Are Profits Killing Innovation? 2

Wednesday, September 21st, 2016
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In any industry, carefully targeted investment in research and innovation represents a critical aspect of staying ahead of the game.

In Australia’s construction sector, however, there are worrying indications that the level of investment which is being redirected back into innovation is insufficient in terms of moving the industry forward.

In 2013/14 – the most recent year for which data is available – ABS figures indicate that the sector spent $864.103 million on ‘research and experimental development.’ Based on this number, overall levels of spending which the sector engaged in amounted to just 0.69 per cent of its economic contribution as measured on a gross value added basis (turnover less inputs) – above the retail sector (0.35 per cent) but well below sectors such as manufacturing (4.8 per cent), mining (2.1 per cent), transport and warehousing (1.58 per cent), wholesale trade (1.5 per cent) and even slightly below agriculture (0.8 per cent).

What’s more, efforts in this area seem to be tapering off. Between 2008/09 and 2013/14, the overall level of spending on research and development dropped from $934.668 million to $864.103 million, or from 0.91 percent of industry gross value added to just 0.69 per cent.

Take out the effect of a surge in heavy industry investment associated with the mining boom and the picture looks starker. Whereas the dollar value spent on R&D in the ‘Building Construction’ sector came in at between $379 million and $433 million between 2008/09 and 2010/11, that figure dropped to $285 million in 2011/12 and just $190 million in 2013/14. The ABS did not give data for 2012/13. Similar trends can be observed in the amount of money being spent on research and development in ‘construction services’, which at $130 million in 2013/14 was at its lowest level in six years.

All this prompts questions about whether or not the sector is reinvesting sufficient proportions of the turnover and profits it is generating back into the type of activities which will spur innovation and productivity going forward. Further questions can be asked about roadblocks to greater research investment as well as how the sector can lift its game in this area.

At the outset, it should be acknowledged that the above data may not capture the full picture of what is going on. Research performed by the likes of BlueScope or Bentley falls under sectors such as manufacturing and technology rather than construction from an ABS perspective. As a result, it is not captured in the data above even though the benefits of such research clearly flow through into the building sector.

Nor does the data capture any informal efforts firms make which improve productivity but are not recognised as R&D expenditure in a formal sense. Finally, courtesy of differences in methodologies used between statistical agencies, international comparisons in this area are extremely difficult. Caution should thus be exercised in using the aforementioned numbers for any form of benchmark or comparison of the performance of the sector in Australia with its international peers in this area.

Be that as it may, commentators agree that the sector needs to lift its game. Whilst cautioning that the data does not take into account innovation which takes place in other sectors but which benefits the building sector, Sustainable Built Environment National Research Centre (SBENRC) chief executive officer Dr Keith Hampson says Australian industry in general is somewhat behind international peers with respect to our efforts in this area. He added that concerns remain within the construction sector specifically with regard to cultural attitudes toward research and development and government leadership. Australia, he says, could learn from leading countries in Asia and the Nordic region, where industry and researchers engage in long term collaborative efforts in targeted areas.

“I think that is the case and it is disappointing to see this figure falling,” Hampson said, asked if the above data suggested that the building industry was being left behind in its efforts in this area.

According to Hampson, there are a number of barriers to greater research and innovation effort in Australia’s construction sector. First, whilst industry efforts through national innovation forums such as SBENRC and its predecessor in the CRC for Construction Innovation have been a step in the right direction, government leadership and buy-in remains critical. That raises challenges as processes of coordinating efforts through the various levels of government across the country can be problematic, Hampson says.

Additional barriers to innovation can occur at the client level. In infrastructure, for example, public sector clients often value certainty and can be reluctant to embrace new approaches or design/construction solutions, he says.

Contractual structures, too, can be problematic. With the majority of gains from innovation needing to be planned at the front-end design stage, any contracts which deal with the construction phase or asset management only can inhibit the ability of contractors to suggest innovative design strategies which would need to have been incorporated into front-end decision making.

