By Jon Davies, CEO, Australian Constructors Association

It seems that Clough’s administrators have quickly learned construction’s dirty little secret: the commercial model for major construction projects is broken and not benefitting anybody, least of all the industry itself.The nature of construction is that contractors and subcontractors price projects months before actual costs are known. They are given only a few months to quantify complex risks on multi-billion-dollar projects and unsurprisingly, despite their best efforts, there is often a difference between the initial budget and the actual cost. In the current inflation environment, that difference can be huge.

Who do you think wears this cost escalation? By default, it’s the contractor. Now you might expect contractors to simply build some ‘fat’ into their budgets to account for possible price rises. You’d be right, but here’s the rub. At the tender box, clients still focus obsessively on one criteria –lowest price. This sets up a perverse incentive for contractors to build in as little fat as possible to keep their bid as low as possible and give themselves the best chance of winning.

In effect, the winning bid is the one willing to take the biggest gamble on the risk outcome. At any point in the cycle, there is always someone willing to take a less-than-prudent risk. So we get a race to the bottom, non-existent profit margins, and an adversarial approach to contract management.

No wonder construction firms account for 26 per cent of administrations on a share of only 17 per cent of all businesses. No wonder that construction productivity is worse now than it was thirty years ago. It’s a brutish game of survival when it should be about producing the best possible infrastructure for the taxpayer.

Based on productivity alone, neoliberalism in the construction sector has failed. The abolition of minimum fee scales for construction professional services only served to commoditise and cheapen highly specialist skills. A focus on lowest cost at the tender box has increased insolvency levels to record highs and reduced competition at all levels in the industry.

In his recent essay the Treasurer noted, “To measure what matters is also to recognise a growing consensus from economists and investors that our economies need to embed and express more than one notion of value.”

This is no truer than in the construction industry. It’s time for the government to disrupt the ‘lowest price’ paradigm and shift the focus to ‘best value’ outcomes. What is needed is a more collaborative commercial environment that removes unquantifiable risk as a source of competitive advantage.

But first, clients need to urgently work with contractors to address contracts on foot and help prevent further insolvencies that benefit nobody. Jason Tracy, one of the administrators responsible for rescuing Clough, summed it up well when he said, “You might contractually negotiate an engineering and procurement contract (EPC) and think you’re off-risk. But of course you’re totally on-risk if something goes wrong. Because who’s gonna come knocking on the door and ask you for money to keep the project going? That is what administrators have to do.”

And you can be assured that it will cost more and take longer via this route than if the client and contractor just worked together in the first instance, particularly in relation to allocation and management of risk.

Value for money to the taxpayer is more than just the lowest initial price for a project. It is this mentality, at all levels of government and in the private sector, that has driven the race to the bottom that sees the industry in such a poor state of health.

Australia’s built environment ambition gets bigger by the year. To meet it, we need a sustainable construction industry, and that means a fundamental shift to procuring based on best value not lowest initial cost at the tender box.

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  1. Tim 1 year ago

    Driving prices to rock bottom is endemic in Australian infrastructure projects. Price only focus seems also to prevail over vital quality standards. The perfect storm is completed by draconian supply contracts which seek only to ensure that no risk is born by the purchaser. The result is not only company failures but also the delivery of substandard projects which contain cheap, hidden defects. When major customers know the cost but not the value, our whole society and way of life are at risk.

  2. Mike 1 year ago

    I’ve been lucky (?) enough to have participated in this race to the bottom over the years while struggling to provide safe, reliable fit for purpose designs. Everyone says they want “quality” but in the end the $s win out not value. We had a brief period of working with clients open book in alliances & this worked well until management changes at the client & they needed to test the market. My other big gripe is the way the tender periods seem to keep getting shorter & project schedules more & more unrealistic. If marketing tell me one more time “it’s a good problem to have”, I may go postal…

  3. Dave 1 year ago

    It would be good to expand on this to explain to a wider audience why this hurts productivity in multiple ways. There is probably limited sympathy for the contractors, even within the industry, since the contractors tend to pass on these risks, as far as they can, to the sub-contractors, consultants, suppliers and basically anyone not a direct hire. Not only do failing contractors reduce competition, but this race to the bottom also undermines productivity investment.

    After all, it can be argued that reducing costs is increasing productivity. However reducing costs by hiding the reduced value and increased risk never ends well in the long run. Why employ someone experienced when a cheaper junior could stumble through it? We all know why, but this can be presented on the face of things to be reduced cost. At least up until it all goes pear shaped.

    Worse than this is that the race to the bottom means that there is little incentive to invest in increasing productivity over time. For example, there may be a better way to do something. This might require investing in software/product/training/machinery/tools/experts etc. But the return on the investment might not be realised within the first project. Or perhaps it might but we don’t have time in a tender to do that evaluation. There is little appetite to innovate because that introduces risk and cost with unproven outcomes initially.

    Basically spend money to make money. In the case of spending on productivity, this is a virtuous circle. It requires enough fat and incentive to make that spend – continously.

    One key feature that distinguishes wealthy productive countries from others is the ability to continuously innovate and invest in productivity.

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