The business cycle

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Abstract

The economy follows a Business Cycle which has four stages; expansion, prosperity, contraction and recession. The global economy is currently in a recession stage following a crash in the US Housing Market which resulted in a credit shortage in Financial Institutions on a global scale. This has impacted all industries, including construction, where consumers have lost confidence and decreased investments.

The Construction Industry has seen a fall in private sector investment leading to a reduction in the number of projects available for tender and construction with an increase in competition from other Contractors. Projects already in the design and construction phases, for example Wembley ARK Academy, have also been impacted by the recession and have been required to look into alternative strategies.

The global recession has impacted the construction supply chain on all levels - Client, Main Contractor, Subcontractors and Suppliers. A reduction in funding for projects has lead to a decrease in the amount of work available and an increase in the amount of competition for these projects. The cutting of profit margins and low prices being quoted for projects is causing many Clients and Main Contractors to be price-driven rather than focussing on the long-term aspects of a buildings life-cycle and an efficient Supply Chain Management System.

Introduction

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Based on the Brief given, this Vocational Practice Analysis will analyse if the recent down-turn in the Economic Climate has impacted the Construction Industry Supply Chain, by investigating the different levels of the supply chain - Subcontractors, the Main Contractor and the Client. The purpose of this investigation is to establish if the behaviour and strategic direction of construction projects, organisations and external factors have been influenced by the changing climate.

The report is structured by investigating the background theory, setting the context of the Construction Project, introducing the theory of strategically managing the Supply Chain and analysing the impact of the down-turn on the project and the project's Supply Chain.

The economic theory will look at the recent economic downturn including defining a Recession, the causes and the effect it is having on the Construction Industry.

The following section will introduce a Construction project, Wembley ARK Academy which is a £32m new-build school for Willmott Dixon Construction Ltd.

A Supply Chain, often related to Supplier/Customer relationship and management, will be explained in regards to its use and benefits to Clients, Main Contractor's, Subcontractors and Suppliers. This section will also describe Willmott Dixon's Supply Chain Management System and strategy.

Once the context has been set in the above section, the report will analyse the impact on the different levels of strategy, Project Level, Willmott Dixon Divisional, the Subcontractors' and the Clients' strategy to minimise the impact on their organisation. A number of different methods have been used to gather the information for this analysis, including interviews, industry data and questionnaires.

Finally the theory and analysis is pulled together in the Conclusion which aims to outline the overall impact and relevant organisations' strategic responses that has affected the Construction Project.

Recession

Economic Cycle

The economy tends to follow a long-term business cycle[1]. A business cycle looks at the fluctuations in economic activity over a period of time and is measured using the Real Gross Domestic Product (GDP). GDP is the value of the country's economic output and can be calculated in three ways:[2]

Output method - The total value of production of all goods and services.

Expenditure method - this measure focuses on expenditure through consumption, investment, government spending and net exports.

Income method - this is measured looks at the total income in the country through employee salaries and wages, company profits and rental income.

The economic cycle was first identified in 1860 by a French Economist, Clement Juglar, who believed the cycle was eight to eleven years long[3]. The Juglar cycle, also known as the Business Cycle[4], states that the recovery stage includes increases in external factors such as consumer confidence, productivity, prices and aggregate demand and the cycle is usually between seven and eleven years in total.

The cycle is thought to have four stages[5]. These are:

  • Expansion - of the economy, often following a recession
  • Prosperity/Recovery - the wealth and comfort within this
  • Contraction/Crisis - phase where the economy slows down and begins to decline
  • Recession - general economic decline
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Economists are split in their views regarding the business cycle and many believe it is not a cycle but economic fluctuations[6]. One of these different views is the Keynesian economics view that fluctuations in aggregate demand are seen as the business cycle. Although Keynesian models do not directly link with business cycles, models such as the accelerator and multiplier models do have results which are similar to cycles[7].

External influences, which include unemployment, technology, and natural crisis, also have significant impact on the Business Cycle. One key factor on the Cycle is the government and their' Fiscal and Monetary Policies, which are used to stabilise the economy and decrease the excesses of the business cycle which therefore level out the economy and the cycle. These policies include:

  • Interest Rates - reducing rates encourages spending whilst increase in rates encourages savings.
  • Taxes - reducing taxes can increase personal wealth and promote spending, but in turn Government spending would reduce or National Debt would increase.
  • Government spending - producing more work and employment but funding for this would be required
  • Supply of money - the mount of money available to an economy has an affect on inflation and price levels.

