Construction cost escalation emerged as one of the biggest issues facing the construction industry last year and while good progress is being made to set the industry up for future projects, the here and now is still a major concern.
We’re calling for government and private sector clients alike to review their contracts and include a price adjustment mechanism for price changes outside the control of the contractor. The nation cannot afford for the construction industry to continue its current course. It’s a costly game for everyone. Administrators are learning 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 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.
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 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.
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.
See ACA’s interview with Ross Greenwood.
Australian Construction Achievement Award finalists
The Australian Constructors Association and Engineers Australia have announced that seven projects have been selected as finalists to compete for the prestigious 2023 Australian Construction Achievement Award (ACAA).
Now in its 26th year, the ACAA is the industry’s most prestigious award recognising the best construction projects, delivered by the nation’s very best construction companies. The award is one of the highest forms of recognition for a project because it not only recognises traditional construction excellence such as how physical problems were overcome, but also excellence in initiatives designed to make the industry a more efficient and better place to work. These projects have implemented digital tools and processes to improve productivity, training and development initiatives to equip workers with critical skills, flexible working environments to support workers’ mental and physical health—and much more. Australia’s construction industry will be stronger because of this.
The ACAA Finalists for 2023 are:
- Echuca-Moama Bridge Project – Stage 3 by McConnell Dowell Constructors (Aust) Pty Ltd and Major Road Projects Victoria
- Edithvale, Chelsea and Bonbeach Level Crossing Removal Project by Southern Program Alliance (ACCIONA Rail, WSP, Metro Trains Melbourne, and the Level Crossing Removal Project)
- M4-M5 Link Tunnels Project (WestConnex Stage 3A) by ACCIONA Samsung Bouygues Joint
- M80 Ring Road Upgrade Sydney Road to Edgars Road by CPB Contractors and Major Road Projects Victoria
- Parramatta Light Rail Stage 1 Infrastructure Contract by Parramatta Connect (CPB Contractors Downer EDI Works Joint Venture)
- Parramatta Square Precinct – 3, 4, 6&8 Parramatta Square & PHIVE Parramatta Square by Built
- Sydney Football Stadium Redevelopment by John Holland Group.
Join us for the winner presentation event at The Palladium at Crown Melbourne on Wednesday 3 May held in conjunction with the Future of Construction Summit.
Find out more.
New industry agreement to bolster construction engineering
ACA is excited to extend our partnership with Engineers Australia to boost development and expertise within the construction engineering sector. Through this collaboration we aim to strengthen Engineer Australia’s Construction Community of Practice, the Chartered Construction Area of Practice recognition linked to Chartered engineering status and the professional development model for construction engineers.
Find out more.
Future of construction Summit
This year’s Future of Construction Summit (FCON23) will be like no other. Picking up from our Disrupt or die report released last year, this year’s summit has a clear focus—disruption. We’re bringing government, industry and unions together to talk about the top things we can do now to kickstart productivity growth, how do we learn to trust again so that we only need a 2-page contract to deliver a $1Bn project and much more.
FCON23 will be co-located with the Australian Construction Achievement Award winner presentation event. Join us from 3-4 May in Melbourne.