Supply-led procurement

I am interested in how new developments to procurement and business practice will impact roles in construction projects. For example, I can see a strong and compelling case for distancing architects from the construction process even further than they are now, so that their focus would be more on the art and less on the technicalities of building. I am developing my research along the lines of Supply-led procurement (a more robust development of the industrialized building agenda). This basically means handing over responsibility for innovation (and the rewards for innovation) to the supply chain. Either architects become more technical and get involved commercially with innovative producers of technical solutions, or they step aside from the commercial process completely, and develop a more advisory role. The idea of an architect co-ordinating and certifying work in progress may become a thing of the past. Indeed, I would like to go further and suggest that construction work should not be based around labour and materials paid for on a work-in-progress basis. The supply chain has an opportunity to get its act together and become truly innovative and integrated. It may be that architects and the professions are the main obstacles to developing new models of finance, new contracting methods and new business models. What would a fit-for-purpose construction sector look like in the Third Millennium? What kind of obligations are suppliers willing to take on, in return for a closer relationship with construction clients and users, and the opportunities to introduce technological innovations without having to route their work through layers of intermediaries?

Hard times

A friend of mine asked me to write something about the impact of the current financial crisis on the construction sector. What follows are my personal impressions about the threats and opportunities currently confronting the sector.

Since the beginning of the financial crisis, things have panned out in a somewhat strange way. First, the impact on the construction sector was a long time coming. There were many public sector projects already in progress, which was part of the government's problem at the time. They had continued to spend on major public sector projects at considerable rate, and all those major projects in the pipeline kept construction companies in work, though at a more relaxed rate until well after the labour government was unseated in a coalition of conservatives and liberal democrats, when there was no outright majority in the 2010 general election. The new government soon discovered that the adventurous public spending by the previous administration had all but exhausted the countries reserves, so a comprehensive public spending review soon put paid to many planned construction projects. As work for the construction sector finally dried up, new major projects were announced, and the tap of public sector investment was quickly turned on again, to try to avoid too many insolvencies and consequent redundancies. Thus, while there is not a lot of work about, the public sector investment programme has maintained a low level of work that seems to have provided a buffer. But the private sector has slowed significanctly, largely through the disappearance of capital markets. Once  the full impact started to hit the construction sector, insolvencies were seen to rise much higher in the construction sector than in others, with a 20% increase in some quarters, compared with the previous year. But most of the time we seem to be seeing insolvencies running at about 10-15% higher than the previous year. Of course, these headline figures are increases, not the proportion of companies disappearing. Headline grabbers are great for creating disquiet. Normally, I would expect construction insolvencies to run at the same rate as all business sectors (contrary to popular belief). But construction insolvencies are always slightly higher in recessionary periods, as they are now. But, still,the vast majority of businesses are continuing to trade, although they would prefer to be busier.

Few developers can raise capital from banks, because the banks do not have any. Clearly, this is a very lean period for the construction sector.  Construction workers are being laid off and a proportion of business are disappearing. Since most work is sub-contracted, the sector is very resilient. Those contractors and suppliers with workflow are now in an odd situation, becaue if they are making profits, there is a real problem in terms of what to do with their reserves. Contractors typically manage their projects so that there is a positive cash flow, ensuring that payments out are always some weeks behind payments received. Few people seem to notice that this means contractors do not need to invest in projects; their clients do. This positive cash flow means that contractors with projects have surplus cash to invest, typically in developments of their own. But in such an austere period, the markets into which they sell their own developments are somewhat moribund. Since this is often quite lucrative, times are hard. Moreover, trade contractors who design and manufacture the things that they install are reliant on investment in their processes, in a way that others in the sector may not be. And they are also hit with the double problem of very competitive pricing levels and nowhere to invest surpluses. Since the banks are not lending, there is not much happening in the private sector capital markets. So those with surpluses appear to be  shepherding their money for now, to see them through continuing lean patches. What development there is, is relying on capital, rather than debt financing. 

