What’s the Biggest Risk in Construction Today? 7

Monday, September 12th, 2016
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No matter who you talk to in the construction value chain, there will be a different view of construction risk and who should bear it.

Of course the ability to bear risk will be determined by who the client is, the scale of the project, its complexity, the unknowns and the usual suspects of time plus quality plus cost.

The allocation of construction risk, and the duties of one party to another have evolved over time. Most construction is procured these days using variations of standard form contracts. These seem to be more littered with interparty defences than a client should get.

A very impressive Chinese PhD candidate who is in Australia to research ways to optimise the processes of off-site and onsite construction inputs shared some insight with me. He has started his work by acknowledging that in a modern digital and industrialised era, the construction industry’s traditional ‘passive, accept, exploit’ experiences as pertains to clients must be transformed.

This conversation canvasses the sustainability of risk mitigation continuing to be seen primarily through the lens of the vendors of the services and parts of construction, and not being redefined by new industry leaders who have the authenticity to underwrite the sum of the parts and their performance.

There is also the issue of clients – and indeed the public – not being able to continue relying on the fitness for purpose of construction and its certifications as the industry navigates rapidly changing technologies, fabrication, assembly methods and sources of its parts.

When all is said and done, the basic tenet of a construction contract is that buildings should be delivered in full, on time and for the contracted price. There is no one group more reliant on this holding out than residential customers in both the traditional detached housing market and the ever-growing multi-unit market.

These customers are the least expert in construction and in many ways the most vulnerable to its shortfalls. They pledge their life savings and they are the life blood of an industry sector that will turnover more than $66 billion this year and build in excess of 220,000 new dwellings. This volume is nearly twice the non-residential construction activity and approximately three quarters of engineering volumes. Traditional detached and attached housing volumes were equalled by multi-unit this year.

The construction industry would do well to remember that it asserts the know-how to build things that are fit for purpose and able to perform for their expected life. This is the core value proposition the construction industry offers. Most buildings are expected to perform for 50 years or more with only minor attention to their basic fabric. They should be adaptable and relatively easy to refurbish. Construction’s value proposition seems a bit shallow if the key driver of behaviour is a 12-month defects liability period and whatever minimum statutory period applies in the various jurisdictions that set these obligations.

When rethinking where in-full construction performance may need to go, residential building contracts seem as good a place as any to start. In-full should mean that the sum of all the parts of a residential build should add to the whole. This is often not the case.

For example, customers may be handed specific product warranties for materials and goods that have been incorporated into their homes. Unsuspecting customers will not anticipate the conditionality of those warranties. Most will be for materials and may be subject to strict installation requirements that if not met, render the warranty void.

But there are a growing range of construction components that may put whole construction assemblies at warranty risk. These assemblies may involve pre-built items such as bathroom pods or whole dwelling modules built off-site and increasingly off-shore. Here our legislators are fast losing the ability to influence because of the multi-jurisdictional mix of these inputs.

The changing nature of construction design, procurement, fabrication and assembly are throwing up new customer risks that have not yet been experienced or stress tested. The source of many of these new risks come from the slowness of standards agencies to keep up. Most have been downsized or sold to the private sector in response to industry calls to reduce red tape and compliance costs.

Many of construction’s new assemblies are at best only able to claim deemed to comply with minimum standards in the first place. Most off-site fabricators and assemblers prefer to be nominated by first specifiers or developers who want to direct deal with these vendor inputs. Often, the constructor of record has little choice in accepting these inputs which subsequently pose on-site sequencing, co-ordination and assurance challenges. One only has to stand job-side for a while to see how the claimed benefits of smarter, better quality, faster and more productive play out.

In all cases, the vendors of these components will have carefully wrapped their warranty obligations. Most do not see a line of accountability to the end customer. Construction’s traditional fractious dealings have created an embedded creed of ‘let the buyer beware’ even if the buyer has no obligation or reasonable ability to see the shortcomings of these arrangements.

Two Australian state governments in particular are herding consumers into new construction methodologies that in my view tick the minimum standard boxes in their efforts to be seen doing something about new jobs and start-up industries. These are not the building blocks of modern construction and public confidence. It is little wonder that construction financiers are slow to embrace off-site payments for these inputs until more convincing underwrite arrangements are in place. In the residential context, its customers and their mortgage providers that get left with fitness for purpose and performance risks.

