HR Nicholls Society

2014 Annual Dinner - Keynote Address

Monday 24th November 2014

LABOUR PRODUCTIVITY IN THE AUSTRALIAN

CONSTRUCTION INDUSTRY WHY ITS BROKEN AND
HOW TO FIX IT
or
LA CONSTRUCTION! CEST UNE CHOSE TROP GRAVE
POUR LA CONFIER DES CONSTRUCTEURS
(With Apologies to Georges Clemenceau 1841 1929)

Final For Distribution

Stephen Sasse
Alpheus Advisory Pty Ltd
Level 14, 52 Phillip Street
SYDNEY NSW 2000
stephen@alpheus.com.au
0487 482 331

THE PARABLE OF THE PIGEONS

Slide One

There was once a City which was not dissimilar to ours. It was made up of the People and the
Contractors. The city was also home to a flock of pigeons. The Contractors were wasteful and untidy,
and wherever they worked they left scraps of food. The pigeons ate the scraps, and became plump
and multiplied. Over time, the pigeons became bolder, and as well as eating scraps they began to
enter the Contractors premises and take food from kitchens and pantries. Every now and then the
People complained about the pigeons who were taking over the city, causing disease and creating
unpleasant odours. Eventually, there were protests and calls to smite the pigeons. But nothing
happened, and the pigeons became more and more dominant in the city. Sometimes the People and
the pigeons clashed but nothing really changed, and the pigeons became entrenched.
In the year 2010, in the month of November, a man called Robert rose to prominence in the city.
Robert had considered the problem of the pigeons and the costs that they were imposing on the city;
but unlike everybody else, Robert did not advocate the smiting of pigeons. Instead, Robert issued a
simple instruction to the Contractors. He called his instruction the Code. The Code forbade the
Contractors from leaving their food scraps and required them to keep their kitchens and pantries
secure. Contractors who did not comply with the Code were banished from the city. Within weeks,
the pigeons had reduced in number, and were much less bold. Very soon the city became a far more
pleasant place to live.

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THE AUSTRALIAN CONSTRUCTION INDUSTRY

If you were not aware that Australia has become an extremely costly place to build things, then you
should be there has been no shortage of credible declamations to this effect:
February 2011

Eco Transit

Sydneys North West Rail Link priced at $366 million

per kilometre. This compares with $90 million per
kilometre for the Gotthard Base Tunnel1. (That is a
factor of 4)
It is evident that labour costs in general are regarded
as more expensive in Australia 2

February 2012

March 2012

Worcester
Polytechnic
Institute Tunnelling
Study
Martin Ferguson

September 2012

Minerals Council

Rising capital costs mean our new projects are also

less competitive. For example, only five years ago we
could build coal and iron ore projects as cheaply as our
competitors. Capital costs, however, are rising more
rapidly here than in the rest of the world.4

October 2012

BHP Billiton

Resource and Energy Sector Construction Wages have

escalated at 16.6% CAGR 2001 - 20125

May 2013

McKinsey

The cost of building new LNG projects has increased

tremendously in the past decade and is now 20% - 30%
higher than that of the competition6

October 2013

PWC

The Australian construction industry is a laggard,

saved from additional scrutiny only by the productivity
malaise that has beset other Australian industries7

February 2014

SMH

Australia one of most expensive places to build8

November 2014

SMH

The costs of light rail projects in NSW were about four

times those of Europe9

Australia is already a high-cost nation in terms of

delivery of capital projects and we must do everything
we can to maintain our competitiveness3

The fact that we are in this position is no surprise the Howard Government construction reforms
had, by 20078, delivered a productivity increase to the Australian Construction Industry of more
than 10%10 (equivalent to 1% of GDP). The systematic dismantling of those reforms could have no
outcome other than to reverse those gains.
What is both surprising and cause for very serious concern is that there is no recognition of the dire
implications of this position. The fact that we have become the most expensive construction
destination on the planet is nothing short of a national disaster a disaster demanding the same
degree of resolute and bipartisan leadership that this country has been able to demonstrate in
responding to a Cyclone Tracey, a Port Arthur or the threat of Islamic extremists.
Let me spell out why the situation is so serious.

