Low margins, high fragmentation, weak productivity: leaders from every part of the supply chain gathered to address the problems that cause endless changes to projects.
Andrew Barraclough, Wates | Mathewe Bennett, Willmott Dixon | Ann Bentley, Rider Levett Bucknall | David Collier, Kingspan | Steven Donovan, Stanmore | Chris Jarvis, Sheppard Robson | Peter Jones, Skanska | Lee Nightingale, KSS | Tony Palgrave, Mace | Andrew Pryke, Bam Construct | Chie Shimizu, Weston Williamson + Partners | Jack Simpson (chair), Construction News | Mark Swift, Kingspan | Stewart Tilley, Lee Marley Brickwork
The business of construction is dogged by two big problems that go hand in hand: low productivity and slender margins.
Solving these problems will require changes throughout the supply chain, from clients, designers and contractors to manufacturers, suppliers and specialists.
Part of the challenge is that projects are unpredictable: the path from client brief to completed building will inevitably be hit by environmental concerns, legal requirements, cost pressures and time constraints. These can not only alter a project, but in some cases introduce additional risk.
Getting the supply chain to work more efficiently to accommodate such changes – or avoid them entirely – could be crucial to boosting industry margins.
To tackle these problems, Construction News convened a roundtable discussion in association with insulation manufacturer Kingspan, bringing together representatives from architects, specialist contractors and tier ones to shed light on how and why designs change as projects progress – and what can be done to mitigate additional risk.
Kingspan national product manager Mark Swift set the scene for the panel: “We would like to understand the thought process when it gets to the commercial stage, why people change specifications and how that might change the fabric of the building.”
A common reason cited for changes on projects was value engineering, which has become a “dirty word” according to Willmott Dixon head of growth and innovation Mathewe Bennett.
It conjures ideas of “hacking costs out of a project” and compromising on quality, he suggested, and is often a result of the client’s brief colliding with a job’s economic viability.
Mace director Tony Palgrave agreed: “I think design changes are generally driven by margins.”
Kingspan Roundtable Mar 2018 1433
Mr Bennett added: “In the light of Carillion, it’s no secret that the low margins in the industry, which no contractor worth their salt can possibly survive on, mean that you have to find value in other ways.”
Sheppard Robson technical director Chris Jarvis pointed out that all parts of a project team can be tasked with finding efficiencies. “I have worked with contractors where different teams are involved at different stages and each one is tasked with making a percentage saving,” he said.
Wates group design director Andrew Barraclough suggested value engineering offered a false economy that missed the wider picture on a job. “We have people in our respective businesses who think that saving £5,000 or £10,000 in the top line is a great thing to do,” he said. “But what they don’t realise is what the consequential implications might be. In my experience value engineering is an overrated proposition that does not deliver on its promises.”
But Mr Palgrave offered a different perspective, arguing that, while value engineering could “dilute the final product”, there were also practical reasons for it. “In essence it’s an essential process to go through to make a scheme viable,” he said.
Earlier the better
The panellists cited early engagement of other parties on a project as one way to ensure viability and reduce the need for value engineering.
“As an industry we have an appalling record for cost certainty and programme certainty,” Bam Design managing director Andrew Pryke acknowledged. “Bring the contractor on early – bring everyone on early – work as a collaborative team and that will work so much better and de-risk the whole process. It’s a golden opportunity to change the whole procurement path.”
This can be influenced by the type of client you work for, according to Mr Jarvis. “For us, to have a client who is aware of their supply chain and aware of the sort of products they want to use can be very advantageous, because it narrows options down, and you can have a confident conversation with a specialist you know who is likely to be used,” he said.
“In the light of Carillion, it’s no secret that the low margins in the industry, which no contractor worth their salt can possibly survive on, mean that you have to find value in other ways”
Mathewe Bennett, Willmott Dixon
Giving confidence to suppliers is vital, argued Lee Marley Brickwork operations director Stewart Tilley. “We often get asked to get involved early, but it puts a big pressure on us,” he added.
