Early engagement key for builders
![Luke Reinecke (left) and Andrew Owens say builders and developers are working more collaboratively than in the past. Photo: Michael O'Brien](https://erben.au/wp-content/uploads/2024/07/Early-engagement-key-for-builders-1.jpg)
SOURCE: Business News
26/6/2024
There are changes in the air for commercial builders.
While companies are increasingly upbeat about Perth’s pipeline of work, the major players have adjusted their approach to procuring projects. Rapid cost escalations during COVID resulted in the downfall of several construction companies, largely due to being caught out with lump-sum, fixed-price contracts. While fixed-price models are still prevalent, the industry has largely moved to an early contractor involvement, or ECI, approach. This means the parties involved in building a project work together to identify the risks and costs associated with a development before a head contract is entered into. Also referred to as a managing contractor model, the concept of ECI is not new, but its use has become a lot more widespread in recent years.
The state’s major tier-one builder, Multiplex, was an early adopter of the approach. Multiplex helped develop the model with the Department of Finance for the Fiona Stanley Hospital project, which Multiplex completed in 2013. As Multiplex regional managing director Chris Palandri explained, the ECI approach was seen as a way to help reduce builders’ exposure to risks. “Generally, it’s a really good way of a client picking a builder, working with a builder, solving the problems, finding opportunities to save some money, getting to the budget, and … taking out a lot of the unknowns … that you have to put more risk against,” he told Business News. “If you’re in a four or six-week tender process, you’re sitting there going ‘we’ve got six weeks to work out everything about this project’, as opposed to an ECI process, where you could have nine or 12 months.” Multiplex’s Edith Cowan University’s City Campus, Nine the Esplanade in Elizabeth Quay and Joondalup Health Campus projects were procured under an ECI model. “If we get a contract that’s different to that, it’d be unusual, it’d be one in 20,” Mr Palandri said. He said builders’ approach to risk had changed during the past few years, in response to cost and labour pressures. “If you’re a builder that’s procured projects through COVID and you haven’t had a financial issue or a time issue around these projects, it’s a minor miracle,” he said. “I think everybody’s been hit with this somewhat, [and] as a result, naturally, I think the market [has moved] towards tightening up what they would accept in terms of contractual risk profile.” Multiplex’s construction of Blackburne’s One Subiaco was caught up in cost escalations of about 25 per cent from the time the job was priced to when it was completed. The project was procured under an ECI model, but the fact construction started in 2020 meant the project was affected by chronic labour and material shortages. “All those things came together to just make it really difficult to get the project delivered on time and on budget,” Mr Palandri said. “We managed to get it done, it was just … really hard to deliver through that time period. “When everyone suddenly has to pay more for their labour, and they priced on x dollars, and they add 20 or 30 per cent to that to attract the labour … you start losing money really quickly.” The builder went on to construct Blackburne’s The Grove, which reached practical completion this month. That project started in 2021 and was the most recent multi-residential development Multiplex has built, sparking speculation the building giant was moving away from apartments.
However, Mr Palandri confirmed Multiplex was in talks with Golden Sedayu over its $4 billion Burswood Point project. “We’re in detailed discussions and have signed a heads of agreement with Golden Sedayu on Belmont,” he said. “We’re in the middle of pricing the first tower for them, and we’ve come to an agreement with them on some risk-sharing elements of that project.”
Mr Palandri said Multiplex was drawn to the Burswood development, which is set to comprise 4,500 dwellings and commercial buildings across a 38-hectare site, for its longevity. “I love that project because it’s a great opportunity for us to get some, potentially, some consistency of work,” he said. “It’s a great way of taking out the highs and lows in the business.” Golden Sedayu is part way through groundworks of the Belmont Park project, with construction of its residences expected to begin next year. Mr Palandri said he felt relatively upbeat about Western Australia’s building market, but the key was to work with the right developers and subcontractors. “[We’ve got] high confidence on going ahead with projects, [but are] just wanting to have the right subcontractors who have who have got strength, capacity, and the ability to attract labour,” he said. “[It’s about] working with the right clients that understand the issues that exist in the market and are open to working with us to mitigate those risks. “I’m pretty buoyant about the market at the moment and what’s coming up; I think the Perth construction market is in good shape.”
