Report on Housing Productivity has New Data but No New Ideas

 Did the Productivity Commission miss an opportunity to change the debate? 

 

The Australian Productivity Commission has released a research paper on the residential building industry, with new data on its declining productivity and recommendations to improve it. The Productivity Commission (PC) is an advisory body that provides research and analysis to the Treasurer and, as an independent agency mainly staffed by economists, has a long history of advocacy for market-based solutions. It plays an important role in developing policies through inquiries done at the request of the Australian Government on policy or regulatory issues, does its own research across seven work streams, and has benchmarking performance monitoring responsibilities.

 

The research paper is titled Housing Construction Productivity: Can We Fix It?  A team of eight people worked on it, there were three roundtables with the Urban Development Institute of Australia, the Housing Industry Association and the Australian Local Government Association, and over 40 organisations and individuals participated in the research. There are new estimates for a set of proxy measures for dwelling construction productivity that ‘encompass the entire homebuilding process, from site preparation and project management to the installation of fixtures and fittings’.

 

This post looks at the key outcomes of the research. These are the five issues that have contributed to falling productivity and the seven ‘reform directions’ the paper has identified. How significant are these outcomes?  How should the reforms be implemented? What other industry issues or characteristics have not been considered relevant or important? 

 

 

Productivity Performance

 

Because there are no ABS estimates of productivity for Australian dwelling construction the PC developed a set of labour productivity proxies. This involved estimating outputs and labour inputs from ABS construction statistics across the two industries of residential building construction (builders and developers) and construction services (tradespeople that build the dwelling). The claim is these ‘productivity proxies capture the broad underlying changes in productivity in the sector’. 

 

Figure 1 shows the PC’s measures of productivity in the dwelling construction industry declined between 1994‑95 and 2022‑23 as:

·      The number of new dwellings built per hour worked declined 53%;

·      Dwelling construction gross value added per hour worked declined 12%; while

·      Labour productivity in the broader economy increased 49%.

 

Figure 1.  Housing productivity

 

 

 

The average time taken to complete new housing has increased significantly. ‘In 2023‑24, the average time to complete a single detached house was about 10.4 months, up from about 6.4 months a decade earlier. The average time taken to complete new townhouses rose from about 9.4 months to 12.9 months, and for new apartments, from about 18.5 months to 27.8 months (though this only covers apartments in New South Wales, Victoria and Queensland)’. Higher density construction performed better than houses according to the PC, in Figure 2. 

 

Figure 2.  Houses compared to higher density 

 

 

Methodological issues with these proxy measures include: indexation and the choice of 1994-95 as the base year; lack of data on annual growth rates; how accurately construction services are accounted for in hours worked; and the use by the PC of their own deflator. The ABS productivity measures for the whole of construction show no growth but nothing like the decline the PC has found. In a 2022 post on construction productivity for the ABS sectors of Building, Engineering and Construction services I found no significant fall in GVA per person employed between 2007 and 2021, in Figure 3.

 

Figure 3. Australian construction productivity by industry sector

 

 

 

Factors Driving Poor productivity

 

The PC discuses five issues that contribute to falling productivity in housing construction. The PC’s issues are: 

 

1.  Complexity and slow approvals –the development and construction approval process is complex, with major development projects such as new housing estates and apartment complexes taking ten years or more. After approval delays can continue as projects need construction certificates and infrastructure connections. Because construction is highly sequential, delays and disruptions can create ‘cascading failures’, which push up costs. 

2.  Fragmented - construction is done by small firms and individual subcontractors and is one of the least concentrated industries in Australia. The combined market share of the largest four firms is the lowest of any sector, at 12% in 2017, and the average residential building construction firm employs less than 2 people. ‘To a degree this is a function of the development and building process and subcontracting’, however:

·      Regulations differ across geographic areas, which makes it hard to replicate a development or construction process across the country and for successful firms to scale up;

·      Building regulation tends to be project‑based rather than firm‑based, requiring new regulatory approval for each new project. In other industries, regulations are a fixed cost that encourages firms to scale up to spread those costs over a larger revenue base. In construction, if a builder scales up, regulatory costs scale up proportionally, reducing or even negating the benefits of expansion;

·      Project risk management and a regulatory focus on the builder as head contractor leads to highly disaggregated specialisation and outsourcing of work. 

3.   Lack of innovation – innovation activity and spending in construction is low compared to other sectors. Only 35% of all construction firms are ‘innovation‑active’ and the sector has been slow to adopt digital technologies and new processes like prefabrication. Estimates are less than 5% of total construction is prefabricated. ‘Low levels of innovation are due to fragmentation, industry culture, lack of direct benefits to firms from innovation and the ‘chilling effect’ of frequent regulatory changes’ [1].

