The Law and the Labour Market

Keynote Address:
The Sub-contractor and Australia's Housing Industry
An Example of World Class Competitiveness

Dr Ron Silberberg

Introduction

Picket lines on building sites, standover tactics, strikes, kick backs to union officials Ä that is the picture most Australians have of Australia's building industry.

While this is the view of the commercial building industry, the picture of the housing industry is, thankfully, very different.

Australia's housing industry has been virtually free of industrial disruption, demarcation disputes, strikes and corruption.

What makes the housing industry so different from the commercial building industry?

Unlike the commercial sector, which builds under tightly-controlled unionised conditions, Australia's housing industry is a shining example of a flexible labour market in operation.

Independent subcontractors are the backbone of the housing industry.

The conditions under which subbies work to earn a living and support a family can be arduous, and their hours long, but few would sacrifice the freedom of being their own boss to become an employee of a construction company in the commercial building industry.


Development of the housing subcontract system:

The evolution of the housing subcontract system is an important case study of an industry adapting its labour arrangements to achieve greatly improved productivity in the face of a home buying market which is very price-sensitive.

Up until the late 1940s, the typical building contractor employed tradespeople in a traditional master builder-employee relationship. Subcontracting in the immediate post-war period was virtually unheard of.

The enormous post-war demand for housing, characterised by a marked preference for detached single-family housing, provided opportunities for smaller building firms to emerge.

The large, repetitious and mechanised building operations of the commercial building sector were far less applicable to a dispersed housing market which favoured customised housing projects drawing on traditional craft skills.

For smaller building firms without the continuity of work, there were mutual benefits from skilled trades being self-employed who would move between builders and jobs as and when their skills were required.

These were the foundations of the housing subcontract system.

Today, housing subcontractors would represent more than 90 per cent of workers involved in on-site home construction activity.

The modern home building company employs directly only construction supervisors and administrative or clerical staff.

The flexibility of the subcontract system, and the highly competitive nature of the home building industry, have interacted to secure a high degree of efficiency and productivity as well as tight profit margins.

There are around 25 different trades involved on-site in the building of a house.

The familiar ones are of course concreters, bricklayers, framing carpenters, plumbers, electricians, roof tilers and painters. In addition, you have the contractor who pegs out the site, backhoe operators, drainers, plasterboard fixers, plasterers, floor tilers, glaziers, the fitting out carpenter, the floor sander, the brick cleaner and finally the Hills hoist installer.

While there are as many as 25 to 30 trades involved in on-site construction, the industry has been able to avoid damaging and costly demarcation disputes. The same cannot be said of the non-residential building industry.


Advantages of the subcontract system:

The subcontract system endures for a simple but obvious reason.

It offers substantial advantages both to the builder and the subbie:

  • Subcontract prices are negotiated between builders and subcontractors before construction commences.
    • Accurate budgeting is essential because the builder has to provide to the client a fixed price contract.
    • Prices paid for subcontract work are not set by a few builders. The largest builder in Australia has about 4 percent of new homes built.
    • The predominant prices are an outcome of prevailing demand for and the availability of skilled trades.
    • Because housing demand conditions can vary sharply at the regional level, so too can prices for skilled labour.
    • The emergence at times of wide differences in earnings achievable by subbies encourages them to move from regions of low activity to areas where the demand for skilled trades is strong.
  • Home builders can adjust their workforce according to work in hand.
    • In an industry where annual production requirements can swing by anywhere between 10 and 30percent, smaller builders cannot absorb the administration and overheads of an employed workforce.
    • By comparison with commercial building, little supervision of subbies is required.
  • Subcontractors are highly self-motivated, which is reflected in their high productivity levels.
    • The amount of income subbies earn depends on their ability and preparedness to work.
  • Subbies have the independence to arrange their own work program. The number of hours they work and the pace at which they work are of their choosing.
    • It is not unusual to see subbies working on housing sites at weekends. They don't receive penalty rates for working at weekends.
    • Housing subcontractors have abandoned the protection of a union and the security of a company job for the satisfaction of relying on their own ability to succeed.
    • Their future earnings depend on establishing a reputation for quality and reliability.
    • Many trade contractors go on to establish their own home building business.
  • The housing industry is characterised by harmonious industrial relations
    • Subbies don't get paid for delays so there is a strong incentive to get on with the job.
    • According to the CSIRO, the level of unproductive time on housing sites is about 4 percent; for the unionised commercial building industry, the amount of unproductive time is 23 percent.


