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.

Is it Time to Abolish Retentions?2019-10-07T14:12:43+00:00

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

NO TIME TO WASTE AFTER REVERSE CHARGE VAT DEFERMENT2019-09-23T11:36:48+00:00

Construction’s Malaise is More Than Just Brexit

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.

Construction’s Malaise is More Than Just Brexit2019-09-10T09:01:01+00:00

Want to Close the Skills Gap? Inspire Women

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.

Want to Close the Skills Gap? Inspire Women2019-07-29T13:03:09+00:00

Late Payers Risk Lost Contracts

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.

Late Payers Risk Lost Contracts2019-06-30T19:28:03+00:00

Direct Employment Needed to Boost Skills

The latest Future Skills Report from the Construction Leadership Council says that contractors should upskill for the future by directly employing staff, encouraging smart construction and updating training in the sector.

The report challenges the industry to adapt to change to improve the poor image of construction, transform sector productivity, advance quality and create a sustainable and diverse industry.

It describes the UK as being on the cusp of “one of the greatest programmes of construction in history with a pipeline of more than £600 billion”. The caveat is a challenging context with the end of Freedom of Movement and the loss of 30% of the workforce to retirement at a critical time for the industry.

The recommend three key actions:

Direct employment– A call for clients to agree a code of employment where those who contribute to a project are directly employed, thereby ensuring it is in the employer’s best interest to train their staff and benefit from improved productivity.

Encourage Smart Construction– Create an environment where Smart Construction methods are encouraged through early design and procurement processes, creating the demand for skilled employees, which in turn drives employers to invest in training.

Update Construction Training– update qualifications and training to include Smart Construction techniques and behaviours with funding made available to accelerate adoption.

The recommendations are based on sound logic and detailed context provided within the report. It does not shy away from identifying the size of the task ahead and the challenges that must be overcome. But the jury will be out for a while on whether the industry – and government – will embrace the roadmap to a more productive future.

The difficulty is that the challenges are inexorably linked to productivity, quality, skills development and more. It’s like a jigsaw that requires all the pieces to come together at once. For example, without a change in the way projects are procured and managed, margins will remain under pressure, curbing the appetite for direct employment and investment in training.

Direct Employment Needed to Boost Skills2019-06-17T11:59:00+00:00

Are Apprenticeships Closing the Skills Gap?

The delivery of a fit for purpose apprenticeship program is a major component of the construction industry’s efforts to close a skills gap which, Brexit issues aside, continues to be at the mercy of increasing retirement rates and a poor pipeline of younger new entrants.

The Farmer report described the skills gap as a “ticking time bomb” and predicted a decline of 20-25% in the workforce over the next decade. Construction Industry Training Board data shows that the overall appeal of construction as a career option for young people is low, not helped by high profile failures like Carillion.

Parents often want their children to be doctors or lawyers, but why not engineers, project managers, surveyors or town planners? These are the skills that design the communities that we live in and are the fabric of our society.

The Government’s Apprenticeship Levy was introduced in 2017 to encourage employers to hire apprentices but in its first year there was a 26% drop in new apprenticeships, perhaps due to a lack of clarity about the new initiative.

The latest figures from the National Audit Office show that UK employers deposited £2.2bn into the levy in 2017-18 but only 9% has been accessed and reinvested in staff training programs.

Businesses have to draw the total value of their levy payments to fund apprenticeships within two years of the payment dates or after that they are forfeit to the Treasury. But many companies still see it as a stealth tax and argue that if take up is to improve the Government needs to simplify the bureaucracy and better explain that the programme covers a very wide range of subject specialisms at many levels.

Many projects require contractors to create a specific number of apprenticeships and job placements but there is evidence that in many cases these individuals return to the training pool once a project is complete. Having the security of a place being allocated and a potential future in employment at the end of an apprenticeship is the best motivation to encourage take up. So maybe the KPI’s on these projects need to be reviewed to reflect that and improve the likelihood of a job at the of the process.

For any chance of apprenticeships to close the skills gap in construction, the sector needs to work together and engage more effectively with schools and pupils to overcome the negative perceptions that currently exist. Stronger links to education would result in the teaching of relevant skills and a clear understanding of the opportunities and rewards that are on offer in the construction sector.  The industry needs to overcome the barriers in schools that are so often heavily focused on exam results and don’t have adequate resources to properly consider where pupils will gain employment. Perhaps the education sector needs to build in processes to measure their effective contribution to future employment, which is an important indicator of the value of school learning.

We need to promote the benefits of working on projects that for many years will serve our communities and remain as long term legacies.

Are Apprenticeships Closing the Skills Gap?2019-06-04T09:22:18+00:00

Construction is a Target for Cyber Criminals

As the use of technology in construction grows rapidly, there is a very real danger that a lack of investment in protection is leaving projects and companies exposed – and cyber criminals are taking note.

A recent Government survey identified that over a third of business in the UK had experienced a cyber breach in the last year but only 33% have cyber security policies in place.

A report from the Department of Health noted that the WannaCry cyber attack on the NHS cost the organisation £92 million and was largely blamed on the use of old software systems that had simply not been updated.

The growth of BIM has had a dramatic effect on modern construction and is expected to have been adopted by 90% of the companies in the next three to five years.  As a computer based control system, it allows shared access for contractors and creates a central repository for huge amounts of data.

