Who Ever Got Sacked for Employing a Blue Chip Constructor? 1

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Wednesday, May 6th, 2015
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The recent wage rises acquiesced to by Australia’s major contractors and developers must be the tipping point for a reappraisal of how construction contracts are awarded and performed.

Little public reporting has occurred of the 25 per cent-plus wage hikes achieved by the CFMEU for construction workers in EBAs over the next four years. The CFMEU claims justification for these raises because “many of their members have big mortgages and families.” That may be so, but it’s an insidious circle when not a single independently verifiable productivity benefit has been achieved.

This round of CFMEU pattern bargaining comes on top of at least two prior EBA periods that have driven up construction labour costs by at least twice the rate of inflation and more than any other sector of the economy. These wage movements have also provided the baseline momentum for an explosion in construction management salaries over the same period. Collectively they have industry wide implications and they are certainly not limited to the Sydney and Melbourne markets.

The recent De Martin & Gasparini EBA is a good case study. It even has a special provision for Sydney’s Barangaroo.  AE 413297 is worth reading as it’s pretty typical; some nice words about the purpose of the agreement, but not a quantifiable productivity trade-off. Another to look at is the AE 896830 on the Sunshine Coast University Hospital. It includes a site allowance of $7 per hour and it doesn’t stop there. This agreement applies across Queensland and the Northern Territory.

It’s amazing that the Reserve Bank Governor continues to describe the Sydney and Melbourne markets as the nation’s property hot spots without any reference to the blanket impact of construction wage agreements and their cost across the whole industry. These costs have a direct effect on rising infrastructure and house prices.

Just as amazing is the silence that reins from the federal government who when elected were going to sort out the CFMEU’s industrial anarchy and the industry’s falling productivity. Worse still is the convenient blind eye being shown by the Shorten opposition in the face of these out of control construction wages, mostly started under their watch.

Over the last 15 years, there has been a successful industry wide push by the major contractors for government to get out of the construction procurement business and to outsource their capital programs and major projects to them. The “them” in this case happens to be a small oligopoly of majors who have on the face of it the balance sheet and “construction know-how” to do it better. Better is hard to define, as details are often shielded by complex comparative formulas and defensive government processes which are held up to attest to the competitive tendering used to achieve value for money. There are no benchmarks or credible independent quantification of these assertions.

In fact there is a specialist consultancy industry dedicated to defending these processes. These consultants have developed a lucrative fee base by specialising in assuring governments they are on the right track. These consultants work for both government and proponents. They seem good at using their formulas to compare assumptions about the status quo, but not it seems for challenging these large constructors to demonstrate how they are driving improved productivity and a better deal for taxpayers.

Ever increasing construction costs are just added to the next project and passed on to the industry’s clients. There is evidence to suggest that avoidable costs in excess of 40 per cent are being incurred, but no-one seems to have the technical expertise to help turn this around.

Despite all of the hoopla that new project planning and integrated design tools such as BIM are being applied to make project procurement more efficient, there is little evidence of this on-site. One would expect to see on-site work methods and practices demonstrating a reduction in waste and inefficiency by their application, but this is not so. These practices over time become the industry norm.

Major contractors these days are not challenged to organise the efficient use of expensive on-site plant and equipment. In fact there are instances where subcontractors bring their own cranes and access equipment to site so they can avoid using the major contractor’s workforce. It’s hard to see a crane on a major project these days being optimally utilised. The same applies to temporary scaffolding and temporary external safety enclosure systems that are unnecessarily duplicated or simply fail to keep up with what should be their scheduled pace.

One thing major contractors are good at is passing on risk to their subcontractors and suppliers. These risks include, for example, the responsibility for completing unknown amounts of design and documentation co-ordination. These subcontractors have to make a guess about what the cost and impact might be to resolve these as they arise. They also have to guess what hasn’t been resolved for the other subcontractors they will meet on-site and the disruptions that will flow to them and others.

These subcontractors are put in a position where they are exposed to substantial damages if they miss a beat, yet if the major contractor has a problem such as a crane breaking down, then it’s supposed to be all hands on deck to mitigate possible disruption and delay costs.

And here is an interesting quirk: these contractors are expected to happily relocate their workforces to another job. Then a new set of tensions arise as workers on conditions that are applicable to a large job, or where the latest pattern EBA has not been agreed to on the job they have been sent are played out.

The current round of EBAs for a carpenter (CW3) will see their annual gross pay for a typical 6 day week rise from $148,481 in July 2015 to $179,034 in July 2019. In this case, the gross cost to the employer will rise to $237,924 by 2019 and assuming a 20 per cent contractor mark-up for normal overheads and profit, the cost to construction clients could reach $285,509 for a carpenter by the end of the current EBAs. This does not take into account site allowances which range from $1.70 to $8 per hour depending on the size of the project. Unchallenged, it’s the starting point for the next round of EBAs. It’s unsustainable for performing the same work they always have.

It’s not unusual for hundreds of workers on major construction sites to be sent home on full pay when construction conditions are inclement. Major constructors are not challenged to show how by better planning and re-organising construction sequences they could reduce these exposures and costs. The reality is that it’s just simpler to pass these onto construction clients and absorb them into project costs. But these costs just don’t go away, they drive up residential construction prices and rents for new offices and factories. They have a flow on effect across the whole economy. And they are causing construction’s clients to take on more debt or to absorb higher overheads because no-one ever gets sacked from employing a major contractor. That has to change, and it will.

Don’t expect the major contractors to take on the unions by demanding that measurable productivity outcomes be achieved as a precursor to the next round of pattern bargaining. Their first challenge will be that most have lost the construction “know how” that allowed them to rise to the top in the first place. How they will approach developing new construction methods and smarter procurement practices is anyone’s guess. How they will deal with the conflict of managing their share prices in volatile equities markets while the CFMEU pushes back on any change will be just as confounding.

So, where to from here? What will Tony Abbott and Bill Shorten do? How will governments that have lost their “informed buyer” expertise regather? How will the Reserve Bank Governor weigh in? Hopefully not by continuing to fuel the fire via already low interest rates that camouflages these challenges. And what useful role can the Senate play in forcing the government to develop a forward looking construction industry strategy to replace the ideologically driven ABCC legislation?

The forces for change would now seem to be swelling. There is widespread discontent with things as they are. History has proven that trying to tackle these problems on larger projects first will not work. Smaller, more dynamic builders will need to lead the way. While the major contractors may be able to adapt, it will be the more agile tier 2 and tier 3 contractors who are better suited for this charge. Of course, they too will need to have a clear and measurable set of productivity improvements mapped out.

Furthermore, as construction evolves in a global market place, our legislators will need to buy into a national approach to dealing with off-site, off-shore and a new wave of smart construction materials, components, sub-assemblies and modules that will redefine tomorrow’s industry.

The IBMs of the computer industry were not immune from these challenges in the 70s and 80s, and the computer industry has had learn to deal with new disruptive changes every year since. Back then, no one got sacked for buying IBM, but it’s a very different story today. Construction’s major contractors now find themselves in similar circumstances, and it will be possible to get sacked for not getting a better deal for construction’s customers because value for money will mean just that.

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  1. Sam

    Shades of the 1980's, David!