by Jon Davies, CEO Australian Constructors Association
Governments of all levels are currently relying on the construction industry to lead the economy forward, on the basis that every dollar spent on the construction of new infrastructure has a $3 kick on to the wider economy. But the industry being relied upon is not in great shape.
Construction companies account for almost 25 per cent of all business insolvencies in Australia. Productivity growth in the construction industry over the last 30 years lags other major industries by 25 per cent. Only 12 per cent of our workforce are women and this number declines to 2-3 per cent for blue collar workers. And most shockingly, our workers are six times more likely to die from suicide than a workplace incident.
If nothing is done to address these issues, we will struggle to attract and retain enough people to undertake the record pipeline of projects ahead of us.
Capability and capacity
In October, Infrastructure Australia released a report on this very issue. The report identified that major public infrastructure activity will double over the next three years, peaking at $52 billion in 2023, and employment in the infrastructure sector will need to grow from 183,000 people today to more than 288,000 in 2023.
These people will need to be drawn from right across industry, especially as in recent times, contractors have sought to mitigate increasing risk exposure by subcontracting works, and associated risks, to specialist and general works contractors.
We will not be able to solve this capacity problem, as we have in the past, by flying in people from overseas, as every major jurisdiction around the world is also spending big on infrastructure and so there will be huge international competition for resources.
We need to think differently!
How the industry works
Importantly, if we want to solve the critical issues facing the construction industry and deliver the record pipeline of projects, we need to first understand how the industry works.
The prevailing view of the construction industry is one of an industry that can be neatly divided up into sectors such as commercial buildings, civil infrastructure and residential. Contractors and designers operating in these sectors are defined as being Tier 1, Tier 2 or Tier 3, and supply chains, by definition, are viewed as simple linear relationships.
This view of the industry is outdated and unhelpful.
As an example, it has been suggested by some that one way to address the looming capacity problem is to break up large projects into smaller packages of work that can be undertaken by Tier 2 and Tier 3 contractors. This assumes there is some magical pool of resources waiting to be tapped into. As anyone who has tried to get some home renovation or repair works done recently will tell you, there are currently very few tradies sitting at home waiting for the phone to ring!
Whilst no definition has ever been agreed upon, the tier system has been used to describe different sizes of contractors and designers based largely on the revenue they generate. It does not take into account important things like whether the revenue generates profit, how much profit is invested in training and innovation, the diversity within the business and the resources/technical expertise that it can call upon.
Linear supply chain
It is also unhelpful to look at the relationship between a contractor and its subcontractors and suppliers as a linear supply chain, where work is broken down into progressively smaller components and delivered by companies that only operate in one sector (such as commercial building, housing or civil infrastructure) or for one type of client, such as government or private. Most companies that operate in the construction industry mitigate cyclical workload risk by operating in multiple sectors and for more than one type of client.
Back to my tradie example; it doesn’t matter if you are trying to fix the roof of your house, the roof of an office or install a roof on a new warehouse building, you will currently struggle to find someone to do this for you.
We also need to consider the influence of globalisation on our industry. Most people will be familiar with the concept of globalisation – the growing interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information.
The construction industry is not immune from the effects of globalisation. We import timber from North America, stone from Europe, steel from China and specialist skills from everywhere!
Less well-understood is the fact that we also import balance sheet capacity. Clients want the assurance that if construction risks are realised, the contractor will have the financial resources to be able to deal with them, or in the worst-case scenario, to absorb any losses associated with them and still be able to pay subcontractors and suppliers and to complete the project.
As projects get bigger, so do the risks associated with constructing them, and therefore the available capacity of a company’s balance sheet required to deal with them. Whilst some of this risk can be insured, the recent high incidence of insurance claims has increased premiums to levels that are uneconomic for most.
The financial capacity of the Australian market to undertake larger mega projects has not kept pace with demand, and has therefore resulted in the need to import capacity.
The construction industry is heavily interconnected. It is not easily capable of being broken down and categorised. Projects are built by many interrelated teams of people, specialist trades and suppliers that that operate across sectors and can be sourced from any part of the globe.
In short, the construction industry can be defined as a complex system. It is not capable of being broken down like a watch, where you can see all the parts and determine what causes what.
So, how do you fix problems with complex systems and improve how efficiently they operate? Thankfully, there is an emerging area of science that is focused on just this issue. It is called complex system theory.
