Long-awaited details of the government's initiative to help firms gauge their performance in the industry have been released this week. Here's how to work out if you're hitting those Egan targets.
You are sitting in the client's office. The contract you have longed for all your career is just a short interview away. The client rocks back in his chair and asks the $64 000 question: "Why should I give you the job?"
You try to convince him that you are better than the competition, but it is just your word against your rivals'. If only you could produce an independently ratified league table that shows you really are better than the rest.
Performance league tables – like those produced for schools – are no longer a pipe dream. This week, the government-backed Movement for Innovation, which is charged with implementing Sir John Egan's Rethinking Construction report, published details of how firms can measure their performance against the rest of the industry. And the DETR's Construction Best Practice Programme is set to administer the scheme, collecting data on performance and compiling league tables of companies.
The tables will be based on 10 key performance indicators. Seven are applied on a project-by-project basis: construction cost; construction time; cost predictability; time predictability; defects; product satisfaction; and service satisfaction. Three indicators look at company performance: profitability; productivity and safety.
Tool for improvement
If firms are honest in presenting data, the indicators will give construction a useful tool for improvement. And companies could use them in-house as a catalyst for greater efficiency.
However, the initial reaction from the industry is cautious. Contractors and consultants are wary of giving away information that will reflect badly on them, prejudicing the accuracy of any performance leagues. Clients, too, believe firms may not be completely open about their performance. They are also concerned that the indicators do not take account of issues of value to them, such as rent yields and aesthetics.
The data that has been used to calculate the benchmarks that firms will measure themselves against has also come under fire. Critics say the base data is unreliable and that the methods for calculating performance are seriously flawed.
For each category, the Movement for Innovation has produced benchmark graphs compiled from DETR, Construction Clients Forum and RICS data. The line graphs trace the industry's average performance for each indicator on all types of project. There is also a set of "supergraphs" that plots the entire industry's average performance for all 10 indicators. There are also six sector-specific sets of graphs covering new-build public sector housing; new-build private sector housing; new-build public sector non-housing; new-build private sector non-housing; infrastructure; and repair, maintenance and refurbishment The benchmark graphs are available as wallcharts from the Construction Best Practice Programme, so firms can measure their own performance. To find out how you measure up, calculate the difference between your performance on a particular project and the Movement for Innovation's 1998 comparison project. Then, plot the figures on the graph. If you are above the benchmark score of 50%, you are better than the average, lower than 50% means you are worse.
The idea is that clients can use the indicators to make more informed choices. They will ask contractors for their key performance indicators and compare them with competitors'. When enough information becomes available, companies will be ranked.
The Movement for Innovation says contractors and consultants can also benefit from the performance indicators by using them to assess how particular project teams are performing. They can also compare their companies with the rest of the industry.
Publicly, the industry is keen to be seen backing the initiative, which has been endorsed by construction minister Nick Raynsford. But, in private, it has concerns. One contractor confided that the methods are "pseudo science" and open to abuse. "It all depends on how much information the contractor gives and how he interprets the definitions in the methodology," he says.
Performance is worked out by comparing a recently completed project with one finished a year ago. To ensure a like-with-like comparison, "normalisation" factors are applied to the data. These adjust it for differences in location, building type and size, and take account of inflation. Once the data has been normalised, it is possible to find out whether a project was faster, slower, more costly or cheaper than the comparator.
The contractor says competitors might put forward bogus information. He believes that even data from a client cannot be relied on: "How many contractors bid low and pull back costs later in the courts?" And, he adds, some contractors are prepared to take on loss leaders to gain an advantage or to win framework agreements with major clients.
A source at one top 20 client, who did not want to be named, says clients may not give genuine information. "The kind of cost information you see published has been processed by our marketing departments to make us look good," he says. "Our real cost information is commercially sensitive and we would never risk our competitors seeing it." The client also says the indicators do not take account of some factors that he values highly. "If a great site comes on the market, we go and build on it. Costs might be higher than projects finished last year because ground conditions are bad or planners are more demanding, but in the end, we make up for it in rents," he says.
