The construction industry needs reform – that much is clear. It’s time to recognise the factors we can’t control and tackle the ones we know we can
The spotlight on construction has been turned up in recent weeks, with the release of a parliamentary report on Carillion’s demise and new developments relating to the Grenfell Tower fire – the release of Dame Judith Hackitt’s review and the beginning of the public hearings in Sir Martin Moore-Bick’s inquiry into the disaster last year.
Commentary in the media reflects the conclusion that most of us had already arrived at: that the construction sector needs to change. Unfortunately, there have been exaggerated (even false) claims: the suggestion, for example, that tier-one contractors are passing all the risk down their supply chain and the claim that the sector is “broken” – if that’s true, how are we delivering so many high-quality projects?
But there are many truths in the criticisms. There are weaknesses in our sector’s business model, with a high degree of fragmentation that creates knock-on effects. We know we’ve got to improve productivity, and the route to that is clear: more offsite manufacturing; better integration of BIM; and closer collaboration between clients, consultants, designers, builders and users. With any luck, the government will publish its construction sector deal paper soon, and it will assist in accelerating this progress.
It’s tough for us to say that there’s no quick fix, but it’s a fair point for us to make, so long as we don’t just throw our hands up and say, ‘it’s impossible’
But many reasons for the industry’s dysfunctions are beyond our power to change. Client budgets (especially those in the public sector) are tight, accompanied by a sometimes irresistible desire to select the lowest-priced bidder. While most of us bid responsibly, it’s undeniable that some players are tendering impossibly low bids in an attempt to generate turnover, and this affects the market.
In this ultra-low-margin environment, there is a corresponding disincentive to invest in research, development and training. And building is a fundamentally cyclical industry: unless someone finds a way to iron out the ups and downs, we will continue to have disincentives to consolidate and retain large teams that have to be made redundant the next time the cycle dips.
A recent CITB report noted that the workforce is generally disinclined to relocate. This hinders employers’ abilities to get skills in the right place. And the specialised skills required for larger projects mean a fragmented supply chain simply makes economic sense – we put the right team together for the task at hand.
The true test of success is not whether we’ve hit turnover targets, but whether we’ve left the world in a better place than when we started
Understandably, this fragmentation is frustrating to politicians and public alike, who want clear accountability. They don’t want to hear explanations like “it’s complicated”. It’s tough for us in the construction sector to say that there’s no quick fix to these problems. But it’s a fair point for us to make, so long as we don’t just throw our hands up and say “it’s impossible”.
Yes, it’s complicated – but fix it we must.
What to do, then? We can’t change the external factors, but we can incrementally improve our performance and productivity in all the ways I mentioned earlier. We can play a constructive role in the follow-up to the Hackitt report, ensuring we are always guided by the principle that we do everything in our power to keep people safe. Surely that’s the real bottom line, not the financial one? The true test of whether our companies have succeeded is not whether we’ve hit turnover targets, but whether we’ve left the world in a better place than when we started – whether we’ve kept our people safe, and whether we’ve created a safe, healthy environment for people who use the buildings and infrastructure we’ve created.
We can also continue to highlight to clients the dangers of a lowest-price, short-term mentality. Here, Carillion’s demise serves as a high-profile example of how badly things can go wrong.
The need to think long-term is a fundamental aspect of good corporate governance, and I was pleased that secretary of state Greg Clark asked me in January to lead an effort to develop corporate governance principles for large private companies. Earlier this month we published our consultation paper, which will have a direct relevance to many companies in our sector.
Beginning in the 2019 reporting cycle, all private companies that have more than 2,000 employees, or a balance sheet of £2bn and annual turnover of £200m, will have to include a statement in their directors’ reports on corporate governance.
The Wates Corporate Governance Principles for Large Private Companies are intended to provide such companies with a framework to follow. They’re not intended to be a box-ticking exercise – they are intended to help private companies apply best practice and aspire to ever higher standards.
I’m under no illusion that they will stop failures like Carillion or catastrophes like the Grenfell Tower fire from happening again. But in time, if we raise the standards of governance across industry, it may put us all on stronger footing.
James Wates is chairman of the Wates Group, the BRE Trust and the CBI Construction Council