The UK construction industry must become leaner, fitter and more integrated to survive. Will the new government act as a catalyst for this after the election?
An outsider’s perception of construction must be one of an industry that is full of ideas and initiatives but with very little appetite for implementing them or seeing them through. Or, alternatively, an industry that is frequently whinging but lacks a coherent strategy aimed at discarding outdated and inefficient business/delivery models and replacing them with cutting-edge processes utilising the full potential of available technologies.
How many times have we been hearing of late: we need more R&D; we need more skills; we need continued access to EU labour; we need more innovation; we need more knowledge transfer; we need to bridge the design performance gap; and so the list goes on. But this “we need” list is devoid of a long-term programme of industry improvement that deploys the full potential of the supply chain. Instead we have an ethos that promotes a “race to the bottom” characterised by lowest price and slipping standards.
My point is this. Construction does not have properly functioning supply chains and, until it does, there will be no radical improvement in the industry’s performance. Addressing this must be our overriding priority - not pontificating. In fact this was the theme running through Mark Farmer’s report, Modernise or Die, but, in the wake of the report, there has been a deafening silence from government.
Writing in the CIOB’s magazine, Don Ward, chief executive of Constructing Excellence, observed: “Hastily arranged one-off subcontract arrangements bought on lowest tender price are not supply chains.”
So what are supply chains? Chains have links and therefore a fully functioning supply chain should, at least, have the following links:
- A communications link
- A cash link
- A people link
- A product link.
The communications link is about having regular and positive dialogue between all parties to facilitate efficient delivery of the project; not, for example, issuing early warning notices that state there is a risk of delay and the recipient is responsible.
Supply chains do not exist for the purpose of funding projects. Recently SEC Group analysed the accounts of the top dozen UK construction companies. They were owed £1bn of cash retentions but 85% of this is funded as an unsecured loan by their supply chains. The supply chain finance arrangements put in place by some large contractors are benefitting them to the tune of millions of pounds while their supply chains are having to pay to access their cash early (usually after their payment periods have been extended).
The people link is about genuine collaboration between different supply chain entities to realise the objectives of the project. The product link enables all supply chain entities to fully understand the clients’ success factors with a shared commitment to ensure that those factors are always prioritised in the delivery process.
In other words a supply chain is a dynamic resource that should be deployed to minimise project risk from the outset of the procurement process, not a receptacle for dumping all commercial and project-related risk after the works have commenced. How many examples are there of projects having a risk register which has been signed off by key elements of the supply chain before commencement of construction? Probably very few.
Instead we have a situation where, in comparison to the EU, construction costs are excessive. They are fuelled by high transaction costs, duplicate layers of profit, overheads and contingencies, numerous interfaces to manage and co-ordinate and constant fire-fighting to reduce risk (or its consequences) because of failure to do so before commencement of construction. Moreover all this diverts and wastes our scarce skills and other resources.
In UK construction the truth is that all these wasted costs have a major economic impact on supply chains. Such costs are being offset by driving down prices wherever possible, manipulating the payment process and ensuring that contracts maximise risk transfer.
The challenge for the industry is to become leaner and fitter. The next government could and should become the catalyst for this. The targets were set in Construction 2025; the two key targets being a 33% reduction in construction costs and 50% faster delivery times to be achieved by 2025.
The new government should be proactive in supporting the work of the Trial Projects Working Group, comprising representatives from the Infrastructure and Projects Authority and industry. The working group co-ordinates the work involved in implementing the model procurement options promoted in last year’s Government Construction Strategy 2016-20. These aim to achieve efficiency savings of up to 20% with early supply chain input to project design and planning. This currently represents the only improvement activity for the industry; it holds out the best hope for driving efficiencies, innovation and productivity.
Delivering better for less should be our response to Brexit, the industrial strategy (assuming this continues under the new government) and anything else that comes our way. Almost 60 years ago the Japanese car industry woke up to this reality in order to compete with the likes of Ford. At that time, it was, for them, a question of “modernise or die” – and look at them now.
Professor Rudi Klein is CEO of SEC Group and president of the NEC Users’ Group