Tag Archives: Procurement

Race to the Bottom

Posted on by
Reply

The built environment is of vital importance to the creation of a sustainable society and construction needs to be considered as being for the public benefit. Decarbonising the UK building stock will not be easy or cheap and it requires concerted effort and co-operation across the supply chain. The capitalist free market is no longer an appropriate mechanism for the construction industry if we are to deliver the new paradigm.

Despite numerous spectacular failings in the delivery of IT and defence projects, our political leaders persist in their faith in the free market. Thus least first cost tendering is now applied across all aspects of public procurement for construction, from initial design right through to the regulatory functions. Where the Government leads the private sector will surely follow.

Open competition certainly does drive down prices but it is equally clear that it does not deliver real value or quality.

Any student of economics can tell you that people respond to incentives and that competition creates perverse incentives. Consider the case of the exam board official caught out last year feeding prior knowledge of exam questions to teachers at a training event. When schools are judged by exam results and exam boards compete to attract schools to use their examinations, they will do whatever is necessary to capture business. The market has created an incentive for perverse behaviours by exam boards including dumbing down the questions and advising teachers which areas to focus on during revision.

Nowadays even Local Authority Building Control has been forced into competition with approved inspectors. There is no longer any protection for the regulatory function. Developers will select their inspection services based not only on fees, but also on who is likely to give them the easiest route to compliance. So, just as with the competing exam boards, there is an incentive for building inspectors to be lenient in order to encourage future business. Any inspector who rigorously applies the regulations is likely to be quickly out of work. How can we therefore expect the statutory regulation function to be rigorously and impartially executed?

So, if our system of statutory oversight is compromised, can we rely on the supply chain to deliver the quality and performance improvements we need? I don’t think we can, as I said in a previous article ‘The Root of the Performance Gap’.

When I started as a young engineer, the practice I worked for had a policy of disregarding the lowest tender when we were evaluating mechanical and electrical subcontracts. You could almost guarantee that the lowest bidder had cut his cloth too thin and that performance on site would suffer, leading to poor quality and a continuous battle over proper completion of the works.

These days however, I find that clients not only appoint the lowest tenderer for every service, but that they also try to negotiate the price even lower. Yet it is clear that lowest cost tendering incentivises suppliers to deliver the lowest level of service that they can get away with. I contend that this actually leads to increased overall cost due to the additional management and supervision required to ensure that the bare minimum requirement of the specification is fulfilled.

However, given the urgent need to decarbonise the UK building stock, simply achieving the bare minimum of the specification is not enough. Every party in the construction process needs to deliver over and above. We need an industry in which every individual actively contributes to achieving a long-term vision rather than being focussed on short term financial goals. We need an industry in which selection is on the basis of performance and lifecycle value.

I suspect however that the public sector is still wedded to competitive tendering and we won’t see the necessary leadership for some time to come. In the interim, a step change in construction performance and value could be achieved by simply changing tender rules. There are lots of clever ways to structure competitions to achieve best value rather than lowest cost. However, a simple first step would be for the public sector to commit to taking the second lowest bid in any tender. At a stroke this would remove the incentive to bid at unrealistically low levels. The construction industry would then be able to concentrate on delivering value rather than recouping its losses.

The Root of The Performance Gap

Posted on by
11

A number of comments made during an industry dinner last week have crystallised a new understanding for me about the real root causes of the building performance gap that we now hear so much about.

The performance gap is the difference between the notional energy performance of a building predicted by its designers and the actual out-turn energy consumption once occupied. When you eliminate the obvious impact of regulated versus unregulated energy then there is often still a disparity between design and operation. In many cases this is due to failings in the design or construction, but equally often there is a failure in the management and operation of the finished product.

As is usual in the construction industry, blame for the performance gap is being attached to individual parties in the supply chain. However I now realise that the real problem is structural and embedded in the nature of supply chains themselves. Design and continuous improvement is a circular process, but the supply chain is linear. It is like that because procurement and project managers have made it so. Nowhere within the supply chain is any one party responsible end to end for the building performance.

The project manager who implements last minute omissions from the ‘expensive’ metering and control system is rewarded by the client for bringing the project in on budget. Facility Managers who reduce operating cost by disabling systems or purchasing the cheapest replacement parts are awarded bonuses for achieving financial targets. The chances are that neither party will even be working on the project when the consequences of such decisions come home to roost.

Further, at each link in the chain, we create incentives that promote short term thinking rather than action for the long term outcome of better building performance. Most client organisations separate those responsible for capital investment from those responsible for operations. They reward the procurement teams for achieving the lowest capital cost. Thus procurement is through competitive tendering which provides a clear incentive to do as little work as possible whilst achieving an acceptable, rather than exceptional, outcome.

The consultants need to win work at the lowest cost which constrains the time spent on design. The contractors need to make profit to pay shareholders so will select products on the basis of cost not performance. The Building Control Officers need to win future work and are unlikely to tell unwelcome truths about the building performance. The facility managers survive on their meagre fees by not spending money on extensive maintenance and quality replacement parts.