If only five per cent of residential new builds are infected with the sorts of issues described here, then a deferred problem for consumers and governments could be running up a tab of over $3 billion per year. This would make NSW’s and the ACT’s Mr Fluffy loose-fill asbestos, and New Zealand’s leaky buildings problems pale in comparison. There are early warning signs.

Construction worldwide is undergoing massive transformation thanks to new materials, fabrication and assembly methods and a vast array of supporting technologies ranging from BIM to DfMA and business apps which now wrap around the multitude of transactions that make up modern construction projects. Add to these wraparounds the impact of the ‘internet of things’ as products become services and consumers benchmark what one industry service level offers in comparison to another.

In many ways, construction is lagging in developing modern ways of dealing with these dynamics. It will soon be forced to rewrite the traditional construction risk book. What happens, for example, when every piece of construction has its own digital fingerprint that stays with it from manufacture, delivery, assembly, commissioning, a life time of service and eventually adaptation or recycling?

Dean Strombom’s book The Commercial Real Estate Revolution cites a momentous shift challenging old industrial models that have served construction well for centuries, and now face calamitous post-industrial stresses. Strombom says “these are becoming increasingly unworkable in our networked world.” But he is positive, suggesting that the building industry may present the best case for how the 21st century can work, with its potential for productive collaborations between designers, developers, construction companies, subcontractors and others to unite hitherto adversarial interests around a common goal.

The Commercial Real Estate Revolution does not leave a lot to the imagination for those who want to continue resisting change and or fail to see the future through a customer lens.

Strombom is not the only one to see this coming. McKinsey’s latest insight into the future of customer experiences is instructive, and there is more in Finith Jernigan’s Big BIM – little bim.

Lawyers have had a field day sorting out issues that should have been avoided in the first place or resolved long before their expensive day in court.  But I do not blame lawyers; in the end the central parties to a construction contract are the client and the contractor of record. I use contractor of record in a pejorative sense as the nature of traditional constructors is changing.

Strombom cites companies grappling with decreasing profit margins and looking at expanding their services to provide greater value to clients and greater control over their fate. He reports that “construction firms are adding architects, architects are expanding into construction services, brokers are adding project and facility management services, and still others are creating one-stop-shop capabilities,” adding that “when the lines blur like this, it is a sure sign of more fundamental shifts taking place.”

I can see evidence of these trends amongst a few ‘first movers’ in Australia today.

James L. Salmon, president of Collaborative Construction Resources, is another thought leader in this space. Salmon makes the call that a collaborative revolution is sweeping the construction industry. CCR works with construction stakeholders to take advantage of the transformative effects of the collaborative contracts that are taking hold of the industry. Salmon’s stakeholders include owners, designers, contractors, subcontractors and sureties.

And in the UK, prebuilt construction collaboration Build-Off-Site is at the forefront of negotiations with lead underwriters and financial institutions to deliver their members the ability to assure customers that in-full construction performance across vendors is now real.

So what should tomorrow’s customer expect from a modern construction industry? An industrialised, digitised and global construction industry will need a new set of dealing arrangements between clients and their constructors of record, and those constructors and their value adding supply chains. But not all will be going on this journey. Those value adds will essentially centre on how the sum of the parts of construction can most efficiently and effectively be drawn together to deliver an uncompromising assurance to construction’s end customer that ‘in-full’ means just that. The leaders will set the pace.

The constructors who see the inevitable coming and make the first moves will set the bar for the rest. The higher they set the bar, the fewer who will be able to follow. If there are 25,000 residential builders of record in Australia today, I predict that fewer than 10,000 will survive to head this transaction interface with construction’s clients by 2026. This is positive news for the construction industry. There will soon be ways to leverage being the best and leaving the rest behind.

Certainly, a new level of construction organisation skills, qualifications and enterprise capabilities will be needed for those anticipating playing in this space. And the chaotic past will be just that: the past.

