The lack of cash in construction could usher in a return to mutual mistrust between contractors and clients
The concerns raised by the “Gloomwatch” panel in Building on 14 November were unrelenting but, sadly, backed up by hard facts. Things are not going well, and the tracker survey by Experian in the same issue predicted further declines in construction activity over the next few months.
Clearly, not all firms are on their knees, as headlines might have us believe. Some sectors of construction are doing quite well. The figures show, for example, that civil engineering is coping with the downturn, and that schools and the further and higher education sectors are still providing work for large and some medium-sized firms. So there is some work out there – just not enough.
The government has indicated that public sector schemes will be brought forward to help firms through this crisis. That’s fine if it is centrally funded motorway or academies work, but if the decision is left to individual local authorities, the politicians may defer replacing a school or upgrading a road and keep down the council tax instead. Central government has also historically not been all that successful at keeping its construction programmes going, as with Building Schools for the Future and PFI schemes.
The practical effect of the troubles in the construction industry are self-evident. A great many housing projects have ground to a halt and the knock-on effect of this should not be underestimated. In the last 10 years, many large housebuilders have been working with housing associations to develop sites. If the housebuilder cannot sell the houses, it will stop the site and not buy any more land. That directly affects what the registered social landlords can do, as much of their funding comes from section 106 agreements or other joint activity with the housebuilder. Many social housing schemes are therefore being deferred or renegotiated, and the government’s housing targets seem very unlikely to be fulfilled.
If funding is left to local authorities, they may defer replacing a school or upgrading a road and keep council tax down instead.
But the damage to the industry will not only come through casualties of respected firms and redundancies. A more disturbing concern at present is that both public and private sector clients are moving away from best practice, and even, in some cases, being advised to do so by their project managers or quantity surveyors. When I wrote Constructing the Team in 1994, I was told that my ideas were not appropriate then, because the industry was still in difficulties, but that things would change when better times came. Some years later, when the industry was much stronger, I heard folk say that my ideas were fine in good times, but that clients would go back to their old ways when things turned bad again …
The simple truth is this. If clients abandon best practice, close down frameworks, stop partnering, and return to lump-sum, single-tender contracts, based solely on lowest price, the industry will go back to its undesirable practices. In 1997, when I was very kindly elected an honorary fellow of the Royal Academy of Engineering, I was sitting at dinner next to a retired senior member. He told me how he had become a non-executive director of a large construction company. At his first board meeting – because his background was not in construction – he was surprised to hear the chairman advocating taking up contracts which all seemed likely to lose money. When he queried this, the chairman smiled and said, “We think these projects will be OK for us.” What he meant was that the company’s estimators and surveyors saw opportunities for claims and variations in the works and also for squeezing subcontractors. That way they could make money that was not in the tender price.
I also remember discussing cost overruns in 1996 with the former head of the National Audit Office (NAO), Sir John Bourn. He asked me why there wasn’t more partnering. I replied, “Because clients don’t understand the difference between the two tenders.” He asked what I meant. I explained that the first is the lowest price tender submitted, the second is the actual financial outturn. And they are very rarely the same. Sir John wrote that down at once. As a result, the NAO then produced construction reports saying “get it right first time”. But beware: if clients go back to the bad ways, the industry will too.
The results will be serious for clients. They will find that the actual cost was not what they had expected. There will be political uproar, and more legal bills. The industry will be blamed again. And some construction minister will call for another Constructing the Team. But it won’t be written by me!