Did you know that the seventh most expensive building in the world is being built right here in Australia? No, it’s not a giant apartment block on the Gold Coast. It’s not a flashy new casino. It’s not even the recently announced hotel and apartment complex that will be attached to MoNA in Hobart.
It’s the new Royal Adelaide Hospital (nRAH)—a project that is 18 months behind schedule and $640 million over budget. This makes the 800-bed hospital—a public-private partnership—the most expensive building in Australia and the largest capital investment project in South Australian history.
But why has this project blown-out? Aside from the optimistic assumptions, project scope changes, ignorance of the technical demand and safety concerns, the nRAH has gone through legal action between the SA government and the builders and unlawful industrial action and anti-competitive behaviour by the CFMEU. In this way the nRAH is a contemporary example of why desperate reform is needed in the delivery of state-based major projects.
Coming soon – the seventh most expensive building in the world!
Construction of the new hospital began on February 2011 and it was anticipated that completion would be completed in April 2016. But the SA government failed to finalise the hospital project on time and missed an additional two set completion dates in May 2016 and June 2017. And recently SA Health announced dates for public tours of the nRAH in July.
Globally the nRAH is the seventh costliest building—ballooning to a cost of $2.3bn. Compared to the final cost, the original estimate of $1.7bn places the cost overrun of the nRAH at 35 per cent of the initial projected cost in real terms.
The world’s most expensive buildings
Where did it go wrong? Since the beginning of the nRAH’s construction, every design flaw, delay and mistake has pushed back deadlines. Construction costs alone doubled from $244.7m to more than $417m. These included the unforeseen remediation costs from contamination claims ($69m), site modifications and defects with building specifications ($34.3m), the setup of a transition team (February 2017) to deliver a long-delayed move from the current RAH ($180k per day), the poorly thought out plan for the emergency section with sick patients faced with dozens less overnight beds available, and outpatient facilities not fit for purpose to meet expected demand with almost 40,000 appointments not being accommodated per year.
There were concerns over the $422m rollout of the electronic patient record system not being ready when the paperless hospital opens. As the ward floors were not sufficient for storage, there were temporarily storing those records in the hospital’s basement car park. In the end, most were being housed off-site which could become a serious patient safety issue with long waits anticipated for records to arrive directly to medical personnel.
Missing the completion deadline of April 2016 triggered the state government to issue a default notice against the construction consortium and withheld service payments of approximately $1m per day to the hospital’s builders. A legal conflict between the South Australian government and its builders ensued over the construction defects that transpired with the builder seeking more than $500m in compensation for the delays. On February 2017, both the state government and builders reached a settlement to conclude legal action.
Union threats and non-compliance by the CFMEU
According to the Office of the Chief Economist, 8.1 per cent of Australia’s GDP stems from the construction industry which employs hundreds of thousands of people.
The contemptible costs of building in Australia has been beset by the influence the CFMEU. The CFMEU has played a pivotal role in driving up the labour costs of building the nRAH and decreasing the overall productivity of its construction.
The CFMEU through their anti-competitive practices of complicity, pattern bargaining and price fixing has instrumented EBAs which are characteristically above award rates. Moreover, the CFMEU has instituted pay premiums for semi-skilled workers and submitted atypically a high number of additional payments in their payroll costs.
Notwithstanding the building costs and delays of the nRAH was the “Armageddon” threats from the CFMEU to disrupt its construction. The CFMEU were fined $57,500 by the Federal Court for making threats to sway the head contractor from enforcing a Fair Work Commission order requiring employees on the nRAH project not to take industrial action.
The two senior CFMEU officials involved were alleged to have stated: “If you try anything there will be Armageddon” and “all hell will break loose and we will take this national.”
Australian Building and Construction Commission (ABCC) Commissioner Nigel Hadgkiss conveyed disappointment in the CFMEU’s conduct and imposed $1.1bn in penalties against the CFMEU and its representatives. He expressed: “unfortunately, the conduct we’ve seen in this case is not isolated, but instead reflects a widespread contempt for the rule of law that pervades the industry.”
The implementation of EBAs by the CFMEU have undoubtedly initiated higher labour costs into the development of the nRAH. The aforementioned workplace disputes and illegal practices by a minority have placed the nRAH project to not only encounter a substantial benefits shortfall but also it is the public, particularly the Australian taxpayer, that loses out.
The mismanagement of the nRAH project represents a clear failure by the state government to control financial costs, risks and uncertainty in project delivery. The major issues presented emphasise the SA government’s ineptitude to design a fit for purpose hospital to cater for patient needs sufficiently, to effectively manage workplace relations, and uncooperative union influence. The result is an expense bill with limited accountability for a poorly executed project.
We must reform how the state government undertakes a large-scale project. They need to:
- Provide greater transparency and oversight throughout the project life-cycle by offering regular status reporting and ongoing performance monitoring available to the public, including key performance indicators and project figures.
- Ensure that internal management of projects utilises continuous improvement for better risk management and contingency practices.
- Enhance collaboration between departments for best practices and lessons learnt to encourage more informed decision making and communications amongst stakeholders.
- Curtail inefficient and any unlawful influence of unions and uncompetitive union-inflated EBAs by increasing the maximum penalties under the ABCC legislation.
- Introduce guiding principles through a Code of Practice in tender decisions to ensure the tender process is open, transparent and accountable.
- Institute penalties for bureaucrats involved in contact administration that act in an unethical manner in awarding tenders and fail to conduct a high standard of due diligence in the competitive bid process.
Only by adopting these recommendations will we lower building costs, keep projects within scope, and prevent significant delays to project delivery.
John Varano is a contributor to the IPA’s Freedomwatch
John Varano is an experienced management consultant and researcher. His area of expertise is in strategy, organisation design, change management, and transformation programme and project management. He has acted as a consultant to international organisations, ASX listed companies, and federal and state departments. As a researcher, his research focuses on the challenges of managing projects, specifically in change management, capital projects and project management. John’s professional experience extends across multiple geographies, including Australia, the US, UK, and Europe.
He is a Graduate Member of the Australian Institute of Company Directors and an Associate Fellow of the Australian Institute of Management.
John is currently an MSc candidate at the University of Oxford in Major Programme Management. He holds an MBA in Finance from The Johns Hopkins University and an MA (Research) in International Political Economy with first class honours from The University of Melbourne. He completed his undergraduate studies with honours at Monash University.
John has been published in The Conversation, Yahoo! News and The Spectator.