract awards.
- Not including prices for supply items in tenders and instead enabling these to be priced with a margin when actual prices are known.
- Pricing being held open for shorter timeframes such as fourteen days rather than the common 60 or 90 days.
- Contracts where the risks associated with supply price escalation are shared between contractors and principals. This might see contractors, for example, wear the first fifteen percent of any escalation with the principal wearing the remainder.
- Substitution clauses which require principals and superintendents to give reasonable consideration to adopting alternative sourcing strategies – say, for example, to source timber from Italy rather than the Nordics – and to allow a variation of cost and time in the contract where the alternative strategy makes sense.
In her company’s own contracts, Mirams says Roberts Co has made a conscious decision to adopt fairer contracts with suppliers and subcontractors.
Contracts clearly state an intention on the part of Roberts Co as a builder to act in a manner which is fair and reasonable at all times and are based on fair risk allocation. Contracts are also clear and concise whilst the procurement process allows adequate time for provision of information.
As a result, Mirams says less money is spent on legal bills whilst contracts are executed more quickly and project team members spend more time and greater focus on delivering on projects.
3. Governments Must Lead
For fairer contracts to become the norm, panellists agreed that government act as a model client on public sector projects.
On this score, Frear applauds efforts from the New South Wales Government, who are encouraging their agencies adopt practices which are reasonable and fair in procurement.
4. Better Practices on Site
According to Mirams, significant productivity gains can be achieved through better on-site practices.
Under typical practices, half a day might be lost by plasterboard contractors needing to come to site and confirm that indeed the plumber has correctly roughed in ready for the plasterer’s firm to plaster before sending their workers in the following day.
Using software and live dashboarding, by contrast, plastering contractors can confirm this virtually and send in workers straight away.
In another example, Mirams says Probuild on its Victorian jobs derived significant gains from operating under a ‘vertical warehouse’ mentality and organisation. This followed a visit from a Toyota representative, who described multi-storey construction as a ‘vertical warehouse’ similar to Toyota’s own horizonal warehouses.
Whereas ordinarily, contractors take and accept materials as they are pushed onto site by subcontractors, the company derived significant gains from adopting a lean construction mentality and instead accepting materials when they were needed.
5. More Documentation. Going to Tender Later
Whilst there is a strong push toward greater involvement of contractors and subcontractors in early design, Frear says more is being done to prepare a greater level of documentation and to define the scope more clearly before projects go to tender.
Whilst this may take time, it helps to promote greater confidence among prospective contractors, reduce the risk premium that contractors apply in their bids and establish greater trust among project team members as they set about delivery.
6. A Better Culture
In addition to the above, Mirams and Frear say industry needs to improve.
Last October, a draft culture standard released by a government and industry taskforce outlined expected behaviours in terms of worker wellbeing, time for life and promotion of workforce diversity. NSW and Victorian governments have indicated their intention to apply the standard across public sector projects in their respective states, Mirams says this should be the expectation on all projects.
In her own firm at Roberts Co, Mirams says the firm is now tendering on the basis of five-day workdays in New South Wales and is seeking to do likewise in Victoria.
On a recent project, Roberts Co worked the Australian Human Rights Institute at UNSW Sydney and Health Infrastructure New South Wales on a trial of a five-day week at two construction sites in New South Wales. The results indicated that a five-day working week delivered greater productivity, higher worker morale and improvements in workers’ family lives along with substantial benefits for their family members (more on this in a future article).
To attract and retain skilled people into the sector, Frear adds that greater working arrangement flexibility is needed along with adequate time for quality-of-life outside work.
She says many women have left the industry amid oppressive conditions and a highly combative environment.
7. More openness in budget/project objectives
Whilst many project owners remain secretive about budgets for fear of compromising their ability to achieve the lowest price from their preferred bidder, Lourensz says it project owners should be open and transparent about project objectives and budgets.
Optimal project outcomes are achieved where key stakeholders are able to design to an intended budget and are then willing to work in collaboration to deliver upon this.
8. A better mindset
Above all, panellists say a shift in mindset is needed away from an adversarial approach toward greater cooperation, fairer allocation of risk and achievement of mutually beneficial outcomes.
With principals wanting best possible outcomes and contractors wanting to deliver a high quality product whilst earning an adequate margin, there are opportunities for mutual alignment and positive working relationships, Pitney said.
Working Together for a Better Industry
Finally, Mirams says a better future is possible if all stakeholders commit to this.
“As an industry of clever problem solving people, I believe we can solve these problems and build ourselves new ways of working,” she said.
“We are making progress. But it can’t just be me. It can’t just be you. It must be all of us acting together.
“Then we can be part of something that we can all be incredibly proud of”