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The Productivity Commission, in its 2014 Report into Public Infrastructure notes that the efficient
provision of infrastructure, including public infrastructure, is the hallmark of a well-functioning
economy11. That is hard to argue with but what does it really mean? What happens to an
economy and to its citizens when the provision of infrastructure is costly, inefficient and
characterised by declining productivity?
Firstly, you get less of it. As the price of any item increases, you cant afford as much of it. That
means fewer hospitals that take longer to build. This is not merely an economists theorising this
affects the very quality of life for the people that make up our society. When the Australian Institute
of Health and Welfare reports that 50% of patients waited 36 days or less for elective surgery in
2011-12, an increase from 34 days in 2007-08 and a total of 2.7% waited more than a year12 that
is tangible human suffering some of which results from inefficiencies in construction procurement
and productivity.
Similarly for schools, nursing homes and sports facilities. Also roads and rail and the associated
economic, social and environmental costs of congestion. In certain classes of infrastructure, it is not
a case of getting less you may get none at all. Sydney will never get a second airport unless our
construction industry undergoes a step change in efficiency. The Sydney Morning Heralds report
that Badgerys Creek would cost a mere $2.5 billion13 is tragicomic indeed.
Secondly, it is the citizens who pay the price and it is brutally regressive. Take the infamous
Wonthaggi Desalination Plant. It is estimated that it will cost the State of Victoria $24 billion over 28
years14. Victoria has a population of 5.7 million people. If we assume that one third of those people
are income earners, then each of them will be paying $450 per year over what is an entire working
life. So delivering Wonthaggi (assuming it was ever required) at a 30% discount to its actual cost
would have saved the taxpayer a whole days work at average wages for each of 28 years. And if
youre one of the one million or so Victorian taxpayers who earn less than the average then the
opportunity cost of that $4,200 is significant.
So the first point that I want to make is this:
Slide Two

An efficient construction industry is essential for the

provision of sufficient and affordable social
infrastructure. The burden of an inefficient
construction industry is borne by all of society, but it is
highly regressive. It is the less well-off members of our
community who rely on waiting lists for elective
surgery; who sweat it out on the trains; and for whom
$4,200 is a significant sum.

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In my introduction, I referred to the resources sector. The ramifications of poor productivity in

resources construction are even more dire than in the social and transport infrastructure sectors.
This is because capital love it or loathe it is absolutely mobile. The global asset owner, the
investor or the banker will direct his capital to the development of a resource that offers the best
return for the least risk.
Slide Three

These data15, from the Minerals Council tell us that in 2007, it cost US$61 in capital expenditure to
construct an additional tonne of thermal coal capacity a 16.5% advantage compared to the global
competition. By 2012 that cost had increased by 285% to US$176, a 66% disadvantage compared to
the global competition. The figures for iron ore show an increase in cost of 95%, and the relative
disadvantage increasing from 4% to 30%.
Consider that rate of performance in another area of Australias national life:
Slide Four
In 2008, Eamon Sullivan swam 100 metres freestyle in 47.05 seconds 16. If his rate of improvement
was comparable to the construction contractors servicing the coal industry, he would have got to 2
minutes and 23 seconds by 2012, and would be on track for 3 minutes and 36 seconds for this year.
In the Pilbara, my own analysis indicates that the average iron ore development project cost blow
out is 45%.
Slide Five
If you find that distressing, consider the LNG sector:
Slide Six

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This analysis17 shows that the average project cost blow out for Woodsides Pluto Project; Chevrons
Gorgon and Wheatstone Projects; QGCs Curtis Project; Santos Gladstone Project and Inpexs Icthys
Project is a massive 166%. BREE reports the Gorgon Project as running an unprecedented 301% over
budget, and the industry scuttlebutt suggests that there is worse to come.
When you are the most expensive construction destination on the globe, and your track record for
on-time on-budget completion is so far beyond any global benchmark as to be an embarrassment,
what happens? BREE has answered that question for us as well18:
Slide Seven

This shows Australian committed resources and energy investment declining rapidly from more than
$200 billion this year to $125 billion in 2015, to zero in 2018. In 2012, the number was $250 billion.19
It should be noted that committed investment will of course decline as you get further into the
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future, but what is abundantly clear is that capital investment in resources is on the decline. BREE
ends its 2014 Report with the sobering statement future investment is far from certain and
Australia is facing growing competition from aspiring market entrants for investment dollars.20
Which brings me to my second key point:
Slide Eight
An efficient construction industry is essential for any economy that
has aspirations to exploit mineral and energy resources. As extractive
operations are increasingly automated, it is the ability to construct
the necessary infrastructure competitively and on program that will
increasingly determine the viability of minerals and energy
developments. The capital that funds these investments is global,
mobile, and averse to cost and program blowouts.

So if you go back to the Productivity Commissions litmus test of efficient provision of

