Who'll join Ballieu's construction revolution?

All state Governments are watching the so-called ‘Baillieu experiment' designed to reduce building costs on government contracts by about 20 to 25 per cent. If Victorian Premier Ted Baillieu succeeds it will slash the costs of commercial and infrastructure building in Australia.

But one of Australia's largest commercial builders, Lend Lease, has decided to take on Victorian Premier Baillieu and, according to The Age, has signed an agreement which will effectively preclude Lend Lease from Government contracts in Victoria.

Effectively it also means Lend Lease will not be able to build in Victoria, if Baillieu holds to his requirements.

According to the newspaper, the Lend Lease deal gives unions much greater access to building sites than the Baillieu government allows for its contracts. Moreover unions have to be consulted over labour hire providers. In essence the unions have a great deal of control over Lend Lease building sites.

Management takes a secondary role in many issues.

As we saw in the Victorian desalination plant, this increased role of unions on contract management can greatly increase the cost of building and also lifts the risk of cost blow outs caused by union action.

Accordingly tenders have to be higher to cover the risk.

Fascinatingly in Victoria, Lend Lease rival Grocon has stayed within the Baillieu guidelines and has refused to buckle to union demands. As a result Grocon is able to under cut major builders in Victoria and has a string of big new projects around Melbourne. It is probably the busiest builder in Australia operating outside the mining industry and old contracts.

But operating this way requires very different management skills – skills few major builders in Australia possess. It is much easier to pass the costs of union power onto the clients. This makes it tough for Baillieu because there maybe no other major builders apart from Grocon with the management skills to meet Victoria's requirements and therefore able to tender for Victorian government contracts.

In the case of the Grocon, the unions understood the long-term significance of the Grocon stance and took their demands for control to the streets in defiance of court orders. They are now being sued by both Grocon and the Victorian Government for damages.

Meanwhile the unions are considering testing the Baillieu requirements before Fair Work Australia.

If Baillieu wins on his requirements and other states follow then the cost of Australian infrastructure will be drastically reduced. It would also help Australia to be once again competitive in mine construction. Some $200 billion in projects have been mothballed partly because of Australia's high construction costs (in fairness lower mineral prices were probably a bigger factor).

There is no doubt that part of the reason for Australia's high construction costs in large projects is that unions demand management control over much of the activities.

Most states are looking at following Victoria but are nervous that if they follow Baillieu's lead there will be no big builders available to build. In addition in many other states the unions do not exercise their management rights with anywhere near the force that Victorian contracts experience.

The issues will also be raised in the looming court case over the cost over-runs in the Victorian desalination plant. Leighton subsidiary Thiess did a union deal, which gave the union's enormous power. The Thiess tender price was higher than that of a rival bid by another Leighton subsidiary, John Holland, which did not give the unions such wide management powers.

The then Victorian Premier John Brumby took the higher priced Thiess tender fearing unions might delay the plant if Holland won (at the time Melbourne dams were at low levels). However he knew the dangers of union management power and did everything he could to make sure that it was a fixed priced contract. Leighton now claims it was not a fixed priced contract because weather and federal industrial relation's laws boosted the costs. The case will set the scene for commercial contracting in Australia if it comes to court – as is likely.