Even within organisations the way people are employed impacts on outcomes. Employees’ performance in regard to promotion and reward is often measured against annual or even monthly financial targets. When you combine this with a project based workload you create a clear incentive to move on to the next project as quickly as possible, rather than spend more time on delivering one project really well. People are then often ‘too busy’ getting work and doing work to plan the future of their business and still less the future of construction.

It is telling that the RIBA survey of chartered practices found that 62% do not have a business plan. I’d be prepared to bet that the most common reason for not having a business plan is being too busy to create one. Having worked in and run small businesses myself I am well aware of the pressure simply to keep turning over the work.

The building performance gap is not the ‘fault’ of the construction industry or the occupiers. It is a product of the systemic failure of procurement, management and operation of buildings.

More thoughts about the impact of procurement on construction value in follow up article ‘Race to the Bottom‘

What Have the Romans (Government) Ever Done for Us?

Posted on by
1

The long awaited Government Industrial Strategy for Construction will be published next month. Here’s a suggestion for what it could say and what I think it probably will say:

What it could say:

The UK construction industry is capable of great feats of innovation, but it needs the support of enlightened, intelligent clients to deliver to its fullest potential. This Government will therefore address the shortcomings of public sector procurement to demonstrate that the public sector can be an intelligent client which no longer stifles innovation, focussing on least first cost rather than value and attempting to transfer all risk to the private sector.

What it probably will say:

The UK construction industry does not innovate often enough. Therefore, whilst maintaining the current public procurement structures that favour compliance and accountability over innovation, Government will introduce ever more restrictive rules that will force the Construction Industry to adopt expensive and un-necessary practices such as BIM in the hope that this will in turn force more collaborative working and somehow lead to more innovation.

Government, national and local presently persists in pursuing risk transfer over innovation and least cost instead of best value in public sector procurement. The recent spending cuts have unfortunately merely reinforced the focus on least first cost by setting short term financial targets. A better outcome for the country could be achieved by refocusing procurement on value so that savings are replicated year on year rather than pursuing least cost today at the expense of tomorrow.

Government also continues with its rhetoric about supporting SMEs and promoting innovation in construction. However it persists in policies that are aimed at transferring all possible risks to another party. Thus it creates the conditions for procurement under which only the largest and safest (ie least innovative) companies can be selected.

It is clear that BIM is going to be used as a Trojan Horse to try and force collaborative working on an industry that is poor at collaboration. However the industry does not collaborate as the present public sector procurement structures actively dis-incentivise collaboration. I am a fan of BIM as a tool, but not as a blunt legislative instrument (look at what has happened to renewables and BREEAM). Until procurement and incentives for construction are re-designed collaboration simply will not happen, with or without BIM. In the meantime the expense of deploying BIM will further prevent Government procurement from engaging with the Innovative SMEs that it purports to support.

Government now has the chance to be an intelligent client for construction and in doing so provide the leadership for the rest of the public sector, and eventually the private sector, to become intelligent clients too. Government could demonstrate the benefits of client intelligence in delivering lower cost, better performing, sustainable construction. Government needs to invest in technical expertise within its departments. Much of what Government is presently doing is evidently well intentioned, but ultimately flawed as it simply does not recognise the differences between construction and other industry sectors. Initiatives and incentives that work in manufacturing or aerospace simply do not translate into the construction sector. A restored, expert civil service would consult with the construction industry to create an intelligent system for procurement, financing and operating public sector projects to everybody’s benefit.

I want to hear that the Industrial Strategy for Construction will commit Government to investing in the reform and demonstration that is essential for the industry to move forward and be genuinely sustainable. Not only in what it constructs, but for the sake of our economy, to become sustainable as an industrial sector, able to compete against international encroachment into UK construction. If the Government cannot do this for us we may as well give up and go home.

Innovation Ignorance

Posted on by
1

There has been a plethora of debate recently about stimulating innovation in the construction industry, but it seems to me that all discussions have missed the fundamental point:

“There is no incentive for construction industry players to innovate.”

Innovation is expensive so there needs to be adequate reward for investment in innovation. In manufacturing, innovation is rewarded by lower production costs or higher product sales, which when multiplied by thousands or millions of products adds up to a considerable incentive.

In construction, a team is assembled to deliver a single product. They may never have worked together before and may never work together again. Some of them may be competitors. The main beneficiary of any innovation is certainly not going to be any of the design team; it is most likely to be the end user who may not even be known at the time of design. How then is the team incentivised to innovate?

Innovation may be in the interests of the developer if this means that buildings are more attractive to customers, but our dysfunctional property market means that the premium for location outweighs that for building performance by such a margin that innovation becomes irrelevant. Further, the developer has the counter incentive to pay the lowest design and construction cost possible to maximise his return in the market.

The reality is that the construction industry won’t innovate unless there is a strong reason for doing so, but that can’t happen with the present property market. Government could lead the way by procuring public sector construction in a way that directly rewards innovators, rather than persisting in least first cost procurement, but that would require joined up thinking which has never been their strength. However that would be a much more productive approach than continuing to lambaste an industry for something beyond its control.