In the longer term, locally and globally, I feel that there is chance the construction sector might be able to finally move away from being a cash cow. If we are to make this into a 21st century business sector, it is essential that we abandon the Victorian business models and ideals that have served us so well throughout the 20th century. I sense that there is an opportunity for businesses to take more of a stake in the things that they are producing. If we can get contractors and trade contractors to invest in the things that they make, and take a greater proportion of their payment after completion, then we shall see greater incentives and rewards for innovative (and, perhaps, sustainable) products and practices. And what better time than now to enable large, successful companies to pump-prime their clients' developments with cash? Many more contractors are establishing capital arms to invest in their own and their clients' projects. This is interesting. If it continues, we could see the end of a business sector based on large volumes of cash being pumped around construction sites, and the growth of significant investment-driven construction companies which will be able to weather financial storms as successfully as any other business sector.

So, who knows what will happen? Even in this difficult time, there are great opportunities. One thing is for sure, as someone once said, "if you always do what you have always done, you'll always get what you've always got".

Complex, commercial, contractual relations

It is interesting how much research in our field is predicated on the assumption that good process leads to good buildings. If this were so, surely there would be few poor quality buildings by now? After all, we are surrounded on all sides by advice and guidance on processes of all kinds. There are British Standards, International Standards, Codes of Practice, Guidance Documents of all kinds. Yet still we produce poor quality buildings. Clearly, we are dealing with a level of complexity in construction that is difficult and uncertain. Perhaps the idea that good process leads to good buildings would form a useful basis on which to critique a lot of the research that has been published in construction management? After all, it has long been accepted in organizational theory circles that there is more to an effective organization than its structure. So much so, that organizational structure is a rare breed of research paper. Or perhaps they have just changed their vocabulary so that I don't notice what passes these days for organizational structure!

The complexity in construction is not necessarily technical, but organizational. Because of the way that the processes are organized, there is a need for diverse skills, and it is important for the purposes of continuity of work and the development of specialized skills that these diverse disciplines are typically found in different firms. To bring a team together means that contracts are important, because each different group of skills comes from a different business. And we are talking about business, therefore commercial interests play an important role in colouring the behaviour of the parties, even if they are exercising professionalized roles. Finally, because the planning, design, construction and occupation of a building occupy many years, the continuity of relationships can be very important. Thus, the kind of organisational problems we face are characterized as complex, commercial, contractual relations.

Anyhow, today's realization was that buildings are just buildings and not, in themselves, good or bad. Good and bad are judgements that reside in people, not characteristics that reside in buildings. More important, in my view, is that when we judge something to be good or bad, successful or unsuccessful, we are typically comparing what we can observe to our expectation. If our expectations are met, then we are more likely to be satisfied. I have long been aware that this is why marketing is so important for business; good marketing is designed to adjust and deal with our expectations, so that we are more likely to be satisfied with certain products, despite their qualities and characteristics, rather than because of them. So if expectations are the important thing, then clear communication is essential. Within the construction sector, we are used to problems of conflict and dispute. Perhaps these, too, can be laid at the door of inadequate communication leading to unmet expectations? Information asymmetry is an important idea that underpins this. It is inevitable in a complex commercial environment that one party will have more information and knowledge about the transaction than the other. Often, the supply side has the upper hand when it comes to information asymmetry, but if the demand side employ professional consultants and design what is to be fabricated, then perhaps the result would be that the demand side has more information than the supply side about important aspects of the job.

Perhaps the purpose of communication in complex, commercial, contractual relations is to reduce information asymmetry and ensure that expectations on both sides are reasonable. This would lead to a hypothesis that information symmetry should lead to greater satisfaction. Businesses expend lots of effort in precisely this area. Conflict flows from dissatisfaction and it is expensive and destructive.

Above all, in construction the transaction is very difficult because the demand side basically requires space, whereas the supply side can only provide boundaries to space. I think this is the interface between architecture and building. We buy buildings because we want space, not because we want walls. No wonder there is information asymmetry, when we have to buy something other than what we want in order to get what we want!

New British Standard - BS 8534 Construction Procurement

After more than a year of work, coordinated by Constructing Excellence, the
draft for public comment is finally available for the new British Standard on Construction Procurement. The full title is "BS 8534 Construction procurement policies, strategies and procedures – Code of practice". This is designed to complement the recently published ISO 10845 on construction procurement, which focuses more on the procedures of tendering and selection. The British Standard is intended to provide an approach for developing a strategic procurement framework, taking advantage of the opportunity to codify and develop the many recipes for good construction practice that have emerged in recent years.