“It’s a cut-throat market as a subcontractor and we could spend £20,000 to £30,000 on a tender and not even know if we’re in with a chance of winning the job. So we have to pick and choose really carefully which jobs we get involved with early and have some surety that we’re going to win the work.”
Stanmore divisional director Steve Donovan said, as a building envelope specialist, his company was only brought on board early under certain circumstances.
“It depends on the nature of the project, the nature of the client, the nature of the relationships,” he said, with the cost of the product being a decisive factor. “If you’re offering a very expensive unitised facade with very expensive materials, you’ll be brought in early.” In contrast, if his company was just tendering against other suppliers, then the design input and early engagement would be limited.
While the panel broadly agreed that early engagement with designers and suppliers was important, KSS director Lee Nightingale wanted to see closer collaboration throughout the course of a job. “There’s always a bit of a vacuum between the drawings we prepare and what goes out to [contractors],” he said.
“So we don’t know how that’s presented or the set of words that go with that documentation. As an architect, we’re frustrated we don’t have an overseeing role.”
Along with this vacuum between design and procurement there can be problems caused by vagueness around specifications.
Skanska technical director Peter Jones said: “The issue is that we get architectural intent, there’s no specification really.” This leaves the spec open to interpretation by the contractor or specialist, he continued.
But even when there are clear specifications in place, problems can emerge when products are actually purchased. Kingspan’s Mr Swift said: “We supply through distribution to merchants, and what will happen is a specification will go into a merchant and at that point it could get changed and substituted.”
Kingspan Roundtable Mar 2018 1507
Kingspan’s national structural insulation manager David Collier picked up the thread: “As of the end of February, 65 per cent of all products we manufacture go through a distributor. They order it in, in bulk, and then it goes out.”
Mr Swift added: “An example would be: a builder would go in and have a specification for a product, and the guy behind the counter might say, ‘We don’t stock that product, this does the same job’.”
This could lead to issues with compliance and buildings performing as specified, according to Rider Levett Bucknall global practice director Ann Bentley. “That’s a real issue for industry: if something’s been specified, how do we know it’s actually been installed?” she pointed out.
Root of the problem: fragmentation
Wates’ Mr Barraclough believed there was a common theme to the points being made: “All of this speaks to an issue around fragmentation,” he proposed, to agreement around the table.
“If we have the right people around the table at the right time to address the concerns of the designer, so we know that we’re proceeding together in a way where there’s confidence around quality, around output and price point and timeframe, then we wouldn’t be having this debate. The central issue for me is: how do we become more integrated?”
Ms Bentley gave an example of the potential financial benefits of better integration. “The Ministry of Justice has done studies on its estate and of the total construction spend on an asset; 51.8 per cent remained in the asset, so 48 per cent was spent on something else,” she said. “They recognise some of that is contractors’ profits, but a lot of it was the cost of interfaces in the supply chain.”
Willmott Dixon’s Mr Bennett pointed out that transaction costs in construction are among the highest of any industry.
A consequence of this lost value is new companies entering and disrupting the market, according to Mr Barraclough, by moving into areas of the industry they have previously avoided and offering vertical integration.
“We’re seeing contractors entering the design space; we’re seeing designers, like Aecom, entering the contracting space,” he said. “I think that is the direction of travel; we’re going to see a lot more of that, where you get much more integrated solutions – and it might be that contractors start to acquire or work much more closely with specialists.”
Alongside this vertical integration, Mr Bennett suggested that new technology offered contractors the chance to produce a whole new business model. “In the next 10 years, with the rise of the internet of things, buildings will become much more intelligent – they will tell you how they’re performing. You could say, ‘I will guarantee operational running costs of this amount’, and then make your margins by knowing it will perform better than that.”
Ms Bentley noted that this was similar to a model used in the aerospace industry, where Rolls-Royce effectively sells engines at cost and then makes profit from keeping the engines running at an optimum rate for 25 years. Contractors could offer that on structures, she suggested.
