BDO CONSTRUCTION SURVEYAn analysis of construction companies in Australia.

FOREWORD

COVID-19

BDO CONSTRUCTION SURVEY

INDUSTRY OVERVIEW

HIGHLIGHTS

LEADERS IN THE SECTOR

THE NUMBERS

LIQUIDITY FOCUS

PEOPLE PRODUCTIVITY

OUTLOOK ON BUSINESS RISKS

SAFETY IN CONSTRUCTION

SUSTAINABILITY AND INTEGRATED REPORTING

HUMAN RESOURCES

RECRUITING TALENT

DIVERSITY

EMPLOYEE BENEFITS

MANAGING PEOPLE

PEOPLE OUTLOOK

INDUSTRIAL RELATIONS

ESTIMATING

QUALITY

REPORTING

FINANCING

CYBERCRIME

INFORMATION TECHNOLOGY

SUPPLY CHAIN

ECONOMIC IMPACTS

NATIONAL TEAM

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CONTENTS

It’s with great pleasure, we release the BDO Inaugural Construction Survey 2020: an analysis of construction companies in Australia.

When we gathered the data for this survey in February 2020, there was an undercurrent of uncertainty in the broader market, and the Australian bushfire devastation was at its peak. Yet, participants indicated that they were optimistic about their futures, which was reflected in their promising forecasts.

This was followed shortly and swiftly by the COVID-19 pandemic - an economic impact that blind-sided all businesses and one that has forced many to adapt quickly to new work practices.

For the construction industry, which employs over 1.2 million of Australia’s workforce and makes a significant contribution to Australia's GDP, early estimates suggest that the impact of GDP from Covid-19, will see construction take a medium hit, or –35% of the economy.

Currently, the Australian Federal Government acknowledges the input of construction and are still considering it as an essential service, allowing many construction operators to continue with their projects.

We understand that some data within this report doesn’t reflect the impact of coronavirus and changes in forecasting will be taking place across the sector.

While the long-term effects are still unclear, day-by-day day businesses are facing new ways of working and overcoming issues of decreased productivity. In late March, I had discussions with construction owners to discuss their thoughts on the Coronavirus impact, and for medium-sized construction businesses, their optimism continues.

For some, it has meant that the implementation of previously discussed initiatives has been brought forward, and in their mind created new opportunities to do things better.

Construction companies are harnessing the opportunity to work more efficiently, upgrade or fast-track their plans to uptake new technologies and find different ways of mobilising people.

Overall, there is a lot of market uncertainty and this will mean that in the medium term at least, there will be a slowing of projects and projects put on hold – particularly where residential is concerned. However, as the GFC in 2008 has proven, recovery for construction will be solid, as they operate in a fairly stable environment. It’s expected that responsiveness will see innovation flourish.

On behalf of BDO and the National Real Estate and Construction Team, I would like to thank you all our participants who took part in this years’ survey. These insights will add significant weight in the ability for those business to benchmark themselves more effectively.

We hope you enjoy reading the report and if you have any questions, please reach out to me or the team.

FOREWORD

ELYSIA ROTHWELL Construction Survey Author, Associate Director, Audit

ANDRES REITH National Leader for Real Estate and Construction For the construction industry, the opportunity from

COVID-19 could be a gamechanger.

PAGE 3

CORONAVIRUS (COVID-19)

The COVID-19 virus will impact many construction organisations, ultimately in the case of a complete lock down, the impacts are expected to be significant in the short to medium term. When discussing the impacts of the virus with some of the leading construction organisations, in the early days of the pandemic, they are actually seeing an increase in productivity with the workforce activating social distancing and flexible working arrangements.

Some preparations that have been put in place include separating the workforce into groups, staggering start times, rostering lunch breaks, implementing thermometer testing at sites, encouraging hand washing and increasing cleaning services. For the organisations with a lower number of active sites, they have been able to isolate the sites and disallow travel between sites with all site visits also cancelled. All administrative and office-based staff for these organisations are now working from home (including project managers).

The trigger for longer term impacts is expected to be driven by the changes in the supply chain, particularly if/when the federal/ state boarders are shut down as it will then disrupt how the whole supply chain move the workforce and materials around efficiently.

Longer term, leaders expect that COVID-19 will fundamentally change the way we do business as it has forced change when things were previously perceived to be ‘too hard’. Much of this change is driven by technology; with the construction industry at the forefront. One of the industry leaders forecast that it will change the way we work, interact with people, how we go to work, and even how we utilise assets buildings. One organisation also noted that there is also opportunity from the pandemic longer term with potential for significant cost savings through restructuring and operational changes away from the "old" norm.

Other organisations are cognisant that change is inevitable, but are unsure as to where the overall impact will land. Some impacts are expected to be driven by their customer base and the industries that they are aligned to, there is expectation that some customers may cut back on future capex if they are heavily impacted longer term by COVID-19. Other impacts identified by the participants include difficulties in cashflow management and potentially financially crippling contractual commitments such as claims for delay damages when projects run over program.

Another organisation noted that they acknowledge that their business will be impacted by COVID-19 where, at the extreme, they may need to look at closing building sites. Unlike the

other organisation interviewed, the office was open. It is clear that each organisation is taking a different approach to the virus with this organisation choosing take action through putting together a dedicated COVID-19 team, assessing the impacts of the virus and allowing the business to operate as usual as best as possible. As well as changes to sign in procedures and implementing temperature testing on entry to sites, they have also implemented rosters for project teams so that they can supplement labour as required.

Similar to other organisations, they are very positive in the longer term outlook for the industry. They have identified previous unproductive time and also seen future efficiencies in potentially reducing the size of office space required. Additionally, particularly with site managers, they were previously challenged with work-life balance for their people. With COVID-19 preparation actions taken, they are seeing that this role (among others) are able to achieve better balance by staggering workforces. However, with these efficiencies, some medium-term changes will likely be considered, including potential restructuring, ‘sharpening up the business to become more lean and agile’. However, they, like other businesses currently being impacted by the virus, they are approaching the situation with a ‘glass half full’ attitude.

PAGE 4PAGE 4

BDO CONSTRUCTION SURVEY

A total of 12 participants completed the survey for 2020. Given the number of the participants, we are able to take a deep dive into these businesses in our report. We note that not all participants’ information has been used in every question as there are cases of outliers and/or incomplete data for analysis purposes. The information provided from the participants has also been considered against historical industry trend data of 44 Australian companies within the construction industry for further insights.

We are excited to see several construction companies get involved in the initiative in 2020, and we believe that this is only the start. We are keen to continue the survey in the coming years to gain greater insights into the industry, increase the number of participants, and bridge the information gap which is currently lacking across the industry.

BDO has launched its Construction Survey to gain an accurate picture of the current and future state of the Australia’s construction industry. Currently, there are few national initiatives available to develop accurate benchmarks across the construction industry, making it challenging for owners and operators to understand best-practice, and for policymakers to accurately understand the issues facing the sector within the context of the Australian environment.

This is the first year we have run the BDO Construction Survey: an analysis of construction companies in Australia. The survey aims to overcome these barriers, by analysing the latest financial and non-financial data from across the sector, to ensure the same metrics are measured, as they relate to Australia.

The survey takes a holistic approach to measurement, with 158 survey questions covering a range of functions including, but not limited to Human Resources, Industrial Relations, Information Technology, Safety, the Environment and the Supply Chain – to adequately capture and illuminate any key strengths, or misalignment within the surveyed businesses.

PAGE 5

INDUSTRY OVERVIEW

INFRASTRUCTURE

Earlier in the 2020 financial year, Ibis World (Construction in Australia, September 2019) reported that the entire construction industry was forecasted to decline by 2.1%, largely as a result of the construction services division. In the past five years, off the back of a decline in major mining and engineering construction projects, we’ve seen a weakened investment in infrastructure and building. However, the short-term performance has been lifted by the ongoing rollout of the NBN as well as progress on major road and rail developments.

To date, the 2020 year has been marked by economic and environmental challenges. The impacts of bushfires, floods and the ongoing Coronavirus (COVID-19) pandemic have threatened the stability of the Australian construction industry. Across Australia, the construction industry is a leading indicator for the economy as a whole, therefore, there’s no better time to consider where the sector is headed in the coming months and in the long term.

RESIDENTIAL

Although the residential market was projected to continue its decline due to weaker trends in the property market and a reduction in residential construction activity, the recent reports pre-COVID-19, are that the market is promising to bounce back.

This year saw an increase in owner-occupiers in the market, arising from the steady population growth and consistently low interest rates. As a result, construction of multi-unit buildings (which previously had a record high in 2016-17) has grown, underpinning the strong commercial building activity across Australia.

For residential construction, the top areas of focus in 2020 are quality, supply and affordability. Today buyers are taking a more active role in undertaking the appropriate due-diligence on residential properties; largely due to several well-publicised incidents of disreputable construction companies in the past twelve months. To combat this, legislation changes were introduced putting additional regulatory pressure on construction companies. This has resulted in a growing trend early in the 2020 calendar year which has seen an increase in activity again from first home buyer interest across Australia. Residential players are seeing a quiet year in project completion, along with a slower uptake in pre-sales of multi-unit dwellings.

PROPERTY DEVELOPERS

International capital injections look to continue to bring numerous benefits. In 2020, we anticipate that global availability of debt will continue to increase as a potential finance option for higher-end developers.

Affordability will continue to be a priority in the sector with ‘Build to Rent’ being one of the potential solutions. Sustainability is also moving up the ranks as a top priority as demand for sustainable and mindful spaces and communities grows. As such, we expect that much of Australia will be connecting with these platforms as they continue to develop in the market.

In the past five years, urban growth has also supported investment in new construction and infrastructure. This includes a moderate growth in public sector capital expenditure on infrastructure projects. In New South Wales, there has been continued development of Western Sydney driven by public investment in the Western Sydney Airport project and related infrastructure and transport.

