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Building failures and developer ecosystems: the tip of the iceberg

The fallout of this building crisis, at the end of the current property boom cycle, may see many developers close doors and get out of development activities. Apartment fire-sales may depress property prices generally and make housing more affordable. The crisis might trigger Parliament to set up an effective federal Independent Commission Against Corruption. However this crisis plays out one thing is certain, it won’t be easy or painless.


Residents out on the footpath after some 560 apartments were evacuated in Sydney? Wouldn’t we wonder “what would I do in this situation?”

Politicians, highly sensitive to expressions of community anxiety, are known to react quickly to defuse concerns. NSW Premier Berejiklian admitted recently: 

“We allowed the [building] industry to self-regulate and it hasn’t worked. There are too many challenges, too many problems, and that’s why the government’s willing to legislate.”

On 18 July, state housing ministers met with the federal government to “work through issues” to address “the crisis of confidence in the building industry”. They have now agreed to consider all recommendations of the 2018 Shergold-Weir Report into compliance failures in recent building.

We don’t need reminding that housing has particular resonance, as shelter, comfort, security and sense of home. Housing is multi-dimensional –extending to survival, personal safety, political and community stability, investment, employment, wealth and status, well-being and health. 

The many emerging stories of major building defects in recent apartment blocks in Sydney and Melbourne are exposing our notions of housing as safe and secure. Evidence of contaminated sites, building settlement, flammable wall cladding, concrete “cancer”, structural cracking, plumbing issues, noise between units, leaky roofs and floors, and flooding, all suggest systemic problems in the development sector. 

Who are affected?

The construction sector has widespread connections within our community, in the building industry, and within governments. The development industry’s international networks and linkages are part of a global sustainability debate.

The current construction sector is a complex and dynamic ecosystem that has evolved locally over four decades. Any interventions of governments in the system will have unanticipated consequences across the system. The emerging crisis of unaffordable professional indemnity insurance premiums for consultants and certifiers in the sector is but one example.

For the development sector, building failures impact the property market, spooking governments, owners, investors and the property market. Uncertain financial conditions can destabilise the wider economy, increase unemployment, and given Australian households’ high debt levels, further limits consumption spending. This impacts political stability and risks of economic recession.

For apartment owners and investors who are directly impacted by building evacuations, or dealing with major defects and liabilities, the financial risks are high. Building defects drive property investment losses, and high repair costs through Owner Corporations at the end of legislated builder defects liability periods.

For renters and residents, major defects directly threaten health, safety, security and wellbeing. Renters are placed in a difficult situation, both unable to respond to defects, and reliant on owners and investors to address the problems in a timely manner. Investors caught in drawn-out legal disputes may be unwilling or unable to expend funds to ameliorate conditions. Evacuation of renters is very difficult without resources or capacity to relocate. There is little legal protection for tenants.

The current crisis is a red flag for social housing providers. Community housing sector characteristics include long-term tenant relationships and long-term building holdings. This means that ensuring building quality for durable, low maintenance accommodation is critical for the longer-term, unlike private market speculative development. Profit-driven developer models bring risks of cheaper materials and fittings, poor quality cut-price construction, and little capacity for residents to arrange defects liability repairs.

How did we get into this fix? 

For several decades after the Second World War, social and communal values forged in economic depression and war were uncomfortable with the “classical economics” of Adam Smith and others from the 18th Century – of greater personal choice, individual enterprise and wealth accumulation. By contrast, post-war policies of western governments sought to reform institutions to better address social inequity and injustice, and redress suffering that the War had brought. 

In the 1960s, increasing prosperity in western democracies saw neoliberal views re-emerge – that our freedoms were increasingly restricted by overbearing red tape and excessive regulation, big government is bad for us, and that the animal spirits of capitalism are needed to increase wealth and free up our societies. Today, Prime Minister Menzies might be labelled a socialist. Such has been the influence of Hollywood and the American Dream.

By the late 1970s, post-war institutions in Australia were being pressured to increase efficiencies, reduce regulation, and provide greater choice. Political figureheads Reagan and Thatcher led the charge to transform societies, supported by politicians, think tanks, and lobbyists. Shades of Gordon Gecko’s greed is good!

