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Why the construction industry is underperforming, and what to do about it 

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Clients and their consultants are at the front of the bus, in a broken industry.  They’re wondering why the performance of the construction industry is on a slippery slope – but it’s not just building certifiers at fault, there are plenty of others to blame.

The news is awash with sad stories chronicling the experiences of construction industry customers. We hear of chronic skills shortages providing an escape hatch for poor quality work. We hear of increasing construction labour costs that follow every unchallenged new Enterprise Bargaining Agreement at twice the rate of every other sector – without a single measured productivity benefit. And we hear of construction company insolvencies being the highest nationally. 

There is unanimous agreement that construction efficiency is poor, its supply chains deeply fragmented, and, despite record recent activity, construction margins remain at unsustainable levels to deal with the risks involved.

Despite all of these challenges, there is still a group of very capable construction companies who cope with all of this. They try to be more efficient. They try to embrace the new technologies and construction methods that elsewhere are redefining this industry into what’s called the Fourth Industrial Revolution or Construction 4.0. 

These companies are doing what they can to deliver quality projects and stay competitive. They invest in cadets and apprentices to help meet the need for new construction professionals.

But they compete with the fringe-dwellers, who strike with sub-cost tenders and clear intent of delivering less than has been contracted. They get away with having sub-standard work paid for, and they thumb their noses at construction safety. 

Many go broke and leave a trail of damaged goods behind them. 

And all of this is aided and abetted by a raft of consultants who have themselves been screwed down to ridiculous prices that do not assure clients they’re getting the real deal. These consultants offer up their “A” teams to get the gig; they’re soon replaced by a lower-costing “B” team. No one is happy.

There are two kinds of misunderstandings of the type and purpose of existing construction contracts. The first is a suite of contracts that are described as Build Only (BO) or Lump Sum. AS 4000 is an example, but there is a variety of others, all heavily modified to help bolt down client risk exposure. 

The second is Design & Construct (D&C) contracts. AS 4300 is an example of this, but multiple varieties exist, including some client-specific versions where lawyers feel they know better every time. 

Most clients would like to achieve a BO contract where all of their specifications and design requirements are locked down. This should lead to assured quality and compliance.

In reality, it seems that client-side consultancies, including architects, engineers and quantity surveyors, are not up for producing a fully integrated suite of complete contract documents these days. 

This is evident in the heavy amendments to BO contracts that attempt to sweep up incomplete design or resolution of over-budget estimate risk to the successful tenderer. It’s a mug’s game – these shortcomings do not lead to better buildings.

Most consultants decry the use of D&C contracts. But their pleas are to no avail. Despite the modern tools available to designers such as AutoCAD and BIM, it seems impossible to achieve a one-time integration of all design and quantification detail. 

One of the reasons for this is the limitations of individual consultant professional indemnity insurers, who are restraining collective assertions about design that may have a counterparty risk exposure. 

These kinds of defences embed fragmentation and introduce unmanageable risks down the entire supply chain, as these unknowns are passed on to each new late comer, who finds themself duped, generally after the contract is awarded. The conflicts of interests and escape hatches then play out.

And the public is hoodwinked about these clients caring for the environment.

One only needs to follow the ensuing construction processes onto a project to see what this means in the field, the most obvious result being the waste generated from traditional chaotic construction being largely made on-site – just like it was somewhere between the second and third industrial revolutions. 

Any client who bathes in a green building credential should have all the waste from their project piled up at a nearby location to see the reckless impact of high carbon products being conveniently squirreled load by load to landfill. 

This is effectively airbrushed out of the picture when the embedded carbon impact of construction is hidden in the shiny images of the finished build, with claims about the building’s operational carbon credentials.

There are no measures of the wasted fabrication labour inputs, or time-related on-site overheads of sheds, plant and the like resulting from imperfect procurement. 

Waste is the canary in the mineshaft that points to systemic construction industry failure.

These clients are hoodwinked by their consultants. They are not getting value for money.

Clients should not be surprised that they are paying more, getting slower and unknown quality outcomes. 

They are not getting smart buildings. Smart requires early contractor and supply chain engagement. Smart buildings represent a modern breed of buildings that can demonstrate their compliance and resilience credentials. They will have embedded capabilities that add to their functionality, operability, sustainability and maintainability.

