Baillieu's Grocon IR game-breaker

The violent Grocon construction dispute of the last few weeks needs to be seen in a much wider context than has so far been reported. Every construction executive needs to be alert to the significant implications for their business model and business futures over what's happened at Grocon.

Central to this is the Victorian government's new construction code of compliance for government work.

Scratch below the surface and the trigger for the Grocon dispute was not Grocon at all. It's the fact that the Victorian desalination plant construction is finally coming to a close. (That's the construction job on which Leighton's will lose close to $1 billion dollars!)

Join the dots and the construction unions need to find new jobs for their in-house heavies who've been on a $300,000-year-plus gravy train during the desal construction while not required to work. It's a cooked-up dispute. The construction unions have demanded that Grocon employ the departing desal union representatives. Grocon has said no! And Fair Work Australia has done its normal job of acting as the mask for the real issue.

Normally, large construction companies give in to such union tactics because it's in their commercial interests to do so. The construction industry is simple. Large firms pick up all the big jobs. They are margin players. Whatever the cost of a job, they add their margin and pass this on to the client. If costs go up, the client is charged more (if it's not a fixed-price job) and/or the risk is passed on to the subcontractors and independent contractors down the chain. If it's a fixed price job, the extra cost is built into the tender price.

The construction unions act to keep out new competitors. Large ‘union friendly' firms pay off the union heavies through cushy jobs and other means. Unions impose industrial relations hell on potential competitors to the ‘friendly firms', thereby stopping small players becoming big. The way this plays out is more complex than presented here but the overall picture sticks.

Normally, Grocon should have given in. But something has changed and it's called the Victorian Premier, Ted Baillieu.

Premier Baillieu has realised that this construction industry structure is killing his State's capacity to build infrastructure. The cost of the ‘system' has blown out so massively that it is a severe impediment to his ability to build anything in Victoria. Baillieu was quite blunt about this in a speech at a recent infrastructure conference in Melbourne.

Baillieu has strong evidence to be concerned. Take just one example. When the previous Victorian government was in charge of building infrastructure for the 2006 Melbourne Commonwealth Games, it admitted that the cost was at least 34 per cent higher than it should have been because of the construction unions. The evidence was contained in contracts for the Games Village construction.

The Games Village was a standard housing development that could have been handled by any one of dozens of Victorian housing construction companies. Instead, construction was managed as a commercial construction site using construction union deals and personnel. The Games Village contracts contained a 34 per cent increased payment to the construction firm specifically to cover the costs of commercial construction industrial relations.

With the Gillard Government's removal of the Australian Building and Construction Commission, this high cost increase is back in play. This time, my view is that the construction cost blowouts are heading north of 30-plus per cent. It's a major explanation as to why resource project developments are now being put on hold! Mine construction costs have become uncontrollable because bad union deals are spreading with great speed.

Premier Baillieu has looked at this and seen the threat. He has an enormously ambitious infrastructure plan for Victoria, seeing this as a key to driving growth. This includes new multi-billion dollar regional and Melbourne rail and roads links, a new hospital, prisons, expanded port facilities in Melbourne and a new regional port. The planned spend, at this stage, is $18 billion over the next 4 years.

Of all Australian governments, only Victoria and Western Australia are running budget surpluses. Baillieu has positioned Victoria to move forward on infrastructure development. But importantly it's a matter of maximising the bang for the infrastructure bucks and stopping the cost blowouts. Baillieu's put in place a process to do this. It's called the Victorian Code of Practice for the Building and Construction Industry. It was announced about a year ago and is well into its implementation phase.

Last week I interviewed the head of the Victorian construction code's Treasury compliance unit, Nigel Hadgkiss. Nigel is well known within the sector and knows the Australian construction industry well. He was formerly Deputy Commissioner of the Australian Building and Construction Commission.

In my record of interview Nigel explains some key differences between the Victorian code and the ineffective federal construction code now in place. At the federal level, the regulator can only act after a construction job has begun. Nigel's compliance unit operates before and during the tender process. Tenderers must be able to demonstrate compliance before they can be awarded a contract. Worksite visits of tenderers' jobs take place to validate compliance claims in tenders.

The ultimate sanction for non-compliance is prohibition on tendering for Victorian government construction work.

The ‘teeth' in the code were demonstrated by some telling comments made by Nigel in relation to the Grocon dispute. In fairly cautious language Nigel indicated that it is known that some employees of construction companies not associated with Grocon were involved in illegal picketing of Grocon. Further, that those construction companies' approaches to their illegally picketing employees constituted a "relevant factor in assessing compliance” should those companies tender for Victorian government work.

The inference I took from this is that if a construction company fails to take action against its employees who act illegally against a competing business, then the first company could have difficulty being accepted for government construction work.

Assuming I am correct, it demonstrates the determination that the Baillieu Government has in ensuring construction cost blow-outs do not occur because of industrial activity. Significantly, the focus is not on the unions directly, but rather on whether construction companies tolerate or allow bad industrial relations agreements and practices in their business. This is simply the government asserting its rights as the client. Companies either ensure that they and their workforces comply or the companies need not bother to tender.

Without knowing the detail, some stronger understanding of Grocon's attitude in this recent dispute perhaps becomes possible. Nigel Hadgkiss indicated that the government has tolerated pre-1 July 2012 pattern agreements in tenders, but for anything after 1 July, the inclusion of pattern agreements will constitute non-compliance and failure to win tenders.

Assuming that the unions' demand that Grocon employ the unions' people was after 1 July, if Grocon agreed to employ them, it would arguably be in breach of the Victorian code. Grocon's business is such that it cannot afford to exclude itself from Victorian government work. This is supposition, but perhaps this was and remains a factor in Grocon's strong stance.

It's early days, but what's potentially evolving in Victoria is a new construction industry environment. Premier Baillieu is demonstrating a resolve to obtain value for money from construction. The system he's put in place gives his government, as the client, real teeth. As a model this could spread to other states. Construction executives and firms that don't respond may find themselves being squeezed out of business.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.