By the 1980s, construction and development businesses were establishing industry lobby groups to loosen labour market restrictions, rewrite building regulations, influence construction standards and move into design and construct contracts (D&C) and project management, to replace client and consultant oversighting and independence. Lobbying to reduce local government roles in development and building compliance was sold as reducing red tape. 

In the rush for capital accumulation and profits, easy finance allowed developers to rapidly expand urban footprints, ignoring urban planning principles and practices. As developers grew, land banking to influence market supply and land prices, became common.

By the early 1980s, government reforms and restructures were well underway to adopt the new economic ideology of efficiency and choice, deregulation and scrapping of red tape, private market boom-bust cycles, and the accompanying loss of older institutional values and practices such as independent construction certification, and Clerk of Works roles to look after client interests on projects – the builder was the client. 

Nearly 40 years on, we are now seeing the fruits of this culture – developers flaunting their wealth, apartment buildings with multiple construction defects impacting human safety and health, limited legal recourse for owners and lessees, minimal developer/contractor liability for defective work, ‘phoenix’ developers closing down after building completions, bankrupt sub-contractors, mounting insurance premiums, and minimal consumer protections. Apartments lose value and owners and investors have little recourse but to sell or pay Owners Corporation levies to repair damage, replace sub-standard materials and cut-price products, and address structural defects. 

How do we get out of this fix?

Self-regulation in the Australian building industry has been a source of disquiet for authorities for years. Appeals to State governments and the Building Ministers Forum were mostly ignored.

The 2015 Lambert Review examined the NSW Building Professionals Act 2005 and the building regulation and certification system in NSW, did flag potential risks of unaffordable professional indemnity insurance for certifiers, and certifier laws were amended in the NSW Building and Development Certifiers Act 2018. 

The 2018 Shergold-Weir Building Confidence Report for the Building Ministers Forum identified “serious compliance failures in recently constructed buildings”, and noted weak oversight by licensing bodies, state and territory regulators, and local governments. The report recommended compliance and enforcement of the construction industry nationally to improve regulation. 

The NSW government response in February 2019 to the Shergold-Weir report proposed a NSW Building Commissioner to regulate the construction industry, providing oversight and enforcement, reforming compliance reporting, registering building practitioners for reporting obligations, and “clarify[ing] the law to ensure that building practitioners owe a duty of care to owners’ corporations, subsequent titleholders, and small construction-related businesses”.

The June 2019 NSW Government’s Building Stronger Foundations discussion paper recommended compliance audits under the 2018 Certifiers Act to include: 

  • A major certifier compliance operation, with 25-30 per cent of the industry to be audited yearly; 
  • A zero-tolerance approach to non-compliant certifiers including a policy of increased penalties for corruption and negligence
  • Better protection for strata buildings, with certifiers being banned from new strata developments if the Code of Conduct is breached in the last 12 months 
  • Increased transparency, with more information on certifier compliance history for homeowners in an enhanced name and shame register 

Additional key reforms in the June 2019 paper include:

  • Building designers to declare that their plans, specifications and performance solutions comply with the Building Code of Australia (BCA), and builders declare that buildings are built according to the declared plans 
  • A new registration scheme for building designers; 
  • An industry-wide duty of care owed to subsequent homeowners 

The NSW government proposed that enabling legislation for these reforms would go to State Parliament by the end of 2019. Industry feedback on the scope of its reform proposals is sought to assess how the reforms ‘can be designed to work in the future’. 

What more needs to be done?

Although the proposed NSW government building industry reforms are by themselves admirable attempts to better regulate the industry, there is a palpable sense that governments are tinkering around the edges of the larger and more complex development ecosystem. 

The focus of recent inquiries, reports and reviews, have been generally confined by their terms of reference to practice reforms for smaller actors in the system such as designers, engineers, certifiers and surveyors. Much of the current focus of the crisis moves attention from the “big fish” controlling the development process. 

A spotlight is needed on the roles and activities of the most powerful actor in the system, the property developer, to address community confidence in the building sector. 

Property developers are top of the food chain – controlling investment decisions, landbanking, design development, costs, tendering, and quality control. Developers employ consultants, contractors and certifiers directly or indirectly, in design & construct contracts and value management exercises. 