infrastructure as the measure of a well-functioning economy, then I think its reasonable to conclude
that the nation comprehensively fails the test, and that as a result the strength of our economy and
the well-being of our society has been damaged and there is no reason to assume that things wont
get worse.
Why is our construction industry so comprehensively failing the nation?
1. Absence of Offshore Competition
There is no offshore competition. Manufacturers compete globally and must understand and
manage labour costs and labour productivity from a global perspective. Australia is littered
with examples of industries and employers that were unable to do that. Miners must also
compete globally, though the quality of the deposit can cover many sins. Construction
contractors are not subject to this constraint.
There is, obviously, nothing that can be done about this fact but it does reinforce the point
that the construction industry operates without the competitive and market disciplines that
constrain other industries. Government in its dual capacities of regulator and client must
recognise this fact.
I have classified the remaining four issues underlying the industrys performance as:
Type I Pattern Bargaining: Union Imposed/Employer Conceded;
Type II Pattern Bargaining: Client Imposed;
Type I Managerial Ineptitude: Contractor Failures; and
Type II Managerial Ineptitude: Client Failures
2. TYPE I PATTERN BARGAINING: Union Imposed/Employer Conceded
I will not presume to lecture this audience on the nature and inefficiencies of pattern
bargaining. The Royal Commission into the Building and Construction Industry provides a
comprehensive analysis of the practice and condemns it out of hand 21 - recommending that
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pattern bargaining be outlawed22. Commissioner Coles primary criticism is that pattern

bargaining cannot by definition result in productivity trade-offs - It denies to the
employers the capacity for flexibility, innovation and competitiveness in a major aspect of
contract cost. In economic terms, it is inefficient23.
I want to go further than Commissioner Cole. It seems to me that the short term economic
interests of contractors may be enhanced by pattern bargaining. Consider these points:
a. If the pattern bargaining outcome is effective, then there can be no competition
amongst contractors in relation to labour costs and productivity. This eliminates
what otherwise should be a key variable in a competitive bid situation. The
contractor is not concerned as to the absolute cost of labour provided that he has
properly constructed his bid, then he knows he will recover his costs. If the
contractor is confident that all of his competitors are bidding on the same labour
cost assumptions, then he can also be confident that labour costs and productivity
are eliminated from the competitive mix.
b. Secondly, provided that every contractor is bidding on the same labour rates and
assumptions, then the contractor has a vested interest in higher rates and longer
project durations. A 14 month project will have more profit in it than a 10 month
project provided that the bid is properly put together and that all competing bids
are based on comparable labour assumptions. The latter is largely guaranteed
through pattern bargaining.
In a reimbursable or cost plus contract, there is at least moral hazard, if not an
outright incentive for the contractor to pursue higher labour rates and lower
productivity as the longer the project duration and the higher its costs then the
more margin goes to the contractor.
Over recent times, commentators such as Robert Gottliebsen24 have suggested that the
community of interest between construction unions and the large construction contractors
is sufficiently pernicious as to be described as a cartel. If a cartel or comparable arrangement
exists, then the mechanism through which it is given effect is the contractors acquiescence
to the practice of pattern bargaining.
3. TYPE II PATTERN BARGAINING: Client Imposed
The third reason for the plight of the industry rests more on the client side. This failing is
best illustrated by the resources industry. When a construction contractor pre-qualifies for a
major resources project, what generally happens is that the client or his agent issues a very
detailed specification providing for all terms and conditions of employment that will apply
on the project. The document may be badged Indicative Key Employment Terms or
Employee Relations Information for Contractors. Such documents may include such
marvellous bromides as:
Below are wage rates and all-purpose allowances which have emerged as market rates on
similar works. These rates and conditions take into consideration factors such as local
conditions and forecast trends within this industry and region. These rates are provided to
Employers to aid with the tender process
Of course what is really being said here is you will bid on these rates and conditions; should
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your bid be successful you will make a Greenfields Enterprise Agreement giving effect to
those rates and conditions; ..and you will not ask questions.
If you go to the Find an Agreement page of the Fair Work Commission website, you will find
92 identical Greenfield Agreements, each of which relates exclusively to onshore works at
Chevrons Gorgon Project. Even the font on the title pages is the same for each agreement
it is only the identities of the employers and the dates of expiry which vary25. Conveniently,
the master document is available on the website of the WA Branch of the CFMEU under the
heading Gorgon Agreement Jan 201026
