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Market volatility the biggest construction constraint

The most significant risk for builders, and for construction output and quality, is market volatility.

In both detached and high-rise construction, booms result in supply chain pressures, cost inflation, labour shortages, and project timeframe increases. Competition for labour and materials means task ‘queues’ are prone to disruption; bottlenecks emerge and tend to cascade. Booms also result in the entry of marginal operators and under-skilled workers, and pressure to cut corners.

Downturns present challenges including some permanent loss of labour, wage suppression, loss of knowledge and
innovation, and builders and contractors leaving the sector.

Market volatility also undermines the viability of volumetric offsite manufacturing, which requires steady, rate-driven production.

Small and medium enterprises dominate the sector

Australia’s housing construction industry is dominated by small and medium enterprises, reflecting extensive use of
subcontracting arrangements. Consequently, housing is constructed by temporary teams that disperse after each
project, resulting in knowledge loss and disruption of skills transfer.

While subcontracting allows head contractors to cut costs during downturns, it leaves workers exposed to under- and unemployment. The resulting loss of labour and skills constrains capacity once the market recovers.

Impacts of low margins and capitalisation

Builders’ margins and capitalisation are typically low. This creates cashflow risk and reduces investment in training
and innovation. It also contributes to poor quality work and unacceptable levels of defects.

Construction defects add to costs and can increase the time taken to complete projects. Defects are symptomatic of subcontracting, company size, time and cost pressures, and a lack of robust building code enforcement.

Builders need to have greater capacity, be less vulnerable to cashflow crises, and obtain higher margins. This will require the structure of the industry to change.

Regulation inadequately enforced

Industry structure would likely change if building codes were rigorously enforced. Building quality also requires
responsibility for compliance to be widened.

Housing construction as a ‘system of systems’

Housing construction can be conceptualised as a ‘system of systems’, in which behaviours emerge from dynamic
interactions within, and between, subsystems. This shift in thinking enables powerful insights into industry practices
and behaviours.

It suggests that reform needs to focus on the system level and has implications for policymaking that may conceive of problems too narrowly.

This Inquiry provides eight interconnected policy development options. Refining and delivering on these policy directions will be challenging. There is a need for a policymaking and industry engagement process aimed at developing an in-depth understanding of housing construction as a system of systems.

1. Develop a national strategy for efficient housing construction

   Transforming the housing construction system of systems to improve productivity requires a focus on the system level, rather than isolated parts of individual subsystems.

   Incremental improvements applied system-wide are likely to have more substantial impacts on performance than
   enhancements confined to subsystems.

   Australia needs to develop national coordinated strategies that integrate construction, housing, manufacturing, and technology and innovation policy to enable the residential construction sector to meet demand for new housing.

2. Address market volatility

   Market volatility is the key barrier to putting housing construction on the path to efficiency. Stimulating demand
   should be avoided, as it creates a subsequent trough in demand. Recent stimulus measures assume capacity in the detached housing construction sector that does not exist. Counter cyclical social housing investment can help smooth demand; however, it is preferable to have stability across the supply of all housing types.

3. Modernise the regulatory framework

   Inadequate building code enforcement supports inefficiency and risk shifting. Policy makers should harmonise the National Construction Code (NCC) across jurisdictions and ensure compliance.

4. Attract and retain skilled employees

   Extensive subcontracting shifts risks down the supply chain. There is a need to grow labour capacity in line with
   economic growth. A national construction training board should be established comprising TAFE, universities and
   industry representatives focused on workforce development. The apprenticeship system needs to reflect regulated and sustained pathways into the industry.

5. Include cost escalation provisions in contracts

   Adversarial relationships and unfair contracting arrangements undermine best practice. Embedding fair and transparent cost escalation provisions within Design and Construct contracts
   – the dominant procurement method in the high-rise sector
   – would enable better risk sharing, sustainable procurement and more stable and collaborative practices.

6. Provide greater support for research and development (R&D)

   Australia lacks a well-developed construction R&D system. Government and industry need to provide financial support for R&D to drive productivity and facilitate a transition to net zero.

   The industry will be able to afford this to a greater extent if restructuring reduces pressures on margins and increases company size. Digitalisation should be a priority.

7. Consider onshoring to reduce supply chain risks

   The global supply chain is vulnerable to significant disruptions. Onshoring can reduce sovereign risk and supply
   chain risk. This issue requires strategic review.

8. Reduce market fragmentation

   There is a need to reduce industry fragmentation and grow the size of firms, taking care to avoid excessive
   market concentration.

The Inquiry consists of this final report and three supporting projects. Across this Inquiry, 68 interviews were conducted with sector participants in Australia and internationally and thematic analysis of transcripts undertaken. Policy testing workshops with industry stakeholders were held, and a comprehensive literature review conducted. Construction simulation modelling and scenario modelling was undertaken. Findings were presented to an expert panel, which provided guidance on ways to maximise the policy relevance.