4.   Regulatory burden – to develop and construct housing requires compliance with layers of regulation on: 

·      Where housing can be built and state planning that affects which land is zoned for residential development;

·      How housing should be built and the National Construction Code’s minimum standards on how buildings are constructed; 

·      What housing should look like, through local government planning requirements for setbacks and roof pitches; 

·      Other indirect regulations, such as environmental regulations; and

·    The regulatory burden is increasing which ‘unambiguously increases the cost of development and construction, and ultimately the cost of housing for Australians’.

5.   Workforce issues – the sector struggles to attract and retain some skilled workers because of ‘stagnating apprenticeship commencements and completions, restrictive and inflexible training pathways for trades, and competition for labour from public infrastructure projects in recent years (at least for the higher‑density housing sector)’. Regulatory settings contributing to low labour mobility are inconsistent occupational licensing accreditation across jurisdictions and limited pathways for migrants to join the construction workforce.

 

The PC uses the housing sector, housing construction and residential construction to describe the industry that the ABS calls residential building. In discussing the issues the paper frequently moves between total construction and residential building. This might be because data is often only available for the whole of construction, but it is not helpful as it obscures the points being made. Residential building is completely different from engineering construction and there are limited similarities with non-residential building, which together have a larger share of construction industry employment and output than residential building. 

 

Reform Directions

 

To improve housing construction productivity, the PC identified seven reform directions:

 

1. Coordinated and transparent planning approvals and appropriately funded regulators – governments need to improve coordination in the planning approval process, and should consider establishing coordination bodies to speed up the process and address delays such as the Queensland State Assessment and Referral Agency. Governments need to adequately resource regulatory and service delivery agencies, ensure there is sufficient accountability, and set performance targets for planning approval decisions.

2. Review building regulations – governments should commission an independent review of the National Construction Code and its implementation by state and territory governments. A review should consider the NCC’s objectives, the regularity of code updates, consistency in implementation by governments’ in approvals, certification, compliance and enforcement, and impediments to innovation and local government rules that affect construction of dwellings.

3. State and territory governments should continue implementing ratings systems that improve information available to consumers about new and existing building quality to help create a price premium for higher quality builders and building.

4. There are opportunities to increase diffusion of technology across the housing construction sector, similar to the government‑funded extension services provided to agriculture. 

5. Governments should consider the adequacy of public research and development funding for housing construction to improve productivity performance. And better information, including rating schemes, could improve building quality.

6. Governments should continue to reduce unnecessary regulatory impediments to greater uptake of modern methods of construction in housing construction, including prefabricated and modular construction.

7. Improve workforce mobility and flexibility – governments should continue removing occupational licensing exemptions and conditions and work towards national consistency, address barriers to migration to improve labour supply, and improve training pathways (including microcredentials) and support for apprentices. 

 

Implementation is Missing

 

Discussion on implementation of the reform directions is not included in the paper, a serious oversight that leaves the recommended directions rudderless. For example:

·      How to reform planning if state governments are not prepared to make difficult, unpopular decisions on allowing development while restricting appeals and reviews of planning decisions? How does the PC propose coordinating planning and approvals across the 537 local councils in Australia?

·      Who will finance and who should undertake the independent review of the National Construction Code and its implementation by state and territory governments? Over the last decade the Commonwealth Government has actually been reducing funding for the Australian Building Codes Board, and the PC could have usefully recommended increasing funding;

·      What about the relationship between building defects and the National Construction Code? The reason there is a Code is to set standards and measure compliance, and state variations typically reflect different conditions [2]. The states are also responsible for the regulators that are dealing with the plague of defects in apartments built over the last ten years, their programs to replace flammable cladding that was illegally installed, and they all have different licensing criteria for builders. How would ‘consistency in implementation by governments’ in approvals, certification, compliance and enforcement’ be achieved?

·      How can funding for public research and extension services be increased when competing with priorities like defence, health and aged care?

·      What are the ‘unnecessary regulatory impediments to greater uptake of modern methods of construction in housing construction’? if these are not identified how can they be reduced? Why didn’t the PC draw on the 2024 research on regulatory barriers by Swinburne University and  the Housing Institute of Australia  or the 2023 prefabAUS industry roadmap for example? 

 

Other Industry Issues

 

A number of other industry issues or characteristics have not been considered relevant or important. Not discussed in the research paper are:

·      The volatility of approvals, commencements and demand means the building cycle from year to year can vary by 10% or more – one solution is to allow builders a tax free sinking fund so in good years money can be saved to be used to finance projects during downturns;

·      Industry contractual relationships – subcontracting is flexible and a method to manage costs and risk but direct employment has a smaller span of control and is more efficient, however, builders will only increase direct employment if there is continuity of work (see above);

·      The cyclical boom-bust nature of residential building also makes increased modular and prefabricated housing and successful industrialisation is less likely than in manufacturing;

·      Improving project management through training and education would significantly improve productivity, particularly for smaller firms. This should include access and training on digital platforms and AI enhanced systems;

·      The reluctance of banks to finance modular and prefabricated houses - although this is starting to change the traditional method of financing and standard contracts do not work for prefab;

·      The lack of standards and an industry quality assurance accreditation system for modular and prefabricated housing - there is work being done on these but nothing official so far;

·       The lack of a building products compliance system – the exception is Queensland’s 2017 Non-Conforming Building Products law that creates a chain of responsibility and requires the supply chain to take responsibility for building products being compliant and fit for purpose;

·       The potential of digital platforms and AI enhanced systems to increase productivity;

·      Automated planning assessment and compliance with codes.

