a change in mindset is essential to address problems in the construction industry
Derek Firth
Part A - some problems
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 self-inflicted by themselves and their predecessors. It is often said that risk allocation is inappropriate, and this is best illustrated with examples. It is totally irresponsible for an employer to require a contractor to take all the risk in relation to ground conditions. Let the present claim for over AUD 1 billion against NSW 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. It is totally 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 totally 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 onto 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, often, not to. There is an obsession about requiring tendering for every project when that is not always appropriate. In Fletcher’s heyday, that 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 that 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 also their bankers, and their consultants. They do not seem to understand that 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 short-sighted and wrong. Unfortunately, consultants advising owners who wish to impose draconian contract conditions and shave the margins to the bare