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?