Fashion is also a factor. "If our tenants demand buildings clad in gold next year, we will provide them, even though they are more expensive to build – that is no reflection on the contractor's efficiency," he says.
Although the client believes the initiative is a "noble effort", he says the normalisation factors are not sophisticated enough He also questions the base data. The construction time and cost graphs have been plotted from the DETR's database. He says: "The DETR can pick up accurate data for public sector projects, but how can it know whether data for private projects is accurate? The whole graph might be skewed by expensive public sector projects."
A top 10 QS criticised the way the time indicators were calculated. These measure the design and construction periods. The problem is that the definition of when the design period starts and the construction time finishes is open to interpretation, says the QS.
The QS also questioned the productivity and profitability indicators. These have been plotted for consultants and contractors on the same graph. Consequently, all contractors – even the most profitable ones – end up on the lower end of the graph because they generally make less profit than consultants, says the QS.
There are also problems with assessing consultants in this way. "Consultants that undertake a lot of [highly paid] litigation work or project management will look better than those companies that just do quantity surveying," he says.
There could be more serious problems if the indicators are used for selecting firms, says one City law firm: "If the methods for working out the performance are not watertight, there is a potential commercial libel," says a senior partner. So, a contractor that is not selected because the indicator is erroneously poor might have a case for defamation.
"It's good to get rid of inefficiencies, but you have got to be right," says the lawyer. "I hope there will be a review in a few months. Otherwise, things could go too far."
How the cost indicator worksTo measure project performance in terms of cost, the project must be compared with a similar one completed a year earlier. If you have just completed an office for £930/m2, you have to find a comparison project and work out the year-on-year performance change. The comparison project might be an office finished a year ago for £805/m2. The cost of your project has to be adjusted to allow for regional price differences, inflation and different specifications. There are two ways of measuring projects. Using the simplest, the “rule-of-thumb” method, you estimate that the specification of your project is, say, 5% higher than the comparison project, that the comparison project is in a more expensive region (you estimate 8% more costly) and that resource costs have gone up 3% in the past year. This gives: project cost (£930/m2) minus quality modifier (5% of project cost) minus regional modifier (8%) minus resource cost inflation (3%) minus comparison project cost (£805/m2). This figure is then divided by the comparison project cost and multiplied by 100 to give a percentage year-on-year cost change. The result is –3%. That means your project has been completed for 3% less than it would have cost if you had built it a year ago. So, your performance has improved 3%. Plotting –3% on the line in the graph gives you a benchmark score of about 50%. This means your performance is average – 50% of projects have performed better than yours and 50% have performed worse.1 Project indicator: Construction cost The construction cost indicator is intended to show the year-on-year improvement in cost efficiency. If two identical structures are completed in successive years and the second is finished for 10% less than the first, then the cost indicator would be –10%. Plotted on the line graph, this project gets a benchmark score of 80%. This means 80% of projects have not reduced costs as much as the second building and 20% have reduced costs more. Of course, no two structures are the same, so data from similar projects is adjusted using factors to correct cost for geographical location (it is cheaper to build in Plymouth than London), function (to take account of different types of building), size and resource cost (inflation from one year to the next). There are two methods for calculating the cost indicator. The rule-of-thumb method involves taking the cost/m2 of the project you want to measure and subtracting a percentage of that cost to account for a higher or lower specification. The percentage is estimated by you. Then, a percentage is subtracted for regional differences and resource costs. Again, these are estimated by you. From the resulting figure, take the cost/m2 of the building you are assessing, divide the result by this cost and multiply by 100. A more accurate method is provided. This involves using correction factors taken from the DETR’s quarterly building price and cost indices, March 1999. Egan target: 10% year-on-year cost reduction. Criticisms: Base data taken from DETR database only – may be skewed to public sector. Correction factors in the rule-of-thumb method are