There is little argument in the industry today that buildings could be delivered 30 to 40 per cent faster on-site than they are. This requires system change, not more of the same.

It requires early contractor engagement with the clear intent of being measurably better, smarter, faster, safer, less wasteful, at a lower cost. 

That requires contractors with an evidenced performance capability that demonstrates that they know how and are achieving more for less. 

This is not about engagement at the margins. Here we are looking for system benefits. And despite the wistful but forlorn hopes of some, this does not involve soft-contracting. 

In the end, there has to be accountability; a single point that responds to: “this is what the client set out to get and here it is”. Unambiguously, with no escape hatches.

To achieve this there are two choices: complete and unambiguous documentation to support the intent of a BO contract like AS4000; or the alternative, where one party steps up and takes on the documentation process, as contemplated under D&C. 

Increasingly there is a case for the latter. This process will depend on very early contractor engagement and leadership. There are few if any consultants with this capacity. Scamming the industry and its clients with unmeasurable hybrids in between BO and D&C is unsustainable. In these scenarios, traditional system dysfunction and non-performance, is easily masked.

Here is the worthy aspiration to underpin the value proposition clients should seek

Prior to tendering a BO project or a D&C work package, the tender documentation comes with the following acclamation: “We warrant that all the documentation has been professionally prepared, coordinated and assembled to fully describe the client’s project. We further warrant that this documentation is fit for the purpose of tendering and subsequently for the purpose of procuring, making and commissioning this project.”

That would enable the bidding contractors to provide the following acclamation to the client before bidding: “We warrant that we have been exposed to the final processes of preparing the client’s tender documentation, we have the professional capabilities and experience to review the tender documentation and its fitness for the purpose of tendering, and, if successful, the delivery of the project (or work packages). We warrant that we have the necessary, available skills and resources to undertake the project in conjunction with the key supply chain parties identified in our tender.” Only two or three proven bidders required.

The immediate reaction by many reading this article will be: “That’s impossible!”

But is it? The industry has the technologies and resources to deliver these value propositions. It’s just that they are never tested in the “business as usual” model.

There are a cohort of contractors today who could do this. The missing ingredient is the ability of clients and their advisors to establish viable performance measures, against which client bidder selection criteria may be benchmarked. The industry is measurement resistant. 

It’s also time to start measuring the performance of project managers and designers.

Systemic change is not possible without setting measurable goals, measuring performance, and benchmarking the results. What would change otherwise? 

Repeat clients should be looking to buy-in informed buyer capabilities to set up a framework to point designers and project managers on a path that requires more for less to69 be achieved. 

Projects delivered at least 40 per cent faster, with at least 80 per cent less generated on-site fabrication waste, with 80 per cent fewer reportable safety incidents and 20 per cent lower cost.

These outcomes are possible, it’s just that clients get hoodwinked by their consultants that these sorts of performance outcomes can be achieved by just beating the construction horse harder. And of course, business as usual. 

Just look at this cover for documents on a project currently out to tender. This project is reportedly going to use the BO AS 4000 contract. At least the client’s project manager is being honest about the fitness of the tender documents for procurement – “They are 80 per cent complete”. 

The questions at this juncture might be: What does 80 per cent complete mean? Is it 80 per cent by number of drawings, 80 per cent by the weight of drawings, or is it a blend of the project team’s estimated progress, for example, 90 per cent architecturals, 70 per cent structurals, a 50 per cent remaining services, 75 per cent cost estimate (percentages are approximates) and still waiting on DA consent? Who knows?

But here is the scam. Let’s assume that five contractors were invited to tender. This project reportedly involves approximately 1800m2 of construction. Estimates of $10.0 m are in the air (about $5500.m2). It’s likely that each tenderer will spend at least $50,000 to bid. So, $250,000 in a lucky dip that will be reduced to two. Two tenderers will then spend another $50,000 each to get to the negotiating table. That’s at least $350,000 before a loser is selected. 

One could assume that the total consulting fee allowance for this project might be about 9.5 per cent (including project manager, quantity surveyor and programming consultant).

