The current challenges in the construction industry, specifically in respect of housing, are endless and complex. The undeniable need to develop and provide adequate housing for the growing population is being inhibited by very real commercial concerns of those key stakeholders delivering housing projects for the community. The imbalance between the practicality and commerciality is one of the biggest hurdles when structuring and negotiating these projects.
A fundamental (but by no means sole) cause of the issue is that contractors are facing significant challenges in the industry including labour shortages and supply chain delays, resulting in reduced pricing certainty. However, to make a project commercially viable, developers (and financiers) require certainty of price. So how do you strike a balance?
Utilising Commercial Modelling and Practices
Firstly, there is a big shift in popularity of commercial models that were historically reserved for much larger and more complex projects. Collabourative contracting, target or guaranteed maximum price models, pain/gain share, structured rate adjustments and early completion bonuses are just a few examples of mechanisms which fell dormant for quite a few years, but are now finding a resurgence on projects of all sizes to balance risk and help stakeholders to reach a commercial agreement.
Clarifying Contracts and Communicating Risk
Secondly, there are a lot more open and honest conversations between parties about who is responsible for risk. The outcome of having this open dialogue between the parties is:
- the project agreements can accurately and clearly reflect the intention of the parties, making administration of claims simpler and encouraging a more collabourative relationship;
- the contractor’s risk in the project is priced into the contract sum, giving contractors confidence to lock in a price or giving the parties the opportunity to properly consider other pricing models (such as target price) that may suit the needs of the project better; and
- the pricing and programming for the project is realistic, allowing the parties to have an informed consideration of commercial viability of the project but also reducing the number of claims for time and cost after execution of the project agreements.
Simplified Construction and Staggering Procurement
Lastly, we are seeing a change in the way projects are structured and executed by developers. Simplifying design and construction methodologies, as well as staggering procurement works throughout negotiations not only removes unnecessary variables such as manufacturing, and supply and installation delay, but also makes the work more appealing to contractors.
Change is always a challenge and when we are talking about moving delivery models from a simple fixed price to an arrangement that is more complex in nature – it’s easy to see why there is some resistance in the industry. However, the basic fact is that the issues being faced in the industry are not changing any time soon. With Australia amid a deepening housing shortage and public infrastructure demands (notably due to the boost in the public health sector and, of course, the Olympics) absorbing resources for many years to come, the construction industry cannot ignore the impacts and merely hope they will pass or settle. Positive action is required and key stakeholders need to adjust their position to successfully balance commerciality and growth for the future of the housing industry.
This article originally appeared in the Winter 2024 edition of UDIA’s ‘establish’ magazine.