Blog2018-06-12T14:15:06+00:00

Re-Education in Procurement Needed Realise Benefits of Offsite Construction

Of the five government departments that committed to prioritising offsite construction by 2019, three have not yet awarded any contracts with an offsite component. That’s a disappointing statistic for a government that agreed to adopt the promotion of offsite methods as one of the key recommendations of the Farmer report in 2016.

Farmer was recently reported as saying that a ‘fixation with cost’ was partly to blame in the adoption of offsite construction and that the internal teams within departments need to be re-educated around how to procure value.

While there is a recognised enthusiasm for offsite at a senior level, often the teams actually working on tenders just revert to doing things the way they’ve always been done. There is considerable inconsistency, with education and justice departments incorporating offsite into new projects but to date we’ve yet to see anything in health, defence and transport.

The benefits of offsite construction have been widely recognised for some time but it’s clear that there is less understanding of how to deliver those benefits. The challenge for many in procurement and project design is understanding the changes required to traditional processes. A new approach is needed that revises the order in which things are normally done so that offsite components can be finalised and procured early.

One of the biggest advantages from offsite, along with quality control and safety, is the cost savings from a reduced construction schedule. But for that to work it needs design work to be brought forward to the start of the process so that all of the components of the project are scheduled accurately.

Once public procurement teams look beyond lowest price to understand value, it will enable teams to recognise cost, programme and quality advantages from a collaborative approach to projects that incorporate offsite techniques.

The Government needs to understand that in order to achieve its ambitions to use more offsite construction, a programme of education is needed at an operational level so that procurement and delivery teams understand how to translate ambition into reality.

OFFSITE MANUFACTURING IS KEY TO THE SUCCESS OF THE CONSTRUCTION SECTOR DEAL

In July 2018 the Government published its response to a recognised need for innovative new ways of working and investment in technology to improve productivity in the construction industry.

The Construction Sector Deal was an ambitious response to widely held concerns that construction in the UK lacked the capacity to deliver the nation’s £600 billion infrastructure pipeline over the next ten years. Although criticised by some for being long on rhetoric and ambition but a little short on detail, the deal set out clear objectives that have a strong focus on productivity:

• a 33% reduction in the cost of construction and the whole life cost of assets
• a 50% reduction in the time taken from inception to completion of new build
• a 50% reduction in greenhouse gas emissions in the built environment
• a 50% reduction in the trade gap between total exports and total imports of construction products and materials.

Offsite manufacturing technology was identified as a key strategic area to achieve these targets, along with the use of digital technology and a shift to measuring whole life asset performance to the total building life cycle.

The deal recognises that offsite manufacturing technologies will help to minimise wastage, inefficiencies and delays that affect onsite construction and enable production to happen in parallel with site preparation – speeding up construction and reducing disruption.

The move towards increased use of offsite construction is supported by a number of reports over recent years. McKinsey reported that the biggest impact on productivity in construction would come from moving toward thinking about construction as a production system, where possible encouraging offsite manufacturing, minimizing onsite construction through the extensive use of pre-cast technology, assembling panels in factories and finishing units onsite.

A WPI Economics report in 2017 on the value of offsite construction suggested that increasing a proportion of the UK construction undertaken offsite could significantly boost UK productivity and growth. The report modelled data from the ONS to suggest that increasing offsite construction by 25% of all construction work undertaken would be associated with an increase in GVA (Gross Value Added) per job of 3.6% in the construction sector. In cumulative terms that represents over £30billion in growth up to 2025.

The Government’s own report “Offsite Manufacture for Construction: Building for Change” recognised the clear benefits of offsite technology and the importance of its role in achieving infrastructure programmes.

The case for offsite construction has been well made and understood across the industry. The Government has committed to changing its procurement models to promote the use of offsite methods and allow the public sector to procure for whole life value rather than upfront cost.

It’s still early days in terms of seeing that delivery on the ground but there some signs of implementation, with the announcement in the summer of a £3bn framework offsite to build secondary and primary schools. Offsite manufacturing is also increasingly being used to build new homes.