That’s $950,000. The tender process will blow around $350,000, and for what? The prospect of screwing the business as usual construction price down by a half to one per cent. Where is the better performance and potential system cost reduction of 20 per cent, noting that the full benefit of these types of system improvements only come from early contractor engagement with proven performers over three or more projects? 

Here the industry needs to come up with a better measurable value proposition. What a waste of effort to this point. 

But that is just the beginning of it.

What self-respecting client, project manager and or consultant team would try this on?

See the program 5.0 here. How would any system improvement be possible when all that is about to occur is business as usual? Screw the lucky contractor up to 15 March, make no commitment about the expected state of documentation, and then grant possession of site on 18 March. 

And then wait for the magic. Really? Will this set up the basis for a construction performance that will engage a supply chain to excel? This is where the artistry of the client’s lawyers must come in to sweep up the risk of any incomplete design and discipline coordination into a heavily modified BO contract that transfers this risk to the contractor and the supply chain.

Will projects such as these then become an arm-wrestle, as the designers respond to “get out of jail” requests for post-award design clarifications and the variations that will follow throughout the contract, despite the artistry of the client’s lawyers? 

How will the designers deal with later discovery of design errors in the original design that needs to be rectified, or obvious material substitutions by the low bidder? How will the perfect risk transfers in the contract stay in place? 

The reality is, that they won’t, and compromises will result. These compromises will end up accommodating the systemic faults of a procurement culture whose time has come. The industry’s clients, like those in this case, lose out.

It’s time to get off the slippery slope and call out these procurement scams for what they are. The construction industry can do a lot better, but it needs a new context for this. And clients will not get full value until they understand how they are fuelling the escape hatch.

David Chandler OAM FAIB is the principal of CE Advisory, and Adjunct Professor in Construction Management at Western Sydney University. He is a construction industry advocate.

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Comments

4 Responses to “Why the construction industry is underperforming, and what to do about it ”

  • Peter C says:

    Professor Chandler in principal I agree with much of what you have said. I have worked in the construction industry of over 30 years as both a consultant and a project based engineer. However I have to say that the problem is that we have a crisis in this country which is not limited to just the construction industry. That is we no longer distinguish between professional and trade skills. We have gone the route of “jack is as good as his master” and that’s the Australian way.

    In my experience most clients do not have any significant appreciation of the potential that consultants have and usually treat them as a necessary evil rather than true partners in their project. They see the design fees as a way of gathering a bunch of PI policies that they can sue against if things go wrong. And to their shame most consultant respond to this by lowering their fee and buckling under the pressure.

    I have not met a client in recent times who would pay for the level of consulting service required to produce the level of documentation you and the industry are crying out for.

    This attitude is best summed up by a recent on site exchange that a colleague of mine experienced.

    There was meeting on site between my friend who is an experienced hydraulic designer and the client and the plumber on the project.

    My friend was trying to explain to the plumber why he wanted the piping to follow a certain route. He was trying to point out the long term benefits of his approach and that even though what the plumber was suggesting was technically compliant and would save money in his professional experience the plumbers suggestion almost always ended badly and that within 12 months of the work being completed there would need to be a large sum spent on rectification costs which made the up front saving pale into the dusk.

    The client turned to the plumber and said will it comply. The plumber said yes and it will save you money. My friend was about to repeat what he had taken all morning to explain when the client turns on him and says, “what would you know you just draw lines he does the real work.” and walks away.

    It is my experience that this is an attitude embedded in the Australian Psyche. We just don’t value what the expert has to bring to the party. Until this changes every thing you have said is just bubble and squeak.

  • Jake says:

    PPP I say no more

  • Nicholas Loder says:

    “Repeat clients should be looking to buy-in informed buyer capabilities to set up a framework to point designers and project managers on a path that requires more for less to be achieved.”

    Woe indeed awaits the client who remains aloof to David’s analysis.

  • John Millar says:

    Brilliant article. Having now retired after decades in construction, building services, tendering, contract and project management, there is generally an adversary relationship between the parties. Variations are where project profits are made. As well as the noted corner and cost cutting. One of the main problems is inadequate documentation. Specs are cut and paste with inadequate proofreading. Recipe for conflict. The less said about Certification standards the better.

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