Entry, Exit and Insolvencies in Australian Construction

 The number of businesses is at a record high

 

 

There has been a lot of attention on the increase in insolvencies of Australian construction businesses. In 2023-2024 the number of insolvencies was 3,882, which was the highest number across all industries, and the construction share of total insolvencies was 26 percent. However, the reporting of these numbers usually does not include any context, and therefore lacks perspective, and focusing on the number of insolvencies can be misleading if industry characteristics are not also considered. 

 

This post compares the insolvencies data from the Australian Securities and Investment Commission (ASIC) with the data available from the Australian Bureau of Statistics publication Counts of Australian Businesses. The ABS data gives the number of businesses that enter and exit each quarter, and the number of businesses operating at the end of each quarter, and is published quarterly with data that goes back to June 2020 in its current format.

 

The ABS data is based on Australian Business Number (ABN) registrations and sourced from Australian Tax Office records of businesses that file a business activity statement and pay Goods and Services Tax (GST). An entry is an ABN that starts paying GST or restarts after a break of more than five quarters. An exit is an ABN that is no longer actively trading because the business has cancelled their ABN, ceased remitting GST, or the ABN has changed due to a merger or acquisition. Therefore exits occur when a business has closed, has been sold, has significantly changed structure, or is no longer operating in Australia. Importantly, insolvencies are only a small proportion of the number of exits. 

 

 

Insolvencies

 

Data on insolvencies comes from the Australian Securities and Investment Commission (ASIC). There are three data sets: insolvencies where an external administrator is appointed for the first time; for any later appointment of an administrator to that business; and for voluntary liquidations where a solvent business reports it is no longer operating. Figure 1 shows this data for three years to 2024. In those years there were only 185, 213 and 170 voluntary liquidations of insolvent construction firms that ceased operating.

 

Construction insolvencies where an administrator or controller was appointed for the first time went from 1,284 in 2021-2022, to 2,213 in 2022-2023, then up to 2,977 in 2023-2024. This was a significant increase, and is the number that is typically used in media reports on construction insolvencies (e.g. Australian Financial Review, Macrobusiness). 

 

A better number includes businesses failing for a second time, or more, after a restructuring and agreement with creditors that allowed a business to continue. There were 355, 599 and 905 of these in the three years, so there was a big increase in construction businesses going into administration again in 2023-2024. Adding repeat insolvencies to first insolvencies and voluntary liquidations gives the total for all insolvencies.

 

Figure 1. Australian construction 2022-2024

 

Source: ASIC

 

 

Construction does have the highest number of insolvencies compared to other industries, but the construction share of total insolvencies has not been increasing, and was 25, 27 and 26 percent in those years. This is higher than the construction share of the total number of Australian businesses, which is 17 percent, but construction also has a higher proportion of micro and small businesses than other industries. 

 

Two of the reasons why construction businesses are more likely to become insolvent are this prevalence of micro and small firms and the knock-on effects on subcontractors when a contractor goes under, where many of the unsecured creditors will be subcontractors on their projects. Most subcontractors are micro or small businesses, and many are extremely vulnerable to a contractor’s insolvency. Businesses employing less than 5 people account for 65 percent of all construction businesses, and these businesses have little capital and few resources. Micro and small businesses have a much higher insolvency rate than larger businesses. 

 

Because of measures put in place to support industry during the Covid pandemic there were fewer insolvencies than usual in 2021-22, with a total of 1,639 construction businesses going into administration. The numbers for 2023 and 2024 are more typical, and these show a substantial increase in total insolvencies from 2,812 to 3,882.

 

However, in June 2024 there were 452,626 operating construction businesses, so the insolvency rate was less than one percent. Further, there are many more businesses in Construction than any other industry. The industry with the second highest number is Professional, Scientific and Technical Services with 344,311 businesses, the third is Rental, Hiring and Real Estate Services with 298,764 businesses, and the fourth is Transport, Postal and Warehousing with 237,326 businesses.

 

Construction Industry Entry and Exit

 

How does the number of ASIC insolvencies compare to the ABS Count of Businesses data?

The ABS numbers for annual business exits are much larger than the number of insolvencies, and were 69,972 in 2021-2022, 78,667 in 2022-2023, and 81,354 in 2023-2024. Again, there was a substantial increase between 2022 and 2023 as pandemic measures were unwound, but the increase between 2023 and 2024 was not as great. 

 

Clearly, insolvency is not the main driver of exits from the construction industry, as the cumulative total was only 8,333 insolvencies over the three years. Some unknown proportion of exits will be businesses that have paused operation, and stopped paying GST for a couple of years, probably because of market conditions. 

 

The ABS data is quarterly, and for exits in particular there is a marked seasonal pattern, with a cycle that peaks in the December quarter and has a low in the March or June quarters. As Figure 2 shows, there is a different cycle for entry, which peaks in the September quarter. What is driving these regular cycles of entry and exit is a matter for speculation. Entries can be births (new ABNs) or other (an ABN that has been reclassified or restarted GST payments). For Construction, in most quarters there are more births than others, for example in the June 2024 quarter there were 12,229 births and 10,753 other entries. 

