Anyone who has any doubts about the urgency to improve productivity in public sector infrastructure construction projects need look no further than the Crossrail project for proof that change is needed – and quickly.
The news that Crossrail faces a £2bn cost overrun on its original £14.8bn budget and the planned opening date of Autumn 2019, postponed from December 2018, is now no longer viable gives a depressing example of another major public project overrun to add to a long list that includes the Olympic Stadium, HS2, The Shard and Edinburgh Trams, to name just a few.
It highlights more than ever the need for the Government’s Transforming Innovation (TIP) and Performance initiative to make a meaningful impact in improving productivity in the sector. TIP aims ultimately to lift productivity growth by the adoption of digital and manufacturing technologies and transitioning to new collaborative business models with better integrated supply chain models.
The new £600bn ten year infrastructure investment pipeline is anticipated to optimise the construction process from start to finish and the initiative aims to eventually deliver £15bn a year in productivity savings.
The programme is working to develop benchmarking and standards for projects as well as accelerating the use of modern methods of construction like offsite manufacturing and incorporating more use of digital technology and collaboration throughout the supply chain.
However, we need to recognise that it isn’t just the client’s responsibility to keep costs down and increase productivity. The key to achieving the aspirations of TIP is in releasing the expertise of the specialists in the supply chain through better collaboration and early contractual involvement. This would create the platform to adapt to better ways of working across the entire supply chain.
It’s clear that the UK economy and the construction sector is missing out on a significant amount of growth that could come from improved productivity. But it’s up to everyone in the supply chain to work together to overcome the barriers to change and deliver that improvement.
There has been much debate about the impact of Brexit on a construction industry that was already facing a severe skills shortage even before the referendum in 2016. But latest information – or lack of information – in the proposed Brexit immigration reforms suggests that there are no stated plans to allow EU nationals to take up self-employment in the UK.
This has devastating potential for UK construction, where a large proportion of the workforce is self-employed, many of whom are EU migrants providing vital skills and labour to the industry.
While plans for points based systems and special visa arrangements for skilled EU migrants are proposed by the Government, there is no indication of special arrangements being available for EU migrants who want to set up in the UK construction sector as self-employed.
The recent Migration Advisory Committee (MAC) report on European Economic Area migration fails to consider any reforms for self-employment.
It is estimated that around 41% of UK construction workers are self-employed. Unless special arrangements are put in place, post Brexit any EU national who wants to set themselves up as self-employed in the UK construction sector will have to invest £200,000 in their business, which is a huge barrier to most.
At a time when plans for infrastructure and housing require a strong pool of construction resources the Government needs to ensure that Brexit plans include special arrangements for self-employed migrants working in the sector. If not, then the result will surely be rising costs and delays on major projects which will impact communities across the country.
For the UK construction and civil engineering sectors the latest budget appears to have provided some much needed investment in infrastructure and roads which looks like good news.
An additional £420 million to local authorities to tackle potholes and repair roads along with £240 million targeted investment in transport, £37 million of it for Northern Powerhouse Rail and £16.5 million for Tees Valley, will be welcomed by many.
Additional support for apprenticeships, cutting the contribution rate by half to 5% for SMEs is a positive response to significant lobbying from business.
The official abandonment of PFI is an opportunity for the Government and public sector as a whole to reset its infrastructure procurement mechanisms and move towards genuine long-term best value rather than the historical race to the bottom culture of ‘lowest price wins’.
But can we really trust anything the Chancellor said? While taking an upbeat tone in his budget speech to Parliament the Chancellor had no choice but to mention the elephant in the room that is Brexit. He said that a no deal Brexit would require a “different response”.
With that major caveat are businesses in any position to make plans based on the budget announcement? If the UK leaves without a deal then a new budget will be required next Spring, which pretty much makes everything the Chancellor has announced entirely moot until the Brexit process resolves itself.
Businesses should really treat the latest budget as a list of good intentions but hold off from making any major changes in their planning until an agreement (or not) on Brexit.
Sadly, it’s a situation that most must be used to after two years of continued uncertainty.
Post Carillion, the temptation is to say we’ve learned the lessons and will move forward. But how likely is it that nothing will change and large Tier 1 contracts will continue to be awarded and managed as they always have been until another company fails and the whole process starts again?
The markets have been betting against the construction sector with reports of significant recent increases in short positions in some of the country’s biggest construction and outsourcing contractors.
