Corrs High Vis: Episode 48 – The health of the Australian construction industry: part one

Ben Davidson, Partner, Corrs Chambers Westgarth
Wayne Jocic, Consultant, Corrs Chambers Westgarth
Julia Korolkova, Lawyer, Corrs Chambers Westgarth

Hello and welcome to Corrs High Vis. My name is Julia Korolkova and I’m a lawyer in the Corrs projects practice group. I’m joined today by Ben Davidson, Corrs senior projects partner, and Corrs consultant and Melbourne University co-director of construction law studies Wayne Jocic.

This is the first podcast in a two-part series looking at the state of affairs in the Australia Construction industry.

In this podcast we’re going to discuss to the findings of a recent report looking into the health of the Australian Construction Industry. The report[1]was prepared by Professor John Sharkey AM, Phillip Greenham, Dr Matthew Bell, Wayne Jocic, myself and Didi Hu. The report is based on the results of a survey conducted from December 2019 to March 2020 and they’re insightful. The survey was completed by 125 individuals representing a wide range of participants in the industry including contractors, principals, lawyers and project managers. Wayne, Ben thanks for joining.

Wayne, I’ll start with you. Can you please touch on the top three challenges named by the survey participants in the tender process?

Wayne Jocic

I’m just conscious that this is a bit like waiting at the doctor’s office, where you’re waiting for some results about the your health and I’m actually going to lead with the headline if you don’t mind just so we’re not too nervous. I mean the headline question was “Is the Australian construction industry healthy”? And I’ve got to say the headline figure is 34%. 34% of respondents think that the industry is healthy.

What that means is 55%, more than half, think it’s not and it’s not more encouraging that just 50% of respondents feel optimistic about the future. So in short the impression is that things are not going so well at the moment and only half of the people are optimistic about the future. Anyway I thought I’d put that out there because I know it’s important to have that sort of nasty diagnosis up nice and early before I get to your question Julia, thank you very much.

So if you think about the ways you can analyse a construction project, the tender phase is very important and what we found is that people gave us fairly consistent messages about the things that go wrong. So one of the things I’m surprised they spoke about was the quality of information that was provided in the tender. Coupled with that no 2, the time that they had to deal with that information to put in the bid and then the tender conditions. I think to me no real surprises there but these are things which are significant problems.

Julia Korolkova

And what were some of the responses in relation to challenges in the contract phase?

Wayne Jocic

Well look again, no particular surprises. A couple of the really headline issues related to potential liability, so the idea that there was no capped liability provision in a lot of the contracts and you pick up a copy of AS4000, a lot of the AS contracts, a lot of bespoke contracts, unsurprisingly, and there’s no capped liability. Overall there’s no cap on liability for LD, for liquidated damages. Then there were concerns separately about liability for indirect or consequential loss, so there’s potential outgoings and then concern about narrower entitlements to money. I think again, the sorts of things you’d expect.

Julia Korolkova

Ben, are those findings consistent with what you’re experiencing in the market?

Ben Davidson

It’s a great question. It’s absolutely spot on with what we see day in and day out across the industry so all of those phases, the tender phase, the contract phase and the administration phase driving constant disputes, and we see it day in and day out on almost every project and just hovering up for a minute. It’s really important.

What we’re talking about here is an industry that is driving 8% of Australia’s GDP and employing over a million of its people. So getting these issues right and managing them properly so that we’re not having these problems is absolutely fundamental, and we are having problems. Across the board on just about every major project that we can see across the horizon, there is some level of disputation and for a significant number of those projects, it’s really serious disputation, like it’s existential stuff for the players.

So there is something fundamentally going wrong if we’ve got major contracting parties and governments and financiers getting themselves into transactions and deals where they can go so pear shaped that it’s a real problem for them looking forward. So these are issues that we are seeing every day and it’s fascinating how accurate this is as compared to our experience in terms of what we’re seeing.

Julia Korolkova

Thank you for sharing your experience, Ben. Wayne, who did the respondents say should lead the positive change of addressing those issues?

Wayne Jocic

Well this is one area, where again, we saw quite a lot of consistency – 65% of people thought it was principals and particularly our government that was best placed to lead reform. I suppose that leaves us with the question – is the health of the industry going to improve? I’m afraid in this backwards looking survey, it’s a snapshot. We don’t really have the answer in a statistical sense. Ben, I don’t know whether you have any views on that, whether you think things are likely to get better and whether you think it’s principals and especially government that might be the source of that hope?

Ben Davidson

Wayne, I unfortunately have a dark view of the world on this. I think unfortunately there is a real risk that despite the best endeavours in the market and at a lot levels, so there’s a lot of goodwill aimed at trying to resolve these issues but a lot of the issues just seem remarkably intractable and what worries is that we’re heading to a Carillion-type event and for those who don’t know what Carillion was, it was a very significant construction company in the United Kingdom that hit a major insolvency hurdle having hundreds of government contracts and PPPs and other arrangements in place and then it caused havoc.

So my fear is that despite all the good and all of the efforts that go into reports like this to identify the problems, that there are some systemic problems and issues that are really tough to shift in terms of getting people to change the way they do things and we’re going to see a seismic event that is going to be the causation of change rather than a smooth transition, which is a real shame but when we see major contracts just rolled out again and the name is basically changed on the front and the same terms that the parties have been screaming about and have been pushed back out into the market, we know there’s a problem. I’m hopeful and I’m conscious that there are lots of people trying to drive something but I do worry that we’re going to have some tectonic problem that is actually going to be the fulcrum rather than a smooth transition.

