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Trust Is About Character and Competency

At a time when the construction industry should be standing up and taking stock, it lacks an authoritative, authentic single voice. One only needs to follow the conversations currently playing out at the enquiries and in interventions to the various parts of construction today. This is not a recent observation, but it was reinforced by a call from a colleague who had just sat through the Melbourne Public Hearing of the Senate References Committee into Non-Conforming Building Materials. It was a sad re-cap. Have we come to a tipping point?

Let’s not mince words in describing the current state of construction in Australia. When construction’s value proposition should be on the ascendancy, there is rising disquiet amongst the industry’s clients and regulators that things seem to be getting worse. Compromised buildings and poor customer experiences seem to dominate the media, when behind the scenes there are many exciting developments to help make buildings better.

Three current interventions in construction make the case that we have a badly broken industry – an industry that lacks the vision and authenticity needed for the future:

How did we get to this tipping point?

There is sufficient media coverage of the issues that each of these attempts to fix a broken industry have been asked to resolve. There are endless reports on the submissions received and the recommendations made by many very respected and eminent folk. These trace back through some very expensive Royal Commissions. There have been clear pointers throughout these enquiries to the fragmentation and lack of leadership that defines the construction industry in Australia. These have a strong base in a federated system where state based jurisdictions and mirror industry associations dictate.

The fragmentation of the industry has progressively worsened as governments shed their traditional roles as informed buyers and those who insist that construction contracts be fully delivered. There was a price to pay for governments having what was then fairly judged as intransigence and a slowness to transform practices when it came to buying construction. The industry was vocal about how they could assume these traditional functions and do better. This has turned out to be a case of, ‘you need to be careful about what you wish for.’ From a public and a consumer perspective the performance of construction is now out of control.

Governments have become entirely risk averse. They rely on process, not substance, to dictate a procurement system that has become as self-indulgent as the one it replaced. The costs of construction are set by a few major constructors who enjoy an oligopolistic station as they influence government policy and practice while sweeping up the cost of their performances into the new benchmark for procuring the next project. No other industry continues the premise that the price of the next thing it makes will be the ‘cost of the last thing, plus a bit’ and especially if its products are becoming less reliable.

Unsustainable fragmentation and out of touch representations

Those who have attended or made submissions to any construction industry inquiry will know in their hearts that the current state of blame shifting and ring-fencing is unsustainable. But everyone seems intent in shoring up their position and limitations.

The 2014 National Energy Efficient Buildings Project report, commissioned by South Australia on behalf of all Australian governments, documented non-compliance, product substitution and uninterested regulators Australia-wide. It made 47 detailed and carefully considered recommendations. The report’s author Phillip Harrington recently attested that “three years later, no government has responded to the report let alone implemented the recommendations,” and – so far as he can ascertain – “no state is undertaking compliance audits – no one cares and no one’s looking.” The focus was energy performance, not fire safety, but Harrington documented a broken system, “in such a system, poor outcomes must be expected.” Who’s accepting legal liability for all the non-compliant building work?

Do we need to know more than we already do to realise we have a national problem? The Review into Security of Payment Laws is a good example. Anthony Igra’s recent article titled Security of Payments Myths is worth reading. Igra sets out the existing methods that should enable contractors to get paid, though he had to do this by describing the available mechanisms on a jurisdiction by jurisdiction basis.

He avoided the real elephant in the room: contractors have always seen their supply chain’s due payments as a source of finance. These practices and a culture that underpin the problems should be long past in a modern construction industry – an industry that should be turning its mind to smarter and better.

But the representations of the status quo persist. The representation transcript of the Australian Building Codes Board to the Non-Conforming Building Materials enquiry should be further evidence that there is no effective single point governance for this industry. And it will make little difference to the outcomes of the enquiry as perplexed industry associations call for better qualifications and accountability for professional certifiers. And there will be no submissions about the shortcomings of Australia’s standard building contracts, how progress payments are made on account and not as evidence of work being performed in accordance with the contract. There will be no submissions on how the valuation of work occurs and how final construction certificates are issued with the prospect of lost defects. There will be no advocacy for work falsely claimed and paid for, to in effect be called fraud.