 

Vocational Education and Training

 

The PC focused on occupational licensing, but there is no discussion on vocational education and training (VET) beyond noting the need to improve training pathways. This is bizarre, because beyond attracting and retaining new entrants are many issues with access, curricula, articulation and the new skills needed with digitisation and automation. To be fair, the PC references their 2020 review of the National Agreement for Skills and Workforce Development and the 2024 Department of Employment and Workplace Relations report Skills For Tomorrow: Shaping The Future of Australian Apprenticeship, Strategic Review of The Australian Apprenticeship Incentive System. Nevertheless, in this paper the discussion is limited to a few points on occupational licensing, although there have been other reports with detailed recommendations on Australia’s VET sector that could have been built upon. 

 

The 2019 review of Australia’s VET by Steven Joyce, a former New Zealand Minister for Tertiary Education, Skills and Employment made 71 recommendations. The key issues identified were:

·      Variations in quality between providers and the relationship between the regulator and providers;

·      A cumbersome qualifications system that is slow to respond to changes in industry skills needs;

·      A complicated and inconsistent funding system that is not well matched to skills needs;

·      A lack of clear and useful information on vocational careers for prospective new entrants;

·      Unclear secondary school pathways into the VET sector and a dominance of university pathways;

·      Access issues for Aboriginal and Torres Strait Islander Peoples and second chance learners seeking skills that will help them obtain and stay in meaningful work.

 

The Joyce review concluded ‘the sector needs to be more active in emerging skills areas in order to be seen as a more modern method of education’ and the essential role for VET is training new entrants and upgrading the skills of current workers as digitisation and automation spread through the economy, including support for second chance learners needing foundation language, literacy, numeracy and digital skills.

 

A more recent 2024 review of NSW VET made 21 recommendations, including better governance, funding and pricing, with industry compacts, regional skills plans, microcredentials, updated curricula, and apprenticeship roadmaps. Other recommendations were for the government to employ apprentices, particularly in regional areas, provide support to VET teachers, simplify the complex and highly prescriptive approach to VET qualifications, expand pathways to entry for teachers, and invest in facilities. 

 

 

How Significant Are The Outcomes?  

 

None of the productivity issues in the PC paper are new and can be found in many other reports on the industry, and the recommended reforms are peculiarly limited. For context, below are the recommendations of four comparable reports on construction productivity that show how constrained the PC’s reform directions are, two in 2024 from the NSW Productivity and Equality Commission and McKinsey, and two older reports from the CIOB on the U.K. and the McKinsey Global Institute on the U.S. 

 

The 2024 NSW Productivity and Equality Commission report Review of Housing Supply Challenges and Policy Options for NSW found barriers to housing supply included high construction and borrowing costs, capacity constraints in the construction sector, and bottlenecks in the development process, with over half of the 32 recommendations on planning. It recommended reforming planning to streamline the development process and reduce approval times, and reviewing the Design and Place State Environmental Planning Policy because ‘prescriptive rules’ on land block innovation. Other recommendations included education and skills training, business regulations and tax, improving infrastructure and transport, replacing stamp duty with a land tax, establishing an Urban Development Program to report on the housing market and a housing supply council to advise on housing targets, and incentives for local government to meet targets. It argued for non-regulatory approaches wherever possible, and avoiding excessive regulation. The NSW report’s planning reforms were controversial because they would lower the quality of high density apartments, but the range of recommendations show a more ambitious agenda than the PC’s conventional and well-known seven reform directions is both possible and required. 

 

A 2024 McKinsey Insights paper called Construction Productivity is No Longer Optional identified seven issues holding back measurable productivity gains and made five recommendations: adopt project steering with production rate metrics instead of conventional project management; nurture a supplier ecosystem across projects; upskill project staff; scale initiatives across project portfolios; and apply technologies such as generative AI to streamline and accelerate engineering, procurement, and construction.

 

That report followed up on The McKinsey Global Institute’s 2017 Reinventing Construction Through a Productivity Revolution, which was particularly blunt: ‘while other sectors from retail to manufacturing have transformed their efficiency, boosted their productivity, and embraced the digital age, construction appears to be stuck in a time warp … The industry is extensively regulated, very dependent on public-sector demand, and highly cyclical. Informality and sometimes corruption distort the market. Construction is highly fragmented. Contracts have mismatches in risk allocations and rewards, and often inexperienced owners and buyers find it hard to navigate an opaque marketplace. The result is poor project management and execution, insufficient skills, inadequate design processes, and underinvestment in skills development, R&D, and innovation’. Changes are needed in seven ‘key areas’: regulations; contractual framework; design and engineering; procurement and supply chain management; onsite execution; digital technology; and upskilling the workforce. Changes in these areas would also benefit Australian housing productivity. 