Recession

The most commonly used definition of a Recession is "two down quarters of GDP"[8]. Gross Domestic However this common definition is often challenged[9] as it does not consider all economic change variables, such as consumer spending and confidence and unemployment levels. In the United States, The National Bureau of Economic Research (NBER) is responsible for declaring a recession with the general definition of "a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and whole-retail sales."[10]

One factor that is consistent in the varying definition is that a Recession is a period of time in which the economic activity within the Business Cycle slows down. This slow down often results in a rise in unemployment and a decline in output and investment levels, which could include a fall in household income, business profit, investment spending and inflation. If a recession lasts longer than three to four years, or if the GDP is down by 10%, this can be referred to as an Economic Depression[11].

A recession, and it's subsequent "recovery" phase can be modelled in one of four "Shapes", which are modelled in fig 1. The shapes of the graphs are formed from the speed of fall into the recession and the time period it takes to recover again.

V-shaped Model Recovery period is approximately the same duration as the Recession Period;

U-shaped Model a more gradual decline and recovery than the V Shaped model;

L-shaped Model the decline is very drastic followed by a long sustained period of low/stagnated growth;

"W"-shaped Model Sometimes called a double-dip recession[12], starts to recover before the economy drops back into recession again.

Recent Economic Recession

Cause

In late 2007, the 'housing bubble' which had been created by re-selling of the securities had collapsed which resulted in the securities tied into the US Real Estate to significantly reduce in value. This impacted organisations and financial institutions globally as many suffered large losses and bankruptcy, which instigated a credit shortage in the US banking system.[13] Another term that has been used for this credit shortfall is the "Credit Crunch" Recession.

During the early 1990s, the traditional lending markets began to saturate, financial institutions began to increase their appetite for risk and began lending to the Subprime market which is defined as lending to consumers in the highest risk category. Traditionally, subprime borrowers have a higher than normal defect rate on repayments.[14]

The underlying issue was linked to a loss in confidence, as the securities had been packaged and sold to a financial institution, then re-packaged and re-sold and the market had lost the ability to track the sub-prime debt. The term "Toxic assets" were created to denote securities that included sub-prime loans[15]. As a result of the threat to increased risk of these Toxic Assets, Financial Institutions began to loose confidence and stopped purchasing securities which in turn decreased credit availability to banks, organisations and individuals. The global stock market was impacted as investor confidence was also drastically damaged due to the inability to track the toxic assets and those organisations that would be impacted by them.

Implications

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Due to the global nature of the Financial institutions, the impact of the withdrawal of credit was felt globally, which resulted in a drop in international trade, rising unemployment and housing price declines[16]. Banks began to assess each application for credit more thoroughly and made credit availability a lot more difficult. This in turn resulted in financial institutions, such as Fanny Mae and Lehmann Brothers "folding" and, in the UK Government bailout for Northern Rock and Royal Bank of Scotland (RBS).

The availability of credit created a spiralling effect and default rates on mortgages began to increase and unemployment began to rise as business loans were withdrawn. As house prices decreased then a number of assets began to fall into negative equity, where the value of the asset fell below the debt level, which added extra pressure to the financial institutions as they were at risk of none recovering of the debt.

Impact on Construction Industry

The UK Construction Industry was worth over £123 billion in 2008, which equates to approximately 6% of national GDP, made up Infrastructure, Housing and Commercial projects funded by both public and private investments.[17]

The recession has hit both public and private funding within the Construction Industry, which has resulted in many projects that were going through the planning phase being deemed as high risk and funding being either removed or suspended.[18] As a result of the credit shortage and decrease in general economic confidence, House prices decreased and the private commercial sector was also more hesitant to invest in construction projects with both sectors opting for the rental market and postponing capital investment. The Housing sector has suffered the most, followed by Commercial and Civil Engineering.[19] The restriction of credit for the Commercial sectors has made many organisations reassess their growth strategies.