The results of this form of pattern bargaining are no less damaging than Type I Pattern
Bargaining there is not and cannot be any innovation, competition or variation in
contractors industrial instruments.
As an aside, it is almost certain that in the majority of cases where the Fair Work
Commission approves these Greenfields Enterprise Agreements, the contractors already
have Enterprise Agreements that have sufficient scope to cover some or all of the work and
almost certainly existing employees who will be deployed to the project. Some of you will
recall Commissioner Coles criticism of the AIRC pointing out that agreements are often
certified by the AIRC even though the necessary statutory preconditions have not been met
or no evidence is provided to establish that they have been met27.
And of course, each new project starts with the most recent deal as the baseline. I have
been unable to detect any productivity trade-offs in any of the resources sector pattern
agreements over the last two decades. In April this year, Mr Roy Krzywosinski Managing
Director of Chevron in Australia publicly decried this practice. He is quoted as saying that the
Gorgon project has borne witness to a ratcheting effect where the end point of one project
labour agreement or greenfield agreement, becomes the starting point for the next28.
4. TYPE I MANAGERIAL INEPTITUDE: Contractor Failures
The fourth category of failure is sheer managerial ineptitude. Let me contrast three major
Victorian PPP construction projects to illustrate the point:
a. Slide Nine
The Spencer Street Station PPP was completed in 2006 over 24 months late and
resulted in very significant losses for the contractor 29. It was renowned for its poor
labour productivity and the number and influence of non-working delegates on the
project. My recollection is that the construction unions at the time referred to the
project as Treasure Island and that it boasted some 28 non-working delegates. The
Age reported: "It's like Christmas every day," says one senior building industry figure
familiar with the site conditions. "The rates on the project would encourage any
worker on it to hope it lasts for the term of their natural life. Their pockets are so full
of gold, they can't walk properly.30
b. Slide Ten
The EastLink PPP was completed in 2008, some 5 months ahead of schedule 31. The
industrial relations strategy for the Project was developed after detailed analysis of
the major productivity barriers on other Victorian projects not least Spencer
Street. As a result, the project dispensed entirely with non-working delegates;
eliminated the practice of lock down weekends; refrained from imposing the terms
of the head contractors industrial instrument on sub-contractors; brought
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inclement weather practices back to a sensible and safe benchmark; and crucially,
retained the right to manage the project without going through Byzantine
consultative and dispute resolution processes32.
c. Slide Eleven
The Wonthaggi Desalination PPP was completed in September 2012, well over 12
months late33 and with a loss to the contractor of more than $1 billion34. The
industrial agreement that was developed for the site provided for massive increases
in wages. The Australian reported that the agreement was A union deal that
handed workers (at a Victorian desalination plant) $50 an hour more than their
counterparts at other major projects (and which) threatens to establish a benchmark
for construction projects across the nation35. More importantly, the Wonthaggi
Agreement36 overturned every single reform in work practices that had been
achieved on EastLink and it dramatically reduced managerial prerogative not only
did the Agreement require extensive consultation before the introduction of change,
the disputes resolution procedure created the ability for every managerial decision
to be discussed and reviewed after the event.
In the latter stages of the Project, the unions and Thiess Degrmont were in the
Federal Court in relation to proposed redundancies at Wonthaggi37. This gave rise to
The Age publishing a pithy summary of the Wonthaggi problem: If you are stupid
enough to give away your managerial prerogative, don't come to my court looking to
get it back again.38
In each of these cases, the employers freely signed up to the relevant industrial agreements.
There was no industrial action underway indeed at the point that the employers signed the
agreements there were no employees. You cannot blame the unions for Spencer Street or
Wonthaggi and you cant credit the unions for EastLink. The same unions and largely the
same officials were around through all three projects.
You cant blame the IR system the Spencer Street agreement was made under the
Workplace Relations Act 1996. The EastLink Agreement was made under the same
legislation and before the Howard Government construction industry reforms. The
Wonthaggi Agreement was made under the Fair Work Act 2009.
The standout variable here is managerial will and managerial capacity.
Regardless of the legal framework, the unions agendas and the composition of the
workplace relations tribunal; Australian industrial relations history suggests that there have
been strategically astute and technically competent labour relations professionals, and there
have also been the idiots.
The ability to mindlessly sign the going pattern agreement and buy a cappuccino in Carlton,
Northbridge or Bowen Hills does not constitute industrial relations management in fact it
is not managing anything.
The trouble with the construction industry is that the legacies of the idiots translate into
unnecessary and ongoing burdens on the taxpayer and damage Australias attractiveness to
investors.