 

There are, over time, more entries than exits, except for the December quarter. The average quarterly number for exits since 2020 was 17,886 and for entries was 21,574. The net result is that the number of construction businesses has been increasing steadily since 2020, rising from 397,920 in June 2020 to 452,626 in June 2024, a 14 percent increase in the number of businesses. If the number of businesses is representative of industry capacity and the supply side of construction, these numbers suggest industry capacity has been increasing.

 

Figure 2. Australian construction 

 

Source: ABS 8165

 

The ABS also has overall entry and exits by employment size, although this is not given for individual industries. In 2023-2024 Non-employing businesses had an exit rate of 17.7 percent, and businesses employing 1 to 4 people an exit rate of 9.5 percent. These rates are much higher than those for larger businesses, those employing 5 to 19 people was 5.5 percent, businesses employing 20 to 199 people 3.1 percent, and those employing over 200 has an exit rate of 3.2 percent. As noted above, exit rates are not the same as insolvencies, but this is good evidence of a higher rate of insolvencies in the micro and small businesses that are the great majority of construction firms. 

 

The ABS calculates industry entry and exit rates as percentages, and Construction does not have the highest rates. As table 1 shows, there are many industries with higher entry and exit rates, although no other industry has a larger number of businesses than Construction. In the 2023 December quarter the exit rate was higher than the 5.8 percent for Construction in five industries, and around the same rate in five others. In the 2023 September quarter the entry rate was higher in six industries, and around the same in seven others. In those quarters for all Australian businesses the exit rate was 5.3 percent and the entry rate was 5.5 percent, so the exit rate for Construction was slightly higher and the entry rate exactly the same. 

 

Table 1. Number of businesses, entry and exit rates in peak months, by industry

 

 

Construction industry sub-divisions

 

The ABS also provides this data for the three industry sub-divisions. The numbers for operating businesses are of particular interest. In June 2024 there were 10,542 Engineering construction businesses, 108,764 Building construction businesses, and 332,320 Construction services businesses. These sub-divisions had 2.3, 24 and 73.7 percent of the total number of construction businesses.

 

The same pattern of a December quarter high for exits and a September quarter high for entries also holds for the sub-divisions, with December 2022 having the largest number of exits for all three sub-divisions. The March 2023 quarter was the low for entries for Building construction and Construction services, and March 2024 the low for entries in Engineering construction. Figures 3, 4 and 5 have this data.

 

Figure 3. Australian Building construction 

 

Source: ABS 8165

 

 

Figure 4. Engineering construction

 

Source: ABS 8165

 

 

Figure 5. Construction services

 

Source: ABS 8165

 

For all three sub-divisions the total number of businesses has been increasing. Between June 2020 and June 2024 the number of Engineering construction businesses went from 10,052 to 10,542, Building construction businesses from 90,722 to 108,764, and Construction services businesses from 296,246 to 332,320. As percentage increases over four years these were 5, 20, and 13 percent respectively. The average quarterly number of exits and entry between 2020 and 2024 for Engineering were 363 and 395 businesses, for Building were 4,666 and 5,837 businesses, and for Construction services were 12,858 and 15,543 businesses. 

Conclusion

 

ASIC data shows a total of 3,882 construction businesses becoming insolvent in 2023-2024, and the industry had the highest number of failures with 26 percent of all insolvencies. However, this needs to be kept in context, because Construction by far the largest number of businesses compared to other industries, and in 2024 had 17 percent of all businesses, and with over 450,000 businesses has a failure rate of less than one percent. It is misleading to claim Construction has an exceptionally high number of insolvencies. 

 

The ABS numbers for annual business exits are much larger than the number of insolvencies, and were 69,972 in 2021-22, 78,667 in 2022-23, and 81,354 in 2023-24. There was a substantial increase between 2022 and 2023 as pandemic measures were unwound, but the increase between 2023 and 2024 was not as great. Clearly, the insolvency of a few thousand businesses is not the main driver of exits from the construction industry.

 

The ABS data for exits has a marked seasonal pattern, with a cycle that peaks in the December quarter and a low in the March or June quarters. There is a different cycle for entry, which peaks in the September quarter. What is driving these regular cycles of entry and exit in Construction is a matter for speculation. 

 

Many industries have higher entry and exit rates than Construction, although no other industry has a larger number of businesses. In the 2023 December quarter the exit rate in five industries was higher than in Construction and around the same rate in five others. In the 2023 September quarter the entry rate was higher in six industries, and around the same in seven others. 

 

There are more entries than exits, except for the December quarter. The average quarterly number for exits since 2020 was 17,886 and for entries was 21,574, so the number of construction businesses has been increasing steadily since 2020, rising from 397,920 in June 2020 to 452,626 in June 2024, a 14 percent increase in the number of businesses. If the number of businesses is representative of industry capacity and the supply side of Construction, these numbers suggest industry capacity has been increasing.

 

For all three sub-divisions the total number of businesses has been increasing. Between June 2020 and June 2024 the number of Engineering Construction businesses went from 10,052 to 10,542, Building Construction businesses from 90,722 to 108,764, and Construction Services businesses from 296,246 to 332,320. These sub-divisions had 2.3, 24 and 73.7 percent of the total number of construction businesses, and their percentage increases over four years were 5, 20, and 13 percent respectively. 