In Supply and Demand terms, this resulted in fewer projects being commissioned (Supply) and therefore there is a rise in competition from other Main Contractors (Demand), resulting in a severe drop in profit margins to try to secure these projects.

Private sector work has decreased as many have struggled to obtain funding, however, Public sector has also struggled, but due to Fiscal Policies, the supply of credit has remained available for the construction industry with the Government slogan being "spend our way out of recession"[20]. The continued investment by the Government into sectors such as education has helped the industry with the availability of construction projects. Unfortunately, the Government has created a huge rise in National Debt (see Section 6) which will have to be recovered in the near future.

The recession has also had a large impact on the Construction Industry's workforce with a number of contractors and subcontractors needing to reduce their employee numbers or enter into administration due to the reduction in demand for work. This has led to many skilled labour being unemployed, leaving the industry and skilled foreign labour leaving the country. This will have an effect on the industry's recovery as once the economy starts to recover a large amount of the skill base would have been lost and therefore knowledge would not be available and money would need to be spent on re-training again.

Previous Recession

In autumn 1988, the United Kingdom suffered a recession which originated in the housing sector. In early 1988 average earnings were rising at a faster pace than retails prices which meant that the majority of people felt well-off financially, but at the same time house prices were increasing even faster than average earnings. With a combination of rising average earnings and the housing market looking appealing as an investment the demand for housing was high.

In March 1988 the Government made its Budget announcement of a Taxation change which restricted the tax relief available to house owners. The policy change was postponed until August 1988 which resulted in a huge influx of people wanting to buy a house so they could benefit from the existing tax relief[21]. This outcome of this was that house prices accelerated which also triggered an increase in interest rates from 7.5% in May 1988 to 15% in October 1989[22] which was unsustainable. Once the new housing taxation relief policy was implemented in August 1988 house sales decreased by such a large amount that the housing market collapsed. House prices decreased which left many house-owners in negative equity, and interest rates were high which made mortgage and debt payments more difficult to pay. House builders were left with land which was over-valued which they could not sell as its value had decreased and there were not buyers willing to buy in this time of economic recession.

This resulted in an economic recession hitting all sectors. Employment fell from 1.8m in 1990 down to 1.4m in 1993 in construction[23]. The Construction Housing sector fell drastically from 1988 followed by the Construction Commercial sector in 1990. The Commercial sector lagged behind due to the nature of the projects are large and therefore projects which were taking place when the recession hit kept construction companies going during their duration. Then in 1990 when these large projects were complete there were fewer large commercial projects available for tender and any which were there had increased competition. Repair and maintenance made losses between 1990 and 1993 and infra-structure struggled, but this was not as much as the other sectors, primarily supplemented by the Channel Tunnel construction which was taking place which large amounts of investments by the privatised and energy industries[24]. It wasn't until mid 1994 that orders began to increase and the construction industry began to recover.

Project

Project Description

The Wembley ARK Academy project, commenced in June 2009, includes the demolition of existing houses and pavilion and the construction of a new Academy. The ARK Academy will provide educational facilities for approximately 1600 pupils including infant, junior and secondary school ages. The £32million project will also include the construction of a new sports hall and external sports facilities which can be used by the general public out of school hours. The buildings are predominantly structural steel frames with precast concrete slabs and some timber elements.

The Client, London Borough of Brent (LBoB), is part of the Government's national Building Schools for the Future (BSF) initiative. LBoB's BSF programme looks to regenerate the LBoB by providing improved school facilities to areas in-need and areas of growth. Through the engagement of the local communities, the LBoB are working towards improving learning to young people and raising standards in areas of disadvantage.[25] This programme is managed by Partnerships for Schools (PfS) which was created by the Department for Children, Schools and Families (DCSF). PfS are an organisation that is in charge of managing and delivering the Government's capital investment programmes into schools. The BSF's "Academies Programme" is a part of the Government's capital investment programme in which its aim is to invest £45billion on rebuilding and renewing almost all Secondary schools in England over a 15 year period.[26] In 2000, the original target was set at 200 new Academies to be opened, or in construction, by 2010, but the target was increased to 400 Academies due to its success. [27]

The Main Contractor, Willmott Dixon Construction Ltd, is a part of the Willmott Dixon Group. Willmott Dixon Group is one of the UK's largest privately owned companies employing over 3,000 people specialising in construction, housing, maintenance, repair and investment. The Group reported a turnover of £838m in 2008 and are expecting this to reach £930m in 2009[28]. The Construction divisions carry out capital investment projects in the following sectors:

  • Commercial;
  • Law and order;
  • Health;
  • Hotels;
  • Low carbon;
  • Leisure and fitness;
  • PPP/PFI;
  • Education.