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5. TYPE II MANAGERIAL INEPTITUDE: Client Failures

The final category of dereliction underlying the construction industrys unsatisfactory labour
productivity are failures on the client side. There are numerous opportunities for clients of
the construction industry to achieve better value for money on their projects. Whilst Type II
Pattern Bargaining might be egregious enough, often even the basic industrial relations
disciplines are absent, including from clients who should know better.
Let me take you back to the Gorgon project. A significant proportion of those Greenfield
Agreements that we discussed earlier have reached their nominal dates of expiry or will
expire over the next four months or so. This means that a number of the Projects
construction contractors and other suppliers are in a position to be subject to lawful
industrial action.
The WA Branch of the AMWU has very helpfully provided an overview of the renewal
process on its website39. The report makes interesting reading.
a. The AMWU doesnt hide behind euphemisms such as Employee Relations
Information. It states that the AMWU, CFMEU and ETU conducted mass meetings of
more than 5,000 workers on the 11th and 17th September 2014. At the meetings, the
unions presented an offer that had been put by KJV. KJV is the Kellogg Joint
Venture a JV made up of KBR, JGC, Hatch and Clough40 and is the Gorgon Project's
downstream engineering, procurement and construction management contractor 41 generally referred to as an EPCM. It is the EPCM who crafts and issues the
mandatory pattern deals that I referred to earlier.
So lets dispense with any notion that it is the actual employers of the labour force
that are responsible for industrial relations strategy or the content of their
enterprise agreements. The unions certainly have.
As an aside, on Friday 31st October, Chevron conducted an investor briefing on its 3rd
quarter results42. In response to a question from an analyst, Chevrons CFO stated
And with regard to the union contract issue in Australia, at this point in time we
know that there has been a downstream agreement reached in principal (sic) with
certain construction unions and that it still needs to be put to a vote by the union
membership. So we have agreement at the leadership level, but we still need a vote
at the union member level43. Well thats true, strictly speaking; but it is markedly
different from saying that the workforce en masse had already rejected the KJV
offer. Workplace Express is now reporting the formal rejection of the KJV offer by
individual contractor workforces.44
b. KJVs offer included an increase to wages and allowances of 3% from August 2015
and a further 3% from August 2016. KJV also offered to vary the roster from 26 and
9 to 23 and 9. That means the labour force would work three less days per cycle.
On my calculations, KJVs offer would result in a reduction of 30 hours work per man
per annum (that is about 1.1%) and an increase in the number of cycles from 10 per
annum to 11 (that is a 10% increase). The increase in cycles is important because it
increases travel costs and both safety and productivity suffer when roster cycles end
and begin.
c. The AMWU makes it clear that the unions claim on KJV is for a 20 and 10 roster. If
conceded, the claim would result in a reduction of 220 hours per man per annum
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(that is about 8.4%) and an increase in the number of cycles from 10 per annum to
12 (that is a 20% increase)
d. The AMWU then very coyly states The Workers have for the first time on a WA
Major Construction Project got an opportunity to make a substantial change to their
current working situation and they understand that they now have the opportunity
to influence their employers for a significant change. The unions are well aware that
they are in a position to take lawful industrial action on the Project in support of
their claims, and their position is bolstered by the fact that KJV already provides its
staff with a 20 and 10 roster. 45 In its 11 November update, the AMWU quotes the
State Secretary of the ETU as saying that Protected industrial action is always a last
resort for unions.but we may be left with no choice46
Meanwhile, Chevrons CFO went on to advise her investors: Frankly there is more
dialogue in the press about challenges -- union-related challenges for us on this project
than there have been reality (sic) on the ground. So the project continues to make good
progress here.47 Observers of industrial relations on Barrow Island would probably
disagree with that assessment, and I suspect that KJV is being less than candid as to the
realities of the situation that has been created for Chevron.

As an example of poor industrial relations management, this is stellar. The nations largest,
and most globally prominent construction project has been left exposed to protected
industrial action during its critical path. The ability of the contractors and KJV to withstand
such action is negligible to non-existent. The cost of the claim will depend on how the
working hours are split between ordinary time and overtime, but it will be in the vicinity of
15%. And, as the Managing Director of Chevron Australia has rightfully pointed out,
whatever settlement is reached at Gorgon will be the starting point for the next resources
project. I suspect that Chevrons appetite for investment in Australia will be even further
blunted once this entirely avoidable snafu reaches its dnouement.
Slide Twelve

The principal causes of Australias poorly performing construction

industry are:
the major contractors acquiescence to pattern bargaining;
client imposed pattern bargaining outcomes; and
managerial ineptitude on the part of contractors and clients

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The results of these failings are:

