Ben: Hi, I’m Ben Stapleton, Managing Director of Aurecon’s Infrastructure Business.
I’m here today to have a chat with Ben Davidson, Partner in Corrs Construction team, and we’re going to have a chat about the impact of collaboration and trust within the infrastructure sector and the importance of that for successful project outcomes.
G’day, welcome Ben. We often read reports that Australia is one of the most litigious countries in the world. We’re a pretty relaxed take-it-easy type of nation and culture. How do you rationalise that; how do you make sense of that?
Ben Davidson: Oh, well, it’s interesting because I think if I look at the Corrs group we are about 50/50, so half of the team is in the frontend and its at least half, and sometimes a bit more, in the back. So, what that tells you is that at least on every transaction, you’re equally weighted between bringing it together and then pulling it apart. So, you would actually expect it to be much less; you would expect your backend team to be much smaller.
I think that the causes in Australia in terms of disputes are many and varied, and the studies tend to tell us that they’re pretty much the same across the world, so the same things that drive the disputes here are driving the disputes in the Middle East and the UK.
In terms of their frequency again the studies tell us that they’re about the same as everywhere in the world. I think the difference is that the parties here tend to be fairly aggressive in their litigation and so what we find is that where parties move beyond the contract, they move into bigger, more aggressive claims under the Australian Competition Law and other ways to get around time bars and things.
So, I think the reality is that the market is pretty much the same as everywhere else; it’s just that we’ve got this ability to actually sidestep the contract often and make broader claims, and it makes us look pretty aggressive.
Ben: Okay, that makes a lot more sense. One of the most important elements that I’ve seen over my experience is the importance of governance, project leadership, building trust at speed, and that’s critical to project outcomes, successful project outcomes. What we’re seeing though is in this massive boom of infrastructure in Australia the phrase being used is “The profitless boom.” We’re seeing unprecedented spend on major infrastructure projects, multi-billion-dollar infrastructure projects come to market and be delivered.
But, in equal measure, we’re seeing major organisations, major consortiums struggling in project delivery and also some of them even going to the wall. Can you perhaps share some of your thoughts around the impact that trust and collaboration is having within the sector?
Ben Davidson: Yeah, well, it is fascinating. There are kind of four parts to that question and the first is absolutely, this is being called a “Profitless Boom.” So, Scott Hutchins, who is the head of Hutchins Builders, came out the other day and said that his actual revenue had jumped to, I think it was 2.7 billion Aussie but at the same time his profit margin had gone from four or five per cent to one per cent. And that’s something we’re seeing across the market. A massive amount of work, I think we estimate that there’s something like 250 billion of government-funded new projects into the system over the last six months and that is generating an enormous amount of pressure on the system and making it very competitive.
And contrary to what you’d expect, that is, that people would be banking a better margin in a hot market, what we’re actually seeing is a compression and you’re actually seeing supply chains compressed, labour market compressed, you’re seeing escalation in terms of pricing, and in a market where there’s a lot of fixed-price contracts that makes it very hard over major projects which can span three or four, five or six years. And so, parties are entering into contracts at a price and finding the market, by the time they get to build it, is very different, and that is causing them a significant problem in terms of their ability to actually make a dollar.
I think the other part of your question was about trust and how important that is to build. As a litigator and disputes lawyer I can tell you that it’s the fundamental piece of the model that makes or breaks a project.
So, we’ve seen projects that have come apart at the seams because of a lack of trust, and not driven by anything in the project but actually driven by a past project; some issue had come up on a previous project, the Project Director carried that through as an issue and there was just no trust from the beginning and so the parties revert to the contract and when they revert to the black letter of the contract and start writing letters from day one that are inflammatory, you can just watch the project just cycle and it falls into dispute very rapidly.
So, I think you put a very significant increase of capital into these markets, you then create a profitless boom, and you have trust over here which is very difficult to form and very important. It’s going to lead to what we are seeing. In recent years or recent times what we’ve seen is the collapse of York Civil. We’ve seen RCR going to external administration. We’ve seen one of the smaller builders here have a cladding issue and collapsed down several of its companies. We’ve seen Fletchers have difficulty in New Zealand. We’ve seen LendLease Engineering have difficulties. So, it’s actually manifesting itself, not in small companies but in Tier 1 builders, and you know it just shows that no company is immune from these pressures.
So, I think getting these issues right from the beginning is very important and the most important piece is the trust piece between the parties because once that falls away invariably these big projects fall into dispute.
Ben: So, you mentioned trust a couple of times there and how it’s really the fundamental component. How does that link to collaboration in the work that you’re doing and then what you’re seeing in the market?
Ben Davidson: Well, so we’ve seen a series of LNG projects over the last seven or eight years in Australia, so at one point I think there were seven projects all running at the same time. So, it was a fantastic case study because you could actually watch each one of them run in parallel and see what people were doing on different projects, what was working and not working.
And so, in terms of collaboration where you could see projects that had, for example, dispute resolution boards that were set up from the beginning and parties were actually working together from day one but with a circuit breaker that could actually allow them to rapidly resolve a dispute, you saw that project get done very quickly. Whereas other projects that didn’t have those mechanisms that allowed active collaboration but with a circuit breaker would tend to get into dispute and once they were in dispute they clamp down and the parties get slow because they’re trying to sort things out and basically you see the project either spin out of control or stop.