 

Construction businesses are more likely to exit or become insolvent because two thirds are micro or small businesses employing less than 5 people, which have a higher rate of insolvency than larger businesses. Subcontractors are also vulnerable to the knock-on effects on their capital and cash flow of a contractor’s insolvency, where many of the unsecured creditors will be subcontractors. Although exit rates are not the same as insolvencies, the ABS data is good evidence of a much higher rate of insolvencies in the micro and small businesses that are the great majority of construction firms. This is an important piece of context that should be taken into account when considering insolvencies. 

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Innovation in Australian Construction

 ABS 2023 survey of business innovation and use of information technology

 

 

The Australian Bureau of Statistics Business Characteristics Survey is an annual survey on business innovation and use of information technology. The 2022-23 survey was recently released, and this post has extracted some of the results for the Construction industry.

 

First a few definitions. The ABS defines innovation as ‘the introduction of a new or significantly improved good or service; operational process; organisational or managerial process; or marketing method.’  Innovation activity is ‘any work that was intended to, or did, result in the introduction of an innovation.’ Firms are divided into innovation active and non-innovation active. An innovation-active business is one that introduced any type of innovation, had an innovation in development or abandoned one in the two years ended 30 June 2023.  An innovating business is one that introduced any type of innovation during the two years. 

 

The Business Characteristics Survey collects data on innovation and digital activities in alternate years, and the 2022-23 survey was on innovation. Approximately 7,000 businesses were surveyed by questionnaire, with a response rate of 82.5 percent [1]. The survey covers a wide range of factors and issues, with the data given by industry, employment size, and state. The data is shown as a percent of businesses within the estimated total number of businesses.

 

Firm Size and Innovation

 

For Construction, 30 percent of businesses introduced a ‘new or significantly improved innovation’ compared to 39 percent of all businesses. However, Construction with 35 percent of innovation active businesses compares poorly to the all industries proportion of 46 percent, and out of all industries Construction has the second lowest proportion of innovation active businesses. 

The difference between large and small employers was significant, with 31 percent of Construction businesses employing 0–4 persons and 43 percent of those employing 5–19 persons innovation active, compared to 79 percent of those employing 20–199 persons and 60 percent of those employing 200 or more persons innovation active. Table 1 shows these proportions are similar for businesses that introduced an innovation or had one under development in 2023. Medium size Construction employers with 20-199 people were most likely to have abandoned an innovation [2]. 

 

Table 1. Innovation status by employment size

 

 

Innovation Activity

 

Innovation active Construction businesses reported better outcomes than non-active ones. As Figure 1 shows, they were more likely to have introduced a new product or service, and their increase in sales, profitability and productivity over the previous year was greater than non-innovation active businesses. The number of innovation active businesses reporting increased profitability and productivity was twice the number of non-active businesses. 

 

Figure 1. Businesses reporting an increase

Source: ABS 8158

 

As a side note, it is interesting that for all construction 21 percent of businesses reported an increase in productivity, and 47 percent no change. There were also 19 percent of businesses with a decrease in productivity, Therefore, the overall industry level ends up without growth as the majority of businesses with decreasing or no growth cancel out the productivity increase in the other one fifth of businesses. The number of SMEs and the low level of innovation in Construction are important factors in the lack of productivity growth [3].

 

There were 13 percent of Construction businesses that introduced a new or improved good or service. Although 31 percent of those innovations were new to Australia or the industry, 75 percent of them were new to the company. Figure 2 shows the percentage shares of that 13 percent of businesses with new or improved goods or services by employment size, with 37 percent of businesses employing 20-199 persons and 25 percent of businesses employing over 200 introducing an innovation. Only 12 and 10 percent of micro and small innovators had an improved good or service. Around half of these goods and services innovations were developed internally. 

 

Construction businesses are three times more likely to introduce a process innovation compared to a new good or service. There were 39 percent of Construction businesses that introduced a new or improved process, of which 3 percent were new to the world. Another 11 percent of those innovations were new to Australia or the industry, and 87 percent of them were new to the company. Figure 2 shows the percentage shares of that 39 percent of businesses with new or improved processes by employment size, with 73 percent of businesses employing 20-199 persons and 62 percent of businesses employing over 200 introducing an innovation. For micro and small firms with a process innovation, the percentage of innovators was 24 and 53 percent respectively. Two thirds of process innovations were developed internally. 

 

Figure 2. Innovation active businesses by type of innovation and size

Source: ABS 8158

 

Although only 15 percent of innovation active businesses reported having an innovation strategy as part of the business plan, 19 percent sought out partners to collaborate with, compared to none and 9 percent for non-active businesses. The main sources of ideas were from within the company (54 percent), clients (36 percent) and suppliers (33 percent), followed by competitors (23 percent), consultants (17 percent) and industry association (13 percent). Only 2 percent reported sourcing ideas from universities, and none reported any research collaboration with universities. 

 

Digitisation and IT

 

Differences in investment in information and communication technology (ICT) capabilities between innovation active and non-active businesses was marked.  Figure 3 shows more innovation active businesses increased expenditure on cyber security, IT and training in 2023, and only 8 percent of non-active businesses increased expenditure on ICT. Significantly, nearly 25 percent of innovation active Construction businesses increased their use of digital technologies but no non-active businesses did, highlighting the growing divide in the industry between those firms that are digitising their operations and those that are not. 

