History Of The Government Construction Strategy Construction Essay

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It is widely publicised that the construction industry is lagging behind other industries in terms of its supply chain practices and efficiency (Bankvall et al., 2010). Briscoe and Dainty (2005) state the industry is facing problems with supply chain management and integration. There are many explanations for this, such as, the fragmentation of the industry (Dainty et al., 2001) and the separation of design and construction processes (Egan, 1998). Latham (1994) argues that this fragmentation has lead towards low productivity, poor value for money and mediocre client satisfaction, particularly when compared to other industry sectors. Morledge (cited in Pryke, 2009) argues that because of this fragmentation there is an increased amount of transaction volumes at lower average values and inevitably higher levels of opportunism, particularly in the context of low barriers to entry. Furthermore, he says this is hindering innovation and development within the industry.

Cox and Ireland (2002) feel that these factors along with the lack of co-ordination and communication, adversarial relationships, lack of customer supplier focus, price-based selection, and ineffective use of technology are the initial causes for the inherent difficulties. The adversarial nature of construction is one which has been recognised for many years (Cox and Townsend, 1998). Morledge (cited in Pryke, 2009) feels that parties within the supply chain try to minimise their exposure to risk and maximise the reward. This is usually achieved by passing the risk down the supply chain (non-legitimate risk transfer). This culture that has developed has resulted in an industry troubled with tension and conflict whilst being inefficient and wasteful (Cox and Townsend, 1998). A diagram showing the needs and areas of conflict within the industry can be seen in Diagram 1 below.

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Diagram 1: Existing industry structure (extracted from Townsend and Cox, 1997).

Cox and Townsend (1996) conducted a survey on various industry groups. These groups were asked what they believed to be the real problems facing the industry. They were only able to identify issues directly impacting on their own performance:

"Clients stated that the adversarial culture and low productivity were the main problems; virtually all contractors claimed that the culture and low profitability were; consultants were concerned with low and discontinuous demand and profitability; and subcontractors were mainly worried about profitability and poor management."

It is important that main contractor-subcontractor relationships are non-adversarial as subcontracting accounts for up to 90 per cent of the total value of a construction project. Subcontractors supply labour and material, converting drawings into physical parts of a building (Hinze and Tracey 1994). Muya et al. (1999) argue that poor practices such as late payments impact relationships between subcontractors and main contractors.

Bankvall et al. (2010) focuses on the interdependencies of construction activities as a reason for poor supply chain management. Reciprocal interdependencies in construction make it difficult to incorporate supply chain management theories from other manufacturing industries such as the automotive industry. These reciprocal interdependencies can lead to adversarial relationships where delays are concerned.

Differing goals and objectives and varying degrees of power within a project team are often the underlying conditions for triggering adversarial relations (Love et al., 2004).

In an attempt to overcome the adversarial nature of construction and improve project outcomes, relationship contracting (such as alliances) have been used both private and public clients (Li et al., 2000;Hampson et al., 2001). In Australia the use of relationship-based contracting particularly partnering has had a “lengthy and somewhat chequered history, principally due a number of parties attempting to exploit the concept in a rather cynical way” (Mortledge et al., 2006).

There seems to be a preventative culture with an aggressive business mentality within construction (Akintoye, 2000). According to Korczynski (2000) the industry is renowned for companies exploiting each other's vulnerabilities. This culture of putting project costs over external relationships is present globally (Fernie, 2007).

Construction is a fragmented industry with a temporary nature (Vidalakis, 2010). Fernie (2007) acknowledges that the market structure does not help to build relationships. In Sweden 74% of domestic houses between 1990 and 2004 were prefabricated and made in factories (Segerstedt, 2004). As there is repetition and a generic product the relationships within the supply chain developed and were present for longer, increasing trust and reducing costs.

Procurement:

Despite development in procurement methods there are still too many parties who are excluded from the power-decision process (Atkintoye, 2000). Large clients and Main Contractors still have all the power throughout the supply chain.

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There are added benefits to having early involvement with specialist contractors and suppliers in the design and planning stage (OGC, 2007).Subcontractors' early involvement in a project allows them to gain a better understanding of the project itself and helps the overall relationship with the Main Contractor, which promotes trust and team working between parties. (Mathew et al, 1996).

The powerful Main Contractor traditionally sees the Sub-Contractors as a dispensable resource (Akintoye, 2000). Fernie (2007) argues that the 'arms-length' approach to contractual relationships and opportunistic behaviour are a legitimate organisational strategy. Whereas, Briscoe's (2005) study identifies that close working relationships do exist and that there are more informal arrangements in place rather than calling it supply chain management.

Motawa (2009) states that incentive payments are often implemented with disincentives included rather than incentives which can create an adversarial culture than one where everyone is working together.

