Governments must regulate the construction industry ‘eyes up’

Michael Chesterman August 1, 2018
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My favourite footballer is the great Johnathan Thurston or ‘JT’ as he is affectionately known as.

JT plays with his ‘eyes up’. This means that as a playmaker, while he is always looking to do something when he has the ball in his hands like make a break, put another player through a gap or score a try himself, at the same time he is also conscious of the need to direct the team around the field in such a manner so as to ensure that the game is played as much as possible, on his terms.

JT plays football like great chess players play chess.

Unfortunately governments of all persuasions often fall into the trap of not having their ‘eyes up’ when developing regulation of the construction industry.

Four year election cycles and 24 hour news coverage means that governments are seemingly always scrambling to address emerging issues. In football terms they are playing with their ‘eyes down’ and therefore only addressing immediate industry issues.

Regulation developed through such a prism, while it might serve an immediate political purpose and perhaps even be effective in the short term, will never be ‘future fit’ regulation of the industry. This is because such regulation is based on how the industry is currently operating. Product, manufacturing and service delivery innovations are resulting in the rapid transformation of the industry so a regulatory regime based only on the present will quickly become redundant.

It also means that governments, by only addressing immediate issues as a result of having their ‘eyes down’, are creating a vacuum for others to occupy and be in the position to influence the future of the industry.

It should be noted that governments certainly have an ‘eyes up’ view of how innovation is transforming the industry through specialised departments and organisations created in part to assist and support businesses that operate in this space.

The Commonwealth Scientific and Industrial Research Organisation (CSIRO) and Queensland Department of Science, Information Technology and Innovation are two examples in this this regard.

However these government departments and organisations are not the ones that make industry regulation.

It is a fact that transformation of the industry is underway as a result of innovation developments. I pointed this out in a previous article entitled Regulation v Innovation.

I have also discussed ‘Future fit’ regulation of the industry in an article entitled Is BIFA ‘Future Fit’?, where I stated in relation to the Building Industry Fairness (Security of Payment) Act 2107 (BIFA):

“In my opinion, none of the BIFA initiatives represent transformative thinking to address Security of Payment concerns, a fact I pointed out in a previously authored article entitled ‘Construction Innovation — It’s not just about apps! I am strongly of the view that ‘future fit’ regulation of the industry must not impede construction innovation, and in fact should be such that it encourages innovation.”

In summing up, governments must always be surveying the industry with their ‘eyes up’ in order to develop ‘future fit’ regulation. Failure to do so may result in the collapse of a regulatory model.

The Taxi industry in Queensland is a case in point. Virtually overnight despite a long established licensing regime being in place, a disruptor called Uber reshaped the future of people transportation, with the government relegated to the role of reactively implementing new legislation to accommodate this industry disruption.

‘Future fit’ regulation

The need for governments to cast their “eyes up’ to implement effective ‘future fit’ regulation to support innovation, has long been recognised. In a April 2014 statement by the Australian Construction Industry Forum (ACIF) I noted these comments:

“The benefits of increased innovation in the industry, and many of the drivers that stimulate it, have been identified, dissected, and discussed over many years in Australia and elsewhere. ACIF has had an involvement in this area through a survey and report in 2002 and a more recent report to the Built Environment Industry Innovation Council (BEIIC) in 2011 when ACIF was commissioned to gather stakeholder views and ideas on problems with existing regulation in the built environment and on the potential to use regulation to support innovation.”

In a recent report from the Deloitte Centre for government insights entitled ‘The future of regulation‘ the following is stated:

“Sweeping technological advancements are creating a sea change in today’s regulatory environment, posing significant challenges for regulators who strive to maintain a balance between fostering innovation, protecting consumers, and addressing the potential unintended consequences of disruption.

Emerging technologies such as artificial intelligence (AI), machine learning, big data analytics, distributed ledger technology, and the Internet of Things (IoT) are creating new ways for consumers to interact — and disrupting traditional business models. It’s an era in which machines teach themselves to learn; autonomous vehicles communicate with one other and the transportation infrastructure; and smart devices respond to and anticipate consumer needs.

In the wake of these developments, regulatory leaders are faced with a key challenge: how to best protect citizens, ensure fair markets, and enforce regulations, while allowing these new technologies and businesses to flourish?

The assumption that regulations can be crafted slowly and deliberately, and then remain in place, unchanged, for long periods of time, has been upended in today’s environment. As new business models and services emerge, such as ridesharing services and initial coin offerings, government agencies are challenged with creating or modifying regulations, enforcing them, and communicating them to the public at a previously undreamed-of pace. And they must do this while working within legacy frameworks and attempting to foster innovation”.

