The Carillion collapse must surely mark a turning point for the high risk, low margin UK construction sector and its increasingly tarnished reputation for poor quality and high cost
There is much analysis and many learnings for industry to follow, not least as government and the pension regulator attempt to unpick just how this industry giant toppled with such apparent ease and speed.
Yet what is already abundantly clear is that a vast swathe of the contractor’s supply chain - the heart of the UK construction market – is unlikely to recover much, if any, of the hundreds of millions of pounds owed to it by the contractor for work carried out up to, and in many cases beyond, its infamous 120-day payment terms.
The fact that Carillion’s sub-contractors have been so abused by their main contractor will come as no surprise to anyone operating in the construction sector. Whether through penal payment terms, spurious claims to reduce cost, withholding payments or by offloading disproportionate risk to their supply chain, professional services providers and suppliers have been at the mercy of the main contractors for a generation. Team play and collective responsibility is much discussed but rarely seen in its fullest sense in the industry.
Perhaps if the industry is serious about breaking what has become a ‘less-for-less’ race to the bottom, we need more quality clients and teams to step forward
Which is why the government’s 2011 Construction Strategy was greeted with such positivity: It included a series of new procurement models designed to kick-start reform and find new, more effective procurement models that might lead to such behaviour becoming a thing of the past. At the same time, there was an opportunity to drive down cost by removing waste whilst pushing up the quality of UK construction.
Integrated Project Insurance (IPI) was one such procurement model. As highlighted by the recently completed £11.6M Dudley College Advance II project, the model actively encourages an atmosphere of collaboration and risk management across the project team to deliver better outcomes for every stakeholder involved in the project, client through to specialist subcontractor.
The aim of the IPI trial was to shift behaviour – to move away from siloed, adversarial behaviour toward a more collaborative environment in which costs are controlled and outcomes enhanced: put another way - better outcomes for all. Without creating the environment for true behavioural change, and the improved efficiency that brings, you can not seriously expect to achieve ‘more for less’.
To succeed, the interests of the project must be put before individual company commercial interests
As a concept IPI was designed specifically to tackle the industry’s increasingly hard-wired inefficiency - a culture of risk passing, blame, disputes and late payment. Instead collaboration is at the heart of IPI, with a delivery team of equals, collectively incentivised to work on a ‘best-for-project’ basis.
To succeed, the interests of the project must be put before individual company commercial interests. Essentially, no-one in the team wins unless everyone wins; and conversely, if anyone loses all lose.
This is not an easy concept for the entrenched construction sector to get its head around – clearly not a concept that businesses like Carillion, with their typical bid low to win, claim high to deliver strategy would naturally gravitate towards.
For while a single insurance project sits at the heart of IPI, in reality the driver for success at Dudley was less about insurance and more about culture, collaboration, effective procurement, and trust.
Thus, the challenge was to break from the established culture, and work together to find the best technical solution. The project team operated on a 100% open book basis, each charging agreed fees to cover their input to the project including an agreed allowance for corporate overheads and a normal level of profit. A pain/gain share agreement based around target design and construction cost provided further performance incentive.
In short, the entire supply chain was paid what is was owed when it was owed, and worked together to help the team hit the client’s target price with the added benefits of early mobilisation and increased capacity at the facility. Hardly radical concepts but rarely achieved.
Yet to date Dudley stands alone as the sole IPI demonstrator - despite both the client and the supply chain alliance being extremely pleased with the outcome. Sadly, the reality is that procurement reform such as offered by IPI must be driven by what we are led to believe are rare things in construction: quality clients, with quality teams.
Perhaps if the industry is serious about breaking what has become a ‘less-for-less’ race to the bottom, we need more of these quality clients and teams to step forward - and then to have the courage to break from the past and actually embrace modern business practices. Surely anything that takes clients and the supply chain away from the culture that allows businesses like Carillion to divide and rule, must be worth a try.
Steve Bamforth is senior partner and group chief executive at Griffiths & Armour