A Strategic Approach to the UK Construction Industry

Stephen Gruneberg

• Publisher: CRC Press
• Year: 2018
• Print ISBN: 9781138089778
• eBook ISBN: 9781351611787
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

The construction industry is a microcosm of the economy as a whole, and as such the economics of the sector contains many of the aspects of the economy in general, albeit with fascinating and unique features. What are the implications of economic theory for the future of UK construction? How does the industry ensure innovation, quality and efficiency? What priorities might best serve the construction industry, those working in it and their customers?

In seeking answers to these and other questions, the UK government has commissioned a number of reports on the construction industry including the Latham and Egan reports and more recently Construction 2025. These have invariably proposed time and cost targets for the construction industry. In this new book, Stephen Gruneberg stands in stark contrast to those reports and presents the relevant theoretical aspects of construction economics to account for the behaviour of construction firms and suggest a strategy for future growth and sustainability. He discusses the theory and data relating to the output of firms in relation to the type of firm, the market and how these firms behave as a result. The purpose of this book is to advocate the measures needed to create the kind of industry that must be fostered to ensure the quality of its output, sustainability and the fair terms and conditions of employment for its workforce.

Gruneberg's new book is essential reading for anyone wishing to understand the economic forces that determine industry outcomes and who has a stake in the success of the UK construction sector.

1 Introduction

Tracing the history of construction reports from Simon (1944) to the Construction Sector Deal (2018)

Introduction

Due to the high proportion of very small building contractors, the construction industry is incapable of carrying out certain functions, such as training, without the kind of rules that governed the activities of guilds in the distant past or without some form of compulsory grant levy system, where appropriate. A grant levy system has been operated by the Construction Industry Training Board (CITB) since the 1960s. All contractors must pay a levy depending on the size of the firm. This fund is then used to distribute grants to those firms, which undertake training and employ apprentices. Direct government intervention is therefore essential if the public sector is to intervene directly in the funding of training needs in the construction industry. Otherwise, the industry itself does not have the means or structure to meet the priorities and needs of this or any construction policy or objective. For example, if the workforce is incapable of meeting the skill requirements of technologically advanced techniques and new environmental demands, additional help may be required.

In spite of these weaknesses, the construction industry is very responsive to changes in demand – for example, when major projects are put to the industry, it is possible to mobilise resources, such as plant and equipment, labour and even materials, at least sufficient to prepare a site for development, within a very short space of time. Firms in the construction industry also continually adapt to the challenge of new materials and technology and remain an innovating sector of the economy as new products and materials are introduced on site and integrated into the construction process. However, many traditional practices appear to be embedded in employment practices of the past and influence the way the industry operates. Procurement practices, the role of the architect, the planning system and land ownership are all rooted in the traditional past. The culture of the industry itself, as a whole, tends to reinforce the traditional fragmented nature of the sector.

Construction is a project orientated industry. As a result, everything to do with construction management is of a temporary nature. People come together only to work on a project, and on completion they disperse to work on many other jobs. Although many in the industry recognise the advantages of keeping project teams together to work on different projects, this very rarely occurs in construction. As a result, construction teams tend to be temporary organisations with an impaired ability to create organisational knowledge that is cumulative and that is common practice in many other sectors of the economy. It is rarely possible to know the strengths and weaknesses, personalities and preferences of individual staff working on site. This means that the allocation of work to individuals is often sub-optimal, and people can be asked to carry out work they are not equipped to carry out or capable of doing. In spite of these shortcomings, new methods of working and new materials are constantly being introduced on site.

Any industrial strategy for the construction industry must take into account the nature of the industry and how it operates. Before proposing a remedy it is important to understand the causes of the problems in the construction industry in the first place, and there is invariably more than one cause.

The behaviour of individual contractors and other firms is to some extent determined by the specific economic features of the construction sector. These features constrain the different options available to firms in the construction industry as a whole and account for many of the problems beyond their control that face contractors and their clients. For example, construction firms work on very small profit margins leaving very little room for error or room for negotiation, especially when things go wrong on site. Their small profit margins force firms to expand turnover to such an extent that the level of risk and default is greater in construction than in almost any other sector of the economy. One would expect that the larger the project the greater the profit margin, but this is not necessarily the case in construction. Many of the problems of construction arise out of the high risk faced by contractors, including the risk of losing money on a project where profit margins can be easily eroded altogether. As a consequence it is not surprising to find that the construction industry is litigious and confrontational. The very low profit margins on a project mean there is no room for negotiation between firms working on projects. This matters as the construction industry is a major component of the economy.

The size and significance of the construction industry compared to the national economy are far greater than the figures given in official data imply. This is because official data is based only on the value added on site by main and specialist contractors and not on the value of the output of construction in terms of the finished goods it produces or the value over many years of the services provided by buildings and infrastructure once completed.