International comparisons:

The performance of the housing industry in Australia compares more than favourably with overseas experience.

In Europe, the relationship between the builder and the labour force is very different to that in Australia.

In Europe, most large house-building contractors are general contractors as well, and have time-paid employees sometimes with bonus incentive schemes.

Bonus schemes have been introduced in order to provide fixed-wage employees with an opportunity to improve their earnings.

The bonus-based employee structure in Europe is highly complex and quite costly to administer and supervise.

The costs of administering Australia's housing industry are, at most, half those in the housing industry in the United Kingdom and Europe.

In order to measure levels of labour productivity in Australia's housing industry, the CSIRO's division of building research carried out field studies of the actual construction process by means of closed-circuit video in a truck.

Observers were on the site for the duration of the construction process.

The results show that it took about 9.5 person-hours per square metre of conventionally built homes. For volume builders operating at peak efficiency the labour input was 5.5 to 6 person-hours per square metre of housing.

In the United Kingdom, which is dominated by a handful of general construction companies, the same square metre of conventional housing would take more than 20 hours.


Productivity in Dwelling

Construction:

Australia Productivity (man hours per square metre)

Australia 5.5-6.0 volume built housing
9.5 average for custom built housing
United Kingdom 20.2 conventional
13.8 system built
United States 9.2 conventional
6.5 system built
Netherlands 23.7 conventional
5.9 system built
Sweden 11.3-12.7
Yugoslavia 21.5-46.0

Source: CSIRO


Even for factory-produced housing in the United Kingdom, nearly 14 hours of on-site labour is required for each square metre of dwelling.

While there's not a great deal of difference in the case of conventional housing between Australia and the United States, Australia's subbies are more efficient on volume-built housing than their subcontractor counterparts in the USA.

The reasons why the housing subcontract system predominates in Australia is obvious Ä it works for builders, subcontractors and home buyers.

Even in Europe, subcontracting of labour for private housing appears to be on the increase.


Threats to the Subcontract System:

Although the building unions now concede that the housing subcontract system is entrenched, the union movement has tried to regulate housing subcontractors through price-setting tribunals.

The list of cases is very long. In the interests of brevity only the major ones will be summarised:

    1. In 1978 Mr Justice Alley dismissed the BWIU's claim to have minimum piece-work rates and conditions imposed on subcontract bricklayers through the National Award.

    Justice Alley made the following observations:

    "I am satisfied that the industry has been conducted for years on the basis that the operators are subcontractors ... I have formed the view that the basic object of the application is not the protection of pieceworker employees, but the regulation of subcontract conditions. The union seeks that the Commission do indirectly what it has no power to do directly, namely the prescription of conditions as to matters which do not pertain to the relations of employers and employees." (CNo. 4256 of 1977 Print D7792)

    2. In 1979 the Victorian Society of Operative Bricklayers sought to have minimum contract rates included in the Victorian Bricklayers Wages Board determination. The Wages Board rejected the application.

    3. In 1980 the South Australian Branch of the Operative Plasterers and Plaster Workers' Federation of Australia sought to vary the building trades (Plasterers and Terrazzo Workers) Construction Award to provide that subcontractors be engaged under the terms and conditions of the Award.

    The Industrial Commission, in dismissing the application, made the following comments:

    "The evidence substantially reveals that persons engaged to perform given tasks preferred to be independent contractors rather than "employees" bound by award prescriptions notwithstanding the benefits they may enjoy in accordance with the conditions of the award. That is, sick leave, payment for public holidays, long service leave and annual leave."

    4. In 1979, the most comprehensive inquiry into the subcontract system was held in New South Wales. Commissioner Burns in his report to the New South Wales Government stated:

    "It is not because of any reverence for those two concepts in `Free Enterprise' and `The Marketplace' that I am convinced that the present practice in the cottage building industry should be left alone. It is because they so obviously work."

