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.
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.
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
There’s no doubting the contribution that Brexit makes to the stagnation of growth in the UK construction sector, but it would be naïve of anyone in the industry not to recognise other factors are also in play.
The sector’s output has been falling at its steepest rate since 2009. The Markit/CPIS UK Construction purchasing manager’s index recorded a reading of 43.1 in June, down from 48.6 in May. Economists expected a rise 49.2, almost above the crucial 50, which indicates growth.
It’s been another tough year for construction, with weakness across the board as housebuilding, engineering and commercial work all fell significantly in June.
Earlier predictions of a Brexit bounce of up to 5% seem to be receding as the new Cabinet repeat their mantra of a hard exit with no deal if the EU is unwilling to renegotiate. For any chance of a bounce there needs to be a deal.
But while the industry frets as spending decisions are delayed and investors sit on their hands, it would do well to find a cure for the underlying and more familiar malaise that lurks behind the Brexit spotlight.
A declining global economy and sustained weakness in the pound seriously impact the cost of materials. Pressure on margins continues as clients still look for lowest cost over best value. Labour costs continue to rise, according to ONS the figure is 5% in the last 12 months, and the skills shortage isn’t showing any signs of narrowing as 30% of the workforce head for retirement. And let’s not forget Theresa May’s commitment to increase the UK’s target for CO2 emissions, which will be costly.
While UK construction waits for a Brexit resolution, the sector needs to also address the chronic underlying inhibitors. And it can’t rely on the infrastructure promises of a new Prime Minister when the political context is so combustible.
The industry has developed innovative workable solutions such as collaborative procurement, digital integration, offsite manufacturing and BIM, that have been proven to improve efficiency and productivity.
These are new approaches that are trickling out across the sector at a time when they need to flood. We used to call all of this ‘new thinking’ and ‘modern methods of construction’ – but it’s not new anymore and for only a minority is it now standard operating procedure.
The construction sector needs to get on and on and make the most of the knowledge and technologies that exists if it wants to overcome the old problems that even clarity on Brexit won’t cure.
The skills gap in construction continues to challenge the sector, with little sign of it narrowing in the near future.
But the stark figures on the number of women in construction offer an opportunity to boost skills with a concerted effort to change culture and working practices in the industry and inspire more women into a career in construction.
Between 65% and 70% of the UK workforce is now made up of women, yet that figure tumbles to 14% in the construction sector and a fairly damning 2% when looking at the number of women working on sites across the country.
There are many companies and organisations working hard to encourage women into the industry, but the figures make clear that much more needs to be done to inspire and motivate women to choose a career in construction.
When it comes to pay, the latest data published by the Government shows that among the UK’s top principal contractors the gap between men and women ranges from £34% to 10%.
Although there has been some progress, sadly in the 21stcentury a culture of sexism is still prevalent and it’s understandably a significant barrier for women. This is an issue that is cutting the sector off from 50% of the talent available to close the skills gap.
A RICS survey in 2017 identified that 30% of women already in construction believe that sexism stops them from pursuing senior roles. The same survey showed that 38% of men in the sector believe that their skills are better suited to the sector than women. It would be interesting to know what those men perceived those skills to be!
Changing culture is never easy but the industry really needs to prioritise its effort and take a harder look at itself to identify ways to change so that it can benefit from the pool of talent that is going elsewhere.
The sector needs to develop much greater early engagement with young women with the creation of more female construction ambassadors.
The UK Government innovation agency, Innovate UK, recommends a number of changes including the introduction of more flexible working and higher paid part-time role for women and men, specific training for women, construction sit open days and cleaner workspaces.
Construction needs more talent. If it can do a better job of inspiring women eradicating sexist culture where it still exists, there is a rich seam of talent already available.
With continued low productivity rates and pressure on margins, late payment still blights the construction sector and may soon exclude some companies from major contracts.
The most recent data from Creditsafe for the third quarter of 2018 showed that construction is the second worst payer by sector in the UK (after hospitality), averaging payment 41 days later than contracted timescales. The same quarter showed an increase in company failures, which is unlikely to be coincidental.
The Government’s Prompt Payment Code (PPC) was supposed to address this issue with companies signing up to a pledge to pay 95% of invoices within 60 days. But evidence suggests that many of the biggest names in the construction industry are not living up to their commitment.
We won’t name them here, but a recent review of the data provided by members to the Code resulted in seven construction companies which are among the largest in the country being suspended for not paying their suppliers in line with the promised terms.
Suspension or expulsion from the code is likely to cost companies dearly in the future as there is an expectation that the Government will implement plans to restrict those who breach the code from bidding from public contracts. The likelihood is that for all public contracts over £5 million per annum, bidders’ payment records will be examined closely and anyone who does not meet the PPC standard will be excluded.
The Government’s ‘Construction 2025’ long term vision for the future of the industry cited equitable financial arrangements and certainty of payment as critical success factors for the industry. The report recommends creating conditions for construction supply chains to thrive by addressing access to finance and payment practices.
Late payment is a historical problem in the constructions sector but getting paid on time is critical for many companies in the supply chain. SME’s, which make up 99% of the construction supply chain, are hardest hit by late payment. They are unlikely to invest in skills training and new technologies if their cash flow is under constant pressure from unpaid invoices.
The problem needs to be addressed at the source of the flow of payments through the supply chain. If large contractors continue to ignore their responsibility, they will exclude themselves from the public contracts that are their lifeblood shrinking the supply chain and restricting opportunities for growth and profitability for everyone.