The conventional measurement of the size of the construction industry is based only on the value added to inputs by contractors on site. While this approach is entirely appropriate for finding the aggregate size of the economy, because the value added approach avoids double counting, it does not take into account the sheer size and scale of building projects and the impact they have on the economy. The conventional method of calculating the relative importance of construction therefore underestimates the size of the construction sector’s contribution to the economy, which is significantly greater when building components and materials, design and civil engineering consultants and other construction inputs are included. The significance of the building industry can be better assessed as the annual value of the final built goods, not just the value added on site by contractors. In assessing the size of construction one intuitively includes the materials that go into the production of the built environment. This more intuitive measure of the significance of the production of the built environment as a percentage of GDP includes the value added by contractors as well as the value of steel, concrete and glass and all the other material and design inputs used in the production process, equivalent to 15.3 per cent of the whole economy, according to Table 5.1 (see Chapter 5).

There has been no shortage of reports on the health of the construction industry and prescriptions for its recovery over the past 30 years or more. The most comprehensive list of reports on the UK construction industry is given on the website of Designing Buildings Wiki (2017) with no fewer than 79 reports named (see the Appendix for the list of reports from 1934 to 2018). Nor are the phenomena found in the UK unique to the UK building industry. King (1996) found much in common between the US and the UK.

In spite of all this effort little has changed in terms of the criticism and practice of construction in the UK over the past 50 years. The same comments keep re-occurring: late delivery, inadequate quality and poor budgetary control. In spite of efforts to the contrary, the industry seems unable to improve. Perhaps there are good reasons for this disappointing state of affairs. We begin by looking at what others have said, by referring to many of the reports that have highlighted the problems.

The Simon Report

Even before the Second World War had drawn to an end, the state of the construction industry had been a cause for concern. Would the construction industry be able to cope with the increased need to build housing after the war? Many homes had been destroyed. Others were old and dilapidated, and returning soldiers would need housing. In 1944 a committee under the chairmanship of Sir Ernest Simon was commissioned to prepare a report on the construction industry entitled “Placing and Management of Building Contracts.”

One of the themes of the Simon Report was procurement and the contractual arrangements in place to facilitate speedy construction. Site management was also an issue due to the volatility of the market, which made it difficult to employ labour. Even at a time of rationing, there was criticism that trade associations were fixing prices, and the Simon Report called for all price fixing agreements to be registered.

The Emmerson Report

In the 70-odd years since the Second World War there have been at least 77 government reports on the construction industry. The Emmerson Report of 1962 was briefed to examine the barriers to improving efficiency. The report emphasised the role of architects but found them wanting in terms of cost control and managing the building process, which had by 1962 become a complex set of relationships between main contractors and several subcontractors. Nevertheless, Moodley and Preece (2003) point out that the Emmerson Report highlighted the gap between architects and builders, a gap that was greater than similar relations between designers and producers in any other industry.

Emmerson also discussed the issue of training of both operatives and management, including the length of apprenticeships and the ability of apprentices to move between firms. The Emmerson Report recognised the importance of regular and continuous employment. Otherwise attracting and retaining staff would be problematic. Emmerson also saw a possible role for government departments in their relations with firms to encourage construction firms to be more efficient.

Although the contracting system had been in existence since Victorian times and was in urgent need of revision, Emmerson noted that proposed reforms put forward in 1954 by the Robertson Committee on selective tendering and fixed price contracts had not been adopted. Instead open competitive tendering meant that too many firms were competing for work, and the winning lowest tendered price was often not profitable for the winning contractor, leading to disputes and problems for all. Economists call this the winner’s curse. As Banwell (1964) was to reiterate in his report, winners in open competitive tender competitions frequently had neither the skills nor the capacity to undertake the work. This failure to modernise the industry to meet modern demands did not appear to have been taken on board by clients or contractors.

One feature that seems to apply to all government reports on the building sector is the assumption that the reports might actually in some way influence change in the construction industry. Reports alone do not necessarily change anything. This may appear to be a somewhat cynical point of view, but it is not clear what the mechanism is for executing the changes recommended. A military model comes to mind, namely the government commissions a report, debates its recommendations and hands over the agreed proposals to a general who then orders others lower in the hierarchy to carry out the changes needed to meet the aspirations of the report.

Instead, there is a highly fragmented structure of independent firms and organisations, each pursuing its own interests, namely survival and the making of profits. The troops, either the small specialist firms or even the individual skilled and unskilled workers, are rarely involved in the strategic discussions regarding the future of their industry. It is hardly surprising that change in the construction industry is slow or static. The business model does not fit the implicit assumption made in these reports, which is that the self-interest of the major firms and professional bodies that participate in the research and writing of the reports is sufficient to bring about reform of the industry. For example, it is not surprising that, according to Moodley and Preece (2003), Emmerson noted in 1962 that measures that had been recommended in the 1950s had simply not been adopted.