    Commissioner Burns concluded his comments with the following statements:

    "The system works. It serves the industry and the public well and, I am convinced, offers a decent and satisfactory lifestyle for the self-employed tradesman.

    "I believe that the present practice has infinitely more advantages than disadvantages and that the effects of the labour only, or substantially labour only, system on both the industry and the workers within the industry are better than anything that might be artificially imposed from outside."

    The Burns Report represented an unequivocal endorsement of the subcontract system within the housing industry.

But of continuing concern is the erosion of the independent status of subcontractors.

In many cases these efforts have been aided and abetted by State Governments through amendments to legislation to deem subcontractors as employees for the purposes of workers compensation, health and safety and payroll tax.

One of the more common complaints levelled by the Unions against the subcontract system is that subcontractors evade personal income tax through the cash economy.

However, in 1983 the Commonwealth introduced a system of source deductions for prescribed payments to contractors in the building industry.

After the new system settled down most subcontractors found that it actually assisted them in scheduling the payment of their tax liability.

The prescribed payments system is now accepted by builders and subcontractors.


Attitudes of Subcontractors:

In the face of concerted efforts by the building unions to unionise and regulate subcontractors the housing industry in the late 1980s commissioned a survey of housing subcontractors.

The findings from the national survey provided no comfort for those who seek to regulate the conditions of employment in the industry.

The survey bore out that subbies see themselves as small businesses for whom freedom and independence are essential.

Many liked the excitement of working in a free market and the opportunity to make a good income when times were good.

On average, subbies worked a 50 hour week, mainly in on-site construction as well as quoting and tending to paperwork.

They viewed themselves to be financially fortunate and to be earning better than award-based employees. Most accepted market fluctuations as part of their job.

Fears of unionisation abounded. There was a strongly held view that unionisation would make housing more costly and reduce the amount of work available.

Although subbies were lukewarm on the need for representation, they viewed the threat of unionisation as a sufficient incentive to mobilise other subbies to join an organisation which was prepared to resist greater union interference.

It would be a retrograde step to drag these highly independent people back into the world of arbitration courts, awards, union membership and industrial disputes.

The Troubleshooters Available decision has resurrected moves by the Federal Government to bring self-employed workers under the control of the Industrial Relations Commission.

Such moves, while made in the name of "protecting" workers from the supposed financial and industrial manipulation of employers, smack of compulsory unionism and a denial of free enterprise bargaining.

While Senator Cook, Minister for Industrial Relations, contends the changes would be aimed only at stopping employers from having "quasi subcontractors" and would not interfere with the genuinely self-employed, these assurances look hollow.

If the Federal Government and the union movement are worried that there is an increasing trend by employers to engage workers under contract in a bid to short-circuit the obligations of an industrial award, they should first examine why employees are happy to accept these jobs.

Could it be the attraction of being one's own boss outweighs the so-called "advantages" of union membership and Commission awards?

While the building unions have been unsuccessful in penetrating the cottage building sector of the housing industry, they have made inroads into the high-rise residential sector, particularly in Sydney and Melbourne.

Home building firms which operate in both low and high-rise housing typically are forced to establish two divisions: One based on subcontracting for their detached housing construction, and for the medium density sector, award-based employees or if subcontractors are permitted by the unions, a rate schedule has to be adhered to and other commercial site conditions.

These building companies estimate that the costs of production on a unionised housing site are 30 to 50 percent higher than on a non-unionised housing site.

But with substantial excess supply of CBD office space there will be renewed pressure from the unions to increase further their sphere of influence into medium-density housing.

This push is being encouraged by the Federal Government which wants to see large commercial construction companies enter the medium density housing sector.

Of one thing we can be sure, should commercial building practices subvert present housing subcontract arrangements, there won't be any low-income families occupying the better cities housing.

The housing subcontract system is not faultless.

But there doesn't appear to be an alternative to the subcontract system which encourages incentive, motivation and personal responsibility to the same degree.

Australia's housing industry has achieved world-class efficiency through a highly flexible labour system which has been of considerable benefit to Australia's home buying public.

It is essential to the future affordability of housing that subcontracting continues to provide a productive basis for the industry and new home buyers.

Why HR Nicholls?

More...