Morledge (2006) argues that traditional procurement methods can be adversarial and that design and build is less likely to have adversarial relationships. Trehel Corporation (2012) argue that Construction management is a means of avoiding adversarial relationships altogether.

Suicide Bidding:

CIOB (2010b) state in tough times what's important is not so much profit but turnover- keeping the business ticking over. This has led to some contractors to the practice of 'suicide bidding'.

CIOB (2010a) define 'suicide bidding' as the practice of bidding unusually lower than competitors in order to obtain work. Companies participate in this highly risky activity in order avoid job losses and to have work for their skilled staff to undertake, even if this means only breaking even on a project or, in some cases, making a loss. CIOB (2010a) further explain that companies use adversarial behaviour to increase their final accounts. Matthews (2011) argue that this is a temporary solution for boosting revenue and to keep people busy. According to Prior (2010) the contractor Connaught had been making bids as much as 20% below the lowest tender in order to win tenders, before it collapsed. This is a highly controversial and risky practice within the construction industry. Matthews (2011) argue that this underbidding harms the bidder, the client, the end-users and rival firms that might have been able to do a better job.

Some Contractors will look at making a loss on some projects hoping that they will get the work on another from the same client. CIOB (2010b) support this activity and further highlight that some projects can be taken on as loss leaders so that in the medium to long term they may lead to other, profitable projects for the same client. However, this is driving the prices down for other contractors as they feel they have to enter this kind of bidding in order to win work. Clients mainly select the main contractor's tender on a lowest price basis, therefore driving a low cost mentality through the supply chain (Wong, 2000). This is further exacerbated by banks restricting lending and the lack of work available in this economic downturn. This is driving tender prices down and contractors are willing to on the risk without a premium. Main contractors seek to recoup their costs, especially in cases of 'suicide bidding', by selecting the lowest price subcontractors and through client changes. Hartmann and Caerteling (2010) found that main contractors consider price as the primary selection mechanism. A known subcontractor will not be selected unless they offer a competitive bid. The main contractors will, however, favour a known subcontractor even if the previous quality has been inconsistent in the past, so long as the difference in price is marginal. Wong et al. (2005) feel that adversarial relations and mistrust emerge from competitive bidding, therefore relationships should be redirected from competitive prices to collaborative procurement practices (Mathew et al., 2000).

Matthews (2010) argue if material prices were to increase and tender prices remain the same then a loss could turn into a major loss on a project. Although risky and highly frowned upon suicide bidding is not illegal within the private sector. CIOB (2010b) state that in other legal systems in Continental Europe contractors can seek renegotiation or adjustments in price if projects become unprofitable to the contractor, but this is not the case in the UK.

In contrast the procurement of government contracts is highly regulated with arms of government are restricted when entering into contracts with the private sector (CIOB, 2010b). Julian Bailey (cited in CIOB 2010a), a construction lawyer, explains that in the case of Morrison Facilities v Norwich City Council: Facilities management works were put to tender under a five- year contract. A number of tenders were received, including one from Morrison Facilities Services. Connaught, a rival bidder, was awarded the contract as they had bid 20% below the lowest tender. Morrison, disgruntled by this made a number of complaints and sought an injunction to prevent the Council from proceeding with the contract to Connaught. Morrison claimed the bid was abnormally low and deconstructed the bid to show that Connaught were indeed making a loss. The applicable EU Directive requires a council to investigate bids which are abnormally low before rejecting them.

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Matthews (2010) argue that underbidding destroys the very trust needed to integrate the supply chain, which the industry has been trying to do since the Latham report (1994). This is because contractors seek to recoup costs through contract loop holes.

Retention:

According to the OGC (2007) unfair withholding retentions can have an adverse effect on cash flow and is detrimental to relationships on site. Furthermore, the OGC feels that collaborative working and industry commitment to and delivery of improved quality should eradicate the need for retentions over time.

Project Bank Accounts:

Project Bank Accounts (PBAs) in a ring-fenced bank account from which payments are made directly and simultaneously by a client to members of the supply chain (Cabinet Office, 2012a). These accounts have trust status which secures the funds in it and can only be paid to the beneficiaries, who are the supply chain members named in the account. The client and the lead contractor are the likely named trustees. "The advantage of trust status is that in the case of insolvency monies in the account due for payment to the supply chain is secure and can only be paid to them" (Cabinet Office, 2012a).

PBAs are suitable for projects of a wide range of values, even to projects as small as £1 million. NEC3, PPC2000 and JCT contracts have provisions for PBAs (Cabinet office 2012a).

Francis Maude (cited in Cabinet Office, 2012a) suggests that in having PBAs SMEs will be able to concentrate on expanding their businesses rather than chasing payments as less efforts into cash management will be needed.