Julia Korolkova

Ben, you mentioned that the same terms get used across different contracts. Wayne, I’m interested to discuss the risk allocation that might be used in those contracts.

Wayne Jocic

Yes there are concerns that were fairly wide spread about the same sorts of risks, so one of the critical ones, unsurprisingly was latent conditions generally and especially subsurface conditions. I think no particular surprises there, but also more broadly, environmental risks, interface risks and then tying all that together again, the concern about uncapped liability, so they were the real concerns that came through from many people, both in the survey responses but also in the interviews.

Julia Korolkova

And do the survey results suggest that a change in attitude and behaviours will have any impact on costs?

Wayne Jocic

Yes absolutely. So of course this is one of those areas where we can look at the number of responses, 125, it’s supported by the interviews. It’s hardly the whole industry, so I think we do need to be a little be cautious about this, but what we saw is that when we asked people to try and quantify the extra costs as a result of some of these difficult concerns in the industry, we saw that they were regularly nominating that they were regularly nominating 15% here, another 15%, 10% - that’s the sort of increase that people were assessing.

In terms of the tender phase for example, not getting the right sort of information, not having enough time to price things properly, the tender conditions. What we saw suggested was that that led to something like a 15% increase in the project costs. Now of course we need to assess that with some caution, but there were similar results in the contract phase, thinking about uncapped liability and those sorts of things and then all the way through to contract administration where, even things the way that the claims are deal with, delays, lack of reasons, all those sorts of things, potentially leading to another 10%. So you can see all these things together, even if it’s a rough indication, do suggest that these problems are having a real impact on the project costs for projects across the industry.

Julia Korolkova

Ben would you say those percentages seem consistent to you for what is happening in the market?

Ben Davidson

Yes I think so. It’s always very hard to get a handle on what is going on in the market and this report is really helpful to that extent because we see a little corner of the market and a snapshot all the time but there’s obviously such an extraordinary amount of work going on and I think in forward estimates at the moment on a rough calculation, there’s about $260 billion worth of government infrastructure investment that’s about to be made, so to try and understand how that’s playing out and what’s going on, they’re such big numbers across so many projects. It’s really difficult to track it and understand it, so we do a lot of sitting and looking at our particular corner of the market and extrapolating it from there, but I suspect that from what we see, that is indicative of the sort of problems that are popping up.

Julia Korolkova

Thank you Ben. Wayne was there anything else that you wanted to touch on?

Wayne Jocic

Well look I think there are plenty of reasons to be pessimistic about these things. I suppose just so that we don’t end up on a particularly glum note, I might just remind people about that initial observation that I made, that 50% of people are optimistic about the industry’s future. That is relatively promising and I suppose the challenge for all of us, is to think about what we might be able to do to improve the industry. How can we do better on these things, now that we have some clearer evidence about the particular problems that people are finding across the industry? That’s the challenges that we’re all facing.

Julia Korolkova

Thank you Ben and Wayne and we look forward to seeing what will happen in the construction industry in the following few months.

Ben Davidson

Can I just add, I think one of the interesting things that struck me in this report was the report[2]that referred to Athol Yates and Bill Sashegyi, I think. I’m not sure how to say his name but it was a report prepared back in 2001 and I think what’s fascinating is when you actually have a look at the statistical finding that they made 20 years ago, how similar those issues are in terms of sort of percentages, just at an issue level. The issues that are cropping up are the same issues.

So I think what is really fascinating is that in 20 years we’ve kind of failed to address these issues and stamp out the problems and so it would be really interesting to see what we can do over the next five or 10 to really clean this up and to be clear, we have to clear it up and it’s not just because, as I said, it’s 8% of GDP and a million people, it’s because the US has just committed $2.6 trillion to infrastructure. It’s because Asia is looking at spending a couple of trillion dollars on infrastructure. If we don’t get our market right, we’re in an international market and if we can’t competitively run a market that is operating as well as inefficiently as everyone else’s there will be a diaspora and we will just end up with the F & the Q teams running stuff because they will get sucked over to run bigger and better projects more efficiently in other markets. So if we don’t get this right, it’s not just a problem for the market itself. It’s a problem for Australia. It’s a problem for our competitiveness in what we do, so it’s something that needs real focus.

Julia Korolkova

Thank you Ben and Wayne. Hopefully we will see some real change and we’re not sitting here in 20 years’ time discussing findings of another survey. Thank you both.

My name is Julia Korolkova and thank you for listening. The link to The Health of Australian Construction Report can be found on the Corrs website accompanying this podcast. We look forward to you joining us in the next addition of Corrs High Vis.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.

[1]https://law.unimelb.edu.au/__data/assets/pdf_file/0005/3501086/Health-of-the-Australian-Construction-Industry-Research-Report.pdf

[2]Athol Yates and Bill Sashegyi, ‘Effective Risk Allocation in Major Projects: Rhetoric or Reality?: A Survey on Risk Allocation in Major WA Construction Projects’ (Institution of Engineers, Australia and Chamber of Commerce and Industry of Western Australia, 2001)