So, that whole piece of trust and collaboration is really important because it is incredibly important that the teams work together. Interestingly, one of the statistically biggest problems with projects are, in fact, between the joint venture partners, and I think from an Asia Pacific statistic is that approximately 25 per cent of joint venture projects the actual joint venturers get into [inter nisi] dispute. And that is a classic case of collaboration, and we see the difficulty because what you see there is two generally disparate organisations trying to come together and work together and you can watch them; they have different processes and procedures and they’re supposed to be on the same side of the fence and they can’t even get it right. So, it’s interesting to see how that works and when it works, how well it works, but when it doesn’t work how quickly it causes the joint venture to fall into dispute.
Ben: Do you think that if we were more effective at collaborating in the industry as a whole that the degree and scale of the claims would reduce?
Ben Davidson: I think two things in this space. I think (1) there is a staggering lack of collaboration within the industry, and I say that as a Director of SOCLA rather than as a partner ofa firm where I do construction law. You know, I sit on that board and you know it’s fascinating that we’ve got on that board a couple of lawyers but only one engineer. You know there’s no-one from the other end of the market; there’s just a lack of collaboration so that people can understand what’s going on. And we talk about going and actually talking to the Institute of Engineers and going and talking to the government and bring everyone together and saying, “Hey, we’re heading towards a crisis in this market. You know, let’s sit down and actually work out how we navigate this together.” It’s almost impossible to get them all together to actually sit down and work it through because the lawyers think they have an answer, the engineers have got another answer, and so you get a really odd situation where something that could be very collaborative is not.
And I think the best example of that at the moment is a super-heated market in rail. Why are there 15 rail projects on at once? I mean, you know, I think you’ve got a situation where if there had been more collaboration in the market and more discussion between the Feds and the State and all the players you know it could have been planned out and you could basically go project to project to project to project rather than having five projects all running at once sucking up all the resources and making it almost inevitable that someone’s going to fail.
Ben: Yeah, I think there’s opportunity for sort of inter-sector collaboration, you know intra-sector collaboration that you just talked about certainly at a project level I think. You know my experience is the strength of the relationship and the trust and the collaboration, even if something’s gone awry, that usually that can often overcome the legal fight. You know things get dealt with quicker and move on. But you know when there’s a lack of collaboration and trust things can rapidly escalate, can’t they.
What’s your view on how prepared or ill-prepared the engineering professional service industry for the next five years, you know if we look at the current scale of infrastructure construction and you know I think what I’m seeing, the ball is starting to roll with poor performance and claims. If we sort of project that forward five years, I can only see that being an exponential increase. I’m just interested in your perspective of how well or ill-prepared the engineering market is?
Ben Davidson: I suspect the engineering markets is very like the legal market, so I’ll try and draw an analogy between both of them, and I think the analogue is this: We have an Australian market that is super-heated. There is a lot more work coming and I suspect with two more elections to come in the next six months there’ll be even more. So, we are going to see a lot more work in this market where already the legal teams are stretched and anecdotally I know that the engineering teams are having the same problem.
That market in Australia pales into insignificance against the Asian market that sits right on our border and the current estimate is that you know our analysis is the last couple of months there’s 250 billion of extra investment in the eastern seaboard of New Zealand. The last analysis I read in respect of Southeast Asia is that they’re talking about investment in infrastructure at 7.6 trillion. I mean the numbers at 7.6 trillion the natural inclination will be to actually suck the resources out of Australia, which are very good in this project space and we’ve got some of the best project lawyers in the world. They will get sucked up into Asia as will the engineers, and so it will actually create a vacuum in Australia.
So, I think we’ve got a really significant problem in terms of resourcing these projects in the near to medium term. So, over five to 10 years there will be a really significant need for skilled engineers and for lawyers to service this market and a significant number more than we have now.
Ben: We’re seeing a really rapid expansion, take-up and disruption around digital in the infrastructure sector. Interested, Ben, in your thoughts around how does that play out in the medium to long-term in terms of contracts, claims, and what that means for our industry?
Ben Davidson: So, a couple. I think BIM will be really interesting, so as that becomes mandated on projects I think it allows a level of granular information-gathering that’s hitherto not been available. So, you know, to move from sort of paper worksheets that you’re kind of working back from to actually systematised market information about what’s going on in the project on a real-time basis allows you to have a much more specific view of what’s going on and then unpack them from a disputes point of view really carefully to understand what actually happened. So, I think those tools are actually going to allow much better control of the project but also much better retrospective review both by principal and contractor to understand where it all went wrong, which will, you know on one view allow people to be more targeted about where they actually go and have a barney if they have one.
But I think that it will bring its own challenges, technology, and you know the engineering market is very much moving into the digital space and grasping it. I think the lawyers having a lot more difficulty in terms of bringing their mind to understand how digital actually comes and works in the law. So, you know you’ve got some advances in AI; we’re very good at using around documents, but you know I’m still not sure anyone’s really turned their mind properly to how we get digital to work for us, whereas I think the engineers are a long way ahead of us in that space and as are the contractors and the principals. We’ve got some catching-up to do.
Ben: Thanks, Ben. I really appreciated your insights into collaboration and trust within the infrastructure sector. We’ve got a fair bit of work to do as an industry but I think we’re up for the challenge.
Ben Davidson: Yeah, so do we. Thank you very much; it’s been great.