Arresting the decline of the UK construction industry

A civil engineer can be defined as “an engineer who designs and maintains roads, bridges, dams and similar structures”1. The industry as a whole is driven by the needs of the project promoters and financiers, who may be either private or public, with an ultimate objective to formulate and develop cost-effective solutions.

Although civil engineers have the intention to deliver value for money, the industry itself has a reputation for financial mismanagement. This reputation has been built by years of extra costs, delays, disputes etc. In 1994, the Department of the Environment formed a group of industrial professionals who commissioned Sir Michael Latham to produce a report “Constructing the Team”2. This report addressed and made recommendations towards the key problematic issues within the industry. Despite a succession of official reports since the war, no action had occurred. These problems are centered around the financial aspects of construction projects. In the UK, construction takes 50% more man-hours than in Washington DC (1995) and it is the engineers duty to attempt to minimise costs and improve efficiency wherever possible.

2 THE NEED FOR LATHAM

The Latham reform started in 1992 following a “talk-in” by Conservative ministers Tony Baldry and Sir George Young at the DOE. The invitees, drawn form a wide cross section of industry, convinced the ministers that the whole construction process was grinding to a halt, disputes were legion and co-operation was minimal. Probably more alarming appeared to be an apparent resignation, by those within the industry that construction was inherently complicated and dispute ridden and that clients could only get what industry produced, regardless of what they wanted.

Before I look at the remit given to Latham and the recommendations that followed, it will be instructive to consider some of the bases for his comments.

3 THE HISTORY OF THE INDUSTRY’S DEMISE

The construction industry has a reputation for being a problem industry, which is full of disputes and fails to deliver what customers require. This reputation is not new. It has characterised the industry for over a hundred years and probably longer. Historical studies under Bowley, noted that the huge increase in commercial activity and the technical innovations of the industrial revolution were inadequately reflected in the arrangements of the construction industry and its developing professionals3. Of particular concern was the formal separation during the 19th century of professions from the physical construction, most notably by architects and to a lesser extent engineers. The Royal Institute of British Architects (RIBA) formalised this separation in 1887 when it barred members from holding profit-making positions in building organisations. It is interesting to note the statement made almost a century later by Sir Harold Emmerson that:-

“In no other important industry is the responsibility for design so far removed from the responsibility for production”.

He concluded that the client suffered as a result of this “divorce”4.

4 PRESSURES FOR DISPUTES IN CONSTRUCTION

The construction industry is probably the most diverse in the UK. It covers a huge range of crafts and professions seeking to design, construct and manage almost infinite range of complicated processes. Most projects are unique with the result that every building is a prototype, involving matrix working associations and temporary groupings of clients, funders, architects, engineers, local and statutory authorities, surveyors, contractors, sub-contractors and suppliers. This is overlaid by the economic realities of the industry, which is labour intensive and highly competitive.

Profit margins are historically low. The economic structure is based on a short and repetitive payment cycle by contractors and sub-contractors who have promised to carry out their work for a price that assumes there will be little or no delay or difficulty. As a result there exists potential for numerous inter-related legal and factual disputes between parties whose size and bargaining power differ.

5 THE LATHAM REPORT

The “Joint review of Procurement and Contractual Arrangements in the UK Construction Industry” was announced to the House of Commons on 5th July 1993. It is worth pausing for a second to acknowledge the full title, because it contains one of the key factors which has led to the startling impact that Latham has had. The word I wish to emphasise is “Joint” and it is this that sets Latham’s report apart from the Wood Report5. This and all previous reports were Government sponsored, appointing external people to stand back and criticise the industry. With Latham, the whole set up was a joint Government and industry initiative. The funding bodies were:

1. The Department of the Environment (representing Government).

2. The Construction Industry Council (representing the professions).

3. The Construction Industry Employers Council (representing main building and civil engineering contractors and material producers).

