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Can value beat cost – and what does it mean in 2019?

How clients and contractors define value is changing – the question now is whether the industry can consign bad habits to history.

In attendance

Nick Abbey, Mace | Isabelle Adams, Crossrail 2 | Chris Arno, Bowmer and Kirkland Victoria Brambini, Scape Group (has since moved to Perfect Circle) Scott Corey, Willmott Dixon | Sonja Deans, Colas | Karen Devonport, Bam Construct | Rob Groves, Argent | Steve Johns, Aecom | Calum Macpherson, Robertson Group | Louise Townsend, Morgan Sindall | John Welch, Crown Commercial Service Richard Whitehead, Aecom | Peter Yates, National Association Construction Frameworks Tom Fitzpatrick, Construction News (chair)

“The impacts we have are way more important than the things we build.”

Like many of her fellow panellists, Morgan Sindall director Louise Townsend’s position was clear: attitudes to what we mean by ‘value’ needed to change.

She was speaking at a debate during November’s CN Summit, where a pan-industry group of experts gathered to discuss how the concept of value is transforming – and how companies needed to adapt to this new-look landscape.

Kicking off a lively debate, held in association with Aecom, Construction News editor Tom Fitzpatrick asked the panel what had changed in 2018.

There was widespread agreement that the old ‘three Es’ definition – based around effectiveness, efficiency and economy – was increasingly irrelevant.

“The landscape has changed hugely recently, frameworks have changed, and that terminology has become outdated,” argued Willmott Dixon national accounts director Scott Corey. “Social and environmental value have become far more prevalent and important. The old cost-driven perspective is something that is being rethought.”

Mr Corey added that his business had come to believe that there is no single definition of value. “After much research, we’ve come to the conclusion that it’s different for every customer. The biggest thing is the recognition that there cannot be one standard for value. Everyone has a different perspective and that frames the debate about maximising value. How do we achieve value for each individual customer?”

“We’ve seen real benefits on some of our frameworks from working on long term objectives”

Karen Devonport

From a client perspective, Crossrail 2 head of scheme design Isabelle Adams acknowledged that defining value on such an ambitious project was challenging, especially when expectations around issues such as carbon emissions will change as the scheme develops. “It’s a truly long-term project, so it’s difficult to define value,” she said. 

“It needs to be defined on a contextual basis, but we still need to benchmark it. For instance, what we’ve tried to do is to come up with a carbon reduction target and what it should be in 10 years’ time. They had very different targets for Crossrail 1 because it was a very different time. We can’t really use that as a benchmarking tool as it’s just not ambitious enough.”

For the contractors around the table, the starting point for defining and maximising value was to establish a deep understanding of their clients’ objectives and ambitions; only then could they define it in terms of quality rather than simply cost.

“We like to understand some of our client organisations’ long-term aims,” said Bam Construct framework director Karen Devonport. “We’ve seen real benefits on some of our frameworks from working on long-term objectives. From a contractor’s point of view, we would like that to be reflected in quality scores – it’s not all about price.”

Aecom roundtable 2

Aecom roundtable 2

This, Ms Devonport added, was not always easy for clients, particularly for public sector organisations that are under tremendous budgetary pressures. “I know that it can be very attractive to procurement teams and that is understandable, but sometimes they don’t see the wider strategic objectives of an organisation,” she suggested. “Trying to factor that into how you distinguish between contractors should be encouraged.”

Aecom managing director for buildings and places Richard Whitehead agreed that clients often still reverted to cost rather than value in the procurement process. “I think it’s still a challenge,” he said. “In an age of austerity, it often comes down to cost. Big clients can invest time and effort into value, but what about the smaller ones who aren’t that familiar with the industry? The challenge on budgets and the noise from government about lower cost has to change.”

Expectation management

On the flipside, John Welch, deputy director at government agency the Crown Commercial Service, accused some large clients of expecting too much from contractors in terms of value. “One of the first steps is to set strategic objectives and to work with industry to understand what is achievable,” he said, adding that Hinkley Point C – which demanded that no agency workers be used on the project – was a good example.

“The frustration we had with Carillion in retrospect was that it became clear that they were challenging their supply chain in terms of payment terms”

Rob Groves, Argent

“Did anyone consult the industry about how difficult or realistic that objective is?” he asked. “Without engagement from the industry, you can’t set realistic objectives. My experience is that clients often don’t listen to industry as much as they could. Having strategic discussions with suppliers is something that will result in real debate about what is achievable.”

While the panel agreed that early engagement was critical to maximising value, it also cited the importance of maintaining relationships. Argent regional director Rob Groves used the example of Carillion, which was the main contractor on phase one of its Paradise Circus development in Birmingham.

“The frustration we had with Carillion in retrospect was that it became clear they were challenging their supply chain in terms of payment terms,” he recalled. “That created a lot of problems for us because we ended up picking up the tab. We made a phone call to Bam the day that Carillion went bust. We have a long-term relationship with them, so we were able to start that discussion straightaway.”

What’s more, Mr Groves said, the fact that Argent had always worked hard to engage directly with the supply chain meant the company was able to pick up the pieces quickly. “Even though the supply chain was out of pocket and we were out of pocket, it was very much in all our interests to get moving as quickly as possible,” he said.

