Builders need to overhaul management culture as ABCC looms

The Australian, February 20, 2017: Robert Gottliebsen:

Passing the legislation to re-establish the Australian Building and Construction Commission (ABCC) is only the first step in slashing Australian commercial building costs by 20 to 30 per cent.

What comes next is a lot harder than passing the legislation, that said, the nation owes a great debt of gratitude to the Senate crossbenchers and, in particular, to Senator Derryn Hinch for realising he had made a mistake (Derryn: Don’t cave on ABCC, February 9).

What makes the implementation of the legislation so complex is that we are not simply dealing with a simple group of enterprise bargaining agreements that set wages and base conditions.

In the commercial building industry we are dealing with complex agreements that are all about who controls each building site and how the unions are to be funded (and in turn how those funds are transferred to the Greens and the ALP).

The agreements regulate who can be involved in any tender and, if chosen, how tenderers must act, including their contributions to unions. An enormous army of highly efficient smaller building subcontractors are excluded so they operate in the housing sector where costs are obviously substantially lower.

The management of the large builders is as deeply involved in the agreement as the unions. That’s why I call these commercial building deals “cartels” between unions and management albeit that the ACCC finds that in most instances “cartels” that operate via the industrial relations act to reduce competition and increase prices are extremely difficult to tackle — i.e. they are legal.

That’s why entirely different legislation and rules were required

In all the major building groups, most of the executives who rose to the top were those who had great skills in operating under the legal “cartel”. The skilled managers and executives are as much a part of the system that inflates the costs and restricts competition as the unions.

Groups like Grollo tried to operate outside the system and suffered big losses and were the subject of campaigns to eliminate them as builders. Their suppliers, like Boral, also suffered big losses.

Paradoxically, Grocon are now concentrating much more on development than building. Other builders, like John Holland and Lendlease (via the acquisitions of Balderstone and Abbey), had to act in the interests of shareholders and make sure they had top managers able to operate under the rules of the legal cartel.

Other companies like Leighton (now called CPB) and Multiplex plus some of the smaller builders, particularly in Victoria, really concentrated on developing managers who could work the system.

To operate under the new rules requires an entirely different set of management skills and the companies need to develop these skills in nine months — not that hard if you take the task seriously.

If managers operate under the old rules in contracts entered into after that date, then they will no longer be eligible for any infrastructure work where the Commonwealth has an involvement in funding.

Old-style managers who cannot adapt will be able to work on old contracts and then their services will be terminated.

Managers who know how to operate under the new rules will replace them. There is naturally going to be a lot of union strikes and other actions and, secretly, many old-style mangers will be barracking for their union partners in the “cartel”.

There will be pressure put on politicians from the Greens and ALP whose funding base will be greatly reduced but once it becomes clear that companies who do not have the managers to operate under the new rules are slowly going out of business, the game will change and the costs will come down.

But there is a big risk. Given we have weak managers, every cost reduction change that is required under the act will be met with a demand for higher wages. The managers, who have been on the union side, might give in so our extra hospitals, schools and roads will be delayed by a massive rise in wages.

If the federal politicians really want to help in what will be a difficult transition, they should go a step further and adopt the Western Australian guidelines which achieve the same or better outcomes than the federal scheme, without the risk of a sparking artificial wage increases (New WA rules a win for subbies, December 6).

The WA guidelines do not mention unions but rather concentrate on the rules for small contractors by preventing the “cartels” from excluding small plumbers, electricians and carpenters from tendering by requiring that their business be run inefficiently.

When you have bad agreements like those that exist in commercial building, the best place to use the mallet is at the bottom rather than at the top. Best of all is to use the mallet at both ends.

As I understand it, Holland and Lendlease still have managers who know how to operate under non-“cartel” rules. Hopefully the other major contractors will fill the skill gap before major retrenchments are required.