PAGE 6

LOOKING AHEAD

Looking further ahead, Ibis World (Construction in Australia, September 2019) related that the five-year outlook was forecasted to strengthen with annualised 2.3% growth and paralleled employment within the industry through to 2023-24. However, a potential recession in the coming 18 months will likely impact this forecast as there is much uncertainty around the impacts of COVID-19. Quality, affordability, supply and sustainability appear to be the key areas of focus across the industry with industry leaders needing to focus on promoting good corporate governance in these areas in order to drive the sector forward.

CONTINUED...

ENVIRONMENT

Recently environmental factors have impacted the industry which have cast uncertainty on the sector, this is likely to continue for the remainder of the 2020 financial year. We anticipate that the A-REITs will be negatively impacted from the lasting effects of the bushfires and subsequent flooding. Retail A-REITS are likely to be worst the affected as these environmental disasters further exacerbated the stresses in the retail sector resulting in a downturn.

More recently, the global outbreak of the COVID-19 pandemic has resulted in falling consumer sentiment as job security and fears of a potential economic crisis become key concerns. This has further weakened the retail sector with an increase in tenants requesting rent abatement or at the extreme, shutting down.

This sentiment could also flow into the Australian financial services sector with lenders becoming more risk adverse, even though there is movement in the right direction with falling interest rates.

PAGE 7

HIGHLIGHTS

The key highlight from the report identified is that every construction business is different, driven by its individual culture and values. There are some organisations that stand out as operating most effectively in their own area of expertise, whether it be safety metrics, staff attrition rates, financial stability or sustainability measures. Speaking to some of these organisations, we understood further that most of these KPIs are driven by top down values, which are embedded right down into the core of each business.

Financially, construction businesses surveyed (pre-COVID-19), suggest a positive outlook for the industry with 75% of participants expecting significant growth in revenues in FY20 when compared with FY19. Specifically the participants are expecting an overall average increase of 23% in FY20 against FY19. However, interestingly, the diversification of business model is expected to become less broad as organisations forecast forward to focus on the areas that ‘they do best’, which in these surveyed participants is commercial construction, moving away from managed services and residential construction. Profitability of those surveyed is also expected to increase in FY20, but not as consistently with the revenue forecasted, with only 50% of participants expecting net profit before tax in FY20 to increase significantly.

This analysis is interesting as it suggests that the top line revenue is forecasted to increase significantly across the industry in FY20. However, as this is not necessarily reflected in the NPBT or profitability benchmarks at the bottom line,

it indicates that there may be some expected leakage of operational expenditure, a squeeze on margins or potentially greater expenditure on one-off strategic projects expected for FY20.

When forecasting to FY21, the survey participants have noted a slight 2% reduction in backlog revenues reflected in their budgeting when compared to the FY20 financial year’s budget. This may be an indication that businesses’ forecasts are prudent, given the timing of the survey as there may be more clarity on the FY20 forecasts at this point in time. When forecasting out to 2020, participants are on average expecting an increase of in revenue per full-time employee which is higher than the anticipated average increase in revenues for 2020. This is following an average increase in employees of 2.7% in the FY19 financial year. What this suggests is that headcount is increasing year on year, and companies are expecting to see efficiencies in the people employed in the coming year and enhanced productiveness. Alternatively, they may be leaning more heavily on contractors and ‘outsourced’ administration staff. Either way, there is a clear shift anticipated for FY20 in the way that construction businesses expect to operate their human capital.

From a strategy perspective, the key business risk for the majority of respondents was a focus on their human capital, particularly retaining quality and skilled staff and providing a strong work culture and safe work environment. Whereas the activities that are expected to create most value for the

business in the sector were focused on client relationships and mitigating areas of financial losses. Construction companies in FY20 will continue to drive initiatives to improve safety and staff culture. Keeping their people connected to the business and increasing engagement with contractors and employees will be key in retaining quality staff which is a large challenge for many companies in the industry. In turn, these employees will provide quality services through strong client relationships.

People’s safety on construction sites is paramount in an industry that is at a higher risk of OH&S claims. The safe workplace environment drives staff engagement as well as reduces financial losses and risks associated with fines, claims and penalties. The survey participants reported an average lost time injury frequency rate in FY19 of 5.71. When considering the serious lost time injury frequency rate in the 2019 financial year, this dropped to an average of 1.58.

Speaking with some participants on the impact of COVID-19 on their businesses and how they are planning ahead, the sentiment is overall positive whilst acknowledging the challenging shorter-term hurdles ahead. Measures being put in place to minimise the impact of COVID-19 for the economy as a whole and for the safety of their staff are providing some interesting future efficiencies. It has forced the industry look at the way that things are currently done challenging the status quo. Particularly in the area of flexibility. So far, reports are that the industry is rising to the challenge, and anticipate that only future synergies and efficiencies will be the end result.

PAGE 8

LEADERS IN THE SECTOR

BDO considers the survey participants to be some of the leaders in the sector. It’s encouraging that there are several industry leaders looking to break down the barriers in the industry and share some of their key financial and business metrics providing greater transparency and collaboration within the sector.

Of the participants in the survey, the majority (60%) are currently within the revenue benchmark of <$500M per annum and have an average of 79% of operations being non-residential construction. Looking out to FY22, revenues are expected to grow with more of the participants forecasted to move up in the revenue brackets with 40% expecting to be in $500M to $750M bracket by FY22. This is also reflective of a median historical increase in revenue of 47% and an average historical increase of 54% across the four-year period to FY20 for the participants. The mix of project type (residential, non-residential and other) across the participants aren’t anticipated to change significantly in 2020 or 2021. Given the economic conditions seen in the past 12 months, it is surprising to see that there is not more diversification occurring within the sector as organisations appear to be sticking to ‘what they know best’.

FORECAST REVENUE FOR FY20

PARTICIPANT BREAKDOWN BY REVENUE FY19

<$500M $500M-$750M$750M-$1B >$1B

<$500M $500M-$750M$750M-$1B >$1B

FORECAST REVENUE FOR FY21

<$500M $500M-$750M$750M-$1B >$1B

FORECAST REVENUE FOR FY22

<$500M $500M-$750M$750M-$1B >$1B

PAGE 9

CONTINUED...

NSW MARKET BREAKDOWN FY19

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Central Coast

Hunter

Riverina MurrayCentral West

Illawarra/ Shoalhaven South East/ Tablelands

Far West

New England/ North CoastSydney City

PARTICIPANTS

QLD MARKET BREAKDOWN FY19

PARTICIPANTS

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Far North Queensland North Queensland Mackay/Isaac/Whitsundays

Central Queensland / Brisbane City Central West Queensland Wide Bay Burnett

Darling Downs/South West Sunshine Coast Gold Coast

Geographically, for the 2019 financial year, the survey participants operate on the East Coast of Australia, mostly within the NSW region. The survey results have therefore been limited to the East Coast of Australia for 2020.

PAGE 10

CONTINUED...

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Melbourne City Barwon South West Grampians Gippsland Hume Loddon Mallee

VIC MARKET BREAKDOWN FY19

PAGE 11

THE NUMBERS

Understanding the financial metrics - ‘the numbers’ - is a critical element to evaluating organisational performance. While there are many ways to determine how effective an organisation is operating from a financial perspective, it’s important to understand the underlying data and critically evaluate the key performance indicators against its peers. Organisations must first understand which metrics are most valuable for the individual’s business in the context of its strategy and objectives and with a stakeholder view in mind.

The survey results show that revenue is generated mostly through design and construct contracts with an average of 60% of revenues relating to these types of projects. Other revenues are generated through hard dollar contracts and then through construction management arrangements. In the 2020 financial year, there is no significant change anticipated in the mix of type of contracts across the participants, we expect that there will be a slight decrease of 1% in Construction Management Services across the participant group.

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Hard Dollar Design and Construct Construction Management

PARTICIPANTS

FY19 REVENUE BREAKDOWN BY TYPE OF CONTRACT

PAGE 12

The majority of participants are expecting revenue to grow in FY20 at an average of 23% compared with FY19. This correlates to an expected growth in net profit before tax (NPBT) of 35% on average.

Of the surveyed participants, 75% are forecasting significant growth in revenues for FY20. This is described as being more than a 10% increase on FY19. However, only 50% of the participants are also expecting a similar growth (more than 10%) in net profit before tax (NPBT) in FY20. Applying another metric (net profit as a percentage of revenue), only 40% of participants are expecting an increase in profitability for FY20.

This analysis is interesting as it suggests that the top line revenue is forecast to increase significantly across the industry in FY20. However, as this is not necessarily reflected in the NPBT or profitability benchmarks at the bottom line, it indicates that there may be some expected leakage of operational expenditure, a squeeze on margins or potentially greater expenditure on one-off strategic projects expected for FY20.

Looking to the 2021 financial year, 42% of participants are expecting little to no change in net profit before tax.

CONTINUED...

EXPECTATIONS FOR REVENUE IN FY20

Significant increase (>10% increase)

Modest increase (5% to 10% increase)

Little or no change(5% increase/decrease)

Slight decrease(5% to 10% decrease)

Significant decrease(>10% decrease)

34%

8%

8%

50%

Significant increase (>10% increase)

Modest increase (5% to 10% increase)

Little or no change(5% increase/decrease)

Slight decrease(5% to 10% decrease)

Significant decrease(>10% decrease)

34%

8%

8%

50%

Significant increase (>10% increase)

Modest increase (5% to 10% increase)

Little or no change(5% increase/decrease)

Slight decrease(5% to 10% decrease)

Significant decrease(>10% decrease)

34%

8%

8%

50%

Significant increase (>10% increase)

Modest increase (5% to 10% increase)

Little or no change(5% increase/decrease)

Slight decrease(5% to 10% decrease)

Significant decrease(>10% decrease)

34%

8%

8%

50%

Significant increase (>10% increase)

Modest increase (5% to 10% increase)

Little or no change(5% increase/decrease)

Slight decrease(5% to 10% decrease)

Significant decrease(>10% decrease)

34%

8%

8%

50%

75% 9% 8% 8%of participants expect significant increase in revenue

of participants expect modest increase in revenue

of participants expect little or no change in revenue

of participants expect slight decrease in revenue

EXPECTATIONS FOR NPBT IN FY20

Significant increase (>10% increase)

Modest increase (5% to 10% increase)

Little or no change(5% increase/decrease)

Slight decrease(5% to 10% decrease)

Significant decrease(>10% decrease)

34%

8%

8%

50%

EXPECTATIONS FOR PROFITABILITY IN FY20

30%

20%

10%

40%

EXPECTATIONS FOR NPBT IN FY21

33%

8% 17%

42%

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FORECASTED MOVEMENT IN REVENUE FOR FY20 VS FY19 FORECASTED MOVEMENT IN NPBT FOR FY20 VS FY19

PARTICIPANTS-40%

-20%

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Movement in Revenue (%) Median (20%) Average (23%)

-20%

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180%

Movement in Net Profit (%) Median (18%) Average (35%)

PARTICIPANTS

PAGE 14

CONTINUED...

