A global turning point or business as usual: Australian engineering and construction sector and the COVID pandemic

With COVID vaccination rates rising and the easing of lockdown restrictions in sight, governments across the country are looking for ways to stimulate the economy, and the engineering and construction sector is firmly in their sights to help. Governments have looked to stimulate the sector by accelerating infrastructure works, implementing stimulus packages such as the HomeBuilder Scheme and the recent release of the 2021 Australian Infrastructure Plan.

Employing almost 1.2 million people directly (which accounts for almost 9 percent of the workforce) and many others indirectly, the construction sector is the lifeblood of the Australian economy. Early in the pandemic the government classified the construction sector as an “essential service”, so activity could continue (albeit with COVID safety plans in place).

However, the recent stoppage of construction and the restrictions placed on those people living in NSW’s LGA’s of concern sent a shock through the system. Although the construction sector is now back up and running, sites are not back to full capacity given the remaining government restrictions and the difficulty in getting sufficient workers to site.

On top of this, lockdowns and border closures continue to impact contractors’ ability to source critical goods and materials and concern remains over the size of the available workforce, with the pausing of skilled migrants coming into Australia.

These labour and material shortages are driving up the cost of construction jobs, and the disruptions caused by the pandemic are delaying projects which has significant flow on impacts such as lease start dates and additional “overhead” costs. The question is, who’s really going to foot the bill?  In many contracts, asset owners pass most risks to the contractors through fixed price contracts, and whilst certain clauses allow for cost recoupment, risk prima-facie remains with the contractor. To date, governments and asset owners have worked closely with their contractors to ensure projects progress, however the contractual nature of the construction business is complicated and very litigious, so be ready for some robust negotiations.

More contractors were already pushing back on the level of acceptable risk, particularly when works involve unknown territory (e.g. below ground excavation). As governments look to roll out infrastructure works faster, contractors will need to be mindful of what risks they can price into their contracts vs those they’re not willing to accept. And the government will need to play ball when it comes to contract negotiation.

There’s no doubt challenges lie ahead for the engineering and construction sector to navigate through the pandemic and beyond. With governments looking to the sector not only to help pull the country out of the pandemic but also to support the national reforms, the opportunities are equally as big.

These challenges present real opportunities for the engineering and construction sector to continue to diversify the workforce given border closures and to embrace digitisation and technology advancements to find efficiencies in the way they do business.

These challenges and opportunities are not Australian specific, they are global thematics and the challenges seen across jurisdictions are similar. The results of KPMG’s recent Global Construction Survey 2021 evidenced the challenges, including but not limited to the global supply chain impacts from the pandemic.  It also highlighted the positive changes in approach to developing and delivering major engineering and construction projects over the past 18 months, in particular the step change in the use of remote and collaborative technology, as well as better risk management practices in order to keep businesses and projects progressing.

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