The development ecosystem that has evolved over the past four decades has incrementally shifted the goalposts from a regulated system constructing safe, well-built and long-lasting buildings, to allow an under-regulated get rich quick development culture with little legal responsibility or care for their products. The development sector has been a major beneficiary of deregulation.

The boom-bust’ property cycles of the property market also reward the development industry by controlling housing and land supply into the property market to manage demand and increase prices and profits. There is evidence of considerable influence in rezoning and regulatory decisions and approvals at all three levels of federal, state and local governments, particularly through networks of decision-makers (C Murray, P Frijters, 2015, Clean money in a dirty system, UQ.) 

However many developers and builders with an ethical company culture and reputation stand by their work. The property developer provides entrepreneurship and leadership and takes risks that lead to significant community benefit. 

In one sense, the development sector is too big to fail, contributing to economic growth, employment, and influencing property values and the political scene. The building industry is a large part of the local economy, contributing some $25 billion to the NSW economy and employing nearly 10 per cent of its labour force in 2015, according to the Lambert Report. 

Mutually beneficial relationships between developers and governments have existed for much of white settlement in Australia. Governments rely on risk-takers to build needed infrastructure, and developers are supported by governments for their roles in raising Treasury revenue, providing employment and stimulating economic growth.

Perhaps the lack of interest in examining developer roles to date might be in part a recognition of the complexity and resilience of the development ecosystem, the fear of unintended consequences of reform, the lobbying power of the development sector, and the need to maintain the development sector’s support. Several failed High Court challenges to developer donation bans have made political motivations of many developers very clear.

Systems thinking suggests that at some point all systems will adapt, collapse or transform when external conditions or internal contradictions stress system behaviours. Early system signs are increasing instability of system components that indicate loss of linkages and feedbacks, flagging sudden collapse of the whole system. It is not too difficult to find indications of system collapse in this can of worms.

What we could do in NSW

  1. Bed down the NSW Building Commissioners job and resourcing with enabling legislation. Address the insurance premium threat to the construction industry. Handle unexpected outcomes and “unknown unknowns”.
  2. Work with the federal government to implement the 24 recommendations of the Shergold-Weir Report.
  3. Seek backing for a national approach to customer protections through the Building Ministers Forum and federal ministers, to address developer and builder liability, establish a national indemnity insurance scheme for the construction sector, and develop unsafe product policies for housing developments.
  4. Set up a Royal Commission to untangle the current development ecosystem and developer roles and practices, and to suggest long-term national reforms to the development sector that will address current building failures and owner losses, and produce safe, healthy, well-built and long-lasting buildings. 
  5. Re-examine pre-1980 building practices to identify potential reintroduction of effective past practices that reduce risk of defects, such as the Clerk of Works role representing the client’s interests on-site, still commonly used in the EU and UK building sectors. At the same time, examine risky developer practices such as “value management” that aim to find cheaper ways to construct buildings by altering approved designs. 

How might this crisis play out?

The exposure of failings of the development industry in NSW and Australia is the beginning of a long journey to reform the sector. Exposure of more building failures are expected in a large stock of recent apartment buildings. Attempts to tinker at the edges of the development ecosystem will prolong the crisis and delay recovery, and drag more investors, owners, tenants and governments into dark places.

The fallout of this crisis, at the end of the current property boom cycle, may see many developers close doors and get out of development activities. Apartment fire-sales may depress property prices generally and make housing more affordable. The crisis might trigger Parliament to set up an effective federal Independent Commission Against Corruption. A root and branch clean-out of the development industry may have long-term benefits for the economy and our community, but carry a lot of pain – unemployment, bankruptcies and foreclosures, and falling government revenue. 

It may be that governments are forced into deficit to fund large capital works programs as per Australia’s recent response to the 2008 GFC and the US New Deal programs of the 1930s. C’est la vie.

Mark Singer is a member of Shelter NSW. 


Spinifex is an opinion column open to all our readers. We require 700+ words on issues related to sustainability especially in the built environment and in business. For a more detailed brief please send an email to editorial@thefifthestate.com.au

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Comments

9 Responses to “Building failures and developer ecosystems: the tip of the iceberg”

  • Anne Paten says:

    Mark, your article is valuable, but you seem to have omitted some of the important historical facts prior to the rise of the HIA and MBA and their take-over of the bureaucracies leading to their ultimate control as the defacto Government across the states and federally!