In accordance with complex system theory, a complex system can be defined as a system of many parts without centralised control. All of these parts operate on different scales but in some way impact on each other either directly or indirectly. This high interdependence is the opposite of the linear relationships we currently think of in supply chains. In fact, in complex theory, they are referred to as nonlinear relationships.
Complex system theory explains that strong feedback loops in nonlinear systems can cause complex systems to adapt very quickly to small changes in the operating environment. We only have to look at how quickly the construction industry responded to the COVID pandemic to see that this is true.
High degree of connectivity
Complex systems also have a high degree of connectivity between the various parts. In fact, it is the connections that define the system, not the properties of the various parts.
It is therefore not surprising that we struggle to achieve positive outcomes using traditional contracts in an environment where every action has a knock-on effect, because a traditional contract presumes we can know everything in advance, plan for it and allocate all the risks effectively. Risk isn’t a linear concept, it is systemic. If we are delivering projects inside a complex system, we can’t manage that risk by allocating it to one party. Instead, we need to focus on how the system works and adopt strategies that drive better outcomes across the system.
Collaborative contract models provide a better structure in which to respond to a complex environment because they bring together more parts of the system, enable better contextual joint decision making and align the parties’ interests to look for and solve problems.
Enterprise models take this process a step further. An enterprise model brings together owners, partners, advisers and suppliers, working in more integrated and collaborative arrangements, underpinned by long-term relationships to deliver programmes of work over a defined period of time. Participating organisations are incentivised to deliver better outcomes.
The Melbourne Level Crossing Removal Programme is effectively using a simple enterprise model to undertake the various individual removal projects. Contractors and designers have been engaged using collaborative forms of contract and are incentivised to meet targets and deliver progressively better outcomes.
Project 13 takes this a step further. Developed by the Institute of Civil Engineers in the UK, the Project 13 procurement model seeks to define the key elements necessary for a successful enterprise model, including:
- A focus on long-term system performance and future operation
- Developing an ecosystem of partners and suppliers, with more integrated relationships, providing the opportunity for early engagement
- Reward based on value added to the overall outcomes, not on time or volume
- Risk allocation aligned with capability rather than transferred through tiers of the supply chain
This final component is particularly interesting, and involves an innovative risk management model where shares in the risk pool are treated like shares in a company, and are allocated on the basis of a party’s ability to influence outcomes, with stakeholders positively incentivised to deliver improved outcomes.
Here in Australia, Project 13 has been adopted by Sydney Water, and the model is being looked at with interest by other delivery agencies.
Given the high degree of connectivity in complex systems, it stands to reason that the performance of the system is dependent on the strength of these connections and how things like work, goods, information and money flow through the system. By separating design from construction and breaking projects down to hundreds of subcontracts, we impede the flow of knowledge from the suppliers to the front end of the project where value is created, adding costs and uncertainty at every stage of the way.
This is why a focus on flow is one of the key principles of lean construction.
Lean construction is a relationship-focused production management system that aims to eliminate waste from the entire construction process and deliver greater value to clients.
Lean construction also recognises the complexity of the construction industry and therefore the need to optimise the system as a whole, as a focus on improving the performance of one part of the system could have unintended negative consequences for other parts.
In the same way as happens in the natural world, complex systems undergo a process of evolution, which is unsurprising given that the natural world is in itself a complex system. In this environment only the fittest will survive, which may explain the adversarial nature of the construction industry and the high rate of construction company insolvencies.
So, is there anything that can be done to change this?
Procure based on best value for money
We currently operate in an environment where contracts are generally awarded to the contractor with the lowest price willing to accept the most risk. It is a short-sighted race to the bottom that is largely responsible for many of the issues that our industry currently faces and, history has shown, this focus on lowest upfront cost and risk transfer rarely delivers value to the asset owner. This is because it fails to take into account life cycle cost, local content or environmental impact. It doesn’t incentivise increased use of social and indigenous enterprise, innovation or improved productivity.
The Construction Industry Leadership Forum, a collaboration between the Australian Constructors Association and the NSW and Victorian public sectors, has set out to improve the effectiveness and value achieved through the procurement and delivery of government infrastructure programs. The forum is currently working on developing a framework that will help infrastructure clients better define and achieve value for money through the procurement process.
Given the volume of construction work procured by governments, delivery agencies are uniquely placed to act as model clients and to change the focus of the whole construction network from one fixated on staying alive by offsetting risk and litigating to recover losses, to one focused on delivering improved value throughout the network.
