UK Construction 2019 – What next? Glasgow May 2019

Market Confidence

Representatives agreed that the project pipeline in Scotland appears to be strong and there is a reasonable degree of confidence in the construction sector despite recent challenges.

However, the impact of the Carillion demise is still being felt. This has led to an increased focus for many on stabilising balance sheets, particularly amongst SME’s in the sector.

There is a clear focus on debt levels, and those operating in the sector are looking much more closely at the levels of risk being assumed in new contracts. Cash flow remains a challenge as many materials used in construction are not produced in the UK. The supply chain in Europe is looking for upfront payments for materials which leads to cash-flow issues as this is not provided for in current contracts.

Clearly no discussion would be complete without referencing the potential impact of Brexit on UK construction, however, those around the table all agreed it was nearly impossible to quantify the risks associated with Brexit and how those risks would be allocated amongst the contracting parties.

Key Challenges in the sector

Onerous Contracts 

A number of government-promoted contracts were seen as being public-sector / employer-friendly. This is a naive approach given the pressures on contractors, such as low margins.

Short-Termism

Questions were raised over whether long-term value was being given sufficient attention as opposed to shorter-term capital costs of the build.

Developing Apprentices

There is pressure within contracts to set up apprentices but many projects are short-term and shorter than the length of the apprenticeship meaning these are not seen through to a conclusion. This lack of continuity of work is a disincentive to those looking for a career in the construction industry and means that those businesses investing on apprenticeships do not get the benefit of skilled labour having made that initial investment.

Culture

The question arose as to how to achieve a shift in behaviours and cultures which led to a suggestion that it is necessary to consider what is driving certain behaviours. Key drivers for contractors were thought to be price and margins, particularly where there were uncertainties in the market.

Current behaviours tend to be based on experience – a bad experience in the past drives behaviour in the future, creating a vicious circle. There was evidence of an increasing focus on blaming the professional team where issues arise. This stifles innovation and has an adverse impact on the relationship.

One solution discussed to change this could be an ability to constructively challenge parties in a project, including providing feedback to employers

Race to the Bottom

Inconsistent leadership and approach can lead to a drive to the lowest price, but driving margins to the bottom whilst looking for long term benefits is unachievable in the sector.

Where there is highly competitive bidding between firms, “softer” points such as apprentices are the first area to be cut where margins are squeezed.

It is recognised that in public sector procurement, differing approaches are taken to the quality / price split. Those represented felt there was a need for greater transparency on this so that the underlying driver for the selection process was clear. It is really was price-driven then efforts could be focused on this.

Labour Supply

Availability of labour remains a challenge in the sector and is likely to be further exacerbated by the fallout from Brexit.

Contractual Structures

It has been noted that there has been an increase in the use of framework arrangements in the sector. Framework agreements can give many benefits including reduced transaction costs and continuous improvement when procuring long term.

NEC is still considered the most widely used standard form of construction contract, with PPC2000 starting to be proposed on a small number of projects.

The view is that the traditional approach to contracting is well understood in the industry and therefore that there is a tendency to default to that model for ease. However, regardless of what contractual structure was used, it is necessary also to consider values, behaviours and competencies.

The idea of “lifting the hood” on some of the terminology used in contracts and the need to look at the substance of what is required for there to be truly partnership working was raised. It was considered that this starts with leadership. There are plenty of examples of partnering in name only where parties revert to contractual positions at the first sign of problems rather than engaging to find a mutually agreed way forward.

It was identified that often contractors could get a possible flavour for the approach to be expected on a project as early as receipt of the tender package. There is an opportunity to set an early tone for the project at this stage.

The use of a particular contract over another does not create particular behaviours. Contractors are often trying to survive in a climate of pressures on cash flow and margins, and are driven to protect their position as a result. Employers may be under separate pressures on budgets and delivery dates.

Contracts tend to be used in a way which reflects the motivations of parties and this will occur despite ‘good faith’ and mutual trust and cooperation’ type clauses or partnering arrangements. It was suggested that whilst the contract sets out the agreed rights and obligations, this does not require to be binary and in some circumstances, it is not appropriate to hold someone to their contract – there is sometimes a need to exercise discretion with an eye on the wider, longer term relationship and the effective delivery of the project.

Potential solutions for a thriving sector

Collaboration & Relationships

The Hub model was set up as a forum to foster collaboration on the basis of long-term partnering relationships. The idea was to bring together public and private sectors and to avoid the need for dispute resolution by creating conditions for collaboration.

There has been some evidence of a step up in collaboration driven by employers. The examples of Collaboration Academies and the ICE Project 13 were referenced as examples.

“It’s good to talk” - The need to foster relationships, including between key decision makers, was a recurring theme. It was suggested that if parties are struggling to do so then bringing in an impartial facilitator to assist could be a solution, perhaps some form of dispute board as a forum to talk about issues and try to resolve as they arise and whilst work progresses.

It was recognised that long-term partnering where there is a recognition of each party’s needs and everyone gets something out of the deal could be a useful step for the sector. It takes time to develop trust but where this is achieved, it leads to an ability to manage and resolve issues as they arise.

The long-term framework model allows the time for relationships to develop and that is important to their success. It allows a strategic approach to be taken. It also engenders an innovative culture as it allows investment to be made.

Technology and Innovation

It was noticed that previously the use of technology and innovation could be constrained by ingrained cultures – to focus on avoiding risk. There can be a resistance to innovation and anything which is different. However, it is recognised that the use of technology and innovation can have a huge impact on the future of the sector. Representatives felt all parties need to have permission to try and fail if innovative and new technology driven solutions are to be implemented.

Early Involvement and Identification of Risks and Issues

The importance of understanding the project and its risks from the start were identified as of key importance to avoiding issues further down the line. It was recognised that “a problem avoided is better than a problem solved”.

It was considered that early contractor involvement should be the norm not the exception when working on construction projects. “Workshopping” contracts to make sure all parties have a full understanding of the reality of what is expected and not just the words of the contract can be helpful to achieving successful project delivery.

Education

The need to nurture young talent was raised – not just technical skills but also in culture and softer skills. A mix of vocational and academic training was thought to be required for those pursuing a career in construction. The need to find ways to retain apprentices and skills within the industry was recognised. There needs to be a focus on longevity. It was suggested this could be government-driven – there needs to be a catalyst to drive this forward.

It was thought that the lead-in time for projects, which can be lengthy, could be used to develop a pool of talent and to leave a “skills legacy” in an area following completion of projects. This is also assisted if there is a forward-looking pipeline of work which allows a local approach to be taken to skills development.

The Transport Scotland Academy 9 programme was referenced as a positive example of exposing school children to the construction process.

The opportunity to pool the availability of skills was explored – for example, starting apprenticeships with one business then moving to another as the needs of each move on would allow those apprentices to complete their training and businesses to have access to a wider pool of talented labour going forward.

Leadership

Leadership training was thought to be a long-term process in terms of changing attitudes. The management can set the tone in terms of culture and behaviours of an organisation. This would require a lot of work but can lead to great benefits in terms of building of relationships based on trust.

Pricing

On “added value” aspects of pricing, such as apprenticeships and community engagement, rather than leave that to be bid competitively, include a fixed price for these aspects to level the playing field for bidders.

Role of Employers 

Many of the issues discussed above are in the client’s control, it was thought there may be a benefit to key clients considering their approach to contracting going forwards. There have been notable successes where there are proactive clients who are open to new ways of working.

PR Push

Those involved in our discussion agreed that there is a need to make the construction industry a positive place for people to work. It is suggested that those operating across the industry need to do more to promote the good news stories happening across the sector.