 

A 2016 CIOB report Productivity in Construction had the subtitle Creating a Framework for the Industry to Thrive. This overview of the issues in the UK says a number of times the problems are well known, as are solutions that have been proposed. Some of the recommendations that would also apply to Australian housing were:

·      Create construction innovation and excellence hubs and promote, through incentives, clusters of construction-related businesses in key regions;

·      Improve leadership and behavioural understanding and shift the emphasis in construction thinking and policy making from industry processes to behavioural aspects of construction;

·      Develop new business models and financial models because the business models currently used inhibit progress on productivity;

·      Get better data and measures of construction productivity, and compile built environment satellite accounts, similar to those produced for tourism, to capture inputs from related professions, materials, manufacturing, plant and machinery suppliers [3]. 

·      Invest more heavily in attracting new entrants to the industry and improve the skills of the existing workforce. Investing in management professionals has great potential to improve construction productivity. 

 

Conclusion

 

By the middle of the twentieth century residential building had developed the materials, methods and processes largely in use now. While there have been changes like more electrical appliances and offsite manufacturing of trusses, windows, doors and cabinetry, the structure and services like electricity, water and plumbing in a 1960s dwelling are those found in a new build today. Houses are often larger and apartments smaller than a few decades ago, but how they are procured and built, and what they are made of, has not substantially changed in decades. Fundamentally, that is also why the level of productivity has not changed [4]. 

 

The PC has focused on regulation and planning as the main issues, but these are just two of the factors that affect onsite productivity, and arguably skills, technology and project management are more important. Also, planning and zoning decisions have no effect on other important supply side issues such as the construction and finance costs for new housing, constructing the infrastructure needed for new developments, and the rate of conversion of approvals into commencements by developers. 

 

A major problem is not what is in the PC’s research paper, but what has been left out. Without question the five issues driving productivity are important, however these are long-standing and well-known, and the paper says nothing new about them. Similarly, the seven reform directions have been suggested many times by many different industry analysts and organisations. Missing is any discussion on implementing these reforms, or how barriers to their implementation might be addressed, which undermines both the usefulness of the research and the relevance of the recommended reforms.

 

There are several other industry issues not discussed, like the volatility of the building cycle, the lack of standards for offsite manufacturing, and product compliance laws. It is disturbing that the PC does not appear to understand why there is a construction code and how it works. Improving productivity through better project management and reform of the VET system are also overlooked. There is no discussion of digitisation and automation in residential building. Apparently, as far as the PC is concerned, digital tools and platforms, AI enhanced systems and automated planning and code compliance checks are not relevant to productivity. 

 

The PC’s recommended reforms are peculiarly constrained and limited, and the paper is a missed opportunity for introducing new ideas and a failure of imagination. Although an agency like the PC is not expected to be imaginative, residential building is stuck with a well-established system of production that will only change when and if there is a clearly superior method of delivering quality housing that is also profitable. Tinkering with regulation, the NCC, planning and approvals processes, and occupational licensing might make a difference at the margin, but will not deliver the big improvement in housing productivity that is required. 

 

                                                                            *

 

[1] Innovation in Australian construction was discussed in a 2024 post, incremental innovation in this post, and innovation and procurement in this post. 

 

[2] The PC does not seem to understand how the construction code works. For example, in Far North Queensland houses have to withstand a category 5 cyclone with roof tie downs, window shutters and a safe room, but in rural Victoria bushfires are the main issue and houses have to be of non-combustible material, have cavity barriers and provision for escape. See also https://theconversation.com/better-building-standards-are-good-for-the-climate-your-health-and-your-wallet-heres-what-the-national-construction-code-could-do-better-166669  

 

[3] I have argued for a built environment satellite account for many years, including the post here and a 2019 journal article here. 

 

[4] With current technology, tools and processes, construction may be close to the efficiency frontier, see Is Productivity Growth in Construction Possible?

  

The NSW Construction Reform Strategy

 Compliance and quality in new residential buildings

 

The National Construction Code (NCC) is a performance-based regulatory system that provides the standards buildings must comply with, supported by reference documents from Australian Standards, the Australian Building Code Board (ABCB), and other protocols and standards. The Building Code of Australia (BCA) sits within the NCC and is given effect by state and territory legislation. These regulations cover building work, products, and registration or licensing requirements for practitioners, and their objectives are the proper construction of buildings and the health and safety of the people using those buildings. Although construction is extensively regulated through the NCC under both state and federal legislation, during a boom in apartment building after 2014 the number of defects in these new buildings became a major issue. 

