Online Article – 8th July, 2019
Considering we’re in the midst of an infrastructure boom, it’s time to ask: what is going on?
The problem with infrastructure blow-outs boils down to a deep-seated, cultural issue with how Australians approach infrastructure projects. That is: in a defensive and confrontational fashion, propped up by a dysfunctional engineering, procurement and construction (EPC) contract model.
Under EPC contracts, the principal or owner enters into a contract with the designated contractor, who will, in turn, enter into various subcontracts for various aspects of the work. Essentially, the risk of the project is passed on to the contractor who oversees design, construction and often incurs any additional financial costs.
I speak to contractors regularly and they find the contract process to be confrontational, litigious and dispute driven, as opposed to collaborative and outcome driven. This modus operandi is baked into our psyche in the way we build mega infrastructure projects and, unfortunately, generations of management in Australia only know this self-defeating, and expensive, way of operating.
Problems are inevitable on mega projects – there are, after all, large undertakings and highly challenging constructions, completed over many years with many different stakeholders – but the real issue is that these problems are dealt with in a litigious fashion, rather than a consensus-seeking one.
There is a culture in Australia of ”fight your corner” and go to the lawyer’s office to fix the problem, rather than to the building site. This attitude is supported by the flawed EPC contract system that encourages blame-shifting, litigation and often puts an inordinate amount of responsibility on the contractors’ shoulders.
This dispute-orientated and adversarial approach ultimately leads to time delays, and subsequent cost overruns, as the contractor and principal are focused on protecting their position, rather than on completing the project. If both the contractor and the principal had an “identify-and-remedy-first” approach, the delays to construction completion would be mitigated alongside cost overruns.
Alliance-style contracts, on the other hand, which are more commonly used in Europe, will materially mitigate the cost overruns by reducing construction delays. They involve the shared responsibility of bringing a project to fruition, and involve government and the private sector working in partnership on big projects.
Crucially, alliance contracts take proactive steps towards rectification, not retreat. This encourages a “we” mentality towards the inevitable construction challenges, rather than a them-versus-us approach. They may not mitigate the cost of construction due to unforeseen issues, however, they will mitigate the time delays, which result from EPC contracts and our confrontational approach to construction issues.
Indeed, a 2009 report by the Department of Treasury and Finance in the Victorian government, concluded that 96 per cent of alliance projects were completed on time or ahead of schedule. This figure relates to a body of 46 alliance projects, all valued at over $100 million.
Ironically, when construction problems arise and the original EPC contracts are terminated, the vast majority of new contracts drawn up to complete the construction are done on an alliance-style basis, a tacit acknowledgment of their capacity to fix problems and bring fractured parties together.
Infrastructure is one of the few streams of the economy that is booming and yet because of the level of risk companies are being asked to take on, many contractors don’t want a bar of it. Lendlease, for example, recently pulled out of the space because they couldn’t make their engineering division work. If Lendlease, a tier-one builder, cannot succeed in this space, no one can.
What is more, that space may be taken up by a series of second-tier builders, without the balance sheet or experience to deliver, and as a result, Australia’s infrastructure debacle will only get worse. Competition is usually healthy for the market, but when the top operators cannot work the contract system, what hope do those companies with no knowledge of the local contract market have?
The examples of Duro, that built the Roy Hill iron ore mine in Western Australia and Acciona Global, which was charged with the Sydney Light Rail, are telling examples of construction disasters with massive delays and cost overruns. And yet, both are also successful Spanish contractors that could not execute in the Australian market.
Government procurement processes, furthermore, need to be more vibrant and creative: simply going with cheapest and quickest is not good enough, and condemns mega projects to failure.
While governments will say their procurement projects are dynamic, they will be placed under increasing scrutiny over the coming years with second-tier and overseas contractors looking to enter the market. The contractors tasked with building our infrastructure of the future will be first-time entrants or at least inexperienced at Australian mega projects.
The government needs to be a partner in construction with the contractor; not opposition party. If you ask contractors, they will say contracting with government is akin to, “Thanks for the tender, now deliver on that price and we will see you at completion to cut the ribbon”.
That needs to change.
Scott Langdon is a partner at KordaMentha Restructuring.