4. National Specialist Contractors Council (representing trades other than electrical and mechanical work).

5. The Specialist Engineering Contractors Group (representing M&E specialists).

The full brief given to Latham was extremely wide and not need be repeated here. However, I think it is significant to this report that he himself chose to emphasise two major aspects as being:

a) reducing conflict and litigation, and

b) encouraging the industry’s productivity and competitiveness.

Latham produced an interim report entitled “Trust and Money” which acted as a short discussion document and contained no specific recommendations; those came in the final report. In this interim, he noted that there was “too little trust – and not enough money”. The final report, “Constructing the Team” contained 30 recommendations, which if taken with supplementary suggestions throughout the Chapters actually increase the total to more than 50. This seems indicative that the whole construction industry is in decline and that corrective measures need to be taken to ensure that everything that is wrong is put right.

6 THE EGAN REPORT

In 1998, the Construction Industry Task Force led by Sir John Egan was commissioned by the DETR to undertake a further review of the industry. The Deputy Prime Minister identified the importance of the Industry to the UK economy and stressed the need to improve the quality and efficiency of our construction programmes. In brief, Egan has gone one step further than Latham and identified quantifiable targets for the industry to guarantee continued improvement.

These recommendations include annual reductions of 10% in construction costs and construction time in addition to a 20% reduction in project defects. Some of Egan’s other recommendations mirror those of Latham, advising partnering cultures and improvements to the project process. The overall vision of Egan is somewhat different however, with the emphasis placed on the need for the industry not to look at what it does already and do it better, but to look at ways in which it could do it entirely differently.

7 ARRESTING THE DECLINE

It is extremely difficult to fully appreciate the complexity of the problems and to make recommendations accordingly. I will however, attempt to focus on the important declining elements and identify resolutions or alternative measures to combat these issues directly. These are ideals only and are not necessarily achievable.

7.1 Declining Civil Engineering Profession

The problems for the Civil Engineering profession started when engineers started to abdicate responsibility to accountants, Quantity Surveyors, etc. and ultimately diversified. The financial elements of engineering were then a sideline and these professions turned the financial management of Contracts into an art form. It can be seen that a control of finance can lead to a control of everything, and it was in this field where engineer was only marginally involved.

I would advise that a re-evaluation of the engineer’s role is necessary to identify areas where the Civil Engineering profession could be made more high profile and take a lead role in making the financial decisions. The outlook, education, motivation, experience and commitment of engineers is such that engineers are in an ideal situation to enable them to make financial decisions. An eradication of the quantity surveying population may be achieve this goal as a sound engineering knowledge is paramount when solving the many technical problems that arise during a project and particularly those with financial implications. However, one of the inherent problems with this recommendation is that of the many technical problems the engineer must solve, the financial implications of these decisions are crucial.

If an engineer was to carry out his job with 100% efficiency, he can not boost profit margins as his decisions have already been built into the contract price. It is only when a mistake is made that the project’s budget can count the cost, which is irrecoverable. A quantity surveyor maintains his control over the finance element, as his sole purpose is to make money over and above the contract price. What I would suggest is a conversion of the QS role to that of a measurement engineer allowing the civil engineer to gain the initiative.

7.2 Training of Engineers

One of the issues surrounding the construction industry professional is that the industry as a whole is not held in particularly high esteem. At present, professions such as law and

accountancy pays significantly higher salaries than construction careers and society holds these professions in a higher regard. The industry has reacted to this issue via the Engineering Council’s SARTOR (Standards and Routes to Registration) recommendations. This involves a more rigorous education system in order to achieve the elitist status of “Chartered Engineer”, i.e. a Masters degree following attainment of a Bachelor of Engineering (Hons) qualification. I think that this is the wrong approach for the industry and will only lead to a worsening of the decline.

It will appear from the student’s perspective that Engineering would be an inherently difficult profession to enter into and would lead them to find a more attractive alternative. The net result would be a lower intake onto engineering degree courses and a reduced intellectual standard of engineering foundation. The perception of the “technician” as a second class citizen will be difficult if not impossible to dispel no matter what the title bestowed. It will be difficult to attract people to undertake a BEng Degree to become a technician when this level of qualification would be accepted across the board in other professions.