PBAs can generate confidence in both the supply chain and the lead contractor, reducing the risks and prices by providing real surety of cash flow for all parties (OGC, 2007). Furthermore, the OGC (2007) argues that PBAs can help make projects become more collaborative and improve trust and confidence throughout the supply chain. This is largely because claims for poor payment should be reduced.

By using these accounts members of the supply chain can be paid promptly which would reduce the amount of credit used n the supply chain as for example if a subcontractor was paid late and he did not have the funds to pay an employee or supplier and he may have to go into his overdraft in order to pay wages or materials. Furthermore, it will help reduce administrative costs in chasing payment.

Some key aspects of PBAs can be seen below in table....

Table.... Key facts of PBAs (Klein, 2012).

Government Construction Strategy:

The Government Construction Strategy (2011) seeks to make public sector construction cost reductions by 15-20% through partnering, supply chain integration and the effective use of frameworks.

Again, much like Latham (1994) and Egan (1998), this report challenges the industry business models and practices. It seeks to replace adversarial cultures with collaborative ones, an all too familiar sound.

A major part of this looks into integrating the design team with the constructors in order to develop a solution that meets the required outcome. The contractors will integrate key members of the supply chain to have an input in the design in order to create value. They also aim to align the interests between the designers, constructors, occupiers and facility managers. With the alignment of visions, interests and performance everyone can work to one elusive goal.

This report highlights the need for suppliers to work together on a shared improvement plan, and the construction process would benefit from having fewer suppliers which would create a more settled supply chain. It states that this has generally been achieved by the use of frameworks, tendered in accordance with the requirements of procurement law.

It is quick to highlight that there are problems when creating long term relationships and using fewer suppliers as this reduces competition (particularly accessibility to new entrants like SMEs) and restricts innovation. However, the government feel with the use of frameworks they can benefit from economies of scale.

"The principal barrier to reduced cost and increased growth is the lack of integration in the industry, compounded by a lack of standardisation and repetition in the product." It points to procurement reform as being a key solution to many of the problems associated with construction. By exploring alternatives to procurement models which introduce competitive tension they feel the cabinet office feel they can encourage innovation, supply chain integration and alignment between designers, constructors, occupiers and operators. They wish to extend procurement beyond construction of the building, and through the products life-cycle.

Another key area this report focuses on for savings is the introduction of BIM. This collaborative 3D modelling has been present in many industries for a long period of time, as usual construction has been late to adopt such technological advances. BIM is thought to reduce the opportunity for error in design and construction, and produce a shared platform in which to reduce costs. In reducing the amounts of errors in design the amount of claims will be reduced and relationships will improve.

One year on:

Unfortunately the results of the government trials will not be available until March 2013 at the earliest. However, the Cabinet Office (2012b) have created a report on the progress of this study and insist the industry has engage energetically this major reform programme. Some of the findings can be seen below:

The trial projects have seen cost reductions and proposed 15% to 20% targeted reductions are seen as achievable.

By using PBAs the Cabinet Office has seen improved payment speed and security to SMEs and others in the supply chain. Also it has seen savings of around 1% of project values, but not the 2.5% they are aiming for.

They found that increasing communication and transparency across the supply chain, and facilitating improved team integration resulted in better relationships.

In personalising business relationships and having an early peer group engagement to deal with issues as and when they arise the trust in the supply chain was maintained.

All three models of procurement have Early Contractor Involvement, integration and transparency. Some of the advantages and disadvantages can be seen in table...

Table:.... Advantages and Disadvantages of Procurement Trials (extracted from Cabinet Office, 2012c).

Integrated project insurance is particularly important to reducing the blame culture within the industry (Cabinet Office 2012c).

Integrated Project Insurance:

According to Parliament (2008) every construction project is underwritten by hundreds of insurance policies. These include Professional Indemnity Insurance, Contractors All Risk Insurance and Public Liability Insurance. All these can be replaced by Integrated Project Insurance, which covers the client, the funders and the project team collectively.

The Construction Strategy (2011) seeks to explore the use of Integrated Project Insurance in procurement models.

Latham (1994) saw one of the major barriers for integration include the liability culture and insurances which are fragmented to mirror the old fragmented construction industry.

Davies (2012) explains how Integrated Project Insurance would be a single policy taken out by the client and will cover the client and all the members of the team. It will cover them from all of the risks that would normally have been covered by Contractors all risk, Public Liability Policies and even risk covered by Professional Indemnity Insurance. However, it won't cover Professional Indemnity Insurance in the same way, it will only cover the cost of the project (the cost plan), if there is a problem on the project which causes over spending that is what it will be covering. This therefore avoids all of the legal costs of finding out who is to blame. Thus, reducing the adversarial culture within the supply chain. Under the policies the members of the integrated team cannot sue each other unless fraud has been committed. Also the insurers claim they will waive subrogation rights and will not claim from the responsible parties, creating a 'virtual company'.