 

Figure 1. NSW apartment building

Source: ABS 870102. 

 

After a series of building failures highlighted widespread lack of compliance with the NCC, Bronwyn Weir and Peter Shergold were asked to investigate. Their report in 2018 Building Confidence: Improving the Effectiveness of Compliance and Enforcement Systems for the Building and Construction Industry across Australia found: 

• Compliance failures included non-compliant cladding, water ingress, structurally unsound roof construction and poorly constructed fire resisting elements; 
• Practitioners may lack competence and do not understand the NCC; 
• Design documentation was generally poor and resulted in inadequate information; 
• Licensing bodies, regulators and local governments were inadequately funded or lacked skills and resources; and 
• Supervision has generally been by private building surveyors who are not independent from builders and/or designers. 

 

The report made 24 recommendations. Recommendation 1 was for registration of building practitioners involved in the design, construction and maintenance of buildings, and 10 was for building surveyors. Recommendation 3 was for practitioners to undertake compulsory Continuing Professional Development on the NCC. The key recommendations 6 and 7 were for effective regulatory powers and proactive regulation, with mandatory inspections (recommendations 18 and 19), and recommendation 21 for compulsory product certification. Recommendation 8 was for a design review relating to fire fighting, and 17 was for an independent third-party review of the designs before work commences. Other recommendations were 12, for a building information database that provides a centralised source of building design and construction documentation, and 20 for a building manual for commercial buildings to be available on completion. 

 

These recommendations addressed the serious problems of building defects and non-compliant materials that were the primary motivation for the Building Confidence report. The report concluded ‘The compliance and enforcement systems have not been adequate to prevent these problems from emerging and they need to change as a matter of priority. There is no panacea or ‘silver bullet’ to resolve these problems. Our 24 recommendations … will address weaknesses in a … pragmatic, risk-based approach’ (p. 4). 

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result.

 

The NSW Reform Strategy 

 

The New South Wales Government responded to the Building Confidence report with the Construct NSW strategy, which had six elements: regulation, key player ratings, education, contracts, digital tools, and data and research. In 2019 the Berejiklian Government established the Office of the Building Commissioner (OBC) to implement the reform strategy and appointed industry veteran David Chandler as Building Commissioner. In 2020 two significant pieces of legislation to regulate new construction work were introduced. With these Acts the Building Commissioner could audit building plans, monitor and scrutinise suspected wrongdoing, and take disciplinary actions such as suspending or cancelling registrations, refusing to issue occupation certificates, and ordering rectification of non-compliant building work.

 

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) allowed the OBC and Department of Customer Service to investigate building work and require rectification of defects for up to six years after the occupation certificate was granted. The Department can delay issue of an occupation certificate until identified issues are addressed, and these orders are public while they remain in force. The definition of a ‘serious defect’ in the Act is a failure to comply with the BCA, Australian Standards or approved plans. The RAB Act gives the Building Commissioner powers to enter construction sites and issue orders for the rectification of serious defects before occupation certificates can be given.

 

The most significant power requires developers to sign enforceable undertakings that the developer refrain from certain conduct which contravenes the Act or take action to prevent or remedy a contravention of the Act. A Building Work Rectification Order requires developers or principal contractors to remediate serious defects prior to the issue of an occupation certificate, and a Stop Work Order is issued if the Building Commissioner is satisfied that work being done could result in significant harm or loss to the public or occupiers of the building.

 

The second piece of legislation was the Design and Building Practitioners Act 2020 (DBP Act), which had three requirements:

1. New registration requirements for designers, engineers, specialists and builders to show they are adequately qualified;
2. To require designers to lodge building designs before construction starts, and builders lodge ‘as-built’ plans upon completion. Builders must also declare that the completed building complies with the lodged designs and the BCA. The requirements on practitioners to register, lodge plans and make declarations came into force in July 2021; and
3. A statutory duty of care for practitioners, so owners can sue if a person who carries out construction work fails to exercise reasonable care to avoid economic loss caused by defects. The duty of care has been in force since June 2020 and applies retrospectively, where economic loss has become apparent in the 10 years prior to 2020.

 

The DBP Act imposed a retrospective statutory duty of care to avoid economic loss caused by defects or construction work. It applies to professionals who perform construction work including builders, designers, product manufacturers and suppliers. In July 2021 the second stage of the Act introduced compulsory insurance, declarations to be given by designers and builders to ensure compliance with the BCA, and a registration regime for engineers. 

 

Also, in July 2020 the Building and Development Certifiers Act 2018 and the Building and Development Certifiers Regulation 2020 came into effect, with stronger conflict of interest provisions and penalties for breaches by certifiers. The Act and Regulation include similar provisions to those in the DBP Act for building and design practitioners to be registered, for suspension or cancellation of registration, and having adequate and current insurance. The NSW Department of Fair Trading provides a certifier practise standard, a condition of licence for all certifiers working on multi-storey Class 2 buildings [1].

