How to rebuild the construction industry
Every prospective project owner and developer is now severely disadvantaged by the absence of a large pool of financially strong contractors. This situation has been selfinflicted by themselves and their predecessors.
It is often said risk allocation is inappropriate, and this is best illustrated with examples. It is irresponsible for an employer to require a contractor to take all the risk in relation to ground conditions. Let the present claim for more than A$1 billion ($1.09b) against New South Wales Transport be a lesson to everyone, whether you are building an underground railway or a house, or something in between.
That claim is for damages for deceptive and misleading conduct in relation to underground issues. It seems to be an example of the consequences of an owner trying to be too clever.
Also, it is irresponsible of an employer to hold over the head of the contractor the right to give some work to others in the future, and it is irresponsible to retain the right to make significant programming adjustments yet deny a variation to the contractor.
These are simple examples of numerous situations where contractors are being regularly asked to take risks which they are not equipped to either manage or price.
Another common example is thrusting on to the contractor the risk of future design issues when the owner retains control of design.
There is an obsession with accepting the lowest price regardless of good reasons not to. There is an obsession about requiring tendering for every project when that is not always appropriate.
In Fletcher’s heyday, the company was well known within the construction industry for two strategies. First, it went through a period of many years when it negotiated as many contracts as it could and avoided tendering wherever it could. This significantly reduced its risk, but it also ensured the employer ended up with a financially strong and very reliable contractor. Secondly, it had a reputation in the industry for looking after its subcontractors. They are the lifeblood of any major contractor.
It was not the fault of Fletcher that the opportunity to obtain negotiated work significantly fell away. It was probably due to the short sightedness (and
inexperience) of those at the procurement end who could not stand the thought of missing out on an alternative contractor being a fraction cheaper.
Some of these issues are not only about owners and their consultants, but their bankers, and their consultants. They do not seem to understand it is better to pay a slightly higher price and have the security of a financially sound contractor with a reputation for consistent quality workmanship.
Some seem to think that shaving a few dollars off another contractor’s margin to enable it to secure the job will provide the best outcome.
This could not be more shortsighted and wrong.
Unfortunately, consultants advising owners who wish to impose draconian contract conditions and shave the margins to the bare bone would rather assist them to implement these unwise tactics than see the owner shift to another consultant who will quickly accommodate their foolish requirements.
Although it is obvious to everyone in the industry, no one seems to want to believe that if the contract has been concluded on the basis of draconian contractual provisions, minimum margins and generally an over-riding anticontractor approach, then what will happen is that the contactor will be on an attacking position from the outset.
It will want to preserve its margin and it will want to ensure it does not lose money as a result of the unfair provisions. It will therefore adopt a claims mentality from the outset.
The most effective solution will be a change in mindset.
Owners and their consultants will be likely to achieve the best results if they stand back from inappropriate procurement tactics and take a broader view of getting the right contractor for the appropriate job at a fair price and based on fair conditions.
A mindset of saving a few dollars and imposing harsh conditions because they think that is how it should be done, will continue to not work.
Ironically, many experienced employers and consultants have no difficulty with this and adopt good approaches. The problem lies with a number of less experienced people coming into a busy market and wanting to prove themselves.
Another solution which can often require an enormous level of will power is to complete the design before tenders are called, or a contractor is asked to price the work. We are riddled with projects where owners are always trying to “beat the gun”. The fallacy with an obsession for always requiring tendering can be simply illustrated. Consider a project such as a hotel or apartment block which is likely to cost in the region of $80 million. That is not the amount which will avoid being tested in a negotiated contract. This is because usually about 80 per cent of it is competitively bid through the tendering for subcontract work. Only about 20 per cent of that price is what is really being negotiated.
Good quantity surveyors will have a very accurate knowledge of the going rate for the various margins (on-site and off-site overheads and profit) and they will know if a contractor is underpricing or over pricing.
Obviously, if one decides to proceed with a negotiated contract it is essential to require agreement by a date which still leaves time to tender if agreement can’t be reached. All consultants (lawyers, architects, engineers, project managers and quantity surveyors) should stand up to their clients and explain to them why short cuts, harsh clauses and penny-pinching are counterproductive in many ways.