Other commentators offer different perspectives. Professor Vernon Ireland, director of Project Management at the University of Adelaide and former president of the Sydney division of Engineers Australia, said different regulations across states makes it difficult for national companies to roll out better solutions across jurisdictions in a uniform manner – a phenomenon which made investment in some forms of R& D more difficult to justify.


Beyond this, Ireland says Australia as a whole suffers from an attitude of complacency. Pointing to recent media reports about the amount which those involved in the construction sector can earn (a recent News Ltd article suggested that tradespeople can earn up to $150,000 per year, for instance, whilst annual payments to some chief executives rise up to tens of millions), Ireland says an example of how this plays out can be seen through significant amounts of wastage in terms of areas such as excessive wages or salaries which are not necessarily tied to improving performance.

Ireland cited Singapore as an example of a country outpacing Australia. Singapore’s Economic Development Board earlier this year unveiled a SG$19 billion (AU$18.528 billion) program of research and investment in science and technology over five years. That country’s economy has come from nothing to overtake Australia despite having no mining or agriculture.

“I’ve always had the view that Australia was too self-satisfied,” Ireland said, stressing that he was referring to government as well as industry.

“Originally, there was the wool industry, then wheat and other agriculture and then there was mining over the last decade. I think many Australians don’t feel they need to try very hard.”

Construction industry advisor David Chandler says the sector suffers from serious shortfalls in R&D. To remain competitive, Chandler says enterprises should be spending at least one per cent of their turnover on genuine research activities. By that score, the industry is falling well short. Actual R&D spending as a percentage of industry ‘turnover’ currently sits at around 0.3 per cent; the aforementioned 0.69 per cent figure refers R&D against industry ‘gross value add’, which is basically the industry’s turnover less the value of its inputs.

Chandler also cautions about using the ABS figures as a guide, stressing that they are based upon what is being claimed as tax deductions for research and development and may include some ‘pretty light cases’ in the event of a tax audit.

Chandler says a large number of businesses within the construction sector are poorly capitalised, and that a recent survey which he conducted demonstrated that around seven in 10 of the companies which had been around for a decade or longer were still reliant upon leveraging the family home for capital. More fundamentally, he says many companies lack a basic underlying understanding of who their customer is and what problems they are attempting to solve and thus were not engaging in ‘strategy driven’ R&D or business planning.


In terms of what needs to be done, Hampson says the private sector takes leadership from the government, who should seek to drive industry innovation through performance-based procurement practices. Infrastructure-based public sector clients, for example, could set an expectation through contracting that greater efficiencies or better quality would be delivered as various stages of long term projects progress.

Public housing agencies, meanwhile, could demand increasing efficiencies/quality over various stages of housing works programs. Greater collaboration between various parts of the government, the industry and academia could also help.

Ireland, meanwhile, wants greater consistency in regulations across jurisdictions, whilst Chandler says the industry needs clear benchmarks by which to measure and improve performance and a better understanding of end client needs as well as a greater commitment to quality outcomes.

The construction sector in Australia appears to be behind in its efforts regarding innovation and investment in research and development.

To address this, clear and proactive strategies will be needed.

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  1. RB

    Innovation in the construction industry is killed by slavish adherence to outdated, irrelavent codes, timid, worthless building certification schemes and players, and worthless certificates issued by contractors. All of this is cleaned up by (at least in the Strata Industry), teams of experts, lawyers and consultants who argue endlessly over minutiae, add no value to the industry, and in the end serve no purpose in protecting the end users of such buildings.

    So it is hardly surprising that no one will attempt to "think outside the box" to progress the industry forward, when all existing players simply seek to drag it back down to the lowest common denominator.

  2. David Kuhnert

    Another Great Article , I agree not enough is put back into the construction industry to make things better . All building standards are what you can just get away with & cheap . Lift the Standards . As a 69 yr builder who has been manufacturing innovative building product & Methods for the last 10 yrs with out government help . I will not lower my standards to be in line with the Australian Standards . LIFT the standards . RB you are spot on , Don`t let the status quo hold you down . Regards