 

Another initiative was micro-credential TAFE courses being offered to practitioners. There are now three dozen of these courses available, ranging from asbestos to waterproofing, with courses specifically on the NSW legislation and its operation, the NCC, and fire and rescue requirements.

 

Further Developments 

 

Since the legislation in 2020 there have been two other NSW Government policies introduced, two court cases, a Strata Hub and a Defects Library created. A new agency was formed when the Building Commission NSW commenced on 1 December 2023, bringing together the Office of the Building Commissioner and NSW Fair Trading building functions into a single specialised organisation focused on quality and compliance of residential buildings employing over 400 people.

 

In November 2022 the NSW Government started Project Intervene, a program to resolve serious defects in the common property of buildings that are up to ten years old. The Department of Fair Trading negotiates a legally binding undertaking with the developer for the benefit of the owners corporation. A building is not eligible for Project Intervene if the developer or the builder are no longer trading. Under Project Intervene, there was no cost to the owners corporation as the developer pays for the remediation works and all associated costs. Other defects might be remediated at the same time but are agreed to separately by the developer. An owners corporation could register for the program up to 30 June 2023, and 152 buildings registered involving 14,523 apartments.

 

Project Remediate was a 2022-2024 program to help remove combustible cladding on an estimated 225 buildings, of which over 135 are in process. It is a voluntary (opt-in) program that only fixes flammable cladding and offers a 10-year interest-free loan to fund remediation work [2]. Government support is provided to owners corporations through quality assurance and program management services, with a $10,00 to $15,000 payment to help cover strata management costs for participating in the program. 

 

In 2023 the NSW Court of Appeal in Roberts v Goodwin Street Developments confirmed an earlier Supreme Court decision that building practitioners owe a statutory duty of care under the DBP Act for all building work, not just residential building work or work on a Class 2 Building. The decision also confirmed owners can hold project managers, superintendents, directors and shadow directors personally responsible for building defects. 

 

The decision in Roberts extended the RAB Act’s definition of a serious defect to all buildings and the duty of care of individuals was confirmed. However, when designing a project, a number of designers and consultants will be involved, some of whom may work for one firm. How the duty of care is allocated between individuals that sign certificates and professional services firms that are contracted for work on a project was not clarified. The uncertainty around this issue was a factor in the significant increase in Professional Indemnity insurance premiums. 

 

In 2024 an Owners Corporation of a residential strata building brought proceedings against Pafburn (head contractor) and Madarina Pty Ltd (developer) for alleged negligence leading to defective construction work and breaching the statutory duty in the DBP Act. The High Court of Australia in Pafburn Pty Limited v The Owners – Strata Plan No 84674 considered whether a developer or head contractor can reduce their liability when faced with claims and found head contractors cannot delegate works to avoid liability. 

 

The NSW Strata Hub was another initiative, establishing a register of strata schemes with information on the number of lots, the occupation certificate, strata scheme management information (committee secretary, strata manager, building manager, the annual general meeting) and the scheme’s energy and water performance rating where available. 

 

The Building Commission has created an online Building Defects Library that lists the most common building defects for Certifiers, Councils and other relevant industry members to help drafting of formal communication to rectify defects.

 

Developer and Contractor Ratings

 

Another element in the NSW reform strategy was the introduction of a ratings system for developers and contractors. This is called iCIRT (independent construction industry rating tool) and uses data on creditworthiness, insurance history, regulatory breaches and legal claims, to assign a rating available to government, industry and the public. Developed by Equifax, a credit rating firm, iCIRT ratings are based on a relative risk ranking. Businesses are assessed relative to others that share the same role (i.e. builders are compared with builders) and size (i.e. small firms with small firms) and a Development Risk Index compares a business to the industry average. These ratings are based on six criteria:

1. Character: the business, its directors and key persons, the holding company, related parties, shareholders and owners;
2. Capability: the tenure and trading history of the business and officeholders experience, licences and qualifications, the track record on previous projects and insurance and claims history;
3. Conduct: includes the commercial history, court judgments and litigation, industrial disputes, tribunal decisions, payments to employees and subcontractors, and any regulatory intervention;
4. Capacity:  the project pipeline and capacity to meet commitments, business solvency and ongoing sustainability;
5. Capital: capitalisation and funding sources, access to funding and borrowing capacity; and
6. Counterparties: the exposure of the business to related parties in the supply chain and capacity to withstand disruptions.

 

Equifax and iCIRT provide a star-rating outcome from zero stars (unrated) to five stars (more trustworthy) and there are three levels of assessment. Gold Ratings are a detailed assessment where the business and/or build team have fully participated and provided all requested disclosures for a comprehensive review, including key person consents for expanded background checks. Silver Ratings are a standard review where the business and/or build team have provided a number of required disclosures, with key person consents to basic background checks. Bronze Ratings are a brief review using all available public and proprietary data that does not require consent or the participation of the rated business or build team, with no key person checks. 