The growth trends identified by the survey is consistent with 2019 when we look across historical company information for the sector. These trends are also consistent with the 20 companies in the construction sector that historically reported reporting a median increase in revenues in FY19 of 1% when compared with the FY18. However, these companies reported a negative median movement in net profit before tax (NPBT) of 13% for FY19 against the FY18 results, which does not correlate to the survey results anticipated for FY20. This suggests that the participants surveyed are less volatile than others in the sector or perhaps the market had begun to stabilise (prior to COVID-19).

Considering only the companies that reflected a revenue of less than $500M in 2019, there was an average decrease of 1% in revenue in FY19 (median decrease of 5%) with an increase in NPBT in FY19 of 9% (median of 4%); a result which is more comparable with the survey trends noted above. As such, there appears to be less volatility in the sector for players with revenues of less than $500M which is consistent with the considerations above.

An analysis was also performed on 32 companies in the industry and their annual revenue growth reported in 2014 to 2018, showing a significant spike in revenues in FY16 followed by a declining trend of revenue growth in FY17 and FY18. This was a trend across both the industry and those companies that were categorised as having less than $500M in FY19. It supports the fact that fluctuations year-on-year in the industry do occur and can be expected going forward.

REVENUE GROWTH FY14 TO FY18

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2014 2015 2016 2017 2018

All Companies Companies with < $500M Revenue In FY19

PAGE 15

CONTINUED...

For the 2019 financial year, the participants recorded a net profit before tax rate as a percentage of revenue of 3.4% on average. This is lower than the historical data average of 12 companies for 2019, which showed an average rate of 4.8%. This suggests that the participants may have some leakage of costs or that they are not as effective in recovering project revenues with a margin squeeze impacting the market.

The participants are also forecasting that the net profit before tax rate as a percentage of revenue will decrease by 0.1% in the 2020 financial year, along with no expected change in their average return on equity (average in 2019 of 37%).

Despite the increase in revenue, the flat return on equity forecast is likely due to an increased anticipated average dividend payout rate across the participants for the 2020 financial year by 11.3% compared with the prior year (calculated as the dividend over the prior year’s net profit after tax). The average and median dividend payout rate across the participants for 2019 was 53% which is comparable to the historical data of another 13 companies detailed below with a median dividend payout rate for FY19 of 44%.

The majority of FY20 revenues expected to be generated by the participants that relates to backlog revenue from the 2019 financial year is 69% on average brought from the previous financial year. This is also a consistent flow through to the 2021 financial year, with 67% backlog revenue anticipated.

FY20 BACKLOG REVENUE

FY21 BACKLOG REVENUE

Other Backlog Revenue

31%

69%

Other Backlog Revenue

34%

67%

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PAGE 16

LIQUIDITY FOCUS

A common risk for construction companies is that there is often insufficient cash held to buffer against any future risk of loss. Given that financial losses associated with one ‘bad’ project can be significant if not effectively managed, the level of cash held by construction companies is generally high due to combat this potential risk. As such, the cash ratio is considered an important KPI for companies looking to manage future liquidity risks.

The participants surveyed held a cash to revenue ratio of 16% on average (median of 13%). Compared with other industry players, the participants’ ratio is considered to be strong against the average, reflecting a 11% cash ratio in 2019 (historical median).

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PAGE 17

A significant aspect of risk management in the construction industry is the use of surety bonds and bank guarantees for mitigating contractor risk. These instruments protect companies against financial loss in the case where a contractor fails to fulfil the terms and conditions of their contract and is unable to complete the job. The survey participants reported a median level of surety bonds and bank guarantees as a percentage of revenue in 2019 of 8.2% and reflected an average percentage of their net assets of 129.6%.

The working capital ratio is also a good reflection of the solvency of a company. The survey participants reported an average working capital ratio in 2019 of 6.4% (median of 5.8%).

Furthermore, an average of 60% participants reported that they did not have any external debt. Those that did have external debt, reported low debt to equity ratios with an average of 25% gearing.

CONTINUED...

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WORKING CAPITAL AS A PERCENTAGE OF FY19 REVENUE (%)

PAGE 18

PEOPLE PRODUCTIVITY

Financial metrics as a function of employee numbers enable companies to assess productivity and efficiency from a people perspective. The average revenue per employee for 2019, based on historical data analysis over 24 companies, was $1.47M. This is consistent with our survey findings as participants reported an average of $1.51M revenue per employee.

Interestingly, when forecasting out to 2020, participants expect an average increase of 17% in revenue per full-time employee which is higher than the anticipated average increase in revenues for 2020 of 16% as shown in the graph. What this suggests is that organisations are expecting to see efficiencies in the people employed in the coming year and enhanced productivity.

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REVENUE PER EMPLOYEE (FY19)

FY20 MOVEMENT IN REVENUE PER FTE

65%

55%

45%

35%

25%

15%

5%

-5%

-15%

-25%

Movement in Revenue per FTE 2020 (%)

PARTICIPANTS

Movement in Revenue 2020 (%)

$'000

Average ($1.47M)

0

5001,0001,5002,0002,5003,0003,5004,000

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Net profit before tax per full-time employee as reported by the survey participants is expected to increase in the 2020 financial year by 11% on average to $45,700 from $41,000 per employee in 2019. However, this does not correlate in quantum to the expected 49% increase in net profit before tax expected by the survey participants.

PAGE 19

CONTINUED...

INTERVIEW INSIGHTS:

When speaking with one of the leaders in the industry, an organisation that considers themselves to be ‘millennial, robust and quick in the way decisions are made’, their current business model is to increase the revenue without having the traditional take up of employees. They are looking forward by relying on consultants and contractors as well as gaining efficiencies through the use of new technology, which includes a hybrid of market leading and traditional technologies along with the use of managed services within the business to be able to scale up and down as the business and projects scale without the corresponding increase in staffing needs.

PAGE 20

Of the participants surveyed, the top business risk priorities reported in order of importance are as follows:

Interestingly, 63% of the respondents had the first point on subcontractor and supply chain reliability in their top four priorities.

Of the participants surveyed, the top value creation activities reported in order of importance are as follows:

It is important to note that 75% of the respondents had the first point on attracting, recruiting and retaining employees in their top three priorities.

Looking ahead, business risk management is an important part of implementing an organisation’s strategy to minimise financial losses as well as avoiding any non-financial negative impacts on the performance of the business.

Of the participants surveyed, the top business priorities reported in order of importance are as follows:

Attracting, recruiting and retaining employees

Providing an attractive workplace environment and employment conditions

Improving safety performance

Improving profitability in existing core markets

Growing revenue in existing core markets.

Subcontractor and supplier supply chain reliability

Intensified competition and winning new work

Access to critical talent.

Establishing and maintaining strong client relationships

Pre and post tender negotiations and risk mitigation

Managing project safety.

OUTLOOK ON BUSINESS RISKS

5

2

1

1

1

2

2

3

3

4

3

It is important to acknowledge that all participants rated establishing and maintaining client relationships in their top three value creation activities.

For companies within the construction industry, establishing and maintaining positive client relationships is critical for project success and winning new contracts. As construction projects involve significant time and financial investment, strong client relationships built on trust and clear and regular communication are critical. This ensures that the project meets client expectations throughout its stages and addresses any concerns raised along the way. Moreover, as the construction industry in Australia is considered to be a tight-knit community, ‘word of mouth’ plays an important role when it comes to company reputation and thus ability to win new contracts.

This information suggests that the sector will prioritise business risks that focus on their human capital such as retaining quality and skilled staff, providing a strong work culture and a safe work environment. Whereas the activities that will create most value for the business in the sector are more focused on client relationships and mitigating areas of financial losses.

PAGE 21

SAFETY IN CONSTRUCTION

Safety in construction is critical for enhancing culture and how it positively impacts the financial performance of the organisation, in respect to lost time injuries, reduced litigation and financial losses. A key business priority for the survey participants is to provide a safe construction site for employees, subcontractors and clients, and this is reflected in accreditation and safety measures being undertaken by the survey participants.

The Federal Safety Commissioner (FSC) was established by the Australian Government to develop, implement and administrate a workplace health and safety (WHS) accreditation scheme for the construction industry. This accreditation allows them to enter into head contracts for work that is funded directly or indirectly by the Australian Government. Findings show 75% of surveyed participants reported that they are accredited with the FSC.

75% OF SURVEYED PARTICIPANTS REPORTED THAT THEY ARE ACCREDITED WITH THE FSC

PAGE 22

The survey participants reported that in the 2020 financial year, their cost of safety operations as a percentage of the forecasted revenue is on average 0.6% (median of 0.4%).

The lost time injury frequency rates of a business can reflect the level of safety effectiveness on sites and is a key indication of how the organisation manages the safety risk. The lost time injury frequency rate reflects the number of injuries resulting in at least one day or shift away from work, per one million man-hours worked. The serious lost time injury frequency rate is the number of significant injuries (those resulting in at least seven continuous days unable to work) per one million man-hours worked.

On average, the survey participants reported an average lost time injury frequency rate in the 2019 financial year of 5.71 and a mean lost time injury frequency rate of 4.40. When considering the serious lost time injury frequency rate in the 2019 financial year, this dropped to an average of 1.58 and a mean of 0.65.