The ABCC has had its work cut out for it, and progress was in large part been due to the tireless efforts of Nigel Hadgkiss. He was no fool, and he knew just how fragmented the industry’s representations are. He knows how preserving the status quo works. When asked how the productivity impact of a more law-abiding construction industry might be measured he is left to indicators such as a hopeful reduction in days lost to industrial disputes.

Hadgkiss had no support for measures that would point to real productivity improvement that test constructor and workforce ability to become more efficient by smarter on-site construction. The construction industry is measurement resistant, as the many politicians from all sides will know. Most were lobbied by the industry to hit the idea of productivity measurement as a pre-requisite of future enterprise bargaining agreements firmly on the head. It’s just too easy to pass these costs on to clients. The status-quo is more accommodating.

Most obvious to those observing the current Senate enquiry into Non-Conforming Building Materials is the short change given to any other related aspect of poor construction quality. If it’s not about materials, especially imported ones, it’s not for discussion. There is to be no entertainment of the non-compliant work that occurs on construction projects every day. There seems to be no interest in how a modern industry will prepare for increasing amounts of construction work being performed off-site and increasingly off-shore. There seems to be no interest in how the world’s processes for product and work authentication and chains of custody are evolving in ways that could make the current broken systems irrelevant. All of these enquiries have the same inevitability: more of the same, just tinkering at the edges.

Where to from here?

Constraining construction’s future dealing practices may soon be wrested from the failed gatekeepers. Frankly, that needs to happen, and fast, if Australian construction is to prosper.

The global financial markets work on trust-based systems, and not the ‘group hug’ type. ANZ’s general manager for wholesale digital banking foresees “many obsolescent processes across commercial property management and insurance.” Examples include how new trust based distributed ledger technologies (Blockchains) are being adopted for share trading and recently the management of bank guarantees by shopping centre owners who currently rely on paper based systems to manage thousands of tenant securities worth tens of billions.

A 2009 Price Waterhouse Coopers report estimated that up to 89,000 houses in New Zealand could still be affected by leaky building problems. The report estimated the repair and replacement cost at $NZ11.3 billion, based on the assumption that only houses regarded as high risk under the Building Code would fail. New research has found the price of certain homes built in the 1990s and 2000s could drop up to 21 per cent – almost $300,000 on the average Auckland house price or just over $130,000 for the average national house price. These numbers pale in significance when the full scale of non-conforming construction materials and work is uncovered more widely around the world. The point to be made here is the potential risk to governments to fund repairs and damages when no other viable party remains. This is not just a sleeper for governments, it crystalizes impairment risk for banks.

There is already evidence of a significant drop in property valuation for same apartments in buildings like the Lacrosse apartments in Melbourne due to the discovery of impaired building works. Property is the largest invested, financed and insured asset class in Australia. One wonders how long it will be before financial ratings agencies like Standard and Poor’s start to ask the banks how they might be provisioning for loan impairments due to risky buildings and how they may be identifying these in the first place. A serious consideration of this question will pay little regard to the findings of the current Senate enquiry, its self-imposed limitations or recommendations. Dealing with the more serious consequences will be what banks will do.

A lot has changed in construction over the last 10-years. There are now ways to identify and price property-related risks on an asset by asset basis. Gone are the days where one price must fit all. Gone soon will be the days when false products like Home Owner Warranty Insurances will be offered as a means to spread the cost of poor industry performance evenly across all its players. Soon, individual builder and building risk will be able to be recorded and priced. Technologies and products already exist to enable this. In the face of the consequences of construction performances becoming more acute and apparent, one senses that the financial and insurance market forces will need to step-in. Ignorance will no longer be a defense in the face of massive property impairment risk and repair exposure.

The construction industry will ignore at its peril the momentous forces that are reshaping and will continue to reshape the industry over the next few years. As we move further into the new millennium, systems based on an old industrial model now face post-industrial stresses. They are becoming increasingly unworkable in our networked world. The tipping point is becoming more apparent. This evolution is causing a blurring of the traditional roles of consultants as they expand into construction services, while constructors are taking on new specialities and others are creating one-stop-shop capabilities. The finger pointing will end.

In this context, trust will become a hard-edged language that underpins transaction authenticity. Construction is late onto the block in re-imagining its future. But, the tipping point has arrived and it will hasten change. The consequences are now too big to ignore.