Here is an extract from the foreword: "In May 2006 a strategic workshop was held to establish what drives value in the construction industry. It and a subsequent series of specialist workshops were sponsored by the then Department of Trade and Industry and its successor, the Department for Innovation, Universities and Skills, under the heading “Rethinking Standards in Construction” and organized by BSI and Constructing Excellence in the Built Environment. The main conclusion from the “Infrastructure” workshop was that there was definite potential for a new standard on procurement, provided it used the Office of Government Commerce process as a baseline."

Now is your chance to get involved! The Draft for Public Comment is available for you to download from the BSI website, at http://drafts.bsigroup.com/Home/Details/679. You will need to register on this site and choose a username and password, because the BS secretariat would like to know who is commenting, and they may want to get back to people for clarification.

Please, take the time to engage in this public consultation, because this new standard may soon be shaping the way that construction projects are organized!

Integrated working

As a response to the Government's Low Carbon Construction report by the Innovation & Growth Team, Constructing Excellence asked its members to answer a few questions. I found the questions thought-provoking, and provided these answers:

Integrated Working survey

1.Why do you think integrated working is not more widely adopted?

Generally, the typical solutions to integrated working in construction seem to address problems connected with trust between the parties, the lack of money in the process, and the structural relationships between the fragmented parts. There are cases where attempts at integrated working have had successes, but the challenges set out so clearly in the full report of the IGT show that we are still not yet addressing the key issues. Perhaps the next thing to look at is not just the relationships between businesses, but how the businesses are structured themselves in relation to investment capital vs cash flow. My feeling is that we need to start looking at trading in a very different way, and challenging the existing business models of major construction businesses in order to take maximum advantage of the opportunities offered by the collaborative working initiative, and the demands of the low carbon agenda. We have a lot to learn from other industry sectors and from construction firms in other countries. There is evidence that some major construction companies are becoming more focused on being an investment-based business, rather than cash-farmers, and this is interesting and useful. How can we cascade this through the different types of construction work? New business models will challenge every aspect of how construction companies get work, how they get paid, and what they guarantee.

2. Why would you recommend or not recommend integrated working?

Integrated working is required for two reasons: to drive out waste and to innovate.

3. Have you worked in an integrated way, if so what did you see as the advantages?

In my research, I have seen examples of integration in different countries and in different industries.

4. What measured results did you obtain from integrated working?

It is hard to measure construction achievements, because construction is an end to so many different means. Worse, it is very difficult to measure anything other than what people actually did. Almost impossible to compare it to what they did not do.

It seems to me, on balance, that one thing that successive government reports have consistently failed to tackle is the actual business of construction. They have pointed the finger at everything else, institutions, low pricing, trust, procurement and so one, but never really focussed on the way that construction companies are financially structured and the deal that they offer. This, surely, must be the next big research agenda?

Which construction procurement method is most popular?

This is a question that I am asked quite frequently. There are some surveys about this, too, but most of the stats are meaningless, because they sample such a very small proportion of the population. Given that there are literally hundreds of thousands of construction projects each year in the UK, sampling a few tens or even hundreds of them is never going to reveal much of a trend. Worse, the terms used to describe procurement routes are confusing and interchangeable. So you cannot even be sure that practitioners are ticking the correct boxes on the poorly-designed surveys that are used to ascertain these things. I do not think that it is a worthwhile exercise trying to figure out what is more or less popular. The reason I say this is that different procurement routes serve different purposes. To put it metaphorically, custard is not the same as gravy; it has a different function, even though both are sauces. Knowing whether custard or gravy is used more frequently is really not interesting or relevant. Construction projects are not all the same as each other, so it is more important to understand how to organize the work than it is to try to figure out what is more popular. It is also important to understand that the way that risks are allocated will vary along with the economic climate. Contractors will turn away risky business if they have plenty of work, but will take on high-risk contracts when they are hungry.

In the current economic climate, what is the most likely area that construction can deliver more for less?

I was asked this question by a journalist, and found it difficult to give a straight answer, but on reflection, came up with this:

Construction can indeed deliver more for less. The sector always has done. It has always been possible to cut corners and substitute good materials with low quality substitutes. Apart from substituting poor materials for good ones, we are also routinely de-skilling and de-professionaling the design and construction processes in every way possible to respond to clients who are not willing or able to pay for a good job. In the current economic downturn, it is inevitable that construction quality and social responsibility will be low on most agendas. But this does not provide more for less, in the long run. Perhaps what we need is a concerted attempt to persuade our clients of the medium to long-term benefits of good design and construction?