 

Figure 3. Businesses reporting an increase

Source: ABS 8158

 

The weights given to factors considered important for digitisation in construction are generally similar to other industries, particularly in access to skills and capability building. However, there is a greater knowledge gap in construction and less investment in digital technologies compared to all industries, and only 7 percent of Construction businesses had a digital business strategy, compared to 12 percent of all businesses. 

 

 

Figure 4. Digitalisation factors important to the business's innovative activity

Source: ABS 8158

 

 

Benefits and expenditure

 

The benefits of innovation for Construction businesses were found to be similar to other industries, although a reduction in costs was not as common. In Figure 5 there are, however, two benefits where construction businesses did notably better than other industries, in improved safety and environmental benefits. The safety result is no doubt due to the importance of improving safety in one of the most dangerous industries, and with 25 percent of businesses reporting and improvement this is a good indicator of industry improvement. Similarly, there were nearly twice as many Construction businesses reporting improved environmental benefits, 14 percent, compared to 8 percent for all businesses, which is probably reflecting industry efforts to reduce waste and energy consumption. 

 

Figure 5. Type of benefit from innovation

Source: ABS 8158

 

 

As Figure 6 shows, at 35 percent Construction has the second lowest proportion of innovation active businesses, Agriculture is lowest with 34 percent and Information media and telecommunications highest with 63 percent. The ABS found 37 percent of Construction businesses spent nothing on innovation, and for 50 percent of innovation active businesses expenditure on innovation was only up to $25,000. 

 

At the other extreme, 6 percent of businesses spent between $50,000 and $250,000, and 4 percent more than $250,00. Only 5 percent of Construction businesses got Government financial assistance, and most of them received it from state governments. For a quarter of businesses a shortage of funds was a barrier to innovation, and one third of Construction innovation was targeted at products or processes internal to the business [4].

 

Figure 6. Proportion of innovation active businesses

Source: ABS 8158

 

 

What Can Be Done to Increase Innovation?

 

The ABS survey highlights the many issues in Construction innovation. Only 12 percent of businesses reported having a digital culture, few innovations were new to the world, and expenditure on innovation was low. Innovations came from within the business or from clients, suppliers and competitors, not universities or research organisation. How could this performance be improved?

 

The survey did not ask specifically about R&D tax rebates, but it is unlikely these will have been claimed by many businesses because of their complexity, difficulty to substantiate, requirements for documentation, and the lack of familiarity with the rebate for accountants doing SME tax returns. This may be an area where industry associations might help by providing information, standardised forms and lists of qualified advisors and accountants. 

 

There are very many startups offering software solutions for construction, and a recent phenomenon has been the billions in venture capital going into construction technology. Setting up a demonstration and testing centre for contech is a possible area for collaboration between construction companies, with perhaps government. The centre would provide reports with evaluations of specific systems such as embodied carbon estimators, procurement platforms for materials and components, financial and timekeeping software, robotic and safety management systems. For construction firms, particularly SMEs, getting started on digitisation or choosing new software is challenging because there are so many offerings and no impartial reviews of their quality and suitability. 

 

Large firms such as tier one contractors and manufacturers could be the centre of an innovation consortium, where they coordinate the efforts of a number of smaller firms in developing and applying an innovation. This could be short-term partnership, probably one or two years, focused on a specific innovation and making it work. For example, a contractor with some subcontractors could work together on a new or improved process, or a manufacturer with some customers could work on a new or improved product. This would improve the industry’s innovation culture and increase participation in innovation activities, and might also get access to the tax rebate for SMEs.

 

A previous post argued for BIM mandates. That post concluded ‘BIM mandates are important because the use of BIM unlocks the potential of digital construction, and affects the organisation of suppliers of materials, products and services for construction of the built environment as well. The deeply embedded nature of the culture and processes of this production system, and the large number of small firms involved, slows technological diffusion and limits voluntary uptake of new technologies like BIM. Therefore, government mandates in particular and client’s mandating BIM in general are needed.’

 

BIM mandates are a blunt instrument and do not address the problems of cost, difficulty of use, and entrenching the few providers of the systems. However, large contractors doing major projects already have BIM capabilities, so making BIM a requirement on major projects is not problematic. It is an issue for SMEs and on smaller projects where the cost is not justified, although an interesting question is where the cutoff point is. Unfortunately, at present there is no alternative to BIM as the path to digitised construction. 

 

What else could government do, beside simplify the tax rebate and mandate BIM for major projects? Investment in digital capability through training and skills is needed. An example is the NSW Institute of Applied Technology that opened in 2023 as a collaboration of three universities, TAFE, Microsoft and CPB Contractors, with a microcredential stream in construction that has subjects in CAD, BIM, cloud computing, automation and robotics. 

 

More funding to develop new standards for prefabrication and modular building for the Australian Building Codes Board would be good, as this would speed up the process and help get the insurance and finance industry support needed for this part of the industry to grow and reach its potential. The June Building Ministers Meeting considered ‘a national scheme supporting the safety and reliability of building products’ and ‘noted the ongoing engagement .. with industry to support greater use of prefabricated and modular construction methods.’ Obviously still a long way to go there. 

