Defence needs a fresh approach to major projects in Australia’s north

While the AUKUS agreement and the defence strategic review have focused strong interest on the massive task of building, crewing and operating Australia’s future nuclear-powered submarines, the government has also agreed in principle to sizeable new defence infrastructure projects, many in Australia’s north. At face value, this is great news for the construction sector, but the industry faces challenges that must be understood by all involved, including the Defence Department.

Construction industry executives in Australia say it has rarely in recent times been more challenging to deliver large projects. Supply chains remain problematic, even beyond the Covid-19 lockdowns. Clients work assiduously to transfer every possible project risk onto their construction partners. And faced with rapidly rising insolvencies, the sector now finds itself reflecting on which clients and projects are best avoided.

Construction companies have a strong interest in identifying hidden costs, particularly those involving risk transfer, to ensure they sit with clients.

Against these changing industry dynamics, the defence review has recommended speeding up delivery of new infrastructure and renewal of existing infrastructure. That call has come at a time when the risk of accelerating infrastructure projects will test everybody involved.

Defence is not alone in this predicament. State and territory governments and private investors face the same issues. It’s undoubtedly more challenging for Defence given the urgent need for new capabilities and their associated infrastructure in a deteriorating strategic situation. The requirement to continue hardening and developing Royal Australian Air Force Base Tindal, near Katherine, is a case in point.

Much of the new defence infrastructure must be built in the north, where doing business demands a deep understanding of local markets and delivery strategies must be carefully synchronised with other industry activities. We have previously written about the importance of context and mindset to Defence’s success in northern Australia. More than in metropolitan Australia, Defence is a very large client in the north and that brings even more challenges.

Good planning today can improve the chances of success and lessen uncertainty in construction projects. International research has consistently found that most large projects that fail do so for three reasons: they are too complex, it’s often too late to build in efficiencies as a project progresses, and there’s been an insufficient focus on the costs of delays and uncertainty.

It’s critical that Defence get its project designs right early.

Defence must acknowledge that a take-it-or-leave-it approach to industry won’t attract the best contracting teams. Construction industry leaders consider carefully the risks of an inflexible or adversarial client. Construction subcontractors have become very choosy about which projects they bid for. Clients that make the effort to attract the best teams realise genuine delivery benefits. Unsurprisingly, flexibility in procurement and a mature approach to contract risk is cheaper in the long run. Defence, as a large customer in the northern Australian market, needs this flexibility and maturity because a top-down approach will not account for regional capacity.

In these challenging circumstances, Defence needs to revisit some of its contract provisions. In particular, it should consider the utility of provisions that financially punish industry partners for delays that are out of their control, like the weather, or that demand insurance coverage well beyond what’s required in the wider commercial environment. In the current operating environment, such provisions do more harm than good. They make defence work more expensive and less attractive. Let’s not forget, the industry prices project complexity and risk into its tenders, which means taxpayers end up meeting these costs, whether there are delays or not.

Inflation similarly multiplies costs. Conversations with industry associations suggest construction costs have risen by 11–13% in the past year, well ahead of the consumer price index. Meanwhile, clients across the country have been using commercial pressure to hold contractors to prices long after the agreed time. They often do so even though their own processes have delayed progress. While that may save money in the short term, it profoundly increases long-term costs. It also threatens the sector’s viability.

Unfortunately, high inflation will likely be with us for some time. Clients and the industry know that fixed-price contracts are an imperfect tool in this environment, but they’ve become used to it. The current economic and commercial uncertainty means industry must factor these risks into its prices.

Defence will be under incredible pressure to deliver significant infrastructure projects across the north in one of the most challenging periods globally for construction in recent memory. Some in Defence may be tempted to run its requirements even harder to achieve speed. But the context has changed.

Defence has a narrowing opportunity to reflect on how things might be done differently, and it must adopt the proper context and mindset to do so. Defence must avoid, where possible, anything bespoke; work hard to attract the best teams to projects; and review its suite of contract provisions that may turn uncertainty into additional costs.

The most prudent option is to hasten slowly and test ideas with industry for delivering projects on time, on budget and with full capability. As the defence review signals a northern Australia focus, careful planning and a methodical approach will ensure fast and effective action.