 

Despite ICIRT’s role in improving accountability and trustworthiness in NSW construction getting a rating is voluntary, as is making it publicly available once acquired. By February 2024 there were 163 builders and developers, plus a few architects and others, listed on the ‘Register of Trustworthy Constructors’. About a dozen had been withdrawn or not renewed and several were waiting for updates. 

 

In a LinkedIn post on Feb 6^th David Chandler said ‘The number of iCIRT rated builders and developers continues to grow. Recent statistics indicate that over 35% of builders and developers with turnover greater than $5.0m pa are now rated. These statistics further indicate that over 50% of developers and builders by volume are iCIRT rated in NSW.’

 

Decennial Liability Insurance

 

Decennial liability insurance (DLI) is an insurance product that enables owners corporations to have a serious defect fixed up to ten years after an apartment building is first occupied. With DLI the work is done without litigation to establish fault, removing a major barrier for owners corporations. In November 2022 the Building and Other Fair Trading Legislation Amendment Bill made DLI an option for developers of multi-storey apartment developments in NSW, so a developer with DLI will not be required to provide a building bond. NSW is the only Australian jurisdiction where DLI is offered, although it is available in over thirty countries.

 

DLI provides residential apartment owners with comprehensive consumer protection for building defects caused by substandard design and building work. It ensures that building owners can remediate those defects because the costs are covered by the insurance policy if a builder or developer is unable or unwilling to fix the defects, including if the developer becomes insolvent. There is currently one provider of DLI, Resilience Insurance.

 

DLI increases involvement of insurers in the design and construction of projects as they take a more active role in monitoring projects through technical inspections, site investigations or due diligence. Regular, independent technical inspections are the basis of DLI, and premiums for highly rated developers and builders should be lower than those with a lower rating and/or a history of buildings with defects. 

 

A fundamental problem had been a lack of supervision to ensure and maintain the quality of work on residential building projects. For contractors, responsibility for compliance with relevant codes and practices requires supervision from the issue of the construction certificate to hand over to the client. For developers, supervision is required to prevent an order under the RAB Act that will damage their reputation and affect consumer confidence in their product. With the ratings tools now available, the cost of independent design reviews and adequate supervision of work may be offset by reduced financing and insurance costs. 

 

Report on Progress in 2023

 

In 2023 a Review of the Implementation of Building Confidence recommendations was published by the Australian Construction Industry Forum, with details on the progress made on each recommendation across the states. Based on that report Bronwyn Weir gave an update on progress on the Building Confidencerecommendations in a webinar presented to the Australian Institute of Quantity Surveyors and the Australian Construction Industry Forum, reported by Andrew Heaton on Sourceable. According to Weir progress varied across jurisdictions. NSW was leading with increased compliance and enforcement and a proactive audit program. 

All states had or were working toward a compulsory code of conduct for building surveyors, and there had been improvements in accountability for performance solutions and performance-based design. The ABCB had developed model guidance so states and territories could implement recommendations in a nationally consistent way. On other recommendations implementation had been mixed. For example:

• Several states had broad schemes for mandatory registration of design and building practitioners, but none were as comprehensive as the National Registration Framework developed by the ABCB (recommendations 1 and 2 of the report).
• Only Tasmania required building practitioners to undergo compulsory continuing professional development on the NCC (recommendation 3).
• No state had instituted any substantive reforms to support career pathways for building surveyors and certifiers (recommendation 4).
• NSW and Victoria have increased regulatory compliance and enforcement action (recommendations 5, 6, 7, 9 and 11), Queensland and Western Australia have ‘light touch’ regulation.
• NSW had strengthened the role of fire authorities in building approval processes, however no state had instituted a code of conduct for fire safety engineers (recommendation 8).
• NSW had and some other states were working toward centralised digital lodgement of building approval documents (recommendation 12), but Queensland, Western Australia and Victoria are not. The ACT and Northern Territory were already doing this. 
• No jurisdiction required a comprehensive building manual be handed over to owners on building completion (recommendation 20).
• There had been insufficient action on regulation of building product compliance. Only Queensland had a supply chain accountability law.

 

Table 1A. Summary of progress in 2023

Table 1B. Summary of progress in 2023

Source. Table provided to Sourceable by Weir Legal and Consulting

 

Surveys on Building Defects

 

The NSW Building Commission has done two surveys on defects in apartment buildings. The 2021 survey on defects in strata buildings over three stories that were completed in the previous 6 years found:

• 39% of strata apartment buildings surveyed had a serious building defect in the common property.
• Of the buildings with a serious defect, most were related to waterproofing (63%), followed by fire safety systems (38%), structure (27%), enclosure (26%) and key services (17%).
• The time taken to resolve defects varied greatly across the sample, with around 38% of buildings taking over 12 months and 25% taking less than 6 months. 
• Only 15% of the buildings with serious defects were reported to NSW Fair Trading;
• The average cost of remediation was over $300,000 (including rectification work, legal expenses, and other professional services. Owners corporations were not able to recover these costs, which were covered by special levies (34%) or an increased annual budget (29%).