Why do CM researchers continue to cite Egan and Latham Reports?

Opening a research paper with citations to Latham and Egan is probably not a good idea. These were government-sponsored reports, not research projects, and they need to be viewed very cautiously as they are now quite dated, and the political and economic landscape in the UK has moved on significantly since they were published. They do not represent the state of the art in terms of knowledge: indeed, they never have. If they were to be cited, they would need to be critiqued, although they have been endlessly, so there is not much point citing them as a reason for carrying out research into how construction work is procured and managed. Rather, researchers should seek out the best of the research that has been carried out (internationally) where this point has been tested and proved. A journal research paper is not the right forum to take up an outdated rallying call for UK industry improvement!

Have a look at them and see if you agree:

• Latham Report 1994
• Egan Report 1998

Is private finance the right answer?

There is much written about the Private Finance Initiative (PFI) and about Public Private Partnerships. The UK government is clearly keen to involve the private sector in the provision of public services. While such partnerships can be very beneficial, the replacement of public investment by private capital is worrying. What is more worrying is the seemingly uncritical acceptance of this policy by the construction industry. Is this because private finance is such a blindingly obvious solution to various problems, or is it just that searching questions have not been asked?

PFI has long been an alternative to borrowing for under-funded governments. Although it can provide necessary infrastructure, it also carries a service charge, such as tolls for roads, for the duration of the agreement. The end user still pays, whether through taxation or directly to the concessionaire at the point of use. The key feature of private investment is that the money comes from revenue streams instead of from capital investment. Is PFI cheaper because the value of a pound in the future is less than the value of a pound today? This advantage needs to be weighed against the fact that governments ought to be able to borrow more cheaply than the private sector (and the private sector must make a profit). On the face of it, net expenditure is likely to be more if the private sector raises capital and charges government for service provision.

There is great enthusiasm for PFI: Contractors and designers are hungry for the extra work; governments are relieved of the need to use the public sector borrowing. By reducing the PSBR, the balance of payments is instantly improved and the government will appear to be handling the economy very well. They may even be able to cut taxes. All this is splendid during a transition period, before these new facilities come on stream. However, the private sector invests in these things because of the income stream. That income will be from revenue instead of capital funds. By the time this pressure for increased government spending forces taxes to be raised, the government that got us into this position will be long gone. Are we mortgaging our future for the sake of someone’s short-term political advantage?
It seems that when there is any kind of public sector mis-management, the only possible answer is to relieve public sector agencies and departments of future responsibility and transfer it to the private sector – a very defeatist attitude. Why don’t they learn how to manage? Apparently, no one in the public sector knows how to manage so private capital has to be used to give private sector managers the incentives to manage efficiently and this somehow will produce efficiency gains.

The public sector may indeed be inefficient, but surely it can be improved? Are we to understand that the government must never have control over capital investment in case they invest wrongly and that the service providers must have private money because the government is too stupid to give them the right amount of money? This seems to be an extreme reaction. The solution, surely, is to learn from mistakes.

There are political risks involved in partnering with government. PFI has been introduced during an era when successive UK governments have downplayed ideology in favour of appeal to the electorate. But if there is ever a return to a more ideological era, policy changes and government involvement in infrastructure decisions will increase. Such risks will inevitably increase the cost of capital. Thus we move from a situation where the government could borrow cheaply because it was backed by taxation to one where we are going to have to pay more to compensate investors for the fact the government might change its mind about an operating contract at some point over the 25-30 year life of the deal.
There are contractual risks in any construction project. Unpredictable risks are, by definition, difficult and expensive to price for, so they are usually taken by the client (an example being unforeseeable ground conditions). This makes sense when the client is the government. If they pay for things when they go wrong, they pay for what it actually costs, rather than for a contractor’s accumulation of contingencies for when hazards occur. But in PFI, the contractor is not employed by the government. We still encounter the same construction risks, but the client is an “SPV”, which has an inflexible source of funding. Presumably, the clauses relating to unforeseeable ground conditions ought to be crossed out, or at least modified, but it appears that these clauses are not modified. The risks are dealt with as if the client for the construction project is the government; is there a rational risk apportionment strategy at work here? Large, repeat clients can cover the risk. One-off clients cannot. An SPV is a one-off client with no financial resource of its own.

