Things are heating up and not just inflation. The upcoming Jobs and Skills Summit, abolition of the Australian Building and Construction Commission and escalating material prices have all headlined recent discussions.
Construction cost inflation
Hyper-escalation of construction costs for contractors locked into fixed price contracts is emerging as one of the biggest challenges for the construction industry. If not addressed, it could significantly impact on the ongoing sustainability of the industry and in the process harm Australia’s economy.
Recognising the severity of this issue, yesterday the Australian Constructors Association released the report Construction cost inflation—ways to address an escalating issue. The report calls on government to take action both in respect of current and future contracts.
The industry is seeing examples of price rises over a 12-month period of up to 70 per cent and yet clients continue to expect fix prices. The industry cannot continue to bear the cost of these steep price increases—some costs will need to be passed on to halt the growing trend of insolvencies.
This is a shared problem—government, contractors and the supply chain are in the immediate firing line, but company failures impact the wider economy. Construction underpins the economy—contributing to 8 per cent of GDP–and yet it accounts for more insolvencies than any other sector.
It is in the client’s best interests to work with the contractor as the cost of doing so will be far less than the cost and or delay to a project if the contractor fails. Governments, in particular, should not seek to secure projects for less than cost as the impact across the supply network is considerable.
The Australian Constructors Association is calling on governments to compensate contractors for projects suffering from major price increases regardless of whether the contract terms provide for such relief. Major projects are often entered into years before they are completed and no one could have foreseen the current environment and priced for it.
Going forward contracts should contain transparent mechanisms to ensure future fluctuations are dealt with fairly. This also means contractors should not make windfall gains if price falls. Projects should not be delayed or deferred as this can have unintended consequences that are worse than the problem trying to be solved. Asset owners can keep to budget by using pre agreed positive/negative variations to adjust the scope to account for material price fluctuations or other risks for that matter.
The industry needs to become more financially sustainable to properly focus on important issues such as improving productivity, sustainability and innovation.
Download the report: Construction cost inflation – Ways to address an escalating issue
View The Australian article.
Jobs and Skills Summit
It seems everyone is vying for a golden ticket to the Jobs and Skills Summit to be held in September. Every industry, every sector, government, unions—everyone wants a seat at the table. The Summit could not come at a more important time with all industries suffering significant skills shortages. In construction alone, Infrastructure Australia last year estimated that the sector was facing a shortfall of 105,000 workers and this was before the major flooding events on the East Coast caused significant damage to infrastructure and increased demand for workers even further.
Whilst skilled migration, training and increased employment participation can all help address this problem, none of them are a silver bullet. Australia’s reputation as a desirable destination for skilled migrants has taken a battering by floods, bushfires, Covid lockdowns and high cost of living. No amount of tinkering with the visa system will counter these issues in the face of increasing worldwide competition for workers. Consideration will have to be given for positive financial inducements to attract people to Australia, like the Living Away from Home allowance and clearer pathways to permanent residency and citizenship.
Training can help with skills shortages in some industries but it is a medium to long term solution that, in a high employment environment, risks simply transferring the problem from one industry to another as workers upskill from lower skilled industries to higher skilled ones.
Given the current high levels of employment it is important that a focus is placed on enabling and incentivising greater workforce participation by those currently underrepresented in the workforce such as women and older workers. As an example, the Construction Industry Culture Taskforce is aiming to improve the culture of the industry through the development of a ground breaking Culture Standard to improve female representation in the sector from the current low base of 12 per cent.
The only silver bullet for skills shortages in the short term is a significant improvement in productivity. We need to find ways to do more with the resources we already have. This applies to both white and blue collar activities and arguably the bigger opportunities lie in improving how we procure, manage and govern things.
This is certainly true of construction industry. In fact, the construction industry presents one of the greatest opportunities to improve Australia’s overall productivity performance. In a recent report commissioned by the Australian Constructors Association, BIS Oxford economics identified that just halving the productivity gap between construction and other major industries would result in savings of $15 billion annually.
Industries like manufacturing and agriculture have recognised the opportunities presented by greater government and industry collaboration and adoption of technology and these industries are outperforming construction. In fact, construction only ranks above hunting in the McKinsey Global Institute Digitisation Index that measures how well industries have adopted digital technologies.
This is especially concerning as governments nationwide have committed record investment in the construction of new infrastructure—a strategy that has seen the industry take on the critical role of rebuilding Australia’s economy.
Whilst the construction industry is challenged it represents a huge opportunity. The Jobs and Skills Summit is a great place to start the process to realise the enormous productivity opportunity that is currently hiding in plain sight. But ultimately it will require a planned, coordinated and sustained effort by all levels of government, industry and unions.
Workplace Relations Minister Tony Burke recently announced that the powers of the Australian Building and Construction Commission (ABCC) will be immediately cut back to the bare minimum before legislation is introduced later this year to abolish it completely.