 

Conclusion

 

The Business Characteristics Survey is a relatively new publication from the ABS, this is the second time it has run. The survey collects data on innovation and digital activities in alternate years, and the 2022-23 survey was on innovation. The results are presented as the percentage of businesses that undertook innovation related activities that resulted in new or improved goods or services or an improvement in processes.

 

Over the two years to 2023, 30 percent of construction businesses introduced a new or significantly improved innovation, 35 percent were innovation active and 50 percent of them spent up to $25,000 on innovation. Innovation active businesses increased their sales, profitability and productivity more than non-innovation active businesses. Innovation active Construction businesses were three times more likely to introduce a process innovation compared to a new good or service, with 39 percent introducing a new or improved process.

 

There are significant differences between large and small employers, with 31 percent of Construction businesses employing 0–4 persons and 43 percent of those employing 5–19 persons innovation active, compared to 79 percent of those employing 20–199 persons and 60 percent of those employing 200 or more persons innovation active. Micro and small firms also reported more difficulty in funding innovation activities and were less likely to have an innovation under development in 2023. The low level of innovation is an important factor in the lack of productivity growth in Construction, and the number of SMEs affects the industry’s level of innovation.  

 

Differences in investment in IT between innovation active and non-active businesses was marked. Innovation active businesses increased expenditure on cyber security, IT and training but only 8 percent of non-active businesses increased IT expenditure. Nearly 25 percent of innovation active businesses increased their use of digital technologies, but no non-active businesses did, highlighting the divide between firms that are digitising and those that are not. At 35 percent, the survey found Construction is the industry with the second lowest proportion of innovation active businesses.

 

 The ABS survey highlights the many issues in Construction innovation. How could this performance be improved? Access to R&D tax rebates may be an area where industry associations could provide information, standardised forms and lists of qualified advisors and accountants. A demonstration and testing centre for contech is an area for collaboration between construction companies, with perhaps government. Innovation consortiums could improve the industry’s innovation culture and increase participation in innovation activities. BIM mandates should be used on major projects. Government could increase investment in digital capability through training and skills, and funding to develop new standards. A goal of increasing innovation active construction businesses by 50 percent over a decade would take the industry from the bottom toward the top of Australian industries. 

 

[1] The ABS estimate for the total number of businesses was 1,016,252, so a survey of 7,000 is 0.7 percent. There were 193,844 construction businesses and if 0.7 percent were surveyed that would be around 1,350 in the survey sample. 

 

[2] The estimate of the number of construction businesses employing 0–4 persons was 142,242, for those employing 5–19 persons was 41,042, employing 20–199 was 8,494 persons, and employing 200 or more persons was 166. 

 

[3] A recent Reserve Bank Research Paper by Majeed, Hambur and Breunig on Monetary Policy and Innovation found ‘ monetary policy, both domestic and foreign, and economic conditions can have medium-run effects on productivity and output by influencing the amount of innovative activity that occurs.’ In the three years after an increase in interest rates innovation by SMEs was much more affected than innovation in large firms employing more than 200 people, and ‘contractionary monetary policy shocks lead to an increase in the likelihood that firms report that lack of funds is significantly hampering their ability to undertake innovation. This is almost entirely driven by SMEs, which is consistent with the evidence that SMEs have a larger decline in innovation following a monetary policy shock’. For Construction this confirms both that the low level of innovation is an important factor in the lack of productivity growth, and the number of SMEs affects the level of innovation.  

 

[4] The ABS notes that there is a high degree of uncertainty around many of the survey results, particularly for the employment size data, because of the sample size. 

The CFMEU, Allegations of Illegal Activity, and Three Royal Commissions

Will this time be different?

 

For many people in the Australian construction industry the allegations of illegal activity, criminal links and general thuggery against union organiser John Setka and the Construction Forestry Mining and Energy Union (CFMEU) will not have come as a surprise. Although it has been widely known for many years that there was a problem, the investigation by the Nine newspapers and 60 Minutes has publicly revealed the extent of the problem and gathered the evidence needed to take action against the union. 

 

The Albanese Government is going to place the CFMEU under external administration, which avoids the problem with deregistration where the union continues to operate with the existing leadership but outside the industrial relations system. That was what happened in 1986 when the Hawke Government deregistered the militant Builders Labourers Federation (BLF) after evidence of criminal and corrupt activity became public. BLF secretary Norm Gallagher was found guilty of receiving secret commissions and building materials from building contractors and sentenced to 18 months jail in 1986. Many BLF members then joined the Building Workers Industrial Union (BWIU) which in 1992 became the CFMEU, and BLF organiser John Setka became Victorian state secretary. 

 

We have been here before. Following media reports in 2012-13 on corrupt and illegal activity in the CFMEU and other trade unions, a Royal Commission headed by Dyson Heydon was appointed in 2014. Over half the Commission’s hearings were on the CFMEU, the behaviour and associates of union officials, and payments or other deals made with employers in NSW, Victoria and Western Australia. The Royal Commission reported ‘widespread and deep-seated misconduct’ across a number of unions throughout Australia, however Commissioner Heydon said the inquiry had uncovered only ‘a small tip of an enormous iceberg.’ 

