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Regulation vs. Innovation

Michael Chesterman
Michael Chesterman April 26, 2018

Looking Backwards

I worked for the Queensland building industry regulator for 22 years. During this time I undertook research, wrote discussion papers, developed policy, gave drafting instructions for legislation (Building and Construction Industry Payments Act 2004), administered broad compliance aspects of the legislative program, consulted with industry stakeholders, gave evidence at a Royal Commission and a Senate enquiry into the building and construction industry and developed and delivered numerous contractor educational initiatives.

At every opportunity I got out of the office to meet with contractors at their business premises. I enjoyed this part of the job the most. I really wanted to understand the daily pressures and challenges facing contractors and the opportunity to do so only usually occurred when they were in a safe place and could talk freely.

I also attended numerous formal meetings where industry stakeholders gathered to discuss issues. Agendas developed, minutes were taken and actions allocated. I could sometimes feel the frustration of the people in attendance who, like me, really wanted to deliver meaningful outcomes. Stakeholders who attended these meetings almost always stayed on script because they had to answer to their members.

On a personal level, the best thing to come out of all this industry engagement was I met hundreds of amazing, knowledgeable and talented people who represented a broad cross section of the industry. I have learnt so much from these experts, and continue to do so today.

Despite this deliberate intention on my part to be externally focused so I could best understand the challenges facing industry participants, I have come to the realisation since I left this regulatory and bureaucratic bubble just over 12 months ago that I actually had a very limited understanding of the future challenges contractors are facing because of the massive wave of transformation that is about to hit the industry and the impact it will have on them.

The reason for this is very simple. Most legislation and policy developed and implemented in the industry is in response to a newly emerging issue e.g non conforming products because of the London fire tragedy and a high profile Lacrosse Project in Melbourne, or in response to an issue that becomes a political imperative to address. If you work in a regulatory environment it is a fact that you are always looking backward because that is where the issues you are been asked to address emerge from. It stands to reason if you are always forced to be looking backwards then you cannot possibly be focused on future industry disruption.

The Building Industry Fairness (Security of Payment) Act 2017 (BIFA) is an example of a piece of legislation that developed as a result of a political imperative. I have written many articles about BIFA but the most relevant one in the context of this article is SOP Reforms….something does not add up.

It is a matter of public record that to secure the support of the independent Member for Nicklin, Peter Wellington in order to form a minority government in early 2015, the labor party agreed to examine 21 issues he flagged as requiring attention, one of which was to review subcontractor payment laws. This undertaking was quite properly made public at the time of these negotiations and the government has always been fully transparent in relation to this issue.

The government commenced its formal review process in this regard by releasing a Security of Payment discussion paper on 17 December 2015, where it sought feedback on how best to tackle this issue for subcontractors.

In a paper published by the Department of Housing and Public Works in September 2017, the following is stated as to what occurred after consideration of this feedback:

“the Premier and the Minister for the Arts, and the Minister for Housing and Public Works released the Queensland Building Plan discussion paper in November 2016. Proposals for reform to security of payment, which were developed from the SoP discussion paper, were part of the Queensland Building Plan discussion paper. Comprehensive consultation was undertaken across Queensland until 31 March 2017. The government held 15 public consultation sessions throughout Queensland which were attended by over 1100 key industry associations, industry representatives, local government representatives and consumers.”

The initiatives contained in BIFA are commencing on a staged basis. At the earliest, BIFA will not be fully operational until March 2018 when Project Bank Accounts will take affect in the private sector. This means that approximately 2 years and 3 months after this formal review of security of payment laws commenced, the legislative response will be fully implemented.

The next state election is not due until 31 October 2020 and although a review of Project Bank Accounts in relation to government projects will occur prior to their rollout in the private sector, it is highly unlikely that the government will make any major changes to BIFA during this current parliamentary term. A previous article of mine Testing the waters of the wrong ocean outlines concerns I have about the evaluation process of Project Bank Accounts that will apply in relation to government projects.

This means that by that time voters go back to the polls the industry will be the subject of legislation that was initially conceived in terms of broad concepts, 5 years earlier. Let’s take a minute to reflect on how much the industry will be transformed by way of innovation during this period of time.

Looking Forwards

A report by StartupAUS in collaboration with Aconex, Lendlease, EY and the Victorian Government entitled Digital Foundations, how Technology is transforming Australia’s construction industry provides an excellent starting point for measuring transformation as it makes some mind boggling predictions.

This report defines construction tech as “digital solutions offered in the planning, design and building phase. These technologies include cloud-based management software, Internet of Things (IoT) sensors, Building Information Modelling (BIM), Artificial Intelligence (AI) and machine learning, Virtual Reality (VR), Unmanned Aerial Vehicles (UAVs) and digital marketplaces.”

The report does not include pre-fabrication and advanced or smart materials in the build phase.

In the reports executive summary the following is stated:

“Within 10 years, according to figures from BCG [Boston Consulting Group], global full-scale digitisation in nonresidential construction could lead to annual cost savings of US $0.7–1.2 trillion (13% to 21%) in the engineering and construction phases and US $0.3–0.5 trillion (10% to 17%) in the operations phase. Extrapolating to the Australian construction sector, the potential added value increase could be $25 billion year on year within the next decade. Startups, therefore, have the potential to add huge value to the local construction sector as well as enjoying healthy global demand for exported technology solutions.”

Elsewhere in the Executive Summary, it is stated:

“StartupAUS estimates Australian Construction Tech startups have attracted at least $98 million in investment since the start of 2016. With over 75% of these deals at an early stage (‘seed’ or ‘A’), this figure has the potential to rise sharply in coming years.