“Bring the contractor on early – bring everyone on early – work as a collaborative team and that will work so much better and de-risk the whole process”
Andrew Pryke, Bam Design
Some of the technology needed for this is already in use, according to Bam Design’s Mr Pryke, with facilities management teams installing sensors that feed back performance, allowing all maintenance to be planned rather than being reactive. He added that the sensors used were not expensive and could be widely installed by manufacturers if buyers started demanding them.
Ms Bentley said the public sector could drive this change. “Clients like the MoJ – the really big estate owners – they’re the sort of people that can change the market,” she said. “They spend billions on construction and construction products, and if they suddenly said, ‘We’re only going to buy products with sensors in them’, I’m pretty sure they would start being manufactured.”
For the whole-life service model to work for contractors, Mace’s Mr Palgrave said they had to return to the idea of early engagement on projects. “People have to be involved from day one,” he said, as any contractor providing an operational guarantee for a building would need to understand and be confident in its design and construction.
Kingspan Roundtable Mar 2018 1454
One measure to foster that confidence and increase construction efficiency would be the increased adoption of BIM. Weston Williamson and Partners associate partner Chie Shimizu used the example of Japan, where she worked before coming to the UK and where BIM is used throughout the supply chain.
“Every single subcontractor and manufacturer provides a BIM model, so it’s a kind of plug-and-play to bring that component in and fit it into your structure,” she explained. “You know what materials and what sizings you need and the cost. It’s very straightforward. But to get that kind of efficiency you need the industry to drive hard to achieve that aspiration; everybody has to have that mindset.”
Sheppard Robson’s Mr Jarvis suggested efficiency could also be increased through standardised modular buildings where appropriate – schools or hotels, for example.
While producing entire modular buildings could be seen as macro-standardisation, Mr Bennett said standardisation of micro-elements in buildings could produce efficiencies. “[It’s about] standardising things that are the same on every job – wall details, ceiling details – that end up being redesigned every time,” he said. “On a secondary school we worked on we had something like 28 different wall types, and managed to rationalise it down to three.”
Wider use of approaches such as BIM, intelligent buildings, modularisation and standardisation could all help the industry achieve bigger margins.
“We’ve done some very, very basic measuring on some of our sites and we reckon we’re running at between 65 to 70 per cent efficiency,” Mr Palgrave revealed. “If we can improve our efficiency by 2 per cent it will add masses onto our margin. We don’t need to go off and chase golden eggs and try to change products; we just need to get more efficient.”
Finding that efficiency is going to take a collective attitude change, he added. “There’s huge investment needed to take us to the next level and the only way we’re going to do it is by getting together as a group, pooling our resources and developing as a collective.”
Mr Bennett agreed: “I don’t think there will be any other option soon.” He argued that the untapped potential held back by the industry’s fragmentation and transaction costs made construction attractive to new, disruptive entrants.
“The potential for someone to come in from Silicon Valley and devise a platform that everyone designs through, with all the suppliers feeding their materials and rates into and all the subcontractors feeding their installation rates – and everyone has to use that platform – is more than feasible; I think it’s probably likely,” he said.
“There’s huge investment needed to take us to the next level and the only way we’re going to do it is by getting together as a group, pooling our resources and developing as a collective”
Tony Palgrave, Mace
He cited the example of Katerra, a California-based offsite construction company founded in 2015, which in January this year raised $865m in funding from investors.
“They have a centralised design platform, build their supply chain around them – literally physically around their factory – and have a design consortium that uses only their software package,” he said. “It is happening. You could be sat around here in 10 years with one representative, because with platforms it does tend to be winner takes all.”
Ms Bentley said the industry was ripe for a technological revolution, a point on which Mr Palgrave agreed: “It will be a system that will integrate all of our processes,” he said.
Bringing the discussion back to the problem of fragmentation, Mr Barraclough said: “Katerra is a really good example of what I’m talking about with integration. They do it from the beginning to the end and they do it their way.”
It’s a bold vision for the future of construction and represents a radically different way of doing business.
But radical change might be the only way to remedy the systemic problems of weak productivity and low margins that dog this industry.