The Banwell Report

Only two years after the Emmerson Report the Banwell Report was published in 1964. Its title was “The Placing and Management of Contracts for Building and Civil Engineering Work.” Its focus was current practice regarding contracts and improvement of performance. Inadequate time to prepare in advance of actual construction was seen to lead to problems on site causing additional expenses and delays. To solve the problem, the Banwell Committee proposed engaging the main contractor and specialist firms early in the design and planning stages to anticipate difficulties and reduce the number and value of variations and claims. Banwell also called for all payments to be made “regularly and promptly,” something that contractors and subcontractors have never quite managed to fully achieve in spite of legislation to that effect.

The organisation and management of training was one of the subjects dealt with by Banwell. Excluding the trade union side and the interests of the construction workforce is a recurring weakness of many of the reports, and Banwell was supportive of consolidating all operative training in the CITB. He recognised the need to train both operatives and managers. The report considered industrial relations, the role of shop stewards, temporary employment and worker registration, though not all of their discussions were fruitful. As Langford (2003, p. 103) was able to say, “the report heralded changes in the industrial relations climate and practice in industrial relations on large industrial sites. As a report it was farseeing and imbued trade unions and employers with a liberal approach to industrial relations.” However, the Banwell Report was published in the decade immediately prior to the Thatcher era, which must have reduced its longer term impact.

The construction industry is a labour intensive industry and is a major employer. In 1970 the Large Industrial Sites Report was one of a minority of reports that engaged with the trade unions as well as the employers and professional bodies. Relations between the trade unions and employers had become so hostile by the late 1970s that involving the trade union movement in discussions about the future of the construction industry had become a political issue. This prevented an important part of the construction industry, namely the people who actually carried out the work on site, from participating in discussions on reform of the industry in several reports in this period.

The Wood Report

It was, however, not the final construction report before the industrial changes made under the Thatcher government of 1979 that extinguished the role of the unions in discussions on the way forward for construction, apart from the formal annual discussions on Working Rules Agreements, which kept up a pretence of negotiation between employers’ organisations and the trade unions. In 1975 a report entitled “The Public Client and the Construction Industries” was published as the result of a collaboration between the social partners (namely government, trade unions and industry), under the chairmanship of Sir Kenneth Wood. The report is better known as the Wood Report.

It recommended, amongst other things, a minimum three year rolling programme of construction projects across the public sector to stabilise demand for construction regardless of other economic problems that confronted government and the economy. Wood argued that the search for the lowest priced tender was at the expense of the effective use of resources and improvements in efficiency and performance. The report was critical of the lack of time to prepare drawings and manage resources prior to commencing work on site. The result of these problems led to delays and variations, both of which in turn increased the cost of construction. The Wood Report was supportive of procurement methods such as lists of firms, restricted to firms known to be competent and have the capacity to carry out the work, two-stage tendering, and design and build contracts. However, like the Large Industrial Sites Report of 1970, the Wood Report did not concur with the approach of government in the 1980s and 1990s, which meant these proposals were not of lasting influence over government construction policy.

In 1977, according to Connaughton and Mbugua (2003), representatives from eight organisations came together to form the Group of Eight (G8). Members of the Construction G8 were the Institution of Civil Engineers, the Royal Institution of Chartered Surveyors, the Construction and Civil Engineering Group and Building Crafts Section of the Transport and General Workers Union, the National Council of Building Materials Producers, the Royal Institute of British Architects, the Federation of Civil Engineering Contractors, the National Federation of Building Trade Employers and the Union of Construction Allied Trades and Technicians. Although it was a single body that attempted to represent the diverse interests within the construction industry, it was criticised as ineffective, and in 1987 the G8 ceased to exist. Nevertheless, it demonstrated that it was possible for the different interests in the construction industry to come together in one body. Its major failing was that it lacked ministerial weight.

The National Economic Development Office

In 1979 the change of government occurred with the arrival of Mrs Thatcher as Prime Minister, a year after the publication of the National Economic Development Office (NEDO) report entitled “How Flexible Is Construction,” which argued that there was a need for construction demand and capacity to be matched and in balance with the processes involved. In 1983 “Faster Building for Industry” and in 1988 “Faster Building for Commerce” were published. Largely concerned with industrial building, both reports sought to speed up the processes involved, including planning and construction. Although the report found contractors were capable of faster construction without necessarily increasing costs, it suggested that a “principal adviser” might be useful for less experienced clients, a role that is currently often taken up by project managers.

It suggested that, if construction were to be improved and speeded up in general, the quality of site management mattered, that communication between the designers and the clients, especially in a co...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Preface
• 1 Introduction: tracing the history of construction reports from Simon (1944) to the Construction Sector Deal (2018)
• 2 A critique of the modern construction industry
• 3 Replacing target setting
• 4 Setting out the priorities of the broad objectives
• 5 The size and scope of the construction sector
• 6 Innovation in the modern construction industry
• 7 A quality built output by a competitive industry
• 8 Efficiency and professionalism
• 9 Construction industry strategies
• 10 The construction market
• 11 The way forward
• Appendix: list of reports on the UK construction industry, 1934 to 2018
• Index