Construction industry is not ‘broken’ – Corrs Chambers Westgarth

On 24 February Probuild’s owners, WHBO, released a statement which provided some context around the decision the previous day to appoint administrators to Probuild. Amongst other matters, WHBO pointed to repeated and lengthy lockdowns and ongoing business uncertainty in Australia. Many may have found this surprising, given the construction industry was largely exempt from restrictions in the states with the longest lockdowns, Victoria and New South Wales.  

At Corrs, we have advised on many projects where extensive COVID relief has been granted to contractors, generally on the basis of force majeure or change in law. 

But in many instances, COVID relief is not enough. 

As pointed out by James Thomson in the AFR, there are a number of other factors contributing to the challenges faced in the construction industry including rises in professional indemnity premiums and a reluctance by owners and developers to take on any risk. Challenges faced by contractors in certain sectors of the market as a result of the increasingly risk averse contracting models adopted by owners and government agencies have been widely reported and have given rise to a number of significant disputes. It remains to be seen if these disputes will provide an impetus for a shift in risk allocation.   

But ‘fixed price’ or ‘one sided’ contracts are just one factor. 

Project problems often arise even before a contract is signed. For instance:

• There is immense pressure on government agencies and private developers to select the tenderer with the lowest price. The ‘value for money’ test rarely looks beyond cost. Robust evaluation criteria which provide weight to resourcing, procurement strategies and other matters should and can override cost.
• The old adage time is money means projects may be rushed to tender without being properly scoped or detailed, with drivers ranging from political convenience to external property market conditions. In conventionally funded projects, the design and construct model is blamed but in fact it is an effective mechanism for single point responsibility. However it is not suited to every project, and careful pre-project analysis is often not undertaken.
• There is a significant lack of capability and depth in some layers of the construction market. Many contractors have made express strategic decisions not to participate in particular sectors (e.g. PPPs or tunnelling) which causes further market challenges.
• The regulatory burden faced by construction industry participants should not be underestimated. It remains unclear why there need to be eight different Security of Payment Acts in Australia, or why the occupational health and safety legislation is still not harmonised.   

No counterparty to a building contract wants a contractor to lose money. However the adversarial structure of these arrangements rarely support a win/win outcome.  

For many industry participants, it can be a difficult path to navigate. When it comes to formulating a contract, it’s worth keeping in mind the following:

• Price escalation is a fact, and should be allowed for in contracts, as was the case in the 1990s when ‘rise and fall clauses’ were common. These clauses, which allowed for the cost of materials, wages or others matters to increase or decrease as a result of market fluctuations, fell out of favour (and are prohibited in some jurisdictions) as owners sought price certainty on as many components of building work as possible. A more limited type of rise and fall clause may have a role to play today.
• Early contractor involvement, in which the contractor is paid to assist with innovation, buildability and design review is rarely anything other than money well spent.
• Flexibility in contract drafting is key, with significant consideration required to build a regime which enables known and unknown risks to be allowed for.
• Supply chain issues can be managed, whether by early procurement and storage of plant and equipment, careful procurement planning with fall back options, or simply granting an entitlement to recover time if issues arise (as some Victorian government standard forms do). 

The current challenges are similar to those which have been faced in the construction industry for decades. Change can be slow to implement but should be accelerated if further insolvencies are to be prevented.