Current Queensland situation

Building Ministers Forum

According to information contained on the relevant government website, the Building Ministers’ Forum (BMF) :

“comprises the group of Australian Government, State and Territory Ministers with responsibility for building and construction. The BMF is responsible for overseeing governance of the built environment, in relation to policy and regulatory issues impacting the building and construction industries. The BMF’s work covers three broad themes:

  • harmonisation of building regulations and standards;
  • collaboration on compliance and enforcement; and
  • considering other national policy issues affecting Australia’s building and construction industries”.

How is BMF performing in the development of ‘future fit’ legislation in Queensland?

I will focus on two significant industry issues.

ISSUE 1: Non Conforming Building Products

The Queensland government has responded to an urgent health and safety challenge in recent times and accelerated work in developing and implementing non-conforming building products legislation under the auspices of the BMF.

As stated in a publication entitled ‘Safer Buildings for Queensland Background information‘,

“The Grenfell Tower fire in London in 2017 and subsequent safety concerns regarding the Aluminium Composite Panel (ACP) cladding products created a chain reaction around the world. While not the first incident, the heightened international concern following the Grenfell Tower fire proved to be the catalyst for a world– wide focus on the use of combustible cladding”

On 24 August 2017, legislation addressing NCBPs was passed by the Queensland Parliament and commenced on 1 November 2017. This legislation was the first of its kind in Australia and it establishes a chain of responsibility, placing duties on building product supply chain participants (including product designers, manufacturers, importers, suppliers and installers) to ensure building products are safe and fit for intended purpose.

The Queensland government is currently playing a leading role in advocating for nationally consistent NCBPs legislation.

An excellent body of NCBPs information can be found on the Department of Housing and Public Works website.

Whether this legislation achieves its objectives, only time will tell. However the Queensland government should be congratulated for developing legislation based on the concept of holding the entire supply chain responsible in an effort to ensure all building products used in Queensland are safe and fit for intended purpose.

This is new regulatory thinking and It would also appear that the two governments have worked together well under the BMF banner to achieve such an outcome.

ISSUE 2: Security of Payment Laws

Under the BMF a review of all SOP legislation in Australia was undertaken. According to the relevant commonwealth government website:

“The purpose of the Review was to identify legislative best practice, with a view to improving consistency in security of payment legislation and protections to ensure subcontractors receive payment on time for the work they have completed. The Review was conducted by Mr John Murray AM, a specialist in building contract disputations and security of payment legislation. Mr Murray provided his final report to Government in December 2017”

In a press release dated 21 May 2018, the Minister for Small and Family Business, the Workplace and Deregulation, The Hon Craig Laundy stated:

“More needs to be done to harmonise the various state and territory security of payments laws so that businesses and subcontractors operating in the building and construction industry are not required to be across several complex pieces of legislation at any given time”.

Only days prior to Mr Murray handing down his SOP harmonisation report to the commonwealth government, the Queensland Parliament passed the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

I have written numerous articles on BIFA and carefully read Mr Murrays report.

A number of Mr Murray’s recommendations embrace significantly different positions to those adopted in BIFA.

I have authored a previous article entitled ‘Is adjudication shopping about to make a comeback in Queensland?‘ where I highlighted a significant difference with regard to the receiving of adjudication applications and appointment of adjudicators. I intend to author a further article on Mr Murray’s report where amongst other things I will identify all the differences with BIFA.

However there is one particular recommendation of Mr Murray’s which I want to comment on in this article, namely:

“Recommendation 85: A deemed statutory trust model should apply to all parts of the contractual payment chain for construction projects over $1 million. The deemed statutory trust model outlined in the Collins Inquiry provides a suitable basis.”

The centerpiece initiative of BIFA is the creation of Project Bank Accounts (PBA’s). In a previous article entitled Project Bank Accounts are happening but will your job have one? I stated:

“By examining the available data produced by the Australian Bureau of Statistics in the 2014/15 financial year, outlined on the Queensland Treasury website, I have examined how much of the $45.8 billion building and construction industry would be covered by PBAs, had it been law during that time.

While not an exact science, based on my analysis of the figures, I estimate that only about $11.5 billion (comprising of approximately $6 billion for non-residential and approximately $5.5 billion for residential) of that total amount would be covered by PBAs in its current form.”