“Time is money and we had tenants signed up for the building. We knew the supply chain and we reassured them that the project would carry on; that we were committed to the development. Those relationships helped reassure them and mitigated the time delay. We employed them directly initially and then they moved over to Bam. Going forward, we are doing our best to ensure that when we appoint a main contractor, we still have a relationship with the supply chain.”

Lifecycle value

There was also widespread agreement that clients should think about value in terms of the entire lifecycle of a development, rather than simply the construction cost; only then can true value be achieved. “The conversation always comes back to the construction phase, when actually the cost of maintaining the asset far exceeds the cost of construction,” Robertson Group director of strategic partnerships Calum Macpherson pointed out.

“Those of us who both build and maintain have a different view of value. The short-term task is to get a bit of kit delivered for a price, but if somebody said to clients that the task is to ensure that this bit of kit provides value over a 40-year period, they would think differently. As an industry, we need to look at that long-term picture.”

Mr Welch nodded in approval. “I did a long stint in the water industry and when I was there we shifted from looking at capital cost to whole-life cost, which was the right thing to do,” he said. “The framework was based on whole-life cost. It’s difficult to a degree, but it worked quite well. What drives businesses often can be finance and that can drive you to procure in a particular way. If your funding is spread over a longer period it can change your view quite quickly.”

Aecom roundtable 4

Aecom roundtable 4

There were signs that this message was starting to get through to certain public sector clients. Bowmer and Kirkland framework director Chris Arno revealed that when his firm bids for work with the Department for Education, it is asked to consider the long-term costs. “We have to understand what that whole-life cost is, whether that’s energy or whatever, and we then get scored on it,” he said.

“A lot of our R&D in recent years has been on improving the performance of our buildings so that we can deliver improvements in a cost-effective, efficient way. That to me is a far better use of capital costs because if you’re improving the energy requirements, you’re doing that for 60 years. That’s where we’re focused at the moment: getting clients to understand the value that brings is key.”

Importance of social values

According to the panel, maximising value in the modern context needs to take account of social factors, as well as environmental performance and cost-effectiveness. Though this trend has been emerging for some time, it was put on a legislative footing by the 2012 Social Value Act.

“We have a social value strategy and have been quite clear about where the Social Value Act sits for us in the context of the construction industry,” said Ms Townsend, who is Morgan Sindall’s sustainable business director. “We have a tool we use to provide a monetary value for those outputs. We’re in early trials with it at the moment and it’s something we set out on about 18 months ago.”

“It’s reasonably rare on a medium-sized project that you would have somebody responsible for social value”

Louise Townsend, Morgan Sindall

Ms Townsend also encouraged others to engage proactively with the Social Value Act, not just because it was the right thing to do but because it had the potential to transform the public’s view of the industry. “We’re seen as all sorts of negative things, but actually I think we need to talk about building communities,” she said. “The impacts that we have are way more important to society than the things we build. The first thing to go every time is social value.

“It’s reasonably rare on a medium-sized project that you would have somebody responsible for social value. [Or] that you would have somebody responsible for community engagement and skills and employment. Because you know if you recruit that person [then] as soon as commercial tensions arise, they are low-hanging fruit. But actually, those are the people who are delivering the value through creating employment opportunities.”

Aecom roundtable 5

Aecom roundtable 5

Mr Whitehead agreed, adding that the media only tended to report on construction when something negative happened, which of course did little for the industry’s image. “The minute something goes wrong on a project, that’s what makes the news,” he said. “If we can somehow shift the conversation with the public so they see the value in terms of local jobs and the investment in the community, then we can change the discussion from failure to success.”

Many around the table suggested that embedding social value into procurement was becoming commonplace, and that it was only a matter of time before that began to be recognised. “We do find that social value is placed more and more as a contractual condition and we find that it works reasonably well,” said Colas project development and strategic analysis manager Sonja Deans. “We do employ more apprentices as a result of that.”

Meaningful dialogue

Scape Group managing director Victoria Brambini, who since the Summit has moved to consultancy joint venture Perfect Circle, added that in her experience contractors were willing to go above and beyond client expectations when it came to delivering social value. “Many contractors already deliver so much and beyond what clients actually require of them,” she said. “What we try to do is maximise value beyond what they think they want. It’s all about the dialogue upfront with the contractors and the clients.”

However, the panel also warned against social value becoming a tick-box exercise, particularly in terms of apprenticeships and other local employment opportunities. Mace framework director Nick Abbey said: “If you look back over the last few years, what people have measured is the number of apprentices.

Aecom roundtable 1

Aecom roundtable 1

“Actually, what we should be measuring is what you have done with that person. Our approach is very much about taking fewer people per £1m spend but actually making sure we take them all the way through their apprenticeship. It’s about providing the pastoral care and put measures in place to develop their career.”

Peter Yates, framework lead at  National Association Construction Frameworks, agreed that the industry had some way to go. “The daft thing is that we’re congratulating ourselves for doing these great things with apprenticeships, but actually there is a huge shortage of skills, so we’re not doing something quite right,” he said.

While major advances have clearly been made, the panel concluded that clients, contractors and consultants still have work to do in terms of maximising value and that short-term cost savings, however attractive, should not be allowed to detract from long-term value – in all its forms.

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