By Michelle Cirson
The Australian construction industry is no stranger to price-wars, underpricing and zero percent margins.
With supply and demand imposing a volatile tug-o-war over work in the pipeline, contractors have resorted to buying work to maintain cashflow objectives and cover overheads.
But who (in their right mind) went into business planning to work for free just to keep a horse in the race?
As long as contractors could maintain the Mexican wave of cashflow, all would be alright. Right?
Wrong! Businesses engaging in this practice are guilty of predatory pricing under the Competition and Consumer Act 2020 (Cth), if the under pricing is likely to eliminate or substantially damage the competition.
If there is one thing COVID-19 has taught the construction industry, it is that high volume, low margin work is risky, particularly when you’re stuck inside a fixed price contract, with no right to decline variation directions, and no entitlement to delay costs.
So what is the answer?
Present industry practice sees subcontractors providing market price indication to head contractors at tender, by providing lump sump quotes or a bill of quantities.
The head contractor, amongst a plethora of competition and informed by its financial demands and revenue targets, decides on a margin percentage (sometimes positive, sometimes negative).
The head contractor’s bid informs the principal’s project viability, and often leads to third-party finance approval. In other words, the principal believes the price point from tender is a reflection of market pricing.
Post-tender, and motivated to claw back margin with trade letting gains, head contractors ask subcontractors for “project pricing” and the price-wars begin.
In many instances, not only has the head contractor bought the job – so has its subcontractors. Meanwhile, the built work almost certainly cannot be completed for the price the principal’s financier has approved.
Prior attempts by industry participants to address the underpricing cycle of despair has attracted the attention of the Australian Competition and Consumer Commission. In some instances, disciplinary action has been taken against well meaning tradespeople who have suggested minimum viable rates for their trades.
So how can the industry break the cycle of unsustainable price wars and underpricing?
What the industry cannot do is any of the activities detailed on the left-hand column to this article, all of which constitute anti-competitive behaviour under the Competition and Consumer Act 2010 (Cth).
Instead, industry participants should do the following:
1. KNOW YOUR NUMBERS
Identify your minimum viable price point for the goods and services you provide. Then, make an objective business decision about get-out-of-bed, lowest viable price.
It is critical that your decision not to offer below your lowest viable price is made in a controlled and calm environment, and not in the heat of the moment during price negotiations with your customer.
Consider using Quantum Advisory’s pricing v volume financial modelling calculator to understand the net effect on your profit margin, and total revenue capabilities as a result of the discounts you apply. Contact Quantum Advisory via their website at www.qagroup.com.au.
2. KNOW YOUR NOT-NEGOTIABLE CONTRACTING CONDITIONS
If your customer is asking you to take on liability or risk over and above your statutory obligations for defects, those additional obligations have a value and should inform your price.
Again, you are much more likely to risk the whole sheep station in the heat of negotiations with a shiny new customer. Particularly after spending time and money to prepare your price.
The nature and extent of the contractual risk your business can take on will depend on the protections and controls your business has in place, such as:
- Insurance policies in addition to the standard business suite, being contract/construction works insurance, trade credit insurance and professional indemnity insurance (if relevant);
- Administration procedures;
- Business structure;
- Commercial and legal support, on an ongoing basis in your business.
If you don’t know what your not negotiables should be, or you are signing contracts without having a lawyer review the terms – or worse, signing contracts without even reading them, we implore you to contact a construction lawyer for urgent advice.
3. PETITION YOUR INDUSTRY ASSOCIATIONS FOR ADVOCACY AND COLLECTIVE BARGAINING DISCUSSIONS OR CODES OF CONDUCT
One exemption to the Competition and Consumer Act 2010 (Cth) anti-competitive behaviour provisions is a bonafide collective bargaining arrangements or codes of conduct.
It is open to industry participants to negotiate collectively with suppliers for pricing parity in the market. The process involves an application to the ACCC for authorisation that the intended agreement and/or activity meets the exemption test.
Such exemptions leave it open to trades to collectively work together to formally and legally address detrimental contracting practices such as unfair contract terms and underpricing.
In conclusion
We appreciate pricing wars are an age old contractor’s woe. It is difficult to believe that our industry could change such an entrenched and cultural problem.
However, when it comes to business viability – the numbers don’t lie. Thanks to COVID-19, we are already dealing with the uncomfortable feeling of change and uncertainty.
Lets make it count.
Want to know more?
Contact Michelle Cirson michellec@mdl.com.au
CONSTRUCTION LAWYER; ADJUDICATOR; LICENSED PROJECT MANAGER