    Also the fact that the ‘Shergold-Weir Report’ was so positively spun as ‘Building Confidence’ when it was impossible to dub any serious public document with such a ridiculous title must be highlighted. Effectively this gambit was utilized to HIJACK the 4 year long Senate Inquiry into Non-conforming Building Products’ Report. I, along with many other decent and ethical small players from industry appeared as witnesses,and told the truth in all its horror. The real building beast was exposed. So this S-W Report was the crafty stratagem contrived to hide the ‘no possible confidence’ reality as revealed in the NCBP Inquiry (the crime school industry, the corruption, the statistics and stories of millions of Australians all covered up) and the truths presented ad infinitum from 2015 to 2018! This provided the positive proof of a thoroughly contaminated, corrupted and lawless industry, and it WAS all secreted with the publishing of the nonsensical Shergold-Weir Report which replaced the Senate’s Report. Just shows how this Senate bureaucracy was complicit in just another cover-up.

    By the way, do you know who these two are, their history, and why they, and not you or me, were selected to be the face of such a pathetic attempt of an ‘independent’ Report?

    As for your suggestion that the NSW ‘reforms’ are admirable, they are as you ended up saying ‘tinkering’. In short, of NIL value. Rather this more spinalotto to deceive and mislead the public on the biggest human disaster in our history, with the people and the public interest again led up the garden path.

    There is but one thing that can work with undisciplined rogue cowboys, and that is ‘regulation’ and penalties for these crooks. There is no possibility of that happening because of the trillions of dollars siphoned from consumers to the crooks and their buddies who have made fraud legal. This now entrenched for decades. They do not care about people, or lives, or deaths – only about new luxury cars and growing the tax haven account.

    Just one more point that you raised which invites comment. You said that the sector is too big to ‘fail’. But con-struction has been failing on a mega scale for 30+ years – and this spectacular failure has proved to be incredibly successful and ever so lucrative. Now we have the failed base industry – which has spurned the rectification and dispute industries – with these combined probably bigger than the ‘primary’ industry’ in dolloar profits robbed from ordinary owners. This has delivered the massive profiteering to the movers and shakers who run the show, and each and all shared with the buddies! The ‘con-struction’ industry, along with all its destruction, has the beneficiaries
    It is good to share views and to discuss, especially if we all learn and do more homework

  • nalee says:

    Mr Peter James,

    You have raised some interesting points.

    1st Builders DO shop around for certifiers who will turn a blind eye. It is well known that if a certifier appears to be hard on a builder, the builder will then issue a Form 22 and disengage the certifier and move to a certifier who will let things slide.

    2nd point. Some certifiers are well known to turn a blind eye for their clients. All you have to do is check the certifiers licence on the QBCC website and you will see the certifiers QBCC have disciplined. There are about a dozen or so certifiers who have done great harm to the building industry in Queensland and we are all paying for the Builders and Certifiers actions. Find me a Certifier who has issued a ‘Refusal’ (Form 61) on a building project that is not compliant? It is very rare.

    The QFES, Local Councils, QBCC and the court system know who these people are and yes it does happen.

  • Peter James says:

    Bit confused….I feel the article doesn’t really reflect reality. A few questions and points:
    Is the building industry really subject to less legislation now than in the 1970’s?
    Are the standards and codes of practice, including Work Health Safety, less rigorous now than in the past?

    Here in Queensland at any rate we have mandatory inspections by the certifier, geotech engineer, structural engineer, fire brigade, and local council throughout the build and at every point where the following phase would cover up (i.e. prevent visible inspection) of the construction system in question. Inspection certiciates are provided by all relaevant engineers and all qualified trades provide Form 16’s for their work with regard to workmanship.

    Thus all reasonable efforts are carried out to prevent patent defects.
    With regard to Latent defects all the suppliers/manufacturers provide latent defect warranty.
    Further the Builder provides practical completion subject to detailed inspection by the client, a retention period and a builders 6 year warranty.