excessively costly social and transport infrastructure, which in turn penalises taxpayers and
citizens, particularly the poor;
damage to Australias reputation as a resources investment destination, which in turn reduces
investment, employment and royalty streams; and
a largely irreversible loss of skills.
This last point is important. As on-site construction becomes more expensive, developers, asset
owners and EPCMs look to minimise the labour hours required on-site by utilising pre-fabrication
and modularisation techniques. To an extent this is progress and should be welcomed, but
unfortunately we are not talking about a transfer of jobs from the Australian construction industry
to Australian manufacturing industry almost all of this work is not only completed off-site but offshore. We have no significant heavy fabrication capacity in Australia any more, and the modular
kitchens and bathrooms that are increasingly prevalent in the building industry are more often than
not sourced from overseas. We are therefore not training the apprentices who would become the
skilled trades of the future.
In its October 2014 World Economic Outlook, the IMF points out that A key priority in many
economies, particularly in those with relatively low efficiency of public investment, should be to raise
the quality of infrastructure investment by improving the public investment process. This could
involve, (among other reforms, better project appraisal and selection that identifies and targets
infrastructure bottlenecks, including through centralized independent reviews, rigorous cost-benefit
analysis, risk costing, and zero-based budgeting principles), and improved project execution48.
The very pressing challenge for State and Commonwealth Governments is to design and implement
a holistic, consistent and effective intervention which delivers much improved project execution by
forcefully addressing the labour productivity and industrial relations issues identified above.
What might that intervention look like?
There is no doubt that we need the reintroduction of the ABCC. The replacement of the ABCC by
FWBC was not so much ensuring that there is always a strong cop on the beat in the building and
construction industry49 as the wilful and systematic emasculation of the most effective regulatory
agency Australia has ever seen. The fact that the current Commissioner of FWBC has delivered the
results that he has, given the legislative and funding constraints that he has been lumbered with, is a
great credit to him and to his Chairman. But no regulator or legal framework can deal with stupidity
or ineptitude Certain things we cannot accomplish by any process of government. We cannot
legislate intelligence. 50
What Government can do is to act like a sophisticated and commercial client of the industry. For
once, we dont turn to the private sector as the model indeed, as we have noted with respect to
the Gorgon Project, it seems utterly incapable of efficiently procuring built infrastructure.
It is in fact the State of Victoria that has embedded some basic but very obvious disciplines into its
construction procurement methodology. These disciplines are premised on a solid appreciation of
the commercial incentives of the contractors; they are administered and enforced effectively; and
they have delivered outstanding results relatively quickly.
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Slide Thirteen
Welcome to the Code.
The notion of a Code of Practice for the building and construction industry goes back to the Hawke
Government. In 1989, then Treasurer Paul Keating asked the Industry Commission to conduct a
review of major projects and to identify opportunities to remove inefficiencies. The Report
Construction Costs of Major Projects 51 - found that a principal source of inefficiency was the
industrial relations practices of the industry, and went on to say that:
Governments can play a significant role as clients of the construction industry. Governments have
bargaining power which could be used to encourage efficient management and labour practices.
With sufficient resolve it should be feasible for Commonwealth and State Governments to introduce
changes on government projects which would lead to codes of practice covering industrial relations
arrangements which might be used as a model by private contractors52
In 1992, the Construction Industry Development Agency was established53. One of its objectives was
to develop, and assist in the implementation of, industry codes and practices 54 . However it was
not until 1997 that the National Code of Practice for the Construction Industry 55 was introduced
and its application was limited to Commonwealth funded projects.
The Royal Commission into the Building and Construction Industry conducted a number of case
studies, including the Alice Springs to Darwin Railway Project. In respect of that Project, the Final
Report concluded that the National Code and its associated Guidelines when effectively
implemented and monitored, results in projects being built on time, on budget with safety and to the
satisfaction of employees.56 Commissioner Cole went on to recommend that:
It be a requirement that any person who contracts to work on a building site owned, operated, or
funded, wholly or partly, by the Commonwealth, comply with the National Code and the
Implementation Guidelines, not only in relation to that project, but generally. That is, the
Commonwealth should agree only to do business with those who comply with the National Code and
the Implementation Guidelines on both publicly and privately funded projects57
This recommendation was not implemented until July 2005 58 following representations by key
industry employers highlighting the need to give the industry leeway to extract itself from non-Code
compliant industrial instruments.
The National Code under the Coalitions Implementation Guidelines basically reinforces freedom of
association, effectively prohibits project agreements, prevents head contractors coercion of subcontractors, and limits right of entry. It was a major, if not the most important driver of the surge in
productivity that the industry experienced under Ministers Abbott and Andrews. Sadly, it too fell to
the Rudd/Gillard Government initially through a significant dilution of the Implementation
Guidelines under Minister Gillard in 200959, and then in 2013 through Minister Shortens codification
of the Code and Guidelines into a legislative instrument under the Fair Work (Building Industry) Act
201260.

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When the Baillieu Government came to power in Victoria at the end of 2010, the wage rates and
unacceptable work practices that were born out of the Thiess Degrmont Wonthaggi Agreement61
had flowed across the State of Victoria and beyond62. The previous government had defended the
Thiess Degrmont industrial deal the then Water Minister being quoted as saying that "Victorian
taxpayers will not pay one extra cent as a result of agreements for workers' pay and conditions on
the desalination project because we agreed to a fixed-price contract.63 That may well be true, but
you would think that a Cabinet largely composed of union officials would be well aware of the flowon implications of wage deals of this nature.
In response to the Wonthaggi debacle, the incoming State Government implemented a Building
Code which was to apply to State funded construction projects with effect from 1 July 2012 64. The
Victorian Code emulated the previous National Code but also took a vital further step through the
additional requirement of a Workplace Relations Management Plan. The WRMP adds two critically
important components to the Code. The first is a requirement to complete an IR Risk Assessment,
and the second is to embed labour productivity metrics and initiatives into the WRMP. The WRMP,
once approved, has as much weight as the contract itself. When DTF issued a sanction on McConnell
Dowell in September this year, it was for a failure to comply with its WRMP65.
The Victorian Code of Practice is about preserving value for tax payers. It is the bare minimum that
you would expect from a sophisticated client of the construction industry. It should be emulated by
all Australian governments and administered with the same degree of professionalism and
sophistication as displayed by the Victorian Construction Code Compliance Unit. Further, in order to
rein in the excesses and manifest failures of the resources sector in construction procurement, the
right to exploit and otherwise develop Australias mineral and energy resources should be
contingent on compliance with a construction Code that is based on the Victorian model.
Lets apply some counterfactual thinking. If the Victorian Code had been in place for Spencer Street
and Wonthaggi and it was administered as astutely and as professionally as it is now:
the VBIA would not have applied to Spencer Street;
neither project would have been able to engage non-working delegates;
sub-contractors would not have been coerced into adopting the head contractors industrial
instrument;
there would be no requirement to obtain union consent and/or to consult with unions in
respect of engaging sub-contractors or other labour arrangements;
both Projects would have been required to complete an IR Risk Assessment. That process
would have identified the risks of restrictive rosters, the issues associated with inclement
weather and other matters, and as part of the WRMP process, mitigation steps would have
been inserted into the WRMP.(Remember that compliance with the WRMP is a condition of
the contract); and
where there was unlawful industrial action, the contractor would have been obliged to take
every step to prevent or stop it, and to recover any damages or losses caused by it.
These arrangements would have resulted in markedly different outcomes on both projects, and
markedly different flow on legacies.