down to the contractor and can easily be abused. Correction factors in the accurate method are still not detailed enough to allow true like-for-like comparison. Relies on honest data. 2 Project indicator: Construction time The construction time indicator is intended to show year-on-year improvement in time efficiency. If two identical structures are completed in successive years and the second is finished in 10% less time, the time indicator would be –10%. Plotted on the line graph, this project gets a benchmark score of 58%. So, 42% of projects have improved time efficiency more and 58% less than the second project. No two structures are the same, so – like construction cost – correction factors are used to make the two projects comparable. As with the construction cost indicator, there is a rule-of-thumb method and a more accurate method. The rule-of-thumb method involves subtracting (contractor-specified) modifiers from the contract period, working out the difference between the modified contract periods and then calculating the percentage improvement. Again, the other method involves using DETR modifiers. Egan target: 10% year-on-year time reduction. Criticisms: Base data is from DETR’s database. It may be skewed to public sector work. Correction factors are either contractor-specified and open to abuse or DETR-specified and not accurate enough. 3 Project indicator: Cost predictability Changes between estimated cost at “commit to invest” stage and actual cost at “available for use” stage are assessed. Commit to invest is defined as the point where the client authorises the project team to proceed with conceptual design. Available for use is the point where the building is available for “substantial” occupancy or use. The graph is based on the Construction Clients Forum annual survey and the RICS annual QS survey. Egan target: 20% year-on-year improvement. Criticisms: Definitions of available for use and commit to invest are loose and open to abuse. Does not take planning delays into account. CCF data is limited. 4 Project indicator: Time predictability Changes between estimated time of delivery and actual time of delivery of a project are assessed. Again, design and construction phases can be measured separately. Design time is measured from commit to invest to “commit to construct” stage. Construction time is measured from commit to construct to available for use stage. Commit to construct is the point where the client authorises the start of construction. Graph based on the Construction Clients Forum annual survey and the RICS annual QS survey Egan target: 20% year-on-year improvement. Criticism: Definitions are open to abuse. Does not take planning into account. 5 Project indicator: Defects This is the degree to which handover was affected by defects. There are four categories: defect-free; few defects and available for use on time; one or more defects and slight delay; and major defects that substantially delayed handover. The graph is based on the Construction Clients Forum annual survey. Egan target: 20% year-on-year reduction. Criticism: Definitions are open to abuse: for a contractor, a slight delay could be two weeks; for a client, it might be a day. 6 Project indicator: Product satisfaction This indicator is intended to show the client’s happiness with the completed project. At the end of each project, the client is asked to rate the project out of 10. One is totally dissatisfied, five is neither satisfied nor dissatisfied and 10 is totally satisfied. The graph is based on Construction Clients Forum annual survey. Egan target: None. Criticism: Very subjective. Can, say, Morrison Development give a rating for a project built by Morrison Construction? 7 Project indicator: Service satisfaction This indicator shows clients’ happiness with service. Again, satisfaction is marked out of 10, with one being totally dissatisfied and 10 being totally satisfied. The graph is based on the Construction Clients Forum survey. Egan target: None. Criticism: Again, it is very subjective. 8 Company indicator: Profitability This is taken from a company’s pre-tax profit as a percentage of sales reported in 1998. The graph is compiled from information in Dun & Bradstreet, Inter-Company Comparisons, Financial Accounts Made Easy and Companies House. Egan target: Increase turnover and profit by 10% Criticisms: Plots for consultants and contractors on the same graph. Shows even good contractors in a bad light because consultants are far more profitable. Pre-tax profit can include all sorts of activities, including lucrative litigation and non-construction activities. 9 Company indicator: Productivity Turnover per full-time employee. The graph is compiled from information in Dun & Bradstreet, Inter-Company Comparisons, Financial Accounts Made Easy and Companies House. Egan target: Increase by 10% year-on-year Criticism: How and when do you count the number of full-time employees? 10 Company indicator: Safety Reported accidents per 100 000 employees per year in 1997/98. The graph is compiled from Health and Safety Executive figures. Egan target: Reduce accidents by 20% year-on-year.