    This article seems to suggest that builders are dishonest and trying to cheat the system where they can just so that they can go bankrupt…are you serious! Do you know many builders?

    With regard to what I would say are the rare occurrence of serious defects it appears that many are related to the import of ‘certified products’, that in reality often turn out to have been falsely certified…this is not the fault of the purchaser but of the overseas manufacturer and certifying/inspecting bodies here in Australia.

    Another cause of fault can be where the design may meet the standard and hence be certified (Form 15) but may not work in reality…this is where practical experience is essential, and unfortunately many designers have no building experience and actually have more confidence than they ought.

    There is also a suggestion that there are certifiers that might be inclined to turn a blind eye to non-compliant work. I really doubt this is common at all (ask around) and further the certifier is generally looking at NCC related issues and relies upon form 15’s and Form 16’s with regard to the design of any professionally designed items and trade qualified built items, so for example the certifier could be blamed if the number of bathrooms is inadequate, but not for a beam that has been incorrectly sized.

    I’m not saying there are no exceptions, but that are the exception and definitely not the rule.

  • Terry Lee-Williams says:

    I think that the spot rezoning process, which created a speeding of development and the focus on “red tape reduction” has translated to a public protection loss. However, construction methodology has advanced somewhat, and there are tools that can take the CAD and ensure they will not result in structural failure. In submitting builders/designers would also create a data pool in Govt control that would stop people having to go into archives to find disputed drawings and designs. But then on top of that let the Govt create a chain of responsibility from the arhitect designer right through to builder and certifier with specific consents and liabilities being created and discharged. Own your work and the responsiblity it creates…

  • NICHOLAS LODER says:

    Looks like everyone is in violent agreement with your analysis Mark. Great work.

    To bring back confidence in the whole Build to Sell delivery model legal ‘gaps’ around Duty of Care owed to Property Owners is a good place to start.

    Whether its just a ‘gap’ or a chasm needs further testing in the Courts

  • Mike Faine says:

    Bringing back a ‘clerk of works’ person onto the site might be one of the better practical suggestions in this article. However it might be hard to find someone with the necessary qualifications and experience to oversee what happens on site these days.
    It would greatly improve the quality of what is built and provide potential owners with an independent appraisal of what they are buying, particularly with respect to the larger high rise type apartments.

  • Andy Charles says:

    Hi Mark, that is an excellent article. Your historical overview that describes how we are in this current crisis situation is succinct and salient in its content. Here in WA at the bottom of the food chain you’ll find the building designers (of whatever qualification) and then the building surveyors. Both are pressured by the builders and developers to reduce their fees well beyond the point of being able to put the right amount of time and effort into any job. They race each other to the bottom and everyone pays.
    Since the privatisation of building surveyors the normal methods of good building practice you refer to from the 80s have long disappeared. Local government, the ones with the money, have removed much of their risk and, arguably, their obligations, by only accepting Class 1 and Class 10 building applications uncertified. All Class 2-9 applications must be certified. And those building surveyors working privately take ALL the responsibility. Remember, they have been forced to take a pittance for their work. And now PI insurance has skyrocketed.
    It’s time for local, state and federal governments to take more responsibility as the key regulators and as the ‘protectors’.
    Finally, having quite some experience dealing with building authorities/commissions in 2 states in particular, I and all of my colleagues are at the point of disgust at the gormless manner in which they go about obfuscating and avoiding their statutory responsibilities.
    I wonder how all this can improve. Where is the political will?

  • Nigel Howard says:

    The fox has set up home in the hen-house and governments are too owned to do anything about it. Look at the appalling findings in the financial Royal Commission despite being ham-strung by restricitve terms of reference. While we remain a corporatocracy with government by the corporations for the corporations and no real policing of compliance of our regulations (already compromised, by corporate lobbying) nothing will really change. This is true of Housing & Construction, Energy & Climate Change, Finance, Pharma and Health.

  • Ian Holloway says:

    Check out Western Australia. There are no certifiers. So nobody signs off on behalf of the builder. The builder takes the risk. Happens in Residential as well. This self regulation if you can call it that where it is compliance with Codes, Regularity bodies and Engineers.
    I dont agree that its self regulation but more like a lack of responsibility buck passing and graft

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