Improving Australia’s civil engineering sector through better commercial frameworks

Published on LinkedIn, October 19, 2020

Calls for reforms to Australia’s civil engineering sector have become louder over recent weeks with the release of:

Common themes that emerge from the documents include:

  • the problems that need to be addressed, including low profitability, boom/bust cycles, woeful gender diversity, poor mental health, low productivity growth and, consequently, difficulties in attracting and retaining talent to the sector
  • the importance of the sector, in terms of its contribution to the economic activity, job creation, and societal objectives such as improved indigenous involvement and skills development;
  • the need for all industry participants – clients/project owners, head contractors, subcontractors, suppliers and consultants – to take steps to bring about positive change; and
  • the need for coordinated action.

The ACA document calls for the Federal Government to assume this coordination role, through Infrastructure Australia, the Transport and Infrastructure Council and/or the National COVID Coordination Commission Advisory Board. The Roads Australia report, on the other hand, suggests that a collaborative partnership be established between the Federal and Victorian Governments and industry – perhaps because the Roads Australia initiative responded to an invitation from the Victorian Premier.

The ACA document provides a sensible framework for a more sustainable industry future, built around three pillars:

  1. Aligned Commercial Frameworks;
  2. Positive Industry Culture; and
  3. Sufficient Capacity and Capability.

Importantly, the ACA recognises that the three pillars are interrelated, such that the ability to achieve improved outcomes for any one pillar relies on improvements in the other two. Commercial frameworks based on tendered fixed prices, and the allocation of specific responsibilities and risks, create inherently adversarial commercial relationships (for reasons I’ve explained earlier articles, linked below). This, in turn, drives a negative culture of blaming others (rather than collaborative problem solving) when things go wrong. And this negative industry culture is an impediment to attracting and retaining talent to the industry.

As a commercial lawyer, I have seen, time and time again, how the commercial framework that the parties adopt in their contract dictates how they are rewarded, which drives how they will behave. In short, money motivates. To improve industry culture, the commercial frameworks in our contractual arrangements need to be redesigned to reward the outcomes and behaviours that industry participants are seeking. The resultant improvement in culture will, in turn, attract more people to the sector. Capability improvements can also be driven more directly, by creating commercial frameworks that financially reward non-owner participants for exceeding training and skill development KPIs.

It is for this reason that I have been strongly advocating for project owners to abandon fixed price contracts on mega projects in favour of alternative commercial frameworks that better align the commercial interests of the parties – for example, frameworks that provide for cost reimbursement coupled with a gainshare/painshare regime that ties the profit margin of each non-owner participant to whole of project outcomes.

Longer-term framework agreements should also be explored, that incorporate commercial frameworks that will allow non-owner participants share in the longer terms gains that will ultimately accrue to owners if the non-owner participants invest in capacity, capability and productivity improvements. Longer term framework agreements, with a life beyond any single project, could also become the vehicle through which the achievement of other longer term objectives identified by the ACA and Roads Australia can be incentivised, including:

  • greater engagement around the development of project pipelines, and the early planning stage of projects;
  • improved transparency and accountability; and
  • strengthening the industry’s social licence to operate.

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