The Australian Constructors Association acknowledges the government’s plans to implement election commitments which include expanding the role of the Fair Work Ombudsmen in lieu of the ABCC but these actions need to be coordinated and whilst we are concerned at the prospect of a prolonged regulatory vacuum we stand ready to work with government to ensure there is sufficient oversight for the sector both now and into the future.
The industry is facing a record pipeline of work having been tasked with the critical job of rebuilding Australia’s economy. We cannot afford to get distracted by the noise—we must stick to the things that matter. The abolition of the ABCC presents an opportunity to refocus on those important matters. We have to improve the productivity of the industry while maintaining a focus on tackling key issues impacting the culture of the sector—these are interconnected with industrial relations matters.
We accept that employers, employees and associations should be covered by the same rules; however, these must be sufficient to ensure productive outcomes. While the construction industry currently has additional oversight, it is important that the pendulum not swing too far towards an unregulated environment that fails to recognise the unique and, at times, troubled history of the sector.
Australia needs a workplace system where officers of registered organisations have the same duties and obligations to officers of corporations, with a regulatory body sufficiently resourced to provide adequate oversight, enforcement, and meaningful consequences for unlawful behaviour.
Ongoing drug and alcohol testing requirements are important as the safety consequences of drug and alcohol impairment on a construction site cannot be overstated, irrespective of how projects are funded.
Working arrangements are also directly linked to worker wellbeing and the Australian Constructors Association believes tackling key issues impacting the culture of the sector are interconnected with industrial relations issues.
The Federal Government’s commitment to improving gender pay equity and prevention of sexual harassment in the workplace is to be applauded. There is direct alignment with the proposed Culture Standard for the construction industry published by the Construction Industry Culture Taskforce—of which the Australian Constructors Association is a key partner.
We are also supportive of sustainable measures to improve job security in the sector and government has a huge role to play. It can do this by providing greater visibility and certainty of the pipeline of projects, taking a program/enterprise approach to the delivery of public infrastructure and working collaboratively with industry to improve financial sustainability of all industry participants. But flexible work arrangements and allowing tradespeople to continue working as independent contractors where they desire to do so should be retained.
Many of the issues the industry faces today stem from unrealistic project budgets driving government to view value simply as lowest possible tender price and passing as much risk to the contractor irrespective of whether that risk can be appropriately assessed and priced e.g material price escalation.
We need to fundamentally change the system so contractors compete on innovation, productivity, quality and sustainability – not price alone.
As highlighted in our 2022 Strategic Plan, we remain focused on strengthening the three pillars supporting the industry: improved Industry culture, sufficient capability and capacity, and equitable and aligned commercial frameworks. These are the keys to a more sustainable construction industry, but they also need to be viewed with an environmental lens. We have committed to being involved in initiatives aimed at improving the environmental sustainability of the industry and, in upholding this commitment, we have joined a Net Zero Alliance. Through this alliance with the Infrastructure Sustainability Council and other associations we will seek to pool knowledge and drive improved sustainability outcomes in the Australian construction industry.
Improving sustainability outcomes in construction will require unprecedented levels of collaboration and the Australian Constructors Association is delighted to be participating in the ecologiQ Greener Infrastructure Conference this 6-7 September.
The two-day conference at the Melbourne Convention and Exhibition Centre will explore the role of infrastructure in driving a circular economy – with recycled and reused materials leading the way – the economic and resource factors shaping the industry’s greener future and how governments at every level can use procurement and policy to change how waste is used.
It will also explore current trends across the supply and demand spectrum and real-life examples of recycled and reused materials in action in transport infrastructure projects.
More information is available at: ecologiq.vic.gov.au/conference-2022.
Speaking of recycling, we all have a role to play. Governments and industry are investing in greater recycling infrastructure, businesses are looking at how their products can be recycled at the end of product life and using recycled content in the products they make, and governments are using their buying power to purchase products made of recycled content.
The Department of Climate Change, Energy, the Environment and Water has produced a series of videos profiling Australian businesses using recycled materials to make new products. Australian Constructor Association members Downer and Fulton Hogan are some of the companies who have shared their experiences.
View the videos here.
In concluding this month’s newsletter, I regretfully have to advise that our National Policy Lead Kate Raymond has resigned. Kate’s expertise and policy insights over the past 12 months have been invaluable. She has performed a critical role in shaping the association’s policy direction and maintaining the quality of our submissions and advice which have been widely recognised across industry. Worthy of particular mention is the Future Australian Infrastructure Rating which Kate has been instrumental in developing.
Despite the association being well positioned for the year ahead, Kate’s departure will leave a noticeable gap in our team. However, as the saying goes, when one door closes another opens and the recruitment process for the role closes today. It is an exciting time to join the team and I look forward to announcing our new policy lead in the near future.