I stated that the reason for this limited coverage of PBA’s is due to a very narrow jurisdictional definition of ‘building work’:

“If a PBA is required on a project it is a question of the relationship between the builder and the client, it is not decided with any reference to the subcontractors. For PBAs to apply the builder has to be carrying out ‘building work’ as defined under schedule 2 of the QBCC Act 1991 and schedule 1AA, work that is not building work, QBCC, regulation 2003. There are 53 exemptions to the definition of ‘building work’, and then depending on the type of work, some further exemptions or contractual limitations may be imposed”

Mr Murray’s recommendation with regard to the establishment of statutory trusts goes well beyond PBA’s created under BIFA. On page 343 of his report Mr Murray states:

“the most obvious difference between a deemed statutory trust and a PBA is that a deemed statutory trust operates such that each contractor or subcontractor holds funds down the line on trust for the person with whom they are in contract. A PBA on the other hand is a bank account, opened and maintained by a head contractor, into which contractual payments by the principal are deposited and through which payments are made to the head contractor and its subcontractors directly by the participating bank.

Accordingly, a deemed statutory trust will protect all parties involved in the contractual chain, whereas a PBA will only provide protection to tier-one subcontractors (i.e. those subcontractors who had entered into a subcontract with the head contractor).”

Furthermore the definition of ‘construction work’ will ensure that statutory trusts capture all the work PBA’s do not apply to. Mr Murray addressed this issue in section 9.1 of his report and recommended:

“The legislation should include a definition of ‘construction work’, which should be drafted in the broadest terms. The definition of ‘construction work’ in section 5 of the NSW Act provides a suitable model.”

An additional $35 billion in construction work captured by statutory trusts is a very significance difference between Mr Murray’s position and PBA’s as outlined in BIFA.

In this instance the two governments have failed to work together to develop a harmonised SOP regulatory position for the industry to consider.

Furthermore I am of the view that BIFA does not represent transformational ‘future fit’ regulatory thinking because it is based on old recycled concepts to address current industry issues. In my article entitled ‘Construction Innovation — it’s not just about Apps!, I outlined in detail why I believe this to be the case. I concluded:

“Despite the building and construction industry undergoing massive changes since 1974 to the point it is almost unrecognisable, aside from PBA’s, the initiatives in the BIFA are recycled ones. Over the years these initiatives have been modified or changed, but fundamentally they seek to deliver SOP to subcontractors through a combination of long established payment, contractual and licensing initiatives”.

The above reference to 1974 is in relation to the Subcontractors Charges Act 1974, an initiative retained in BIFA.

As I previously indicated, it is my intention to shortly undertake a detailed analysis of Mr Murray’s report. As part of this analysis I will consider whether it represents transformational regulatory thinking.

Final thoughts

‘Future fit’ regulation of the building and construction industry will assist the industry to transform itself into a more productive, profitable, inclusive (more women!) industry, with ‘future fit’ well trained and appropriately remunerated workers and professionals producing efficient, safe, sustainable, liveable and affordable buildings for us to work, play and live in.

Well that is the hope!!

However if governments are not careful they may miss out on having a seat at the table in terms of the having any influence on the rapid, innovation based, transformation of the industry.

In an article entitled ‘Is what’s wrong with Construction Assurance sorting itself out‘, David Chandler OAM, Adjunct Professor at Western Sydney University Sydney, a well known construction and housing expert stated:

“The construction transformation reshaping the global construction industry is profound, and now it has its own momentum. It points to a happier construction story for future construction customers who have often felt at the wrong end of the deal. The momentum to rectify the industry’s woes seems no longer reliant on the effectiveness of local regulatory and compliance systems. Banks and insurers are now stepping up with new solutions not previously imagined.”

Mr Chandler is of the view that in the future, clients will achieve better outcomes as a result of banks and insurers been able to rely on new construction assurance and building certification initiatives which will negate the need for them to have regard to industry regulation.

While this may appear to some readers to be way out futuristic thinking, I would encourage everyone to read the article and take the time to ponder what Mr Chandler is saying because industry change is happening at breathtaking pace.

In an article authored by Klaus Schwab, Executive Chairman of the World Economic Forum entitled ‘The Fourth Industrial Revolution: what it means, how to respond’, he states:

“We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.

The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production.

Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.

There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact. The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.”

If you are keen to be at the front of the technological revolution you are invited to get you and your team future fit on 13 August 2018 at the home of Helix Legal at The Capital. If you are interested in what is just over the horizon and how you get ready for it bring your team along. As with all of our innovation series events you will also hear from those at the forefront of change in the construction industry.

Not intended as legal advice. Read full disclaimer.
Michael Chesterman August 1, 2018

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