The refusal of many banks to approve construction loans for architect-administered contracts is anti-competitive and is imposing costs on consumers and small business, according to a submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The joint submission by the Australian Institute of Architects (the Institute), ArchiTeam Cooperative and the Association of Consulting Architects Australia (ACA), condemns the unfair treatment of industry-standard construction contracts by banks, which is negatively impacting construction industry competition.

The groups, which have a combined membership of almost 15,000, have identified a growing number of member complaints regarding banks refusing to approve clients’ construction loans. This has occurred primarily in the housing sector where architect-administered construction contracts have been applied. 

According to the submission, banks are refusing to lend to consumers where contracts specify an architect as the contract administrator; contracts contain provisions for monthly progress payments; progress is assessed by the architect rather than a bank appointed quantity surveyor; and contracts contain provisions for variations.

Key figures: 

• A snapshot survey conducted by the Australian Institute of Architects, ArchiTeam and the ACA revealed 175 projects with an aggregate budget of $152 million were delayed by a total of 324 months.
• The big four banks were identified as comprising 65% of reported cases of loan refusals of architect-administered contracts.
• Loan refusals predominantly impact small businesses, with 71% of impacted architecture practices employing five people or less.
• Project budgets are most commonly at the smaller end of the construction industry, with 66% of budgets under $1m and 85% under $1.5m – the average project budget is around $870,000.

‘Currently, banks are unfairly discriminating against architect-administered contracts, discouraging the professional engagement of architects and excluding them from engaging in a task for which they are specifically trained,’ said Clare Cousins, the Institute’s National President.

‘This unfair exertion of market power results in a negative financial impact on architects and their clients as well as potentially compromising the end project outcomes. It needs to change.

‘At the end of the day, Australian consumers are the ones paying for this unreasonable and discriminatory behaviour by the banks, which prevents architects from properly overseeing the projects they have been appointed to design and in many cases, to oversee and manage to ensure work is completed to the required standards.

‘If more architect-administered construction loans were approved, it would ensure that more buildings are constructed to the highest standard, designed and overseen by qualified architects, which would, on the whole, offer greater consumer protection.’

With renewed focus on building safety after the Grenfell Tower disaster and the recently released Building Confidence report, which recommended significant changes to the National Construction Code (NCC), architect-led project management should be front-of-mind.

‘Architects study at university for five years, then must undertake two years of mandatory practical experience and pass a state registration exam before being registered as Architects,’ said ACA Immediate Past President, Kieran Wong.

‘This rigorous training means architects have the expertise to carry out the role of contract administrator for these contracts and their role on-site reduces inherent risks associated with construction and improves the quality of building outcomes.

‘Unfair lending conditions ultimately remove choice for consumers, add costs and risk to construction projects for consumers and exclude architects from practicing their profession.’

ArchiTeam Directors Barbara Moje and Warwick Mihaly said while banks were entitled to manage and reduce risk, current lending standards were uninformed and discriminatory, impacting consumers and small business.

‘We trust that the Royal Commission will examine this issue thoroughly and that this will lead to change,’ they said.

‘Banks need to improve their attitude towards architect-administered construction contracts and cease forcing architects, consumers and builders to use construction contracts that create more risk to them and add project costs.

‘Industry-standard construction contracts provide a clear and contractual role for the architect to administer the project and provide considerable protections for the consumer.

‘This is in the common interest of architects, consumers, builders and the banks.’

The submission was lodged on 21 August 2018. A copy is available here.