Improved packaging of projects
Another way in which government delivery agencies could make the network more sustainable is through improved packaging of projects.
An increasing proportion of economic infrastructure investment is being concentrated in high value ‘mega-projects’. This is particularly true for transport investment. These projects are not only very costly, but more complex and involve substantial underground works and multiple interfaces in congested brownfield locations. All this brings substantial additional risks that are then spread throughout the construction network.
Contrary to the views of some in industry, if projects, where possible, were to be broken down into smaller components, it would not directly address capacity constraints. In fact, in the short term, it would lead to increased resource requirements in government delivery agencies. What it would do, though, is reduce risk for the construction network, and allow for an increased focus on innovation and efficiency, which in turn would reduce demand for resources over time.
Adoption of Culture Standard
Finally, another area where the government could drive improvement is by addressing the poor culture that exists within the construction network.
According to BIS Oxford Economics in its recent report, The Cost of Doing Nothing, the construction industry’s poor culture is estimated to be costing the economy over $8 billion every year.
If not addressed, it could further impact our ability to attract and retain the workers required to construct the pipeline of work ahead of us. In their report, The Great Resignation, PWC identified that the COVID pandemic has caused the population to reflect and reconsider what is important in life, and that 38 per cent of the workforce is looking to leave their current employer in the next 12 months. They identified that after remuneration, the most important consideration for workers is improved wellbeing, an area in which the construction network does not have a good track record.
This is why, expanding on the important work of the Construction Industry Leadership Forum, the Australian Constructors Association has partnered with the governments of NSW and Victoria in the Construction Industry Culture Taskforce.
Guided by academic research, the Construction Industry Culture Taskforce has developed a ground-breaking industry Culture Standard to improve industry culture by detailing measures that, if adopted, will improve time for life, wellbeing, diversity and inclusion. The measures include diversity targets, adoption of flexible work hours and implementation of wellbeing programs. Governments will be called upon to incorporate compliance with the Culture Standard into their standard procurement requirements and adopt the measures themselves.
Whilst there is much that the government can and must do to improve the sustainability and performance of the construction network, there is much that other parts of the network can do themselves.
For its part, the Australian Constructors Association is committed to working with government and industry to shift the dial and set the industry on a more sustainable path. We identified that that there are three key pillars for a sustainable construction industry which I have already largely discussed. These are:
- improved industry culture
- equitable and aligned commercial frameworks and
- sufficient capability, capacity and skills
In 2020, we published ten commitments to change that are aligned to these three pillars. The commitments are:
- Increasing collaboration with clients and industry partners
- Maximising the social and economic benefits of construction
- Building a social licence to operate
- Improving industry diversity
- Improving the health and wellbeing of our workers
- Building capability and capacity
- Reducing our impact on the environment
- Encouraging innovation and improve productivity
- Striving for improve industrial relations
Recognising the importance of the construction network, the final commitment was to improve outcomes for all project stakeholders.
In releasing these commitments, the key message to all industry stakeholders is that we all have a role to play, and we all need to work together. We’ve proven we can do this and the work underway by the Construction Industry Leadership Forum and Construction Industry Culture Taskforce are evidence of this. but more needs to be done.
The construction industry has been presented with an enormous opportunity. We’ve been called upon the lead the nation’s economic recovery. But we are faced with challenges that could seriously impact on our ability to do this.
In order to address these challenges, we need to shift our thinking of how the construction industry works, from an industry made up of defined sectors, tiers and linear supply chains to a highly connected, complex network of suppliers, trades, designers, contractors and clients.
Capability and capacity constraints represent a real risk to the delivery of the record pipeline, but seeking to reallocate work from undefined tier to another is not the answer. We need to take a more collaborative approach to delivering projects that focuses on improving productivity and delivering best value, not lowest cost.
We need to adopt a culture standard to attract back into the industry the half the working population that currently considers it a less than desirable place to work —women. We need to improve the wellbeing of our workforce so that our existing workforce sees the industry as an attractive place to continue their career. We need to adopt enterprise delivery models, like Project 13, that incentivise the construction network to innovate and continuously improve. But these actions require a joint government and industry response and leadership from the Federal Government.
We all have a part to play in achieving change. You can join the conversation by connecting with the Australian Constructors Association through LinkedIn and visiting our website www.constructors.com.au. We have no time to waste — the time for action is now!