 

Before the Heydon Royal Commission there had been two previous Royal Commissions into the building and construction industry, both also headed by judges. Roger Gyles headed the Royal Commission into Productivity in the Building Industry in NSW (1991-1992) and Terence Cole the Royal Commission into the Building and Construction Industry for the Commonwealth Government (2001-03). Both concluded the fundamental problem was a lack of respect for the rule of law, a phrase found repeatedly throughout their final reports, and this was a problem on both the employer and union sides. Cole said ‘Culturally, first, there needs to be recognition by all participants that the rule of law applies within the industry,’ and Gyles suggested those who break the law should be punished. 

At this time it is worth revisiting the findings and outcomes of the three Royal Commissions, which is what this post does, starting with the most recent Heydon Royal Commission, which a decade ago found evidence of the CFMEU’s close relationship with motorcycle gangs and criminal groups.

 

The Heydon Royal Commission 2014-15

 

Following reports from the ABC and Fairfax media group (now Nine Entertainment) in 2012-13 on corrupt and illegal activity in several Australian trade unions, in particular the CFMEU, the Health Services Union (HSU) and the Australian Workers Union (AWU), a Royal Commission was appointed in 2014 to inquire into trade union finances and activities. While the terms of reference covered a range of issues around union corruption, the CFMEU was the catalyst and provided justification for the inquiry. Over half the Commission’s hearings were on the CFMEU, the behaviour and associates of certain union officials, and payments or other deals made with employers in NSW, Victoria and Western Australia.

 

The Royal Commission into Trade Union Governance and Corruption was headed by former High Court Justice Dyson Heydon, who found evidence of blackmail, theft, intimidation and death threats, use of motorcycle gangs and other criminal groups as hired muscle, interference in union elections and illegal agreements with employers. In his view ‘It is clear that in many parts of the world constituted by Australian trade union officials, there is room for louts, thugs, bullies, thieves, perjurers, those who threaten violence, errant fiduciaries and organisers of boycotts.’ 

 

The Final Report highlighted poor union record keeping, false invoicing and destruction of documents, union ‘rubber stamp’ committees which failed to enforce rules, payment of large sums by employers to unions for dubious ‘training’ schemes and ‘services’, and influence peddling in the Labor Party through inflation of union membership figures. The sums of money involved were also significant, with many officials benefiting from their positions through fraud or theft from the union (HSU in particular), or in the CFMEU through arrangements with employers for work on properties owned by officials. 

 

Based on that evidence around 50 people, unions and companies were referred to various authorities for possible prosecution, including police and public prosecutors, the Australian Securities and Investments Commission (ASIC) and the Fair Work Commission. Some of the large private companies caught up in the inquiry were Thiess, John Holland, ACI, Downer EDI, Cbus, Winslow Constructors and Mirvac. Companies were found to have made payments to unions to get onto tender lists. 

 

The Final Report, released in December 2015, had 79 recommendations, with half concerned with the regulation of unions (24) and union officials (14). The first recommendation was ‘Commonwealth and State governments give consideration to adopting a national approach to the registration, deregistration and regulation of employee and employer organisations, with a single regulator overseeing all such organisations throughout Australia.’ This Registered Organisations Commission would have investigative powers similar to ASIC, and focus on financial compliance with new rules on management and disclosure. Other recommendations were for significant changes to industrial relations laws, to restrict union privileges, and Federal competition laws on price-fixing and bid rigging. 

 

Although the Royal Commission reported ‘widespread and deep-seated misconduct’ across a number of unions throughout Australia, Heydon said the Royal Commission had uncovered only ‘a small tip of an enormous iceberg.‘ There was also a confidential sixth volume because ‘a large volume of evidence cannot be publicly released due to serious threats made to certain witnesses and their families’ and ‘reveals grave threats to the power and authority of the Australian state.’

 

An important recommendation was for the reestablishment of the Australian Building and Construction Commission (ABCC) as an independent industry regulator ‘For the purpose of seeking to combat the culture of disregard for the law within the Construction, Forestry, Mining and Energy Union’. Originally set up after the 2003 Cole Commission recommended widespread changes to the industry’s industrial relations laws, legislation establishing the ABCC as a statutory authority to monitor workplace relations was passed by the Howard Government in 2005. 

 

The ABCC was opposed by the CFMEU and the ACTU, and in July 2012 the Gillard Government replaced it with the Fair Work Building and Construction Inspectorate, a body with reduced scope and powers. In 2016 the ABCC was reestablished by the Turnbull Government, then in 2022 the Albanese Government transferred its responsibilities to the Fair Work Ombudsman and in 2023 abolished the ABCC for a second time. According to the Australian Financial Review  the Fair Work Ombudsman was ‘handling 35 court cases against the CFMEU, including six appeals,’ after the ABCC transferred 40 remaining matters to the agency in 2023. 

 

The cases brought against the CFMEU by the ABCC were mostly about illegal pickets, intimidation and abuse, and coercing companies to accept union agreements, all industrial relations issues. These cases typically resulted in over $16 million in fines between 2016 and 2022 that were easily paid by the CFMEU, which in 2024 had net assets of $106 million.  Over both periods of the ABCC’s existence there were no cases involving association with people with criminal records, and there were no reports of any advice to the ABCC from the state and federal police forces responsible for monitoring the activity of bikie gangs. 