It’s clear that continuing with the same models of business only brings higher risk than ever and the balance of reward is becoming even smaller. So if clients and contractors keep doing the same thing then the same outcome – another company failure – is inevitable.
The traditional contracting model sees all the risks passed to the sub-contract supply chain with Principle Contractors accepting the overall contract risks for a very low margin. A recent survey found that the average pre-tax profit margins for the 10 largest Principle Contractors was -0.5%. The numbers speak for themselves.
The industry needs to change its long held loyalty to a delivery model for large projects that simply isn’t working. While the ultimate solution is self-performance without the reliance on a large chain of sub-contractors, it requires a strong pipeline of projects to sustain high staffing and training costs but brings with it direct control of costs and quality. This may be achievable for midsize engineering and construction companies but unlikely for the larger Principle Contractors who are delivering large projects such as HS2.
A collaborative and transparent process between client, contractor and the client advisory team is likely to deliver genuine best value for the client along with reasonable and fair margins. A proportionate approach to contracting risk also needs to be considered, are bonds and retention required on any project? Should a contractor take process risk? We also need to consider the role of advisory teams and how to incentivize the creation of a repeatable team and process which will inevitably create improvements.
The greatest thing the construction industry has to fear is its own inability to adapt – If it doesn’t change then the cycle of large contractor failure will only continue.
In any construction project products and services account for around 80% of costs. So effective management of that element of procurement can have a significant impact on client satisfaction and contractor profitability – the desired outcome for both parties.
Traditionally in the construction industry the relationship between contractor and supplier is through products and services priced to the lowest bidder, often through separate contracts with the client.
A supplier who has been procured on lowest price against a fixed specification will always bid to do so as cheaply as possible. They are not really motivated to work in the client’s interest. In some cases even the designers and contractors have separate contracts with the client.
But longer term integrated relationships can reduce real costs while maintaining margins, incentivising efficiency in the processes as well as delivering much greater underlying value to the client. It’s a win win for client, contractors and suppliers.
Collaboration and strong relationships are key to success. Involving the designers in the supply chain is essential, along with open and transparent cost management. Many clients are now beginning to appreciate that they will achieve best value if supply chain margins are preserved. It means that the supply chain focuses on delivering value rather than working constantly to protect its margins.
Optimising process cost management and a rigorous approach to risk management will ultimately pay dividends for all.
Many of the current frameworks operating in the construction sector encourage and promote flexibility of choice to support supply chain integration.
It is an approach that is fundamental to leaving behind the race to the bottom driven by lowest cost procurement and will result in high quality infrastructure that is fit for purpose and built at best value to last.
The publication of the Government’s Hackitt Review, commissioned in the wake of the Grenfell Tower tragedy, identifies procurement as the key stage in the construction process and calls for a change in the “race to the bottom culture”. The report also recommends that procurement processes should “obtain best value, rather than lowest cost”.
This may be stark reading for many people in the UK but it doesn’t come as any surprise to the construction sector.
The astronaut John Glenn once said that when travelling through space “one thought kept crossing my mind – every part of this rocket was supplied by the lowest bidder”.
The public sector is the construction industry’s largest client and in its pursuit of best value now uses the definition “most economically advantageous tender”. But speak to most public sector procurement professionals and they will admit that all too often this translates to lowest cost bidder.
There will be times when the lowest bid does offer best value but as public sector budgets have been stressed post the 2010 banking crisis and contractors competed more aggressively as volumes of projects dried up, the natural tendency has been for many to focus totally on price, ignoring many of the associated risks.
In some cases under pressure contractors have resorted to suicide bids that are below cost, hoping that they can generate more income on contract variations. It’s a cycle that starts with the procurement and leads to projects mired in disputes, delays and, in the most extreme cases, bankrupted contractors and empty building sites.
The “lowest cost” approach is certainly not one that creates high quality buildings that are safe and will remain fit for purpose for years to come.
While the Hackitt Review identifies the problems that exist we should not forget that there are many examples of great buildings being built at genuine best value around the country.
This happens when procurement teams establish open and transparent processes that start at the bidding process and continue through the lifetime of the project. Many of today’s frameworks allow flexibility in choice of pre-qualified contractors and open book accounting policies, all of which encourage genuine best value.
There is no single “best value” model but a relationship that allows contractors to understand the wider strategic needs of their clients with continued engagement and transparency throughout the procurement is a proven approach to success.