Another useful indicator to measure the severity of injuries on site is the medical treatment injury frequency rate which reflects events where an injured person’s treating doctor requires that person to go on light duties after seeking medical attention. On average, the survey participants reported an average medical treatment injury frequency rate in the 2019 financial year of 7.57 and a mean medical treatment injury frequency rate of 7.70. This indicates that there has been disparity in the severity of injuries across the participant group for the 2019 financial year.

0 1 2 3 4 5 6 7 8 9 10 11 12 13%

FY19 LTI FREQUENCY RATE (%)

FY19 MEDICAL TREATMENT INJURY FREQUENCY RATE (%)

FY19 SERIOUS LTI FREQUENCY RATE (%)

0 1 2 3 4 5 6%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17%

CONTINUED...

PAGE 23

Safety management initiatives are a continual focus for the sector. The priorities of focus from those that completed the survey are safety initiatives including:

• Focus on lead indicators and high-risk activities;

• Recognising positive safety performance;

• Encouraging proactive behaviours;

• Senior managers and construction managers playing an active role in how safety is managed on site;

• Ensuring the safety and security of scaffolding works and workers;

• Reducing lost time injuries 10% annually;

• Use of technology in site induction and check in systems;

• Implementing training programs (including one program identified to “Stop, Think, Eliminate and Mitigate”);

• Developing the HSEQ strategic framework, which identifies key improvement areas and initiatives in line with company policies;

• Whole of business leadership demonstrating and driving safe workplace conditions, behaviours expectations;

• Verifying that high-risk construction work activities are performed in accordance with the corresponding SWMS / risk assessment;

• Understand the effectiveness of controls and explore improvement opportunities with workers performing the tasks aiming to identify any gaps in work as planned and work as performed;

• Focus project personnel on hazard and risk reduction specific to key recordable injury themes.

Specific safety initiatives that participants have planned include: introducing an alarmed scaffold safety system, improving air quality and monitoring conditions, release of practical/accessible safety guidance material on a free mobile phone application, along with a variety of training including topics such as silica awareness, electrical safety, scaffold awareness, WH&S and environmental concepts, e-learning, and newsflashes on safety issues.

PAGE 24

CONTINUED...

SUSTAINABILITY AND INTEGRATED REPORTING

We are aware that there is an increasing pressure on organisations to consider their corporate social responsibilities and enhance their reporting to various stakeholders. With global warming, along with other social and political issues, being at the forefront of many organisation's minds, it is an interesting topic in the industry. While the survey participants are making progress regarding sustainability and reporting, the findings demonstrate there is way to go before sustainability and accurate reporting are adopted effectively across the construction industry.

As the focus in this area continues, it is expected that integrated reporting will become the new normal in Australia, with the Integrated Reporting Framework eventually being adopted. The challenges with this will be the credibility, relevance and comparability of reporting across the industry as it is explored further by the sector. However, the concepts are exciting and forward-looking and BDO are eager to be part of the global adoption of integrated reporting.

From a construction industry perspective, waste management is becoming a critical part of business, particularly with the focus on sustainability within the sector. From the participants surveyed more than half had a system in place to measure waste recycling. However, Management are not currently comfortable that the information being produced by the system is reliable in half of the cases. The survey also noted that only one organisation had a system in place that monitored energy consumption, but also noted that the system did not produce reliable data. No participants had a consistent and reliable measure of greenhouse gas emissions at the date of the survey.

INTERVIEW INSIGHTS:

One organisation that we spoke to discussed how they successfully monitor waste and recycling. This is done by contracting the service out to a service provider that is linked to their job sites. This is a simple but effective method, that along with traditional tracking of waste movement, allows them to monitor waste and recycling.

MEASURING WASTE AND RECYCLING

38%

25%12%

Yes, accurate reporting available25%

Reporting system exists but doubts exist over reliability of data

In the process of establishing a reporting system

No

PAGE 25

HUMAN RESOURCES

Investing in a strategic human resources program is critical to the success of any organisation. The cost of salaries as a percentage of revenue for the participants surveyed was a median of 9% (average of 8%). This reflects the cost of base salaries and superannuation but excludes motor vehicle allowances. Furthermore, the cost of wages as a percentage of revenue for the participants surveyed was a median of 1% (average of 2%). This reflects the cost of base wages including overtime and superannuation, but excluding on-costs.

The participants surveyed also noted that their forecasted cost of 2020 human capital operations as a percentage of forecasted revenue was on average 0.18% (or a median of 0.17%) which is a significant portion of an organisation’s expenditure. As at June 2019, the median ratio of full-time human capital staff to full time employees was 1.23:100 (average ratio of 1.19:100) with some organisations investing significantly more than others in human capital operations.

On average in 2019, these companies in the industry had an increase in the number of employees of 2.7% when compared with the previous financial year. The participants surveyed are expecting the number of staff to further increase in 2020 at an average of 4.7% (11 full time equivalent employees) with only two of the participants expecting a decrease in human capital. Interestingly, the increase in staff numbers is not aligned with the increase in revenue anticipated for 2020 of 21% across these participants. This suggests that the participants are expecting increased efficiencies and/or productivity from its employees to reach the targeted revenues for FY20 and beyond.

The participants were diverse in respect to their level of human capital with an average number of full-time equivalent staff in 2019 of 235. To give some context to the group of participants, this is compared to a range of companies in the industry where the average number of staff is 554.

No. of Employees Median (345) Average (554) Par�cipants Median (187) Par�cipants Average (235)

0200400600800

1,0001,2001,4001,6001,8002,000

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FTE EMPLOYEES

PAGE 26

CONTINUED...

When considering the breakdown of full time and part time employees at the companies surveyed, the part time employees make up a small portion of their human capital at an average of only 2%. However, this breakdown is expected to increase to 3% of the total workforce for 2020.

Looking at the next 12-month period, majority of participants surveyed are expecting to have a minor increase in their workforce which is defined as up to an increase of 10%.

EXPECTED CHANGE IN WORKFORCE IN NEXT 12 MONTHS

80%

10% 10%Maintain current workforce size

Minor increase in roles (up to 10% increase)

Major reduction in roles (>10% decrease)

Minor reduction in roles (up to 10% decrease)

Major increase in roles (>10% increase)

PAGE 27

CONTINUED...

As identified earlier in the report, 75% of the respondents identified that recruiting and retaining employees was one of their top priorities. One of the measures to address this risk is considering remuneration and benchmarking against the industry. Our survey participants provided their average fixed salaries by role, of which the median of each has been presented in the table above. The table demonstrates that there is some disparity in salaries across the industry across the East Coast of Australia.

MEDIAN FIXED SALARY BY ROLE NSW VIC QLD

Cadets 57,301 50,868 56,625

Contracts administrator 117,059 96,331 110,182

Contracts manager 187,374 Isufficient data to report

Site supervisor/Foreman 138,481 129,841 132,306

Site Manager/ General Foreman 182,902 157,305 157,839

Project Engineer 136,931 Isufficient data to report

Project-based Safety Advisor 136,687 Isufficient data to report 132,596

Project-based Quality Advisor 142,106 Isufficient data to report

Project Manager 173,285 144,279 163,369

Senior Project Manager 226,159 195,375 207,250

Design Manager 171,900 Isufficient data to report

Estimator 158,833 118,700 164,470

Senior Estimator 225,275 197,580 182,128

Commercial Manager 260,220 237,928 209,053

Construction Manager 280,527 234,667 234,000

PAGE 28

RECRUITING TALENT

Of the participants surveyed, majority of recruitment activity was sourced from an external recruiter in the past 12 months. Interestingly, there are some companies that have a heightened source of recruiting directly within the industry. Additionally, most of the participants noted that up to 10% of their recruitment needs were met through internal promotions in the past 12-month period.

The above analysis is also correlated to the fact that 56% of the participants noted that they had a dedicated internal recruitment resourcing team, however we note that this internal resource was not aligned at all to the size of the human capital workforce at the organisation.

% OF RECRUITMENT NEEDS MET INTERNALLY

Participants reported that up to 10% of recruitment needs are met internally.

Participants reported that more than 30% of recruitment needs are met internally

62%

25%

13%

Participants reported that 10-30% of recruitment needs are met internally.

PAGE 29

DIVERSITY

From a diversity perspective, it is clear from the results, that each organisation is approaching the matter differently. Of the participants, only 58% currently have a diversity and inclusiveness policy developed (or under development). For those that provided specific information in respect to the organisation’s diversity areas of focus, all considered gender diversity at a minimum. The majority of policies also considered age, ethnicity, indigenous and disability areas of focus.

When considering the breakdown of employee diversity in the workplace, 37% of participants had no full-time employees identifying as an Aboriginal or Torres Straight Islander person and at the other end, one participant had 2.0% of their full-time workforce identifying with this culture.

DIVERSITY AND INCLUSIVENESS POLICY?

% OF FULL TIME EMPLOYEES IDENTIFIED AS ABORIGINAL OR TORRES STRAIGHT ISLANDERS

NO42%

YES58%

13%

50% 37%

None

<1%

Between 1% and 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Recruited directly Referred by an employee

PARTICIPANTS

Placed by an external recruiter

RECRUITMENT SOURCES

PAGE 30

CONTINUED...

Interestingly, there appears to be no correlation between the percentages of females in an organisation when compared with female employee turnover in 2019. This suggests that the issue of losing females in the organisation is not linked to a lower rate of females i.e. the “need to see it to be it” mentality.

Gender balance in the construction industry is also topical and should be a focus due to the imbalance in all roles. Across the surveyed participants and particularly within senior roles and project manager roles, females represented only 9% and 7% respectively. There is also a notable difference in the gender pay gap with those in the industry that were surveyed which was between 34% and 64% depending on the state which is quite significant.

It also appears that there is a disparity in gender balance for those that are completing university or TAFE, whereby there is an average of 4.5% of full time male employees that are studying compared with only 1.1% of full time female employees that are studying.

