We also appreciate that meeting the nation’s infrastructure needs is challenging. There are many competing priorities, demands, and factors to be considered in the decision-making process by all tiers of government, private sector and, crucially, the community.
Fission believe both Government and Private Sector alike have an opportunity to address some of the real issues affecting both. Firstly, the imperative that projects deliver value for money for Government and the taxpayer. Secondly, that Contactors and the construction sector supply chain are able to participate in a sustainable industry; and an Industry in which people are willing to invest and focus on delivery excellence, value and innovation rather than resolving contract disputes from underperforming projects and poorly managed risk. Whilst there have always been projects delivered that don’t satisfy value to the taxpayer nor equitable returns to Contractors and their supply chain, Fission believe that throughout the past 10 years or so, the number of distressed projects has risen as a percentage of the total projects delivered. If this trend is not addressed, the construction and infrastructure sector faces a critical challenge; profitability and therefore ability to provide value to taxpayers.
For contractors and the industry, the delivery of infrastructure project can be financially challenging. In the Australian Constructors Association’s publication Constructing the Future, the association states, ‘Construction industry profits collapsed between 2014 to 2018, and many well-established construction businesses went out of business or were sold. The construction industry currently has the highest number of insolvencies of any major industry sector in Australia’. In addition, when delivering megaprojects between 2000 and 2015, the sector incurred losses of $6bn. The effects are such financial losses are massive, not only on the larger corporate contractors, but on government agencies managing these projects and, perhaps more importantly, on the thousands of small business owners who supply materials and services to these projects.
And it is a similar tale in multiple jurisdictions. For example, in 2017 analysis of the results of the UK’s top 10 largest contractors, including Balfour Beatty, Interserve and Laing O’Rourke, Construction News found that they had an average pre-tax profit margin of -0.5% as losses from problem contracts took their toll. Pre-tax losses totalled £52.9m on a combined turnover of £32bn.
Meanwhile, theconstructionindex.co.uk reported profits for the largest 100 firms of just £1.1bn, equivalent to a margin of 1.5% on a £69.1bn turnover.[1]
In many ways, it explains the number of major firms that have collapsed or exited markets in recent years.
It also explains why we have what may be referred to as a ‘challenging culture’. When we started our careers as engineers, designers, project managers, planners, I don’t think any of us had thought we were entering an industry where profitability and value for money seem to be balanced on a knife-edge and where a lot of intellectual power is spent protecting commercial positions rather than focussing on delivery excellence. At times it appears that we work to deliver major public and private works, only to have success defined by who has managed to secure the highest-paid lawyer and can withstand the never-ending cycle of claims and counterclaims. These project outcomes are taxing emotionally and financially. It is hardly aspirational to the next generation of people considering a career in the construction industry, and in a highly competitive global talent market, will we recruit the best and brightest – and importantly keep them engaged – if they spend more time arguing than achieving? The taxpayer also suffers from valuable budget resources being consumed in contract disputes rather than extending the physical works delivered for the dollar spent.
At Fission, we put our heads together and believe that there are key areas where collaboration is required to help overcome the sector’s profitability challenges and ensure that there is a beneficial reward for all for every project undertaken. Here are our areas of focus:
- Improved planning and procurement
- Changes to contracting model – collaborative rather than adversarial
- Sharing risk fairly and equitably
- Adopting best practices from around the world
Improved Planning and Procurement
If you put garbage in, you get garbage out. Sometimes the best advice is the bluntest, and this is certainly the case in project development and delivery. In the delivery of projects, if you make significant failings at the front end, then the likelihood of success at the back end is significantly reduced. Therefore it is vital that projects are comprehensively planned and are procured according to the plan. However, this requires time.
We would encourage more time, resources, and money to be invested at the start of a project to get it right, as this will save considerable sums at the back end of the project and stop the endless legal arguments. Key aspects include clear Project Scope and or Performance Definition; sufficient design development on the major project cost centre items; clear master planning overlay to ensure today’s project aligns with tomorrow’s requirements and clarity regarding the key criteria within project benefit-cost ratio economics.
There are a range of procurement options available to Clients. The decision on which procurement model to use varies from Client to Client and is subject to budget constraints, internal skills and expertise, project risk profile and time. Where possible, early project pipeline planning to allow projects to be developed in a methodical and staged manner. This is the optimal scenario, but ultimately, the success of project outcomes will be heavily dependent upon the thoroughness of key project documentation including:
- scope of works and battery limits
- design definition (drawings and accompanying technical specifications)
- clearly defined and assigned project risks
- balanced contract and commercial terms
- a procurement process that generates the right amount of competitive tension rather than wasted effort!
The construction market; Contractors to Supply Chain alike, are by and large happy to compete, but not in a race to the bottom. Procurement and tendering processes which consider shortlisting to a select few, followed by tendering or early engagement with selected Contractors will generally receive better quality tender proposals because companies are happy to invest more where their chance of success is higher.
Changes to contracting model – collaborative rather than adversarial
Reflecting on the value for money/profitability performance of major projects over the past decade or so you can ask some questions:
- Why do we have contracts that perhaps inadvertently incentivise the sector to be adversarial?
- Why do we define winning as deflecting as much cost onto another party as possible?
When we break down the models under which projects are delivered, whilst large portions of the contract terms are administrative, it makes little sense to do what we do when it comes to contract frameworks that promote value to the taxpayer nor equitable risk to the Contractor. While we acknowledge that there have been challenges in the past over competitive pricing when operating with collaborative contracts, the reality is that such challenges can be minimised with clear governance and the requirement to change.
It is time for Australia to consider more collaborative models of contracting, and we believe that the trials underway in a number of states are an encouraging sign that positive change may be on the horizon; change which ensures value to the taxpayer and a sustainable commercial model for the Contractors and their suppliers.
Sharing risk fairly and equitably
Sharing risk does not mean simply passing it down the line to the supply chain. The delivery of a major project of works is risky; there will be challenges, things may go wrong; in fact, they often do. But if we are to be sustainable, to ensure that everyone is rewarded for their efforts, then the clear qualification, quantification and allocation of risk must be fair and proportionate and shared equitably between clients, designers, contractors and the supply chain.
Adopting Best Practices From Around The World
We live in a global world yet are often very conservative when it comes to embracing new ideas or concepts from overseas. This applies to the contract model to technical standards. If something works in one jurisdiction, it may work seamlessly in Australia, or its core concept can be tailored for Australian conditions to achieve similar outcomes.
From productivity-enhancing technology to procurement methodologies to contract types, we must become more innovative in how we apply global learning, experience and initiatives to Australian projects. This is especially true in the age of the mega project, which has a far greater history of occurrence overseas, yet are dominating Australia’s capital cities at present.
In summary, we all want to work in a sector that delivers world-class infrastructure and can reward its participants fairly and equitably and motivate project stakeholders (Clients and Contractors alike) to deliver value for money. We also want to work in an industry where success isn’t defined by the best legal team or whoever has the most detailed site records but is defined by a project being delivered on time and to budget.
With billions of dollars in the pipeline and potential Olympic games coming, maybe it is now time to ensure that we place a renewed emphasis on sustainability and profitability to create an attractive sector? One that appeals to businesses and talented people and indeed realises the intellectual talent in our industry.
[1] https://www.kreo.net/blog/why-are-construction-profit-margins-so-low