The potential gain using PFI is an efficiency gain brought about because of the reputed expertise of the private sector to be lean and efficient. Added to this are financial benefits of using cheaper future money instead of expensive current money. However, the advantage brought by PFI has to be weighed against the disadvantages; higher cost of capital in the private sector, payment for the revenue stream for the facility, paying for the long-term risk of changes in government policy and transferring major risks to SPVs with inadequate financial reserves. It seems that the whole idea is built upon the dubious assertion that the public sector is completely incapable and the private sector is completely capable. But does the private sector have a blemish-free record of managing major ventures? How many major failures have there been in the private sector recently? I would love to see this debate taken beyond the immediate concerns of firms hungry for work and placed into the longer-term context of the future health of the UK.

Originally published in Construction News in 2002

House of Commons

It was quite a kick jumping into a taxi and requesting "House of Commons, please". But the traffic around Westminster slowed to a useless crawl, so I walked the last part. The occasion was the launch of a report, wittily titled, "Never waste a good crisis".

After a couple of glasses of wine and a few nibbles, Nick Raynsford was introduced to us. A very good speaker, of course, being an MP. Good eye contact, engaging, and clear points. He drew our attention to one graph in the report and told us how the best construction projects had done really well, but the rest had a long way to go. He shared with us his vision for an improved industry focused on value, and congratulated Andrew Wolstenhulme and his team on a great piece of work. Andrew then gave us an overview and, like a true gentleman, diverted the spotlight to the team rather than himself. One strange point that he made was that for every pound spent on deign, ten are spent on building, a hundred on operating and the benefit is a thousand. Yes, I know, almost impossible to figure out what it can mean, but the last incarnation of this kind of ratio was 1:5:200, a ratio that claimed that for every pound of building there are five of maintenance and 200 of operating. Clearly nonsense, otherwise construction would be half a percent of GDP. We debunked that myth in a conference paper (click here if you want to read it). I was happy with the idea of construction being pitched at roughly 10% of GDP and design being roughly 10% of construction. These are near enough in terms of orders of magnitude. But I had no idea how we could get £1,000 of "benefit" from £10 of construction. All very bizarre, but worryingly typical in this kind of gathering.

Then Vaughan Burnand, Chairman of CE enjoined us to keep the faith and continue to believe in the change agenda. By this time I was wondering if I'd stumbled into some strange kind of church gathering.

I had been involved in one of the multidisciplinary workshops that were part of the background work for this report, I was interested in meeting those participants again, and in seeing what the team had made of our input. Of course, few from our group had made it. And it was hard to recognise our words in the report. Shortly after our workshop, I received a draft nine-page summary of all we'd said, and I remember being satisfied that most of what we'd said had been captured. Perhaps it was not sufficiently "on-message" to have made it into the final report. Or, more likely, perhaps there was just too much of it! The section on industry structure in the report picks up a few of the main points and makes good use of them, so I am pleased with the impact of this. The report is available for download here. It was good to meet up with so many friends and colleagues from the industry, and catch up, and it was particularly good to see reports aobut how we organize ourselves being launched in the House of Commons. Have a look at the report, and post your comments here - it would be interesting to see what others make of it.

British Standard on Construction Procurement

Today we had another meeting in London of a BSI Committee which is developing a new standard for construction procurement. The group is organized by Construction Excellence and has met quite a few times since the work started last year. After several meetings, we are now all familiar with each others' foibles and it is very easy to work together. There is representation from across the industry, although with an industry so diverse and complex, no group like this can ever be fully representative. But with a group of experienced people, we are touching a lot of diverse concerns about how to go about the process of construction procurement. Interestingly, this is taking place at the same time as the International Standards Organization is drafting an eight volume standard on construction procurement. The first part of the ISO is currently in draft form and out for consultation until end of April, so when I got back to my office I notified a few thousand people in our field about this, through a couple of mailing lists. I am hoping that this will generate some discussion and feedback, but there is a niggling doubt in my mind that a lot of people will not prioritise this or, perhaps, even see the point of commenting. I am keen to get as many people to comment on this Draft International Standard as I can, so if you have in interest in construction procurement, contact me and I can let you know how to get hold of the draft and comment on it.