 

Before the Heydon Royal Commission there had been two previous Royal Commissions into the building and construction industry, both headed by judges. Roger Gyles headed the Royal Commission into Productivity in the Building Industry in NSW and Terence Cole the Royal Commission into the Building and Construction Industry for the Commonwealth Government.

 

 

The Gyles Royal Commission 1990-92

 

In the 1980s, industrial warfare made construction sites a battleground because of the intense rivalry between the Builders' Labourers Federation (BLF) and the Building Workers Industrial Union (BWIU, now the CFMEU). In July 1990 the New South Wales Premier Nick Greiner appointed Roger Gyles QC to head the Royal Commission into Productivity in the Building Industry in NSW (RCBI), after spectacular cost overruns from union disputes on major projects associated with the bicentennial in 1988, such as the Convention Centre at Darling Harbour and the Dowling Street Courts, among others. The deadline for the Royal Commission was extended three times after September 1991, before the Final Report was released in May 1992. An enormous amount of material was compiled by the RCBI, the Final Report’s 62 recommendations are in Volume 7 of a 10 volume report that is over 5,000 pages long.  

 

The RCBI had a substantial staff. A Building Industry Task Force to investigate breaches of the law and commence legal proceedings was headed by a Crown Prosecutor and staffed by lawyers, law enforcement officers and expert advisers from the industry. Thirty policy and research analysts were responsible for producing the discussion papers the RCBI issued. There were three volumes of appendices with data and analysis in the Final report, with detailed case studies of 20 major projects, industry surveys of contractors, subcontractors and suppliers, and background papers on a range of topics including insolvency, partnering between contractors and clients, and industry characteristics. 

 

A Second Commissioner, Kevin Holland QC, was appointed to conduct hearings on tendering practices which revealed bid rigging, payment to industry organisations of special fees by successful tenderers, and unsuccessful tender fees paid to the other tenderers providing cover bids. This collusive behaviour by contractors acting as cartel was (as is) illegal and was facilitated by their industry associations. Holland’s inquiry resulted in repayment by contractors to the NSW Government of some of the inflated costs of public projects. The major contractors representative association, the Australian Federation of Construction Contractors was closed down (to be later reborn as the Australian Contractors Association) and Gyles recommended to the government that advice be sought on whether the Master Builders' Association of New South Wales should be deregistered as an industrial organisation.

 

Hearings before Gyles on the behaviour of unions and some union officials revealed practices beyond the rights of unions on behalf of their members. Gyles found illegal activities ‘range from physical violence and a threat of physical violence at one end to petty pilfering of building materials at the other. In between there is a great variety of illegal activities, essentially economic in nature or effect, from collusive arrangements involving giant corporations and industry associations to labour-only subcontractors paying small amounts of graft to project managers. Those involved range from managing directors of large corporations to labourers on site. No sector of the industry has been immune.’

 

Gyles also said ‘Observance of the law and law enforcement in general play very little part in the industry. The law of the jungle prevails. The culture is pragmatic and unprincipled. The ethos is to catch and to kill your own … Once it becomes acceptable to break, bend, evade or ignore the law and ethical responsibilities, there is no shortage of ways and means to do so.’

 

Gyles did acknowledge the complexity of the industry: ‘the issues thrown up … have been manifold. Some have been controversial ... some are complex or technical ... In relation to some issues, I have fairly well developed and precise views as to what ought to happen. In relation to other issues, I … leave them to the government or interested parties to follow through, or make suggestions as to procedure by which they ought to be resolved.’

 

Nevertheless, Gyles concluded industrial relations were overwhelmingly the most important issue, and the union’s conduct and philosophy the fundamental cause of the industry's problems. He recommended deregistration of the BWIU in both the State and Federal jurisdictions, and that the Commission’s Building Industry Task Force pursue cases and recommend changes to the law. The Final Report found:

 

the conduct of the members and officials of the former BWIU (NSW branch) very severely affect productivity and efficiency of the industry in this State, both because of the persistent disruption of projects and businesses and because of the restrictive work practices instituted and defended whilst work is actually proceeding (p.5).

 

In all, Gyles made 62 recommendations to the NSW Government, of which all but two were adopted. The Commission’s report recognised the structure of government departments and authorities makes implementation of many of its recommendations difficult. Gyles recommended the government should take the lead in a client-led process of reform, and a NSW Ministry of Construction should be set up, with the role of developing a code of conduct and procedure appropriate for each form of project delivery. In 1991, the NSW Legislative Council's Standing Committee on State Development had also recommended that a Ministry of Construction be established to plan capital works, help departments to improve their capital works management skills, check projects in order to improve cost effectiveness and issue guidelines for all public sector capital works projects. 

To implement the RCBI’s recommendations a Construction Policy Steering Committee (CPSC) was established with people from the Department of Public Works, the Roads and Traffic Authority and other NSW agencies, but no private sector involvement. Its primary responsibility was to develop a code of practice to be implemented by all government agencies which would then drive reform within the industry. The CPSC's work was published in 1996 as the Capital Project Procurement Manual (CPPM), with the Code of Practice for the Construction Industry and a Code of Tendering for the Construction Industry. The objectives of the CPPM were to define minimum levels of acceptable behaviour, and to provide goals that facilitated higher performance from both individuals and organisations. 