It doesn’t take an expert to understand the effect of an attack on a large construction project if information and control systems are closed down for days or weeks or designs amended without signoff from the design team. That’s why it is surprising that two thirds of companies have no cyber security policy in place to mitigate the risk, leaving themselves incredibly vulnerable.

In an industry where risk is carefully managed it would be interesting to know how often cyber security is identified and reviewed on project risk registers.

Cyber criminals see the potential for success in targeting construction because the combination of extensive document sharing using cloud services and a supply chain of many third parties makes it attractive.

While most businesses now have at least basic firewall and network security, the majority of attacks are phishing or social engineering based, or simply employee negligence.

Although most now have technical IT measures in place to secure networks, they need to recognise that humans are always the weakest link. A human has to make the decision to invest (or not) in solutions that mitigate risk and commit the business to maintaining a secure environment. You can have as many steps in a technical authentication process as you like, but how can you legislate for the staff member who clicks a link in a sophisticated phishing email or plugs an infected USB stick into a network device.

Every project needs to have a minimum IT standard for all of the supply chain, along with a digital risk assessment that is reviewed on an ongoing basis. That will take care of the technical aspect, but it should also be supported by a clear staff policy promoted to everyone involved in the project with continuous education and awareness programmes.

Hopefully it won’t take a successful cyber attack on a high profile construction project for the sector to recognise that a robust cyber risk management programme should be at the top of the agenda on every project.

Construction is a Target for Cyber Criminals2019-05-14T09:43:53+00:00

Construction’s Digital Future is Overdue

In a sector that is desperate to improve productivity and efficiency, it seems paradoxical that construction remains one of the least digitised industries, only beating agriculture and hunting, according to McKinsey

Construction needs to catch up quickly and realise the benefits can come from disruptive technology solutions.

The Centre for Digital Built Britain recently released its Gemini Principles report which identified that greater data sharing could release £7bn per year in benefits across the UK. It will do this by enabling better decisions leading to financial savings, improved performance and service along with better outcomes for business and society as a whole.

A recent survey undertaken by technology specialist NBS found that 90% of respondents recognise that digitisation will transform how they work and that 70% think that those who do not adopt digital ways of working will go out of business. Many also see technology as an opportunity to develop offsite construction, with 41% already designing for offsite and a further third planning to do so within 5 years.

Digital technology goes way beyond BIM, which is just one core aspect of its potential application across the construction sector. Whether it’s drones for digital mapping and surveying, moving to paperless collaborative projects, 3D printing or increased use of artificial intelligence, McKinsey estimates that the industry can improve productivity by around 15% by infusing digital technologies across the construction process.

There are a number of significant robotic solutions about to break into the industry.  It is about to be possible to use a 3D printing robot to build a large building. A mobile robotic arm controls a 3D printer that builds an entire structurally safe building using a preprogrammed set of instructions. This technology has already been successfully used to build bridges in Netherlands.

We are now seeing robots that can undertake brickwork and masonry, dramatically improving speed and quality.  Demolition robots have been developed to demolish concrete and structural components that may be slower than humans but are far safer and cheaper.

Among the main inhibitors in the industry is a fragmented understanding of digital skills along with short term pressures that restrict investment in technology. Without the right conditions for innovation demand for digital skills will continue to be slow wasting precious opportunities for improved productivity and efficiency.

Putting ideas into practice is recognisably difficult in a sector that designs and delivers complex projects with little margin for error or waste, but none of it is going to get any easier.  Projects continue to get bigger and even more complex and a growing demand for environmentally sensitive construction, along with a persistent skills gap, makes digital construction technologies a no brainer.

There will never be a more obvious time to embrace the benefits of digitalisation.

Construction’s Digital Future is Overdue2019-05-06T11:47:23+00:00

Brexit Shines a Light on Skills Gap

As the country extends the official date for leaving the EU none the wiser on what Brexit actually means for anyone, or if it will ever happen, many red flags have been raised about the risk to a construction sector heavily reliant on EU labour.

There is no doubt that Brexit will impact the sector and may result in fewer EU workers coming to the UK, but rather than create the skills shortage Brexit has simply shone a light on a situation that the sector has struggled with for years. It exacerbates a pre-existing underlying condition where the symptoms have been obvious, but treatment and cure has so far been elusive.

Around 7% of the workforce in the UK construction sector are EU nationals, that’s more than the percentage of EU nationals working in all other industries in the UK. On top of a pre-existing skills gap that’s more than the sector can bear.

A coalition of construction industry organisations and the Construction Industry Training Board recently published a “Building After Brexit” action plan that recommends a twin track strategy to address skills shortages. It identifies the need for growing investment in the domestic workforce and driving up productivity while working with government to agree how to maintain access to migrant workers.

The report also recommends attracting talent by raising apprenticeships starts and completions and creating pathways to construction for underrepresented groups along with providing better work experience opportunities. It seeks to retain workforce, supporting older workers to stay in the industry and identifies the need for a Future Skills Strategy to identify skills to modernise the industry and boost investment in modern methods of construction.

The industry has been talking about how to deal with the underlying condition of skills shortage for years. Maybe the intensifying of pain caused by Brexit will be enough of a catalyst for a much needed treatment and effective long term cure.

Brexit Shines a Light on Skills Gap2019-04-17T11:57:57+00:00