Reform Involving contractors early in projects is one of the approaches advocated by the Master Builders Association of WA, as part of its reform package. The industry body successfully lobbied the state government to change procurement practices for Department of Finance projects following a joint working group between the two parties. Announcing the implementation of the reforms last month, Commerce Minister Sue Ellery said they would “improve cash flow for builders and increase transparency in the tender process”. MBAWA chief executive Matthew Pollock said the changes should trickle down to the private sector. “The government is the biggest client in town for commercial construction,” he said. “There is an opportunity for them to lead by example when it comes to putting forward best practice procurement models. We hope that, where appropriate, … it’s something that the private sector can follow. The apportion of risk is central to the reforms, which promise to result in fairer allocation of risk between developers and builders.” Mr Pollock said this should result in a better outcome for all in the supply chain. MBAWA is projecting an increase in construction activity for WA over the next two years, from $34 billion of projects this financial year to $39 billion in 2024-25 and$39.2 billion in 2026-27. Mr Pollock said the construction industry was in a unique position where the pipeline of residential, commercial and infrastructure projects were all growing. “What that means is those sectors are competing for resources,” he said. Mr Pollock said labour shortages remained the key concern for MBAWA members, with a predicted shortfall of up to 50,000 skilled workers in WA by 2026. He said the tapering off of the federal government’s wage subsidies for apprentices saw a drop in the number of people learning a trade. In WA, the number of apprentices in the construction industry has fallen by about 30 per cent, he said. “That’s something we definitely need to address,” he said. The state government’s incentive for apprentices, including payments for workers to stay in training, were helping, but the federal government needed to do more, according to Mr Pollock.
Growth
The downfall of commercial builders Probuild, Jaxon, Pindan and FIRM has created opportunities for other builders to take on more projects. Once an industry giant, BGC has put a pause on taking on new contracts in its commercial or residential businesses, as it focuses on completing its jobs and on manufacturing. Several companies have boosted their presence in Perth in the past 12 months and some new entrants have appeared. Roberts Co announced its move into Perth last year as the builder for Edge Visionary Living’s The Dunes apartment development in Scarborough, but so far that is the only project the builder is taking on in WA.
National builder ADCO Constructions is part way through overhauling Enex for ISPT, redeveloping the WACA, and the state government’s $70 million affordable housing precinct, Common Ground. The company is aware of the risks associated with the industry, having taken on the work for fallen builder Jaxon on its Forrest Hall project in 2021. ADCO WA state manager Lyn O’Brien said ADCO’s national presence helped it mitigate risks. She said the company, which has moved up to third spot in Data & Insights’ construction companies list, had grown its Perth presence significantly in recent months.
ADCO has gone from 100 staff in Perth to 120 in the past 12 months and expects to have about 130 staff by December this year. “Looking at what’s coming up in terms of pipeline, there’s health, which we will be targeting, general commercial construction as well, and sport and recreation,” Ms O’Brien said “We are doing quite a bit of correctional (prisons) [as] a target area.”