The NSW strategy was mirrored in Victoria and Western Australia. Both States adopted Codes of Practice requiring contractors and subcontractors to meet defined standards on industrial relations and tendering. Then the Commonwealth, State and Territory governments through the Australian Procurement and Construction Council introduced a National Code of Practice for the Construction Industry (1997). 

 

The Cole Royal Commission 2001-03

 

In May 2001 the CFMEU’s NSW Secretary John Sutton made allegations of organised criminal activity within the union on the ABC’s 4Corners program. As in the 1980s, there was intense conflict between ex-BWIU members and the Victorian BLF for control of the NSW branch. A report for the Minister for Workplace Relations Tony Abbott then alleged union officials were engaged in bribery and criminal corrupt conduct, and accepted secret commissions. The Howard Government appointed Justice Terrence Cole QC as sole Commissioner in August 2001 to inquire into the ‘nature, extent and effect of any unlawful or otherwise inappropriate industrial or workplace practice or conduct.’ 

 

Ten years after Gyles the same problems were still prevalent. Commissioner Cole found a disregard for enterprise bargaining, unlawful strikes and use of inappropriate payments. As a result 31 individuals were referred for possible prosecution, 392 instances of unlawful conduct were found (including 30 by employers), and 25 different types of unlawful conduct and 90 types of inappropriate conduct identified. 

 

In his Final Report Cole envisaged an industry where ‘disputes are resolved in accordance with legislated or agreed dispute resolution mechanisms rather than by the application of industrial and commercial pressure. The rule of the law must replace industrial might.’ His view was ‘These findings demonstrate an industry which departs from the standards of commercial and industrial conduct exhibited in the rest of the Australian economy. They mark the industry as singular. They indicate an urgent need for structural and cultural reform. At the heart of the findings is lawlessness. It is exhibited in many ways.’

 

The Final Report in 2003 had 212 recommendations, the great majority about changes to federal workplace relations legislation governing the building and construction industry. Federal Cabinet extended the operation of the Commission’s Building Industry Task Force, pending the establishment of the Australian Building and Construction Commission (ABCC). However, the legislation for that was rejected by the Senate and it was not until 2005, after the election in 2004 when the Coalition gained control of the Senate, that the bill was passed. Cole intended the ABCC to monitor illegal behaviour by unions and, while the ABCC had a restraining influence on the conduct of the CFMEU, it clearly did not fundamentally alter industry ‘standards of commercial and industrial conduct’ before its first abolition in 2012.

 

Conclusion

 

Nearly 40 years after the deregistration of the BLF because of corrupt officials and illegal behaviour, evidence of these problems today in the Construction Division of its successor union the CFMEU have again been made public by investigative journalists. Previous media reports on these issues led to two Commonwealth Government Royal Commissions in 2001 and 2014, and there was a third Royal Commission in NSW in 1991. Through these three Royal Commissions and other state inquiries, the ABCC coming and going twice, and the shift of industrial relations from a centralised system to enterprise bargaining, the CFMEU has endured. 

 

While many of the recommendations from Commissioners Gyles, Cole and Heydon did become legislation, perhaps the underlying issue that should be addressed is why the building and construction industry operates the way it does. None of these Royal Commissions produced a vision of a different industry, apart from a law abiding one, and made no recommendations on industry policy or the direction that development of the industry might take. In their absence we have had quasi-judicial agencies and an emphasis on industrial relations. 

 

The three Commissioners agreed the fundamental problem is a union culture of lawlessness, and the three inquiries found illegal behaviour by both union officials and contractors. In keeping with Australia’s complex and institutionalised industrial relations system, the focus of their inquiries was on industrial or workplace practice and conduct and their recommendations, in various ways, primarily focused on increased regulation and enforcement through legislative action. In this they had, as Roger Gyles’ said, ‘well developed and precise views.’ 

 

While necessary, increased regulation does not address the issue of why the building and construction industry has such a culture. What are the causal factors at work in creating this culture? How might they be affected by industry practices and institutions in areas like recruitment and training, tendering and procurement, wage setting and agreements between unions, employers and government? Clients use of fixed price contracts makes contractors vulnerable to union action that may delay their projects, and can also affect their choice of subcontractors. 

 

It is worth asking if the recommendations of the Gyles and Cole Commissions, and other subsequent State inquiries and industry codes of conduct, had all been implemented and followed through, would the third Heydon Royal Commission have been necessary? Enforcement is an expensive exercise, due to the cost of monitoring projects and the staffing and resources required for the relevant agencies. It fact, it is unlikely these agencies would get the resources needed to cover an industry as large and diverse as construction, thus it is unlikely that the issues of criminality and illegal behaviour can be solved by increased regulation alone. Also, there have no police actions against the CFMEU for links to criminals over the last three decades despite the evidence available, and the cases taken to court by the ABCC when it was active were on workplace issues and behaviour.  

 

Will this time be different? Under the centralised industrial relations system of the 1980s, deregistration was the only option for dealing with the BLF. Today an external administrator can be appointed to run the CFMEU and reform the union and replace the leadership. While that is a necessary step to stop corrupt and illegal behaviour by current officials, it may not be sufficient to replace the ‘law of the jungle’ with  the ‘rule of law’ in the Australian construction industry.