No Case to Answer: Productivity Performance of the Australian Construction Industry

Toner, Phillip, Green, Roy, Croce, Nic, Mills, Bob, The Economic and Labour Relations Review : ELRR

1. Introduction

This article examines the productivity performance of the Australian construction industry and identifies some of the key factors affecting productivity growth. It also evaluates the recent Productivity Commission (1999) report on the construction industry. The article challenges the central thesis of the Productivity Commission that a high level of unionisation within the industry is adverse for productivity growth. Moreover, the recommendations of the Commission directed at increasing productivity within the industry are likely to exacerbate those structural features of the construction industry which impose a constraint on productivity growth within the industry. Some of these recommendations include, for example, an increase in labour flexibility through increased use of labour hire firms and the setting of different remuneration and hiring practices by individual sub-contractors on large construction sites. The primary data sources are national and international official economic data on the industry and case studies undertaken by the authors of major city building projects. The study finds that the Australian construction industry is within the top three OECD countries in terms of construction output per person employed. The survey of major city construction projects included project managers, sub-contractors and union delegates.

The article is structured as follows. Section Two provides a brief analysis of the role and significance of the construction industry in the economy. Section Three critically considers the terms of reference of the Productivity Commission Inquiry into the Australian construction industry and the methodology employed. Section Four outlines the numerous problems of devising productivity measures for the industry and summarises international productivity comparisons of the construction industry. This section also briefly summarises the findings of the case studies of industry participants engaged on large capital city building projects. The main findings are that for industry participants the primary determinants of on-site productivity are issues such as skilled project management; a co-operative on-site environment; training and high OH&S standards. The principal conclusion of this study are that the Productivity Commission has ignored the substantial evidence regarding the excellent comparative productivity performance of the local construction industry; the terms of reference of the Inquiry in focussing solely on work arrangements within large capital city building projects are unnecessarily restrictive and exclude a consideration of many influences on productivity and the recommendations of the Commission are likely to constrain long-term productivity growth within the industry.

2. Economic Significance of the Construction Industry

The building and construction industry currently accounts for around 6.3 per cent of total Australian GDP and is the fifth largest of the seventeen ANZSIC industry divisions in terms of its share of GDP. (The other industries in descending order are Manufacturing, Wholesale, Retail, and Property and Business Services). The industry's long-run rate of growth, at just under 2 per cent annually, has been marginally less than growth in the total economy, with the effect that its share of GDP has gradually declined over the last twenty years. It is comparatively labour intensive, with its share of total employment generally exceeding its contribution to total GDP by around 0.5-1.0 per cent. Construction is the sixth largest employer nationally, directly employing around 640,000 persons in 1998-99. This figure includes both employees and self-employed. (The other industries in descending order are Retail, Manufacturing, Property and Business Services, Health and Community Services and Education).

Aside from its importance in terms of its contribution to employment and GDP, the building and construction industry is significant as it is a key element in investment and, therefore, the future prosperity of the nation. Expenditure on Building and Construction activity is defined within the system of National Accounts as investment and is recorded as a component of Gross Fixed Capital Expenditure (GFCE). Dwelling and Non-Dwelling construction combined comprise around 50-60 per cent of total investment (excluding real estate transfer expenses) in Australia. Accordingly, the efficiency of supply of construction investments is critical to the quantity and quality of productive investment in Australia. Productivity within the Australian building and construction industry is clearly a major determinant of the efficiency of supply of these investment goods.

3. Productivity Commission Study Into the Australian Construction Industry

The Productivity Commission announced in October 1998 that it would conduct an Inquiry into 'the relationship between work arrangements and workplace performance on large capital city building sites' (Productivity Commission 1999: 1). This was one of a series of studies ordered by the Federal Treasurer into highly unionised industries, the others being the waterfront, mining and meat production (Productivity Commission 1998a, 1998b, 1998c). Work arrangements are defined as 'the way in which work is performed and managed, the conditions attached to that work, and the process by which wages and conditions are determined' (Productivity Commission 1999:1).

Specifically, the objectives of the study were to:

* describe how current work arrangements affect workplace performance on large capital city building sites;

* identify and explain changes in work arrangements since the later 1980s; and

* assess any impediments to future workplace change which, if addressed could raise performance (Productivity Commission 1999:1).

3.1 Criticisms of the Scope of the Inquiry

An important question is why the focus of the study is restricted to work arrangements on large capital city building projects. The justification for this focus is the Commission's 'extensive consultations and an analysis of past research revealed that this is where concerns in relation to work arrangements and perceived scope for payoffs from improved arrangements are greatest' (Productivity Commission 1999: xvii). A higher level of unionisation on large city building projects, compared to other parts of the construction industry is assumed to be a source of inefficiency. ' [U]nions have market power in negotiations over work arrangements because large capital city building sites are inherently vulnerable to industrial action and most workers on such sites are union members. This can lead to the adoption of work arrangements that involve lower worker effort and reduced total factor productivity' (Productivity Commission 1999: xvi). However, the Commission adduces no evidence to support these claims and moreover, admits that it cannot quantify the objectives of the study as identified above. This problem of evidence is detailed in section 3.2 below.

A second rationale for the research is the goal of assessing the extent to which productivity or costs have changed since the implementation of the findings of earlier inquiries such as the Gyles Royal Commission and the work of the Construction Industry Development Authority. However, the scope and recommendations of the Gyles Royal Commission were much broader than that of the present Productivity Commission's focus only on 'work arrangements'. They included for example, a consideration of:

* collusive tendering arrangements amongst construction firms operating to restrict competition and increase prices;

* collusive arrangements amongst manufactures and suppliers of building materials

* mismanagement of apprentice training schemes by employer organisations within the construction industry (Gyles Royal Commission 1992).

These important aspects of earlier Inquiries into the construction industry have been excluded from the scope of the Productivity Commission research. This is of concern, given that the Australian Competition and Consumer Commission has undertaken successful prosecutions over the . 1990s of the same collusive arrangements in the building industry that were identified by the Gyles Royal Commission …

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Publication information: Article title: No Case to Answer: Productivity Performance of the Australian Construction Industry. Contributors: Toner, Phillip - Author, Green, Roy - Author, Croce, Nic - Author, Mills, Bob - Author. Journal title: The Economic and Labour Relations Review : ELRR. Volume: 12. Issue: 1 Publication date: June 2001. Page number: 104+. © Economic Labor Relations Review, University of New South Wales May 2008. COPYRIGHT 2001 Gale Group.

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