 

The second survey in 2023 found 53% of strata buildings in New South Wales had serious defects, the increase from 39% in 2021 suggesting increased engagement from strata communities [3]. The survey found that defects in newer buildings trending down since 2020, driven by a decrease in buildings with waterproofing serious defects, and consumers were more confident in reporting defects to the regulator. The most common defects were: Waterproofing (42%); Fire safety systems (24%); Building enclosures (19%); Structural issues (15%); and Key services, such as lifts and plumbing (14%).

 

 

Figure 1. NSW Defects survey

 

Source

 

In his Foreword to the 2023 survey Building Commissioner David Chandler [4] said: 

Since the commencement of the NSW Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 developers and builders associated with the construction of apartment buildings with serious defects are increasingly held accountable to fix them. As of 1 November 2023, 465 RAB-Act-related audits have been conducted involving more than 29,000 apartments. Development financiers are now paying attention to how they can lower these risks.

 

We are also seeing the positive impacts of the Design and Building Practitioners Act 2020. Since the DBP Act commenced in July 2021, 94 DBP Act audits have been conducted, involving over 10,000 apartments. Across NSW, apartments are now commencing with a much higher resolution of design before construction starts on site. This shift of approach is being reported by builders as leading to less rework, less waste and improved construction times. On-site we are observing far greater awareness of what compliant construction work looks like.

 

Conclusion

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result. Following the recommendations of the 2018 Building Confidence report on non-compliance with the BCA, building failures and defects, the NSW Office of the Building Commissioner was established in 2019 and David Chandler appointed Commissioner. In 2020 the Design and Building Practitioner Act and the Residential Apartment Building Act came into effect. The goal of the NSW reform strategy was to restore confidence in newly built apartment buildings. 

 

The issues addressed by the regulatory reforms in NSW were accountability for the quality of work done, and access to data and transparency about a building’s quality or lack of it. Under the 2020 legislation there are two key requirements:

1. Designers must design properties in compliance with the BCA; and 
2. Construction workers must build properties according to those designs and must build in compliance with the BCA.

To implement the strategy and enforce the legislation the OBC could inspect plans, visit sites, and stop work to prevent defects, and in David Chandler had a highly energetic and effective Building Commissioner. In 2023 the Building Commission NSW bought together the OBC and NSW Fair Trading building functions into a single agency employing over 400 people, focused on compliance of residential buildings.

 

Firms and their employees affected by the DBP Act have had to incorporate its requirement for registration into their business plans to operate in NSW. For many this is not onerous, but for some it is challenging. Similarly, getting an iCIRT rating is difficult for firms with a poor track record, but is an opportunity for good firms to establish themselves as trusted and trustworthy, and for their relationships with suppliers, consumers, insurers and financiers to benefit from being highly rated.

 

The iCIRT ratings scheme for constructors and developers identifies a ‘trustworthy building’ that is fit for purpose, resilient and measurably less risky for the owners, financiers and insurers. With the introduction of the iCIRT ratings scheme and Decennial Liability Insurance, NSW became a leader in increasing the accountability of developers and contractors. Although there are some similarities with insurance-based systems for regulating construction such as the Miller Act in the U.S. and the French system, the scope of the RAB and DBP Acts is wider and those other systems do not include the same inspection powers. 

 

The NSW Government’s Construct NSW strategy was a response to repeated failures in design, construction and certification of buildings. The objective of the NSW strategy was to restore public confidence in new buildings after high profile building failures and widespread defects, with the associated financial burden and misery for owners of affected apartments. This was a multi-pronged strategy based on a Building Commission with new powers for increased inspection of designs and building work, data driven audits of companies and projects, registration and education of practitioners, a ratings scheme for companies, and introduction of ten year defect insurance. This comprehensive strategy has placed NSW firmly at the forefront of construction industry reform in Australia. 

                                                                        *

 

 

[1] Class 2 buildings are multi-storey, multi-unit apartment buildings or mixed-use buildings with shops and apartments. 

 

[2] The problem of flammable cladding in Australia was covered in a previous post, on both the extent of the problem and the differences between the states in their response. 

 

[3] The time and cost of remedial work on defects has increased under the DBP Act because some work that previously was done after agreement between an Owners Corporation and contractor now requires a Development Application. 

 

[4] David Chandler’s term as Building Commissioner finished in mid-2024, and in October James Sherrard became the new Commissioner. While the Berejiklian Government gets the credit for establishing the Office of the Building Commissioner and passing the enabling legislation, Chandler was responsible for the success of the reform strategy.