GENDER BALANCE ALL ROLES

GENDER BALANCE SENIOR ROLES

GENDER BALANCE PROJECT MANAGER

ROLES

82% 91% 93%18% 9% 7%

PARTICIPANTS

% Females in all roles

% Females in senior roles

% Females in project management roles

Turnover of female employees

0%

10%

20%

30%

40%

FEMALE EMPLOYEE TURNOVER (FY19)

AVERAGE OF THE MEDIAN FIXED SALARY BY GENDER

NSW VIC QLD

Male employees 153,706 143,055 153,619

Female employees 102,480 107,104 93,900

Gender pay gap 50% 34% 64%

% OF FULL TIME EMPLOYEES STUDYING AT TAFE OR UNIVERSITY

MALES FEMALES

0%

1%

2%

3%

4%

5%

PAGE 31

INTERVIEW INSIGHTS:

We interviewed an organisation that was at one of the extremes of this metric, with the average age of employees aged 30 years old. Their millennial workforce is accredited to the tertiary education system where the younger more diverse generation are seeing opportunities in the property sector with options to be a successful project manager or engineer. They are well trained and have a good understanding of the industry. Additionally, the culture is ingrained from the leaders of the organisation who are role models with real connection to their people. They are supported by a diverse senior management team.

With a culture attracting a young and diverse workforce, they acknowledge that there is some risk of having a workforce that 'live in the moment'; want to see the world; may have a tendency to move on quicker or jump at opportunities with higher remuneration. But with that risk, comes a very hard working, highly intelligent and adaptive workforce that have a focus on quality and the importance of safety.

CONTINUED...

Diversity in the average age of an organisation’s workforce is also important. Of those surveyed, the average age of employees was 38, with the results ranging from between 30 and 42 as detailed in the graph below. There is diversity across the group as to those that have a higher proportion of ageing staff versus those that have more of the younger generations in the organisation. This may reflect, or may be driven by, the organisation’s culture and values.

30 31 32 33 34 35 36 37 38 39 40 41 42 43Age

AVERAGE AGE OF SALARIED STAFF (AGE)

0% 20% 40% 60% 80% 100%

< 30 Years Old

PART

ICIP

AN

TS

Between 30 and 50 Years Old > 50 Years Old

BREAKDOWN OF SALARIED STAFF BY AGE

PAGE 32

CONTINUED...

INTERVIEW INSIGHTS:

At the other end of the scale, on speaking with the organisation that had the oldest average age of employees at 42 years old, they see the benefits to having a slightly older generation in their workforce who have a different preference for flexibility. With some regional sites, their workforce are happy to travel to see more of Australia. As a Tier 3 builder from a size perspective, they are impacted heavily by other organisations poaching their younger staff. We know that this is a big issue for many organisations in the industry with many struggling to retain high quality staff of all ages.

From a human capital perspective, this organisation is aware of the need to consider their older generation and have a focus on ensuring their people have clear career road maps guiding them through the latter side of their career, but note that they are not actively managing this sub-section of their workforce currently. It was acknowledged that with having greater maturity in their workforce, they could also be missing out on some innovation that comes out of the tertiary education systems.

It would be interesting, after discussing with both of these organisations, to identify any links with the average age of staff from the perspective of risk and quality of work.

PAGE 33

CONTINUED...

The survey considered the gender balance across specific administration and support service roles. From this analysis, the following roles were led predominantly by women:

• Finance, accounting and payroll roles (on average 33% of an organisation is in this role that are female and 10% male)

• Marketing, communications, events and business development roles (on average 23% of an organisation is in this role that are female and 8% male)

• Business support such as reception, personal assistants and office managers (on average 20% of an organisation is in this role that are female and 8% male)

• Human resources and recruitment (on average 13% of an organisation is in this role that are female and 3% male).

The administration and support service roles with the largest gender gaps and which are led by males on average are:

• Estimating, quantity surveying, cost planning and bid management roles (on average 63% of an organisation is in this role that are male and 15% female, average gender gap of 47%)

• Commercial management roles (on average 45% of an organisation is in this role that are male and 0% female, average gender gap of 45%)

• Safety and environmental roles (on average 32% of an organisation is in this role that are male and 4% female, average gender gap of 28%).

Based on those surveyed, it appears that majority of employees in the industry will stay with the organisation for up to five years with employee tenure greater than five years on average reflecting only 28% of the workforce on average across the participants.

A good reflection of an organisation’s culture is reflected in the tenure of its staff. Of those surveyed, the average tenure of employees was 4.5 years with the results ranging from between 2.0 years to 6.5 years as detailed in the graph below.

AVERAGE TENURE OF SALARIED STAFF

BREAKDOWN OF SALARIED STAFF BY TENURE

0 1 2 3 4 5 6 7Years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

<2 Years Between 2 to 5 years

PARTICIPANTS

Between 5 to 10 years >10 Years

PAGE 34

Driving growth, innovation and productivity in the workplace is undeniably driven by diversity. Organisations that prioritise diversity and inclusiveness at all levels - especially in leadership - lead within their industries, because they focus strongly on creating rich learning environments and positive cultures necessary for fostering ideation and innovation.

The BDO Construction survey found that the majority of participants are challenged by attracting, retaining and developing talent. Overall, there is historical lack of diversity within the entire construction industry and interestingly, only 58% of those surveyed have a diversity and inclusiveness (D&I) policy.

Having the right D&I policy and initiatives in place is a vital step for setting the ‘tone at the top' that diversity is important and a priority to be considered in all areas of the businesses, such as in the recruitment process. Like many construction companies today, they are looking to attract quality talent, especially when it comes to specialist skills, they need to internally reflect the values and diversity of the talent they are looking to attract.

One topical issue in the construction industry right now is gender balance, which lags behind other industries when it comes to its representation of women, especially in senior management. This low representation of women may discourage talented women with the desired skills from applying, as they may not feel they will be heard, nor believe there is opportunity

for career growth. This under-representation is further exacerbated by the notable gender pay gap highlighted in the survey – it is difficult to both attract and retain female talent if they are under-remunerated in comparison to their male peers.

These issues may also have a flow-effect for future talent, with women not pursuing an education or career in construction given the male-dominance, making it viewed as inaccessible to younger women.

Construction companies need to critically review their workplace culture, leadership and businesses practices to identify areas that may be hindering their ability to attract and retain female talent. These reviews could include the recruitment processes, career development programs, workplace flexibility, remuneration and incentives at the least, and could expand to review the broader operating model.

It’s also important to note that these issues of under-representation of certain groups in the construction industry are not limited to gender but apply to ethnicity, ability and age diversity. Another challenge highlighted in the survey was the management of millennial employees – an understandable issue given the average industry age is quite high and there are often different attitudes and values between age groups. This could also suggest that there may be some barriers to younger people entering and staying in the industry. In the medium to longer

term, this poses a significant issue for companies in looking to attract new technical and technological skills – and the longevity of the business. A focus, therefore, on creating a workplace culture that values knowledge and skill sharing from both the top-down and bottom-up as well as encouraging mentoring to help bridge the ‘culture’ gap, plus driving productivity as a result of new ways of thinking.

At the end of the day, if there is only one type of leader in your company, it’s almost certain that you will only attract and retain one type of employee. Therefore, it’s critical from both an innovation and growth perspective construction companies should become leaders in focusing on building a diverse culture and leadership team to attract and retain top tier talent.

INSIGHTS - PEOPLE

Construction companies need to critically review their workplace culture, leadership and businesses practices to identify areas that may be hindering their ability to attract and retain female talent.

JENINE WATERS Partner, People Advisory

PAGE 35

EMPLOYEE BENEFITS

From the surveyed participants, the majority of organisations offered benefits for motor vehicles (paid for, leased or allowances), additional leave, incentive scheme / bonuses (contractual and/or discretionary), subsidised tertiary education and working from home or work hub arrangements. A small number of participants also offered other benefits to staff in the form of health and wellbeing benefits (gym, club membership, etc.), discounted financial products and additional employee superannuation.

75% of the surveyed participants had a paid parental leave policy in place and those policies were diverse across the participants ranging from 1 week to 18 weeks in total (one of which was based on tenure). The participants that had a paid parental leave policy also provided leave to the secondary care giver of between 1-2 weeks.

When considering incentive schemes across the various roles in the organisations, it appears that it is most likely for senior and junior project managers, construction managers and general managers to have access to these incentives. Across the participants surveyed, the common incentives used are annual bonus and project completion bonus structures. Incentives that are less common include equity participation (which are only provided to senior estimators, commercial managers, construction managers and general managers based on surveyed participants’ responses).

0

2

4

6

8

10

12

Motor vehicle (paid for/lease)

Addi�onal leave

Discounted financial products (home loans, financial advice)

Incen�ve scheme/bonus (contractual)

Addi�onal employer superannua�on contribu�ons

Child care allowance

Motor vehicle allowance

Health and wellbeing benefits (gym/club membership, other)

Incen�ve scheme/bonus (discre�onary)

Subsidised ter�ary educa�onWorking from home or a work hub

EMPLOYEE BENEFITS OFFERED

PAGE 36

CONTINUED...

Staff culture is also impacted by the programs available to staff. All participants surveyed offer some form of program to motivate and retain staff as detailed in the summary below.

Even though 100% of survey participants noted that they provide flex time and/or flexible working arrangements to staff, not all participants noted that they have a flexible working policy in place (18% did not).

Specifically, on flexible working arrangements, only 55% of participants surveyed used formalised arrangements (i.e. compressed hours, flexitime, split shifts, variable hours, etc.) and all participants offered staff with flexible leave options (purchased leave, leave without pay, personal and carers leave, career break, TOIL, etc.).

To assist in developing junior staff, all participant respondents noted that they provided a cadetship program whereas only 50% offer apprenticeships.

% of Par�cipants

Ad-hoc / Informal Formal Flexible Location Flexible Hours Flexible Leave82% 55% 82% 73% 100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

100%

50%

Cadet program

Apprenticeships

FLEXIBLE WORKING POLICY?

