Interesting article written by a law firm Partner re: the "Broken contract model" that I've seen referred to occasionally. Last year, Gladys Berejiklian (Premier of New South Wales) went on the news/record immediately after Acciona and the NSW Government settled out of court on the Sydney Light Rail Project to say that Government's (the Client for public infrastructure) must have better and more cooperative relationships with construction contractors.
The SLR Project that was heavily criticised in the media for cost blow outs, time blow outs, poor productivity etc. It was a PPP, and my "intel" was that the contract and upfront design scope was going to set whoever won the contract up for failure from the beginning. The "risk" taken by tendering contractors is driven by the competitiveness to win more work for a number of reasons, profit obviously, but also maintaining market/country presence, maintaining employment of key resources in the business etc.
This is just one written opinion that i just happened to see on LinkedIn that had been shared by the CEO of Acciona (funnily enough he highly recommended the article!!!)
A New Deal for infrastructure in Australia?Published on June 23, 2020
Matthew Croagh Partner / Head of Australia at Pinsent Masons
In 1933 Roosevelt was sworn in as President of the United States amid a depression which had devastated the world. The series of programs he introduced, referred to as the New Deal, focused on relief, recovery and reform. Public works projects were at its core. The nature and scale of the New Deal were unprecedented. As Roosevelt said at the time, “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation”.
Although Australia did not adopt the Keynesian approach of the New Deal (resulting in a longer recovery from the Great Depression), the economic thinking which informed the New Deal is now accepted wisdom. Infrastructure is seen as a key part of the economic road out of this pandemic. It provides a multiplier effect by first assisting to alleviate unemployment directly and by secondly improving the productive potential and efficiency of the economy. All of this is uncontroversial. However, there are serious problems in our infrastructure sector which undermine our nation’s ability to efficiently and safely deliver the state-led infrastructure projects we sorely need.
At one level, these problems threaten the profitability, and ultimately the viability, of the service providers we rely on to deliver the projects. At another level, these same problems critically threaten the sector as a safe and productive place of employment providing a fulfilling vocation for our workers. Over the last two decades there has been a consolidation of the companies that have the scale, experience and balance sheet to deliver the mega projects. These major contractors are now predominantly foreign controlled. They have world class experience. Despite this, there is a track record of major contractors losing substantial sums delivering the mega projects in Australia. This points to a very serious problem with the way governments procure major infrastructure. Ultimately, these companies can choose in which countries they do business. A presence here is not necessary for them. Australia already has a poor international reputation due to a string of loss making mega projects. This was recently clearly demonstrated by the Victorian Government's failed efforts to attract other international contractors to participate in the “profitless infrastructure boom”.
Arising from where the market has found itself, decisions about what projects are bid and whether a position in the Australian infrastructure market should be persisted with are no longer made in Australian boardrooms. Resources will be shifted elsewhere if prospects of making a reasonable profit in Australia are low. That this leads to bad outcomes is self-evident. Consider the result of another bidder withdrawing from the North East Link project after one already has?So what is to be done?
First, the substance and form of government procurement contracts must be reformed. There are promising signs that governments are willing to look at more collaborative forms of contract. This will take some time. In the meantime, a more sensible approach to risk allocation must be adopted. For example, governments should accept the risk and responsibility for the matters and stakeholders which are in its control or subject to its authority or influence and not push this risk on to contractors. The contracts themselves must also be streamlined. The government spends millions on having advisors prepare contracts that are overly complex, the administration of which is costly and burdensome. To secure the valuable rights such contracts apparently confer on contractors requires unnecessarily complicated contractual processes to be followed. These processes are often effectively impossible to comply with. The sanctions for minor non-compliances are often fatal to entitlement.
Secondly, transcending contracting strategies, is the need for a government led cultural shift towards a more collaborative approach. Complicated construction and engineering projects require a “best for project” approach on the part of all relevant parties to help manage the multiple interfaces and the emergence of unforeseen risks. Unfortunately, the industry has become (or continues to be) unnecessarily adversarial. This is perhaps to some extent unavoidable in the high stakes game where risks are allocated and blame is an inevitable reaction to the emergence of a problem. Too often in the eyes of the contractors, the “best for project” approach advocated by governments results is more workshopping of alternatives resulting in more costly outcomes for the contractor with no increased return. Distressed projects all too often descend into distracting and unproductive disputes, with contractors driven to claims while governments accuse them of incompetence, or worse. Such controversies are often played out in the press, with the government having the opportunity to mobilise this powerful medium to articulate its position while the contractor, bound by confidentiality obligations, must stay silent. Successful projects require all challenges to be confronted as shared problems to be solved. This requires a profound cultural shift which the government, as the proponent of the projects, must lead.As a related point, governments also need to show leadership when it comes to the government agencies and stakeholders with whom the contractors must consult as part of the design process. Many of the hurdles placed in the way of projects emanate from government agencies. Responsibility for satisfying their often conflicting requirements is pushed onto the contractor without assistance from the government.
Thirdly, we must seek to involve more of the industry in the mega projects by dividing the projects into smaller packages which will make them more accessible to our high quality second and third tier contractors.
Fourthly, genuine IR reform is needed to increase productivity. Mega projects remain plagued by uneconomic site allowances, unlawful industrial action (often targeting critical activities such as concrete pours) and union-mandated employment.
Fifthly, we must adopt a truly national approach to the infrastructure sector. This means that we must adopt a national infrastructure program which provides for sequential timing of major projects – competition between States for resources and expertise is grossly inefficient. Furthermore, regulation, forms of contract and matters such as security of payment legislation must be standardised.
Finally and most importantly, we need to address the mental health crisis in the construction industry so that it provides a safe and productive place of employment. Suicide rates are tragically high. Construction workers are more than twice as likely to take their own lives as other Australians. Professionals working on major projects are working extreme hours and under constant deadline pressure. Employers are not hiding from the devastating reality of the data. Major contractors are prioritising mental health training for employees but it is a long road to change an industry where a deeply entrenched 'macho' culture and burn-out inducing hours are the norm.
Addressing improved risk allocation, the adoption of more collaborative strategies in project delivery and a simplification of forms of contract will have the effect of reducing the burden that the industry, in its current form, brings to bear on its workforce. This will lead to better mental health outcomes.To achieve practical not theoretical change, employers in our industry need support and assistance to begin or continue rolling out suitable training, policies and procedures. Specialised training from organisations like MATES in Construction, the Bluehats initiative and the Black Dog Institute should be mandatory if we are serious about meaningfully supporting our construction workers. If we are to encourage our young people to enter an industry which we see as critical to our nation’s future, we owe it to them to take decisive steps to address the tragic problem which affects much of it.
In the face of a serious crisis, our State and Federal governments have demonstrated the capacity to rise above the partisan and leadership squabbles that have dominated public life and prevented serious reform for more than a decade. We must leverage the adaptability and togetherness which has emerged in response to the challenges of Covid-19 to catalyse the cultural and contractual change this industry so desperately needs. There is already evidence of government, unions and the private sector beginning to work together in a respectful and collaborative manner. Long may that continue. The nation is presented with a once in a lifetime opportunity to change things for the better. To borrow from Roosevelt, now is the time for bold and persistent experimentation.
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