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  1. This is an awesome article, and I agree with most of what's been written. As a builder, it is becoming increasingly difficult to pick the right digital systems to help make everyone's life easier. Things r changing, and changing quickly – as they should, we are dinosaurs. Having said that, no matter how clever or digitised we are, our world hinges on our subcontractors and suppliers, and considering some of there can barely read or write, it shouldn't be the builders job to educate them-that's for tafes. I'm a builder, not an education facility

    Many thx for a gr8 article

    • Branko Mladichek

      I am a builder and can answer this one.Yes, there are subcontractors and suppliers out there that can barely read or write or understand English (builders too, how they became registered I will never know) but why do you bother with them? Is it not the lowest price? There are many really really good and professional subbies out there, why don't you select them? Higher price? You are the captain, you get all of the loot so don't complain if you are sailing with cheap crew.

  2. Mark Whitby

    Good article David… and obviously aimed at the larger projects. But there is a lot of risk associated with smaller projects where builders (like their home owner consumer clients) spend $3 Billion or more annually at present (just in Victoria), mainly because of poor workmanship.

    And one simple adjustment could reduce that risk enormously. I'll leave the more precise figures to you (being not in possession on the seldom publicised) number of dwellings and units built in Victoria (say), but let's assume that 50 000 is close to the mark. So 50 000 into $3 Billion equates to $60 000 risk per job… and nobody talks about this at all.

    Just by builders ensuring that they use experienced top quality supervision at critical times (which it seems to me would equate to about 40 hours per project), this risk could be cut by something like 85%, allowing for various anomalies including minor delays… because the defects will not be left in the works to be covered over by successive layers.

    • David Chandler

      Mark, thanks for the feedback.
      In fact this article is more about enterprises than projects.
      But I will be clearer in future. I am pointing to constructors with turnover of +$2.5m.
      I think the future for recalibrating the way construction is performed in a modern industry will be born in the T2, T3 and start-up sectors. In residential I am thinking enterprises from 10 to 100 dwellings per year are the the core. But only part.
      We are developing some 'modern construction enterprise' thinking picking up the main thematics you will read about in Sourceable at Western Sydney University. So your comments are very important to us and appreciated.

  3. Mervyn Sher

    The biggest risk on any project remains in the QTC triangle, which when brought together give you project delivery.
    It all comes down to management, or lack thereof. Weak regulators, confusing legislation, rabid lawyers and suspect business values all contribute to increasing the risk, sadly none of the above provide any solution to mitigating and managing the risk.

  4. Anne Paten

    David an excellent article. Your comment that "the construction industry’s traditional ‘passive, accept, exploit’ experiences as pertains to clients must be transformed" is accurate. From the domestic and strata consumer perspective, this has become 'traditional'. But if we consider the 1950s-1970s, the culture was very different. I know because my father was in the building industry and I an active observer – skilled, dedication to high standards, quality and 'pride in good workmanship'. Alongside 'customer service', delivering to meet clients' needs and quoting a fair price! I can barely believe these statements! Now it seems we have moved to a parallel universe. You state that the "construction contract is that buildings should be delivered in full, on time and for the contracted price". Sadly, over decades this tenet has disappeared, especially in the last 10 yrs. Now we have around 50% of 'builders' and buildings which disregard compliance; all laws and 'rules'. You point out the building 'assertion, but this is not reflected as reality in so many 'approved buildings'. As for minimum standards – no! As for lasting 50 years – so many as built require demolition! As for 'warranties' – meaningless! And the Vic/NSW push to high-rise is but another disaster in every sense – the over-crowded cities, the lack of enforcement of any 'standards', the endemic hazardous materials/serious risks to safety and multiplier effect add up to a major catastrophe. Gone are killed trades people, with competence and commitment to excellence. Re lawyers, they are very much part of 'how' we came to be in this mess – framing the laws and biased 'system', unfair contracts, acting as 'regulators', and making money from a the current scheme.

  5. Tony

    Very well written article, David, thank you.
    It would seem that what is old is new again … facilitated by evolving information systems we have moved the full contractual cycle since the "No Dispute" roadshow of the early 90's and right back to the beginning. Indisputable fact is that the fundamental building materials are still the same, concrete, steel, and timber, only the location of processing of the materials into products has changed. As a student in the 70's we were implored to consider prefabrication as the answer to meeting expectations of the industry and it is only until recently that cost structures have made this feasible … that is the rising cost of fabrication in situ.
    So long as the slavish pursuit of cost reduction is pursued in "construction organisation skills, qualifications and enterprise capabilities' then the "chaotic past" will manifest itself as the chaotic future. The skills are there but the lowest common denominator is the status quo.