In its update one year on from the publication of the Construction Sector Deal the Government was once again a little short on detail. It says that it is consulting on how government departments can take a consistent approach to drive a new market for manufacturing in construction, taking advantage of economies of scale. In July 2019 it said that the response to the consultation is due for publication “shortly”.

There is no doubt that the use offsite construction is growing, but a lack of data on its proportion of total UK construction is still hard to come by, which is why there have been calls for an annual report from the Government to detail the proportion of public funded offsite construction.

What’s clear is that offsite is key to the success of the Construction Sector Deal and can deliver all of the targets for improved productivity and cost, and sustainability in UK construction projects.

CONSTRUCTION SHOULD SEIZE THE OPPORTUNITY FOR A LOW CARBON FUTURE

The Government’s target of net zero carbon emissions by 2050 is challenging for every business sector but perhaps none more so than in the construction industry.

UK construction directly accounts for 10% of the country’s emissions and influences a staggering 47% of all emissions through all of the work in the sector.

Rapid change is likely to be incredibly difficult due to the fragmented nature of the sector and its complex supply chains, but there is a real opportunity for clients and contractors to drive the agenda so that UK construction gets moving and recognizes the opportunities ahead.

The National Federation of Builders (NFB) in November called for open and frank discussions on solutions that the industry can provide to tackle climate change and challenged the Government to establish a “Ministry of Carbon’ to drive forward the initiatives needed to reach the low carbon targets. We’ll have to wait and see whether the Government takes them up on this but you don’t need a crystal ball to predict that whoever holds the balance of power after 12th December will soon take a stick to the industry in the form of legislation to force carbon reduction.

There is no doubt that legislated standards are required that counter the effects of short term market forces so that those who ignore the environment cannot gain economic advantage from doing so. But the NFB also points to the need for Government funding to support low carbon initiatives and create the necessary momentum to achieve targets.

The application of appropriate standards and verifiable outputs needs to be provided at the procurement stage by design teams. The industry needs to adopt a more collaborative approach in procurement to procurement that treats all stakeholders fairly with appropriate transfer of risk.

There are a number of initiatives already focused on designing out waste and developing new products and materials with low carbon footprint.  Offsite manufacturing can reduce carbon within a building using efficient, repeatable designs and more efficient production. Onsite waste accounts for 15% of the embodied energy of a building and research shows that offsite manufacture can reduce this by at least 50%.

There is a real opportunity for construction to make significant impact on carbon reduction and the best way to achieve this is through a collaborative approach with main contractors, clients and the whole supply chain acting as one.

The NFB is right to point out that without a bold vision from Government, backed by a detailed action plan and regulatory landscape, the challenge is probably insurmountable. But in the current political landscape that will take time so the industry should seize the opportunity now and drive the agenda so that it is ready to make the most of the carrots and mitigate the pain of a regulatory stick.

BUILDING SAFETY OVERHAUL IS LONG OVERDUE

It’s taken more than a year since the publication of the Hackitt Final Report in 2018 but the Queen’s Speech confirmed that the Government will “bring forward laws to implement new building safety standards” in what has been described as the biggest regulatory reform programme in over 40 years.

A much tougher and more effective regulatory framework promises to improve building standards across the country with plans to create an independent buildings safety regulator to oversee construction practice.

All of Hackitt’s 53 recommendations are being taken forward by the Government and in some cases they are going even further. Reforms include making it a criminal offense for failing to comply with proposed new safety regime for designing and building high rise homes. Duty holders will have to demonstrate a building’s safety through a new system of gateway points during design and construction and through a safety case regime during occupation. The legislation is also expected to develop a new framework to provide national oversight of construction projects to ensure that they meet high performance standards.

The new regulator will be given powers to take quick and effective action, including heavy fines, when designers and contractors are non-compliant.

The message from government is clear – building safety is top of the agenda and developers, contractors, designers and building owners need to be more accountable in ensuring compliance with national standards.

There is still way to go before the recommendations become law and with the lack of government majority in the Commons there is a possibility that the Queen’s Speech could be voted down with an election to follow. However, it seems unlikely that opposition would vote against the proposals whenever they do eventually move through the legislative process.