Latham’s vision was concerned with changing attitudes, developing a new culture of working together, and seeking continuous improvement. The status and earning potential of engineers may be enhanced if Latham’s goal can be realised. Rather than SARTOR, I would suggest a broader based learning programme might be more beneficial to the industry. A longer degree course, with a common first year foundation package would enable specialist skills to be identified and enhanced, with increased emphasis placed on personal competencies such as lateral thought, responsibility and communication. Also, in order to achieve the “team culture” philosophy, it is in the education of engineers where this can be embedded, eradicating the adversarialism that is so fundamental to many of the industry’s problems.

7.3 Culture of the Construction Industry

As identified earlier, the whole industry is awash with claims, argument, disputes, litigation and adversarialism. This needs to be tackled on a nationwide scale with the adoption of Latham’s recommendations. I would suggest the more pertinent of these are:

a) a single form of contract conditions for all construction contracts (perhaps similar to I.Chem E in nature);

b) a partnering or team culture for all parties.

In the United States of America a large proportion of the industry’s construction processes are based around the “Design and Build” contract mechanism. This involves the contractor forming part of the project team from the inception stage through to completion. I would suggest this method be more widely promoted and adopted throughout the UK with the radical elimination of the “Resident Engineer” role as we know it. The RE is traditionally thought of as the client’s “on-site” representative and as such will look after his interests.

The true definition is one of imparciality, though this is rarely the case. I would advise that the RE should provide an overall input into financial aspects of the Green Book type contract, with a sound engineering knowledge. I believe that in order to achieve the partnering culture, it is necessary to promote trust, honesty and value for money, again liking with Latham’s interim report. It is important for the contractor to feel valued, for his input to be appreciated and for his efforts to be rewarded. In the same token, the client’s newfound appreciation should not be taken advantage of, leading to trust from both parties.

I also feel that the design and build contracts should be taken one step further to include maintenance. This would lead the contractor to feel that they “own” a project, and to apply resources effectively in order to achieve collective goals. I feel that this would also go along way toward removing the “bury your mistakes” attitude.

On page 37 of the Latham report, he recommended a single form of contract and set out 13 features of what he calls an effective “Modern Contract”. Some of these features include: teamworking and financial motivation; easily comprehensible language; appropriate allocation of risks; avoidance of pre-planned work changes; payment methods and schedules (this has lead to the Construction Act 1996); and providing incentives for exceptional performance.

The fact still remains that disputes and conflicts will still arise, but avoidance is the primary objective. Where this is not possible, a provision must be made for speedy resolution of disputes with the appointment of pre-determined adjudication personnel where required.

8 CONCLUSIONS

All the recommendations made by Latham to arrest the decline of the construction industry could be implemented without effect. In order to have any impact on the state of the industry, it requires the commitment of the industry’s professionals, the contractor and sub-contractor companies, the client organisations and the professional institutions. People currently within the industry need re-evaluating, re-educating and re-culturing. With newcomers enjoying the benefit of an improved training and development system, once and for all removing the adversarial philosophy.

The suggestions made by myself are intended to be ideals and may or may not be possible to implement. I would suggest that large-scale investment is required in order to alleviate the inherent financial problems, with a move to reduce Government privatisation. Although it can be said that privatisation of say the Water companies have made them leaner, fitter and more efficient, why couldn’t they be leaner, fitter and more efficient with the profits going back into the industry rather than into shareholders pockets.

It is my opinion that the decline of the construction industry has progressed to a stage where it would be extremely difficult to correct. The whole attitude of the industry’s professionals would need addressing in the first instance with the objective to abrogate the “them and us” perspective. Team working would be the key to meeting tendered costs, whilst maintaining profit margins. Should disputes arise, agreement can be reached by way of adjudication procedures, which should be the first resort rather than litigation and arbitration.

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