In fact, as this report highlights, Australia has some significant advantages in the adoption of new technologies in this space. Our construction sector is heavily concentrated, with just 20 firms accounting for 68% of contracts won. That means proactive steps being taken to digitise by sector leaders are already having industry-wide repercussions. Anecdotal evidence also suggests Australia’s construction sector has been a leading adopter of technology for some time — most notably in cloud software, use of mobile products for field processes and in adoption of BIM.”

An area of major disruption to my mind is prefabrication. Off site construction is one area I can see clearly why it is being predicted for rapid growth in the next 5 years. In an article entitled A salutary reality for Australian Construction — get competitive fast, David Chandler, OAM, Adjunct Professor at Western Sydney University stated:

“It really is time for our national leaders to get down to the docks and see just how much value added construction is flowing into the country. Every week major projects are importing thousands of containers of building assemblies ready to be lifted straight into their final position. Donovan and Bonney report that the cost of transporting goods from factories and markets halfway around the world is typically one percent or less of the retail price. And no-one should imagine that these factories are all in Asia. There are many ready to assemble construction components coming from Europe and the USA”.

Elsewhere he stated:

“It is likely that as much as 40-percent of the on-site fabrication work will move off-site by 2025”.

In another article entitled Trying to fix the construction industry with the same old impotents will not work. And it’s time to take back the narrative from naive media, Chandler stated:

“We are taking a 19th century mentality and culture to trying to solve a problem that needs to be addresses using a 21st century reality. The construction industry (resist it or not) is now part of a fast moving global market. Traditional construction on-site is rapidly moving off-site and in many instances off-shore. The most recent form of general construction contract being used in Australia was written in 2000 (17 years ago — 10 years before Uber and Airbnb started) and informed by the last century’s outdated concepts and industry cultures, rather than how construction will be organised in a more modern construction framework.”

Think this is all pie in the sky stuff?

In an article entitled World’s tallest timber office building launched at the RNA Showgrounds and it will open its doors late 2018 Chris Herde of The Courier-Mail, outlines the construction of a cross laminated timber office building at 25 King Street, Brisbane. This ten-storey tower utilises a combination of engineered Cross-Laminated Timber (CLT) and glulam (glue laminated timber). The glulam is used for the structural beams and columns, and the CLT for the floors, lift shafts and escape stairs.

The engineered timber has a lower carbon footprint than traditional building materials, and is sourced from certified sustainably-managed forests. It enables precise offsite prefabrication and safer onsite construction.

On 18 April 2018, along with my Helix Legal colleague Janelle Kerrisk, I attended a thought provoking and very informative NAWIC QLD presentation at Lendlease on the construction of this innovative building.

In another example of engineered timber been used in Australia, in an article entitled All-timber apartments assembled like flat-packed furniture, Mary Lloyd outlines the construction of 101 residential units in towers up to eight storeys high at Campbelltown, Sydney. In her article, Lloyd states:

“The digital plans are sent to the manufacturer, where computer-controlled machines produce the timber elements to the exact dimensions required, right down where electrical wires will be chased down to light switches. The panels are then put into shipping containers and delivered to the construction site, where builders slot them into place.

With so much of the construction process taking place in an offsite factory, builders are less exposed to onsite risks such as accidents or weather delays — which helps make projects faster, cheaper and more predictable”.

So Melbourne does not feel left out, I recently had brought to my attention the building of a five storey apartment complex utilising timber frame construction methodology. An article entitled Australand breaks through the affordable multi-resi barrier with timber gives an excellent insight into the need for creating affordable, denser buildings in the middle to outer suburbs of our major cities.

There are many, many more examples of the use of engineered timber in the construction of high rise units, schools, aged care facilities or public housing.

With construction changing so much, so quickly, will the BIFA framework endure?

Future fit?

Let’s assume that in terms of the projections outlined in the Digital Foundations report and David Chandler’s off site construction projections, by 31 October 2020 (date of the next state election) there is clear evidence that such significant industry transformation trends are clearly playing out.

How will BIFA be performing in light of this industry transformation? Will it be shown to be ‘future fit’ legislation? I have addressed this question in two previous articles, namely Is BIFA ‘Future Fit’? and Construction Innovation — it’s not just about Apps!.

Will BIFA have delivered outcomes along the lines outlined in a recent statement by the responsible Minister, the Hon Mick de Brenni, MP, when heralding the commencement of Project Bank Accounts, namely:

“Queensland’s $45 billion construction sector employs over 220,000 people and it is vitally important that subcontractors and suppliers feel confident they will be paid in full, on time and every time.”

On the issue of Project Bank Accounts, in a previous article entitled Project Bank Accounts are happening but will your job have one?, I made the case that because of all the exemptions 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.

Now consider for a moment if David Chandler’s prediction that “It is likely that as much as 40-percent of the on-site fabrication work will move off-site by 2025” turns out to be correct. Under the current BIFA definitions, Project Bank Accounts are not required for the undertaking of off site manufacturing work. By 2025 Project Bank Accounts will therefore only apply to approximately $8.7 billion work of the total amount of $45 billion (2018 figures).

The challenge facing contractors over the next 5 years will be to fully comply with their regulatory responsibilities, and also at the same time be agile enough to quickly redesign their business operations so as to take advantage of industry innovations.

You are invited to get you and your team future fit on 26 June 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
Michael Chesterman April 26, 2018

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