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NBN EBA Assessment
Overview and Conclusion

6 June 2011

Introduction

This is ICA's assessment of the standard industrial agreement that is allegedly required to be used for construction companies that build the National Broadband Network.

Primary links
  • Detailed assessment of the pattern industrial agreement.
  • Clause extracts. Main clauses of interest upon which our assessment is made.
  • Master: Contains all key details. 74 pages with 628 clauses and sub clauses
Full links are listed below.

Update 10 June 2011: NBN media coverage

$1.1 billion NBN contract awarded (1 June 2011)
NBN Co says contracts on track (5 June 2011)
NBN construction is risky business (6 June 2011)
Lateline Business (TV) questions NBN Co (6 June 2011)
NBN costs contained? (7 June 2011)
Ooops! More trouble (9 June 2011)

Background

In April this year, the tender process for the National Broadband Network construction hit a brick wall. The tenders were so costly that the NBN could not have been constructed anywhere within the $36 billion budget currently being estimated. The tender process was halted and several leading NBN Co executives resigned.

I conducted an assessment of the situation and suggested that one reason for the tender cost blow-out related to speculation that the disastrous industrial agreement at Victoria's desalination plant was flowing over to the NBN construction. The desalination agreement imposes pay and conditions way above standard construction rates. If NBN tenderers had applied the desalination agreement rates to the NBN, this would arguably increase the NBN's construction costs by some 25 per cent. NBN Co had apparently accused construction companies of price gouging whereas in fact the companies were costing prudently based on facts known at the time.

Update: Industrial agreement risk

More recently, however, it's been revealed that NBN Co and the government have worked on deals to get around the militant construction unions that have caused trouble and cost blow-outs at the Victorian desalination plant. They say that they have secured alternative industrial agreements with other unions that will deliver the NBN construction within reasonable costs. I can now reveal a further development in this continuing saga.

I've received a copy from highly placed sources of the alleged revised template industrial agreement intended to apply to all contractors who undertake the NBN rollout. I'm reliably informed that any company bidding for NBN work 'understands' that this industrial agreement is the one they will need to apply to their workforces if they win work. There's nothing official about this, of course. That's the way big business-big government-big union deal-making works in Australia. There's lots of winks and nudges, but any company putting in a tender 'knows' that if it doesn't apply the 'politically approved' union agreement, its chances of tender success are negligible. My information is that current tender preparations are based on the industrial agreement template I've received.

Observations

Assuming this to be the case, I've been able to undertake an assessment of the impact of the agreement on tenderers and the cost of the NBN construction. The following observations apply:
    a) The pay rates and conditions applicable under the agreement are generous but within a normal range expected of construction jobs in Australia. The huge overpayment evidenced in the Victorian desalination agreement is not being applied to the NBN. The pay and conditions, in themselves, should not cause uncontrollable cost blow-outs in the NBN's construction.
However
    b) Other clauses in the agreement effectively neuter any construction company's capacity to manage its workforce so as to maximise productivity and efficiency. A company must have union approval on any matter to do with the way it manages its workforce. If the union disapproves, it can declare an industrial dispute and force the company (ultimately) into compulsory arbitration. That is, any operational function is potentially subject to imposed decisions by the union or Fair Work Australia.
The consequence of point (b) above is that no construction company could be certain that it could manage the NBN rollout in a productive and efficient manner. Any imaginable thing it might do (or not do) could cause a formal industrial dispute to be triggered, resulting in uncontrolled cost blow-outs. The alternative action is to effectively hand the management of the NBN rollout to the union and to do only what the union authorises. This loss of management capacity would presumably also result in uncontrolled cost blow-outs. This situation would never be resolved and could last for the many years of the rollout programme. The cost blow-outs may not occur---but the risk is guaranteed because it is written into the enterprise agreement.

Conclusion

There is, as a consequence, only one thing that the CEO of any construction company bidding for the NBN rollout could do. Assuming that for political purposes the company must comply with the pattern industrial agreement, a cost-escalation clause would have to be written into the company's commercial agreement with NBN Co. The cost-escalation clause would ensure that where the company was prevented from managing its workforce productively and efficiently due to the industrial agreement, the associated costs would be passed on to NBN Co. If a CEO failed to ensure that his or her company was protected by such a clause, he or she would be acting irresponsibly and exposing the company to substantial known risk.

Key links

The NBN pattern industrial agreement is long, consisting of 9 documents:

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Submitted Comments

On 8 June, Michael commented:

Nice piece on the NBN 'labour template agreement'.

The big problem the NBN Co has, is that it has committed to one and only one method of delivering 100MB/sec into the home---this has cut out all forms of innovation that could reduce costs, helping to put 'downward pressure' on costs (eg. the fibre Optical Network Termination unit will be installed underneath the power box on the outside of a house---you'd think it'd make sense to share the cost of 'showing up' with the power companies who want to put in smart meters above it? There are many other innovative ways to reduce costs). Without this 'downward pressure' on costs, there is more attention given to essentially 'fixed' costs such as the labour required to do the installation. All recipes for cost blow-outs as risks are discovered and detailed during deployment. It is not going to be pretty. .