Health andwellbeing

Performancemanagement

system

Cascadinggoals to

organisationpriorities/

performance

Mentoring Careerdevelopment

Flexibleworking Leadership Relocation

Permanentresidency

sponsorship

% of Par�cipants

75% 88% 38% 63% 88% 100% 88% 50% 88%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

STAFF PROGRAMS

FLEXIBLE WORKING ARRANGEMENTS

TRAINEESHIP PROGRAMSNO18%

YES82%

PAGE 37

MANAGING PEOPLE

The majority (55%) of respondents noted that they have an annual performance management system in place with only 9% responding that they do not have a performance management system in place at all. For those that responded to having a performance management system, 11% consider it to be ineffective and at the other end of the scale 11% considered them to be highly effective.

FREQUENCY OF PERFORMANCE MANAGEMENT SYSTEM

18%

18%

9%

55%

Annual

Six monthly

Monthly

More frequent/ as required

We do not have a performance management system in place

EFFECTIVENESS OF PERFORMANCE MANAGEMENT SYSTEM

33%

11%

45%

Highly effective

Reasonably effective

Somewhat effective

Ineffective

11%

Attrition is a key metric of any organisation's culture, some key employee turnover metrics reported have been depicted on the following page. The participants noted that the most comon causes of attrition (in order) are:

Lack of career development or opportunity

Work/life balance

Remuneration

Personal reasons

Relocation

Change of industry.

5

6

2

1

4

3

PAGE 38

CONTINUED...

FY19 OVERALL VOLUNTARY TURNOVER RATE (22%)

FY19 OVERALL VOLUNTARY TURNOVER RATE IN FIRST 12 MONTHS (6%)

FY19 TURNOVER OF LEADERSHIP OR SENIOR ROLES (6%)

FY19 FEMALE EMPLOYEE TURNOVER (10%)

FY19 VOLUNTARY STAFF TURNOVER DESCRIBED AS 'NON-REGRETTABLE' (12%)

1 2 3 4 5 6 7 8 9 10 11 12 16 17 18 190 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41%

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 191 2 30 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37%

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 191 2 30 20 21 22 23 24 25 26%

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 191 2 30 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34%

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 191 2 30 20 21 22 23 24 25 26 27 28 29 30 31 32 33%

PAGE 39

PEOPLE OUTLOOK

For people risks and challenges, the most important for the participants (in order) are:

Interestingly, the lack of available talent, may be correlated to the gender gap noted in significantly less females in supported educational courses (e.g. TAFE courses) as noted earlier in the report.

The survey participants consider the following to be the top priorities for human capital management (in order):

Lack of available talent

Workload and work demand

Lack of specialist skills

Lack of soft skills

Not being able to provide suitable career development

Challenge of managing millennial generation employees

Speed or degree of change.

Leadership and development

Recruitment and workforce planning

Providing development and career opportunities

Providing work / life balance opportunities for staff

Culture and engagement activities

Succession planning

Remuneration and benefits

Changes management and lifting staff productivity

Legislative change and industrial relations.

5

5

6

6

7

7

8

9

2

2

1

14

4

3

3

PAGE 40

INDUSTRIAL RELATIONS

Of the respondents in the survey, 100% were members of the Master Builders Association (MBA) with majority of participants considering that the MBA was reasonably effective in managing industrial matters.

From the responses received, all participants noted that they were compliant with the Building Code 2016 (Commonwealth).

The participants were very diverse in responses to their view on the outlook of industrial relations for the coming 12-month period (pre-COVID-19) with Victoria being the only state noted to have only a consistency in anticipated modest volatility.

This is inconsistent with the trend in the last 12 months whereby in all states, majority of respondents had on average one to three days of work stoppage due to industrial disputes in each state, which suggests the environment was considered to be fairly stable.

EFFECTIVENESS OF THE MBA

25%

75%

Highly effective

Reasonably effective

Somewhat effective

Not at all effective

NSW VIC QLD

29% 28%

43%

20% 20%

60%

33% 34%

33%

Little to no volatility

Modest volatility

Severe volatility

33% 34%

33%

Little to no volatility

Modest volatility

Severe volatility

33% 34%

33%

Little to no volatility

Modest volatility

Severe volatility

33% 34%

33%

Little to no volatility

Modest volatility

Severe volatility

PAGE 41

ESTIMATING

Estimating and successful tendering is important to the effective operations of a company in the construction industry. The survey participants reported that the forecasted cost of estimating operations as a percentage of revenue for 2020 is on average 0.99%.

From the participants surveyed, the average tender success rate is on average 33% when based on the number of projects and 28% when based on the value of projects tendered. This suggests that the larger projects are less successful in the tender process for the participants. This response is reflective of total estimating volumes of between $750M to $4,700M.

The majority of participants either utilised Bid Contender and Estimate One (software applications) to distribute tender documents at the time of tendering.

INTERVIEW INSIGHTS:

When in the tender process, one organisation attributes its successful win rate to ‘picking its battles’ with a strict go-no-go strategy with consideration to the scope of works and the competitors in the running on the panel. A key to keeping the bid teams in check is keeping them accountable to a tendering budget.

37%

37%

13%

13%Estimate One

Bid Contender

Various

Procore

SOFTWARE APPLICATIONS

PAGE 42

QUALITY

Maintaining a high level of quality in the organisation is very important to managing reputational risk in the construction industry. Particularly recently in the residential sector where some issues of quality on the East Coast of Australia has significantly impacted the rate of sales and damaged the reputation of the industry as a whole.

Of the respondents in the survey, 57% reported that they had a dedicated quality management personnel that was separate from safety, environmental or other project or corporate personnel. The reported average forecasted cost of quality operations as a percentage of revenue for 2020 is 0.4%.

All of the participants in the survey responded that they consistently measure (> 80% of completed projects) projected quality outcomes. Project quality for the respondents is tracked using various methods detailed below (in order of methods mostly used to least used):

Participants also noted that quality is tracked through internal quality audit processes, using a net promotor score, tracking number of defects on project completion or agreed date post practical completion, tracking on time delivery of jobs, provision of O&M manuals at handover, and training on the use of facilities within an agreed timeframe.

The cause of poor quality was ranked by the participants (in order of importance):

Client satisfaction survey

Project team’s self-assessment of quality

Program over-runs due to poor quality workmanship

Consultant satisfaction surveys

Poor choice of subcontractors

Ineffective progressive verification of construction

Poor supervision and knowledge of site staff resources

Poor quality management systems of subcontractors and suppliers

Poorly documented drawings and specifications (client’s consultants)

Insufficient staff supervision resources

Poorly documented drawings and specifications (contractors’ consultants)

Quality being compromised to achieve program or from ineffective scheduling

Delayed responses in processing requests for information

Poor interpretation of client quality expectations.

Subcontractor or other stakeholder surveys

Cost of defect rectification

Cost of re-work

Quality frequency rate.

5

2

27

1

1 6

5

7

6

84

4

3

3

8

9

10

DEDICATED QUALITY MANAGEMENT PERSONNEL?

NO43%

YES57%

PAGE 43

REPORTING

The forecasted cost of finance operations as a percentage of revenue in 2020 was on average 0.25% across the participants. From a reporting perspective, survey participants provided details on the processing time in working days (not elapsed time) for the following reporting activities:

There were no specific trends in audit fees across the participants with fees ranging between $48,000 and $161,000.

Majority of participants surveyed rated the effectiveness of their finance team’s contribution to the management of cash and paying creditors process and the transaction processing process (AP, AR, GL, payroll, etc.) as being ‘Above Acceptable Standards’.

The participants on average rated (where applicable), the finance teams’ contribution to the following processes as being at an ‘Acceptable Standard’:

• Contributing to the planning, budgeting and forecasting processes

• Project financial forecasting

• Monthly management reporting and business forecasting

• Providing strategic business advice regarding performance improvements

• Providing business and commercial operational advice to the organisation

• Business systems development, process improvement, workflow methodologies, process collaboration systems

• Managing insurance programs

• Managing regulatory compliance

• Managing pre-tender and tender risk (where appropriate)

• Managing other commercial risks and internal controls (where appropriate).

The finance team’s priorities (in order of importance) for participants surveyed were:

Managing commercial risks / ensuring observance of internal controls

Improving reliability and quality of project forecasting and reporting

Improving the reliability and quality of corporate-wide forecasting and reporting

Balancing organisational risk and opportunity when tendering and negotiating new business

Improving project cost controls

Collaboration and communicating effectively with other areas of the business

Integrating accounting and reporting systems

Keeping up with and investing in new IT systems

Reducing time and effort required to prepare credible project forecasts and management reports

Finding and retaining staff

Improving overhead cost control

Reducing time and effort required to prepare credible business forecasts and management reports.

1

2

3

4

5

6

7

8

9

10

11

12

MEDIAN FIXED SALARY BY ROLE Monthly Financial Reporting Package

Sign Annual Audited Financial Statements by

Auditor

Annual Business Plan / Budget

Average No. of Working Days 13 40 29

Median No. of Working Days 6 23 30

PAGE 44

FINANCING

Of those surveyed, the principal banking service provider is Westpac. All survey participants also use surety bonds (mostly underwritten by Vero).

Participants in the survey also noted that they are not expecting much change in banking and surety bond conditions in the next 12 months.

INTERVIEW INSIGHTS:

We enquired with one of the organisations that is expecting the finance industry and conditions to tighten in the next 12 months and identified that this response was driven by the sector that they mostly operate in (aged care) which has been heavily impacted by the royal commission. They have observed that finance institutions are sensitive to disruptions within the economy and in this case, has resulted in taking longer to receive funding in some cases.

In a similar vein, it will be interesting to see how conditions are impacted by COVID-19 and how the building code may be impacted going forward. External economic impacts not only change the finance options available to organisations, but it also can change the business models currently operating in the construction industry.

The participants also note that clients have been paying ‘about the same’ in respect to debt/cash collections compared with 12 months ago. However, when compared with 12 months ago, 50% noted that there is some demand from subcontractors for shorter payment terms. None of the respondents in the survey have a trade credit insurance policy covering all receivables.

The majority survey participants (> 85%) consider the following events to be potentially under insured or uninsured risks as being of some concern or higher:

• Subcontractor insolvency;

• Social engineering and payment fraud; and

• Cybercrime.