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For most of us, engagement with the construction industry is limited to a residential building or
renovation experience we cannot be expected to know much about construction procurement. But
the State Governments are the construction industrys largest client. If, like the State of Victoria, you
have a $27 billion construction programme66 then you want to be reasonably astute when it comes
to managing value for money. If you can achieve a modest 1% lift in productivity from your $27
billion then you have saved $270 million at $500K67 per bed that is a new 540 bed hospital.
The Code is the means by which a large and multi-sector ongoing consumer of construction services
ensures that it achieves value for money. It is designed to counteract the moral hazard that
contractors may have a vested interest in de facto collusion on labour costs and productivity. It
ensures that unacceptable industrial behaviour meets with appropriate consequences. And it is the
only practical way that inflationary construction costs can be brought under some semblance of
control.
The Victorian Code is a benchmark for the other States and the Commonwealth. The Productivity
Commissions recent report into public infrastructure echoes this view. A sensible starting point is
for all jurisdictions and the Australian Government to deploy the Victorian guidelines (or something
akin to them) for their building codes of practice.68
The right to exploit the nations mineral resources should be contingent on doing so efficiently
certainly as far as the construction phase is concerned. To that end, I would suggest that a Code
approach be taken by the relevant tiers of government and form part of the Development
Assessment and Approval process of minerals and energy projects.
Returning to our Parable..our Citys problem was not the pigeons but the Contractors. By
modifying the behaviours of the Contractors, the pigeons ended up in their proper place.
Unions thrive where there are vacuums if management abrogates its duty to control its sites and
its workforces, then it is hardly surprising that the unions step into the gap.
If management is unable to contemplate or act on the long term economic implications of 16% per
annum wages inflation69 with no productivity trade-offs then the client needs to step in and ensure
that there is some measure of sobriety in the labour relations performance of the industry. If, as is
evident in the resources sector, the client is simply incapable of strategic industrial relations
management, then the States and the Commonwealth need to protect our national interest and
reputation through the imposition of a Code.
The Code is designed solely to modify contractors behaviours. It exists to protect the short and long
term interests of taxpayers by forcing contractors to take some responsibility for the effective
management of labour productivity and labour costs. The Code is the minimum that one would
expect from a large, informed and sophisticated consumer of construction services. The Code is not
anti-union rather it is pro-taxpayer, and it is particularly important for the less well-off those who
rely on public transport and public hospitals and those for whom the outrageous cost of Wonthaggi
is a noticeable impost.

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Stephen Sasse has worked in industrial relations for major Australian and multinational companies for 30 years. He has
held senior executive positions in Transfield Construction, John Holland Group and Leighton Holdings. Highlights of his
career include ending the entrenched demarcation issues in the Australian paint manufacturing industry (1990) and
the development of the industrial relations strategy for Melbournes highly successful EastLink Project (2004). Stephen
authored the first employer submission to The Royal Commission into the Building and Construction Industry (2002)
and the John Holland Submission to the Wilcox Review (2008). Stephen consults to public and private sector
organisations in industrial relations strategy, labour productivity improvement, cost reduction, workplace health and
safety and construction procurement strategies.

