Queensland Curtis LNG (QCLNG), is one of Australia’s largest capital infrastructure projects. Recently work began on the Western Downs section, burying the 42 inch diameter steel pipeline which will stretch for more than 540 km to take gas from Chinchilla to Gladstone.
QCG estimates that more than 5000 jobs will be directly linked to the construction of the pipeline which is likely to generate up to $A32 billion in value added activity in Queensland from 2014 û 2021.
QCLNG forms part of the 98 projects currently at advanced stages of development and which as at April 2012, the Bureau of Resources and Energy Economics (BREE) reported make up the $260.8 billion in committed capital expenditure in the sector, 60% of which is accounted for by seven LNG projects. Queensland made up 29% of the $260.8 billion committed in capital expenditure at that time and has been further lifted by the Federal Government’s environmental approval for GVK-Hancock’s $6 billion Alpha coal mine and rail project in the Galilee Basin in August.
Whilst there is much talk of the softening of the resources sector, of greater concern is the number of large scale projects such as these already in progress, with a dependant and sizable subcontracted market and the latent skills shortage facing construction project management in the next two years.
Difficult to Recruit
It is very true that in recent months Queensland mining companies have been shedding jobs due to economic pressures. However new projects coming on stream are providing continuing opportunities. What is still most evident is the skills shortage, particularly at a management or control level, and the pressure this brings to current projects.
The Queensland Resources Council, in its Workforce Accommodation Survey released in May 2012 estimates that the number of people likely to be employed by the sector will nearly double by 2020 in Queensland. Yet a number of commentators and government statistics point to the continuing skills shortage that has been ever present since 2002. Industry analyst heavy weights PWC and KPMG have both separately reported concerns regarding the chronic shortage of key skills in professions and trades that will undermine the success of resource sector projects and potentially artificially inflate wages.
The Department of Education, Employment and Workplace Relations (DEEWR) has recently published its Skill Shortage List for those national occupation shortages which are widespread. A majority of the key professions fall within the mining and resources sector, as outlined in Figure 1.
Ten years on from the issues initially flagged at the outset of the resources boom, there is still a real lack of public sector ownership of the investment required and the accountability for skilled labour to support what is becoming an ever increasing juggernaut towards potential claims and litigation.
Situation Normal?
Out of all the rhetoric and boom and doom stories, what is being overlooked is the compounding pressure on project management to deal with variations and claims effectively.
We can see that two years out, due to the high volume of constraints on projects in relation to workforce and infrastructure gaps, there is a likelihood for huge delays, disruptions and variations which cascade through the subcontractor and supplier chains resulting in a greater amount of pressure on management to administer claims under the complexity of contracts.
With the squeeze on project managers daily and skills shortage in construction managers and estimators specifically in the mining sector, companies need to address the accountability of their contract administration more effectively in order to minimise delays and budget blowouts.
Typically what we are seeing in the mining and resources sector is that because of the nature of contracts being often large and lengthy and whilst weighted generally towards the principal, contracts are still quite loose. The tender value is based on a significant portion of provisional documentation. This in part seems to have resulted in the sense that the work has to commence quickly which can mean contract negotiations and scopes of work are rushed.
As a project progresses it becomes apparent that the realities differ from what was initially expected and disputes begin to fester as each party considers what they are required to do in comparison to the original intent. Due to a number of issues ranging from design changes to gaining planning approvals, the project runs extremely late, the costs spiral up and the targeted profit levels are not achieved.
The problem is often compounded by either; the level of knowledge required by the project managers not being present, or the more experienced managers are so thinly spread that basic fundamental errors are being made. As a result, progress payments are not being made or have been severely reduced, the contractors are not happy with this and are responding aggressively, threatening to suspend works and make claims through legal channels including under BCIPA, although BCIPA is increasingly seen as a last resort method.
Accountability in Claims Administration
We have seen isolated attempts to resolve disputes by engaging firms like Mitchell Brandtman to provide independent opinions.
What seems to be overlooked by principals and contractors in this sector is structured contract administration at the outset and a long term plan to run the project through to completion in relation to variations and claims. This is a function which can successfully be outsourced and can effectively support the internal project team by engaging an advocate for either the principal or the contractor.
Whilst a construction expert can provide a review of the practical day to day administration of the contract and any concerns in this regard, a dedicated contract administrator can assist at commencement with advice on systems, processes and documentation for contract administration. This service can also prove cost effective for the ongoing review and management of variations and claims throughout the project to keep disputes to a minimum and resolve them at the source wherever possible.
Regardless of whether the resources sector continues to grow at the same pace of the last 10 years, the need for support to contractors and principals will accelerate over the next two years. As these billion dollar projects progress and where claims management is stretched in-house or poorly executed, the risk of delay and increased costs is great unless proper claims management is recognised, funded and diligently applied.
For more information contact Gary Thompson, Director, Mitchell Brandtman, Tel. 07 3327 5000