PRINCIPAL BANKING SERVICES PROVIDER

EXPECTED DEBT COLLECTION

FORECASTED BANKING CONDITIONS

FORECASTED SURETY BOND CONDITIONS

SHORTER SUBCONTRACTOR PAYMENT TERMS

ANZ

CBA

NAB

Macquarie

St George

Other

Westpac

38%

25%

25%

12%

87%

13%

About the same

Tightening

Loosening

80%

10%

10% About the same

Longer (worse)

Shorter (better)

Tightening

50%

25% 25%About the same

Some demand forshorter payment terms

Much greater demand for shorter payment terms

10%

90%

About the same

Tightening

Loosening

PAGE 45

CYBERCRIME

Although cybercrime is considered to be a concern in the majority of organisations surveyed, it is surprising to note that 63% of the participants surveyed do not have a cybercrime insurance policy, particularly given that 20% of participants had been subject to cybercrime in the past 12 months.

DOES YOUR ORGANISATION HAVE A CYBERCRIME INSURANCE POLICY?

HAS YOUR ORGANISATION BEEN SUBJECT TO CYBERCRIME IN THE PAST 12 MONTHS?

NO63%

YES37%

YES20%

NO80%

PAGE 46

Cybersecurity remains a key concern across industries and to insulate themselves from increased threat, construction companies should be looking at building a cyber resilience strategy. While it’s getting harder to maintain total control over the likelihood of a cyber event due to the changing technology landscape, a cyber resilience strategy will help manage the impact of an incident.

By implementing the right controls and testing them thoroughly to ensure they are sufficient, organisations have a better chance of recovering from an incident and ensuring business continuity – decreasing the overall impact on their finances and reputation. Construction companies should be assessing the potential cost of a cyber incident and the most effective ways to avoid it.

Based on the results of the Construction Survey 2020 and aligning these with the recently released BDO AUSCERT Cybersecurity Survey 2019, there are two key areas where key decision-makers can be taking a proactive approach to threat-based cybersecurity in their mission to establish resilience – this involves implementing cyber insurance and taking an inward-looking approach to training staff at all levels.

CYBER INSURANCE

The BDO construction survey results show that of those surveyed, was 63% of those surveyed in the Construction report do not have a cybercrime insurance policy.

In our experience, not adopting a cyber insurance policy is a strong indicator that those businesses haven’t qualitatively assessed the potential cost of a cyber incident and the most effective ways to avoid one. This occurs because there is a lack of awareness that this type of insurance exists, or there is a belief that it’s not needed with other policies such as self-insuring, or being covered under another policy will suffice.

These findings closely correlate with the number of cyber incidents experienced, suggesting that there may be uncertainty if they had or had not suffered a cyber attack.

STAFF TRAINING

The willingness and capability for organisations to recognise and adjust to the modern way of operating will be critical to the future of construction. This acceptance is evident in the number of participants who expressed an increase in the uptake of technology moving forward. Cybersecurity education, training, and awareness among employees should go hand-in-hand with the implementation of technologies and be consistently reviewed.

In recent years, organisations have been highly concerned about the risk of third-party data breaches, often prioritising it as cyber risk. In response, many organisations are ensuring they are assessing the risks of their third-party security through audits. This is reflected in the findings of this report with

several participants undertaking a third-party audit at least annually; and in the BDO AUSCERT Cyber security survey, which showed approximately 60% of organisations across all industries are actively auditing, risk assessing, and setting baselines for their supply chain’s cybersecurity. Given the complex nature of the construction industries' supply chains, this is a positive finding. However, while supply chain risk is important, our BDO AUSCERT cyber survey’s found that data breaches are more likely to be caused by trusted insiders – such as a contractor working in the office, or a supplier with internal access to the network, as opposed to an intrusion of a vendor’s networks alone. In particular, the prevalence of Business Email Compromise and Payment Redirection Fraud are areas where businesses should be investing time, resources and funds to manage risks.

With this in mind, construction companies must look internally to address issues where their infrastructure may be compromised. Given that many companies lack a resilience strategy, there is an identifiable gap in staff training and education about the safe use of technology.

INSIGHTS - CYBERCRIME

LEON FOUCHE National Leader for Cybersecurity

Download the BDO AUSCERT Cybersecurity Survey 2019

PAGE 47

INFORMATION TECHNOLOGY

The forecasted cost of information technology (IT) operations for 2020 as a percentage of revenue is expected to be 0.42% based on the responses from participants.

Survey respondents are also expecting the cost of IT capital expenditure for 2020 as a percentage of revenue to be 0.17%. This is also reflected in budgeting whereby the average estimated percentage of the organisation’s 2020 budget dedicated to IT systems innovation and development (as opposed to ‘business as usual’ expenditure) is 14%.

We can see that more than half of the organisations surveyed are using new technology to manage safety with initiatives around web-based safety management software, software for management, training and compliance, as well as automation of safety reporting.

A participant in the survey also noted that they have Project Simpel and Sine Pro, which has been used on a sample of projects to assist the process of site inductions and plant management. They noted that the software is creating efficiencies and provides accurate up to date information regarding licencing and permits as well as provides maintenance regimes for mobile plant.

Another participant noted that the organisation is adopting the Sign On Site (SOS) contractor site access and induction platform for new projects.

75% of the survey participants noted that they use more than one document management system.

The majority of survey participants (50%) noted that they will annually perform third party intrusion testing and network security audits. 33% of participants reported that they do not perform this testing or have such an audit program.

DOES YOUR ORGANISATION USE MORE THAN ONE DOCUMENT MANAGEMENT SYSTEM?

THE PREFERRED DOCUMENT MANAGEMENT SYSTEM

FREQUENCY OF THIRD PARTY INTRUSION TESTING AND NETWORK SECURITY AUDITS

YES75%

NO25%

40%

10%

10% 10%

30%

Custom Developed

Procore

Aconex

Teambinder

iTWOcx

33%

17%

50%

Monthly

Quarterly

Six monthly

Annually

Never

PAGE 48

The construction industry’s interest in the investment of IT systems innovation and development is evident in the survey findings, which show the average percentage of the organisations expenditure for the 2020 budget is 14%.

With the impact of COVID-19, many construction businesses are grappling with how they can bring their IT plans forward, or quickly adapt to new technologies, given that there’s an expectation that this disruption could continue for at least six months.

With social distancing measures in place on construction sites, construction operators are having to quickly adapt their work practices and culture, to align with government directives, whilst also looking after the wellbeing of their staff.

It is with this backdrop that we are seeing construction owners take innovative measures to adapt to working from home, keeping workers safe onsite and creating efficiencies through the deployment of technologies.

For those who are still trying to understand how they can fully harness these new ways of working, there are actions they can take in the immediate term. However, they should also be looking at how they can further adapt these practices post-covid19 to remain competitive.

The top eight considerations to undertake now are highlighted below:

1. RAPIDLY IMPLEMENT FLEXIBLE WORKING CAPABILITIES

As social distancing is further implemented, every business operational model will need to change. The government has indicated that further measurements will come to construction industry, so taking pre-emptive action is critical. On a positive note, this provides an opportunity to seriously enhance your flexible working capabilities for not only the current situation, but to meet future requirements.

IT leaders need to provide the tools and frameworks for businesses to utilise collaboration platforms such as Skype, GoToMeeting, Zoom and Microsoft Teams. If you don’t currently provide these tools to your business, you need to assess the best tool for your requirements and develop an implementation plan ASAP.

2. BUILD YOUR DASHBTOARD

Monitoring financial performance and cash flows will be critical over the next six plus months. Management will need to pay attention to obtaining timely and accurate financial information in order to recognise any reduction in financial performance and implement corrective action in a timely manner.

As we look to manage our businesses in different ways, through challenges and new ways of operating, we must focus on establishing data driven decision making.

Leveraging existing data and creating an environment to collate, sort and report, will enable you to understand the overall position of your business. If your business is faced with sharing large, complex spreadsheets to determine performance, now is the time to make that investment in a single Microsoft Power BI or Tableau dashboard.

3. UPDATE YOUR SERVICES STRATEGY

For the next few months, the construction industry will need to work through how they deliver on projects more digitally. If you had a digital service strategy, spend some time refining it. If you don’t have a strategy, it’s time to prioritise putting one together. As a starting point, understand what digital services you currently offer, and how you can adapt to meet your stakeholders needs.

INSIGHTS - TECHNOLOGY

PAGE 49

4. USE IT AS A MARKET DIFFERENTIATOR

We are already seeing businesses whose systems are unable to cope in a socially distanced world, but we are also seeing innovative business owners implementing ways to keep operating in an increasingly restricted society.

During the next 12 months, IT systems and capabilities will be a differentiator, contributing to determining which businesses survive or thrive in the circumstances and those that don’t. IT investment will be essential, not discretionary.

5. REVISIT YOUR SUPPLIER AND SERVICE AGREEMENTS

Most businesses will have supplier and support agreements that have been in place for a number of years and are rarely looked at. Now is the time to review these agreements.

These reviews should be about driving greater value out of what has been agreed and making them viable for longer, for your business and theirs, not about saving money – this will serve your business during difficult times.

6. ACCEPT THAT THE WORLD WILL BE DIFFERENT ONCE THIS HAS PASSED

Although we can’t predict what the world will look like once the pandemic has run its course, it is likely that organisations with agile and scalable IT systems will be in a very strong, or stronger, position than others. If the world’s economy significantly shifts, and your business can’t move fast enough, it might be in danger.

7. BE ALERT TO CYBER RISKS

With turmoil comes opportunities and no one identifies these faster or better than cyber-attack groups. If you have quickly implemented a new work model to meet social distancing requirements complete a risk assessment. Understand what risks might now be embedded in your business due to a disbursed workforce and keep your compliance requirements front of mind. The construction industry already operates in a high-risk environment when it comes to safety more generally, and therefore are more attune to these needs than other industries. Look at strategies such as training that you already use to implement safe work practices and build these to you cyber resilience program.

Now is also the time to ensure that your IT change management process is consistently applied and that all changes to your infrastructure are assessed for potential cyber risks. Don’t open the door to attacks by implementing changes in haste.