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Ecotransit Sydney Fact Sheet Tunnelling for Rail: What it Really Costs
http://www.ecotransit.org.au/ets/files/Rail-Tunnelling-Factsheet.pdf
2
N Efron & M Read Analysing International Tunnel Costs Worcester Polytechnic Institute 2012 p. 30
3
AFR 29th March 2012
4
Minerals Council of Australia Opportunity at Risk Regaining Our Competitive Edge in Minerals Resources
September 2012 p. 10
5
Marius Kloppers BHP Billiton Diversification and Delivery in a Cyclical World Brisbane Mining Club 17 th
October 2012
6
McKinsey & Company Extending the LNG Boom: Improving Australian LNG Productivity and Competitiveness
May 2013 p.1
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PWC Productivity Scorecard Reconstructing Productivity Productivity in the Australian Construction
Industry October 2013
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John Holland Group Pty Limited Submission Proposed Building and Construction Division of Fair Work
Australia December 2008
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Productivity Commission Public Infrastructure Inquiry Report No 71. 27th May 2014 Volume One p.3
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http://www.aihw.gov.au/haag10-11/hospital-performance-elective-surgery-wait/
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Sydney Morning Herald 15th May 2014
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The Age 13th December 2011
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Minerals Council of Australia Opportunity at Risk Regaining Our Competitive Edge in Minerals Resources
September 2012 p. 26
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BREE Resources and Energy Major Projects April 2014 p.27
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BREE Outlook for Australian Resources and Energy Commodities Annual Research Workshop 2013
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The Royal Commission into the Building and Construction Industry Final Report March 2003. Volume 5
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The Royal Commission into the Building and Construction Industry Final Report March 2003. Volume 5
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For example Voters will make a choice on builder-union cartels Business Spectator 10 October 2014
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https://www.fwc.gov.au/awards-and-agreements/agreements/findagreement/results?AGREEMENT_TITLE=barrow+island&STATE=All&INDUSTRY_1=All&sqlsrv_combine=&ABN=
&ODN=&AGREEMENT_ID=&OLD_PUB_CODE=&PRINT_ID=
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The Royal Commission into the Building and Construction Industry Final Report March 2003. Volume 5
Paragraph 39
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The Australian 7th April 2014
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Auditor-General's Report on the Annual Financial Report of the State of Victoria, 2006-07 p.34
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The Age 17th July 2004
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Johnson, D and Humffray, H EastLink: Redefining the Possible ACAA Technical Paper 2009
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Australian Industrial Relations Commission Thiess John Holland Mitcham Frankston Project Construction
Agreement (AWU) Certified Agreement 2005
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The Age 9th October 2012
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The Herald Sun 10th November 2014
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The Australian 12th May 2011
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Fair Work Australia Thiess Degremont (TD) and AMWU, AWU, CEPU and CFMEU Victorian Desalination
Project Greenfields Agreement 2009

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37

Federal Court of Australia: Construction, Electrical, Electronic, Energy, Information, Postal, Plumbing and
Allied Services Union of Australia v Thiess Pty Ltd [2011] FCA 1020
38
The Age 13th December 2011
39
http://www.manufacturingmatters.net.au/amwu_gorgon_report
40
http://www.kjv.com.au/
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http://www.kjv.com.au/kellogg-joint-venture-gorgon.html
42
http://investor.chevron.com/phoenix.zhtml?c=130102&p=irol-EventDetails&EventId=5170148
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Thomson Reuters Street Events Edited Transcript - CVX Q3 2014 Chevron Corp Earnings Call 31 October
2014 p.18 http://investor.chevron.com/phoenix.zhtml?c=130102&p=irol-EventDetails&EventId=5170148
44

http://www.workplaceexpress.com.au/nl06_news_selected.php?act=2&nav=10&selkey=52882&utm_source=i
nstant+email&utm_medium=email&utm_campaign=subscriber+email&utm_content=read+more&utm_term=
Gorgon%20workers%20rebuff%20agreement%20with%20new%20roster%20pattern
45
http://www.kjv.com.au/careers/advanced-search/58.html
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http://www.manufacturingmatters.net.au/workers_reject_gorgon_construction_ea_and_demand_family_frie
ndly_rosters
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Thomson Reuters Street Events Edited Transcript - CVX Q3 2014 Chevron Corp Earnings Call 31 October
2014 p.18 http://investor.chevron.com/phoenix.zhtml?c=130102&p=irol-EventDetails&EventId=5170148
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International Monetary Fund World Economic Outlook October 2014 Chapter 3 Is it time for an
infrastructure push? The macroeconomic effects of public investment p.77
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AMENDMENT (TRANSITION TO FAIR WORK) BILL 2009 Hansard p.7807 13th August 2009
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The Australian 10th July 2009
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http://www.comlaw.gov.au/Details/F2014C00110
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Project Greenfields Agreement 2009
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The Australian 12th May 2011
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The Age 22nd March 2010
64
Department of Treasury and Finance Implementation Guidelines to the Victorian Code of Practice for the
Building and Construction Industry April 2012
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http://www.dtf.vic.gov.au/Infrastructure-Delivery/Construction-code-compliance/Exclusion-sanction-onMcConnell-Dowell
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68
Productivity Commission Public Infrastructure Inquiry Report No 71. 27th May 2014 Volume One p.33
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Marius Kloppers BHP Billiton Diversification and Delivery in a Cyclical World Brisbane Mining Club 17 th
October 2012

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