The proposed reforms highlight the challenges in the construction sector that ultimately stem from a ‘lowest cost wins’ culture which risks compromising quality and in turn has implications for building safety. The construction sector must continue to push procurement reforms that focus on a collaborative model, abandoning what Hackitt described as ‘the race to the bottom’ and focusing on improved quality and productivity.

Is it Time to Abolish Retentions?

They have been described as a “blight on the construction industry” and a significant contributor to late payments in the supply chain and subcontractor insolvencies. So is it time to abolish retentions altogether, as proposed by CECA and Build UK or will new legislation to reform address the problem?

The collapse of Carillion shone a stark light on the practice and its impact on the supply chain, with the company holding £800 million in retentions which caused heavy repercussions for sub-contractors and pushed many of them over the insolvency cliff.

Retentions are part of a business model in construction that is unsustainable in terms of profit margins.

The problem isn’t necessarily in the principle of retentions per se, but more in the way that they are used and abused in practice by clients and contractors, who are themselves often under cash flow pressure. The system has always been open to abuse and the supply chain and bankruptcy courts are full of examples to back the claim.

Some contractors have adopted a standard operating procedure of keeping retentions so long that subcontractors write off the debt or in extreme cases go bust. These contractors consider retention part of their profit margin. So to counteract this, many subcontractors build the retention into their pricing. It is a corrosive process that ultimately undermines the whole industry.

With British construction companies recently reporting that they have a third less work in the pipeline than a year ago, the industry needs to shake off historic ways of working. It must operate at optimum or there are likely to be more high profile failures that send terminal tremors through a supply chain that now reports 19 weeks of work in the pipeline – down from 27 weeks last year.

The industry needs to increase pressure for legislative reform.

The “Aldous Bill” introduced by MP Peter Aldous in 2018 proposes a retention deposit scheme that would protect retention money, rather than allowing it to simply sit in contractors’ bank accounts. Failing that, the money would have to be paid in within seven days. But like many other bills, progress is snail-like as the political focus is dominated by Brexit.

In an ideal world where clients, contractors and sub-contractors always delivered on time and to specification and there were no unforeseen challenges, there wouldn’t be a need for retention. But in the real world, we still need a way of managing risk. The obvious compromise is a ring fenced deposit scheme supported by much more transparency in the payment process.

NO TIME TO WASTE AFTER REVERSE CHARGE VAT DEFERMENT

The construction industry recently heaved a sigh of relief after it was announced that the government has agreed to delay the implementation of domestic reverse charge VAT for construction services by a year.

The original plan to implement it on October 1st 2019 would have potentially put terminal pressure on cash flow for a huge number of companies creating conditions for a resulting sharp rise in business failures across the sector. For some, it’s a crucial reprieve from disaster, others though are still blissfully unaware that the legislation was about to be implemented which, along with concerns about Brexit, is why the government caved in to intense lobbying for a deferral.

But far from relaxing, construction businesses need to now use the time wisely to make the necessary arrangements well in advance of the new deadline of October 1st 2020, or they’ll simply be postponing the inevitable. While a small number of companies may now have to take steps to reverse systems that were put in place for the change, the majority need to get on and prepare for the change next year with robust plans to manage cash flow.

The initiative is intended to tackle VAT fraud in the industry by getting the customer to account for VAT on supplies on their VAT return, rather than suppliers. HMRC has promised to focus additional resources on identifying perpetrators of fraud and to provide additional guidance and work more closely with the industry to help businesses prepare for the new implementation date.

The message is simple – companies who weren’t ready (or possibly even aware) of this change need to start preparing now without procrastination. Suppliers need to identify customers that are liable to account for the reverse charge by checking VAT numbers and obtaining evidence that a customer is an end user or not so that VAT can be invoices correctly.

The National Federation of Builders plans to work with the government to deliver a series of workshops around the country for construction employers to explain what is happening and why. Other construction associations are also planning similar initiatives so companies should check with their own for any details.

More information about the planned changes available from the government website at: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services