8. ASK FOR HELP

Above all, don’t be afraid to take advice. Now is the time to consult your IT advisor to help your business withstand these tough economic times, our experienced team is always available to discuss your needs.

CONTINUED...

NICK KERVIN National Leader for Technology

PAGE 50

SUPPLY CHAIN

From the participants surveyed, only 12% noted that they had a centralised purchasing and subcontractor procurement function. Furthermore, 25% of the participants reported that they undertake single source purchasing or subcontractor procurement (these were in respect to sourcing all materials, trades, or specifically for rubbish and property plant and equipment supplies).

It appears that this is common practice in the industry, with 75% of respondents noting that they offer shortened payment terms in exchange for discounted pricing from suppliers and subcontractors as part of the regular accounts payable process (as opposed to at the time when the original supply agreement was entered into).

YES12%

NO88%

YES25%

NO75%

CENTRALISED PURCHASING/ SUBCONTRACTOR PROCUREMENT FUNCTION?

YES75%

NO25%

SHORTENED PAYMENT TERMS IN EXCHANGE FOR SUPPLIER / SUBCONTRACTOR DISCOUNT?

SINGLE SOURCE PURCHASING OR SUBCONTRACTOR PROCUREMENT?

PAGE 51

CONTINUED...

All the participants reported taking steps to manage their subcontractor risk. The majority (75%), undertake some form of ad-hoc assessment of the financial solvency of subcontractors. Additionally, all participants conduct some form of performance review of their subcontractors with 50% of participants in the survey performing reviews throughout the life of the subcontractor works and at their completion.

The other 50% conduct subcontractor performance reviews only at work completion.

In the last 12 months, 40% of the surveyed participants had suffered a financial loss due to subcontractor or supplier insolvency. The financial impact of these losses varied from less than $50,000 up to $500,000.

13%

12% 12%

75%

All material

Only when new and material

Ad-hoc

Never

50%50%

Throughout and at completion

Only at completion

Not performed

PERFORMANCE REVIEWS OF SUBCONTRACTOR PERFORMANCE

FINANCIAL ASSESSMENT OF CONTRACTORS

YES40%

NO60%

FINANCIAL LOSS DUE TO SUBCONTRACTOR/SUPPLIER INSOLVENCY

PAGE 52

Those operating in the construction industry are acutely aware that their supply chain networks are an area that they can’t afford to overlook, particularly around subcontractor and supplier arrangements. Contractors who rely on subcontractors to perform work should be mindful of insolvency issues which are a systemic issue in construction.

Insolvency in the construction supply chain can be detrimental to project outcomes, ultimately increasing costs and delaying project timelines. Over the past decade, the construction industry has accounted for approximately a quarter (20-25%) of all insolvencies in Australia. While there have been several legislative attempts to overcome phoenix operators and impose penalities for directors, the issues continue to occur.

Given the historical context and based on the findings of this survey, participants would do well in firming up their processes for assessing the financial viability of their subcontractors and suppliers.

While all surveyed participants undertake some kind of contractor due diligence, in 75% of cases, it is often adhoc. In the last 12 months, 50% of those surveyed said they only undertook performance reviews when work was completed. Furthermore, 40% of the surveyed participants had suffered a financial loss due to subcontractor or supplier insolvency. The financial impact of these losses varied from less than $50,000 up to $500,000.

Preventative measures to manage subcontractor and supplier risk should be a priority. This involves taking the appropriate steps before entering contracts, during a contract period and after the contracting process to protect from credit risks and counterparty insolvency.

You should also protect yourself by registering each of your interests on the Personal Property Securities Register (PPSR) and/or making sure you get credit Insurance where possible. This is critical for construction where plants and equipment are one of the highest overheads for construction businesses.

Rather than waiting until the end of the process to perform an assessment, operators should be undertaking a pre-contract due diligence. When entering agreements, the approach should be to think more like a bank, by ensuring a holistic view of the business is taken, and that you aren’t making decisions in the absence of financial information.

This entails assessing the various risks associated with the contractors, by taking a look at their size, structure and balance sheets, alongside their prior performance and experience in delivering similar sized piece of work. For example, a small business operator typically has more risk than a government subcontractor.

Given the competitive and fast moving nature of construction, when assessing contractors cash flow and balance sheets, your judgement should not only be based on historical evidence

but also forecasts. Warning signs of insolvency may include a weak balance sheet with limited liquid assets, a net asset deficit, a growing trade creditor balance, high turnover of senior personel or something as simple as a quote that seems too good to be true.

INSIGHTS - SUPPLY CHAIN

DUNCAN CLUBB Partner, Business Restructuring

Now more than ever, construction contractors should be assessing their contracts and the impact Coronavirus will have on their current arrangements - due to a slow-down from changed practices and reduced productivity. While many sites are doing the right thing by slowing down to ensure the safety of their people; technically they may find themselves in breach of contracts if project timelines go over their agreed arrangements. Unless amendments are made now, as soon as a liquidated damages provision is instigated under a contract – this will need to be shown on your books and if there is significant amount of liquidation damages on your books, you may be trading while insolvent.

PAGE 53PAGE 53

During the beginning of the 2020 calendar year, the East Coast of Australia was impacted significantly by the bushfires, floods and now COVID-19. When the survey was taken in February 2020, 17% of the participants responded that they had been affected by the recent bushfire crisis:

IMPACT FROM BUSHFIRE CRISIS

ECONOMIC IMPACTS

Only 12% of participants consider themselves to be fully compliant with the Commonwealth Modern Slavery Legislation. Although most participants have considered the legislation, they are at varying points of assessing and preparing for compliance with the legislation.

COMMONWEALTH MODERN SLAVERY LEGISLATION

INTERVIEW INSIGHTS:

On discussing these findings with one of the organisations that predicted that it may be impacted by the bushfire crisis, it was identified that the impact at the time of completing the survey, was the potential to diversify into opportunistic avenues as a result of the crisis, which with hindsight, never eventuated. With any crisis, paralleled to the COVID-19 pandemic, we are seeing businesses adapt and remain positive while facing diversities.

Fully compliant

Compliance is welladvanced

Some steps towards compliance taken

Few steps towards compliance taken

No action

12%25%

25%

38%

YES17%

NO83%

PAGE 54

INSIGHTS - SUPPLY CHAIN

The construction industry operates within a complex supply chain, relying on resources and materials from across the globe to meet the competitive demands of projects, which are often short-term. It also employs a large section of Australia’s workforce with a varying degree of skills.

The nature of construction means vulnerable citizens, such as migrant workers, students or other-low-skilled workers, are often subject to poor working conditions such as underpayment, non-payment or third-party contractors with fraudulent work practices. On short term projects - typical in construction - these types of activities are less visible and there’s a lack of oversight of monitoring and training. This is not just an off-shore issue but has been found to be occurring within smaller Australian businesses who are contracted by larger construction businesses.

Across the global supply chain, many construction businesses use raw materials and workwear from high-risk countries such as Indonesia, China and North Korea.

It’s these factors that make the construction industry a high-risk sector for the breach of human rights. It’s also why construction operators must be vigilant in their application of Australia’s recently enacted Modern Slavery Act, as they should the recently passed Whistle-blowing laws. With this increase in construction businesses responsibility, it’s important for management to consider its response to the compliance.

The Commonwealth Modern Slavery Act requires entities with annual consolidated revenue of more than AUD$100 million who are based, or operating, in Australia to comply with the Act by providing a statement on their compliance on an annual basis. The NSW Government is awaiting Legislative Council committee recommendations before progressing its response to modern slavery, but something is expected during 2020 - so now is a good time to ready your supply chain.

While entities may assume their practices are legitimate, the new laws put the complete supply chain under the spotlight. For the construction industry, labour-hire and sourcing of raw materials - whether onshore, off-shore or through a third party, must be assessed to ensure compliance.

While entities may assume their practices are legitimate, the new laws put the complete supply chain under the spotlight. For the construction industry, labour-hire and sourcing of raw materials - whether onshore, off-shore or through a third party, must be assessed to ensure compliance.

PAGE 55PAGE 55

CONTINUED...

The BDO Construction Survey highlights some stark results. Of those surveyed, only 12% of participants consider themselves to be fully compliant with the Commonwealth Modern Slavery Legislation. Although most participants have considered the legislation, they are at varying points of assessing and preparing for compliance with the legislation.

Reportable entities must take time to assess their risks to comply with Modern Slavery legislation – with reporting dates beginning from December 2020, depending on the entity’s annual financial reporting period and disclose their non-financial risk. Construction companies must be assessing their operations and supply chains, taking action to address the risks and set up mechanisms that monitor and assess those risks.

1. Assessing the potential modern slavery risks in their operations and supply chains with emphasis on high-risk geographical locations and business transactions

2. Developing and review company policies on modern slavery in operations and supply chains

3. Developing training for staff in modern slavery requirements

4. Preparing to conduct due diligence on local and global supply chains and operations

5. Reviewing supplier contracts to ensure they contain terms that are consistent with the Act

6. Taking steps to mitigate any potential modern slavery risks identified and

7. Establishing appropriate mechanisms for external and internal reporting such as a whistleblowing hotline.

A modern slavery response that addresses these key points is critical to prevent harm. Given the significant issues facing business at present, we see this as a critical period, to consider your supply chain, and put in places measures to mitigate against Modern Slavery when your workforce comes back online, which it will.

MARK GRIFFITHS Partner, Risk Advisory Services

ADAM SIMMS Partner, Forensics

PAGE 56PAGE 56

ANDRES REITH National Leader for Real Estate

and Construction, Sydney

MARK PIZZACALLA Melbourne Real Estate and

Construction Leader

NATIONAL REAL ESTATE AND CONSTRUCTION TEAM

MATTHEW LAMING Adelaide Real Estate and

Construction Leader

HUNG TRAN Brisbane Real Estate and

Construction Leader

DEAN BOYLE Perth Real Estate and Construction Leader

ELYSIA ROTHWELL Associate Director, Audit

Sydney

AUTHOR

PAGE 57

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO East Coast Partnership ABN 83 236 985 726 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO East Coast Partnership and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation.

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