Ms O’Brien said the WACA and Enex developments were both procured via an ECI process, which helped eliminate some of the guesswork early in the projects. “It’s fantastic if we can get in early, [because] it gives us that opportunity to establish the relationships early, to understand the needs and requirements early and to really run the methodology and logistical challenges to ground,” she said. “It’s not required on every type of project, but [for] something like Enex [it’s] perfect, you need to be able to get in there and investigate and see what it is that’s in front of you prior to actually doing the works.” Ms O’Brien agreed that labour shortages were the key issue for the sector but said having a strong culture helped retain staff. The company is working towards 30 per cent of its staff being female by 2030. It has a 50/50 male to female ratio of workers on its Fremantle Hospital mental health facility project to date. Sydney-headquartered Built entered the Perth market 12 years ago and has gradually grown its WA staff to 125 people. Built is set to move into Westralia Square 2 from its premises at 99 St Georges Terrace at the end of June. The business has taken on Hesperia’s $233 million Malaga Film Studios and Sirona Urban’s Wellington Street student accommodation project during the past 12months. It is also building three train stations on the Armadale line as part of Metronet. Built director Jon Stone, who has been in the building industry for more than three decades, has experienced considerable change in the way projects are priced. “The best outcome hasn’t been where you’re just in a race to price a job to deliver a price,” Mr Stone said. “We’re more than happy to take on lump sum contracts, but I think for us [what’s changed] is how we get to that lump sum contract. “That collaborative procurement arrangement is certainly one that we are enjoying, and I think it’s certainly one that is beneficial for all stakeholders.”
Like ADCO, Built has chosen not to take on apartment projects. For Built though, it was a deliberate pivot away from build-to-sell multi-residential projects during COVID. In 2021, the company was lined up to construct Edge Visionary Living’s South Perth apartment development Lumiere but decided against going ahead. “We took a conscious decision at that time, and even now, [it’s] not a market that we are really that keen to be involved in,” Mr Stone said. “The procurement, the tendering process, is a little bit different.” He said he preferred build-to-rent and student accommodation projects, because instead of dealing with multiple owners he was just dealing with one client. Built ’s exit from the apartment build space prompted Edge Visionary Living to launch its own building arm, which started the build on Lumiere this year. Edge is not the only developer taking this step, with Willing Group doing the same last year with its Willing Build division. West to West Group, which is known for its building fit out and maintenance businesses, has established a foothold in construction. The Osborne Park-based builder has taken on Megara’s Serai apartments and Place Development’s Rottnest Lodge projects. West to West Group general manager of construction Adam Harvey was appointed to the business in January last year, with a view to establishing its construction arm. “I came on board, and we made the move into construction,” he told Business News. Mr Harvey said West to West Group planned to occupy the space in the market that the exit of other builders had left open, in the sub-$50 million bracket. “There’s definitely a gap in the market in that sort of boutique … space,” he said. The company’s aim was to be strong across building, fit outs and maintenance. West to West is working on fit outs for some of Perth’s biggest commercial owners, including Centuria Capital Group and Brookfield Properties.
![Luke Reinecke (left) and Andrew Owens say builders and developers are working more collaboratively than in the past. Photo: Michael O'Brien](https://erben.au/wp-content/uploads/2024/07/Early-engagement-key-for-builders-1.jpg)
Icon Constructions, headquartered in Melbourne, has emerged as a player in WA’s apartment building scene with its work on Erben ’s Cirque Duet project. Icon was appointed to the Applecross development last year, following failed builder Jaxon’s completion of the adjacent tower, Cirque Apartments. Icon Constructions WA general manager Andrew Owens said many of Jaxon’s workers came across to Icon, which helped with continuity across the two buildings. Mr Owens said the project was procured in a volatile market, prompting the developer to continually reassess its feasibility. “When we first met … for this job it was January 2022; between that date and June 2022 the price had shot up,” he told Business News. He said using an ECI approach for Cirque Duet meant most of the budget issues could be resolved prior to entering a fixed-price contract. “There was a lot of honesty and trust all the way down from [Erben] to the subcontractors,” Mr Owens said. “We didn’t get a subbie on board and try and hammer the last few cents out of him … we said, ‘we want you on the job happy and able to deliver’.”
Erben managing director Luke Reinecke said conditions in the building market in recent years had forced developers to change their approach when it came to working with builders. “The traditional model where you sort of have the builder go and price things using their internal QS (quantity surveying) and a little bit of feedback from the market, then signing the head contract and going to market and going through the procurement process … became almost impossible,” he said. “Subcontractors wouldn’t hold their price, they were walking away, and it was creating a lot of issues and a lot of risk from a builder’s perspective. “That’s probably the biggest fundamental change is the sharing of risk.”
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