Within the Education sector works includes primary, secondary, higher and further education and academies and are members of a number of Academy Frameworks.

ARK Academy's objective, in partnership with LBoB and PfS, is to deliver an all-ability school, which is free to all students. Each party are independent which therefore allows the Academy the flexibility to choose their own curriculum and staffing. The PfS assists with the design and construction of the school which helps to support LBoB and the Academy.

The land in which the Academy is being built is freehold owned by London Underground Ltd, who have agreed to lease this land to the LBoB, who in turn are responsible for the development and the associated cost of the ARK Academy Project.

The Wembley ARK Academy is made up of two separate buildings with a large amount of external works for sports grounds.

Procurement

The tender for the Wembley Ark Academy project was procured via the National Academies Framework, which consists of six Main Contractors, known as Panel Members, who are invited to bid for each and every Academy being constructed throughout the duration of the Framework Agreement. At the end of the framework the panel members are reassessed based on the tendering and delivery history and are either re-appointed or a position is opened up to other Contractors.

The procurement process begins by the Panel Members being notified of a tender opportunity for a specific Academy contract (Wembley Ark in this instance) where an initial expression of interest is sought required form the panel members. This is followed by a project briefing session ("Bidder's Day") which is in advance of the 'Project Invitation to Tender' (PITT) being issued.

The PITT consisted of answering between twelve and seventeen questions covering topics such as team selection and risk management, and must be returned in a specified timeframe. In this instance the duration was two weeks, which resulted in Four Panel Members being selected to progress to the next stage of the procurement process, the PITT interview. The Evaluation Process, which looks at the PITT documentation and feedback from the interview, down select the candidates to the final two. The two remaining Panel members were given a fourteen (14) week period to enter a more detailed design competition, which develops the design of the Academy, from RIBA Stage B through to stage D, and up to the point in which a planning application can be made. The planning application can only be submitted at this stage as the statutory period is fourteen weeks and is a pre-requisite of obtaining Financial Close. At this point the preferred bidder is then selected.

In this instance the preferred bidder, Willmott Dixon, were given a further sixteen (16) weeks to progress the design from RIBA Stage D to stages E / F. Upon completion of this phase, the contractor is able to commence work on-site upon obtaining Financial Close.

One of the main advantages of being a Panel Member on the PfS Academy's Framework for a Contractor is that they have a higher chance of getting future Academy projects is the limited competition, as it is only Contractors that are within this framework that can tender for Academy jobs.

Contract

The form of contract being used on the Wembley Ark Academy is a Lump-Sum Bespoke "Design & Build" Contract for PfS Academy Framework. The type of contract used is dictated by the source of funding (PfS) and the Client does not have an opportunity to change this under the scheme.

A "Design and Build" contract differs from other types of contracts as it does not require a Quantity Surveyor to be appointed by the Client but instead there must be an Employer's Agent who acts on the Employer's behalf. A document called the "Employer's Requirements" is basis of the contract, where the document specifies the Contractor's delivery criteria. As part of the Partnerships for Schools (PfS) there is an "Authority's Requirements" document, which is the same as the "Employer's Requirements" document, and contains all of the requirements set out by PfS and London Borough of Brent which are specific to this project. These include the lease agreement with London Underground Ltd, progress reporting (including progress photos), working hours, traffic arrangements and a large number of other items. For example, the site is located adjacent to Wembley Park Underground Line and Station and also has a bus lane running past the entrance to the main site access route. Conditions have been included in the contract in regards to the location of the site as care must be taken to keep the bus lane clear at all times and the roads must be kept clean at the access point into and out of site. Also, the land where this Academy will be built is owned by London Underground Ltd. Therefore, London Borough of Brent have a lease agreement in place between the two parties in regards to the lease of this land.

A "Design and Build" contract usually transfers all risks to the Main Contractor and away from the Client as the Contractor is responsible for both the design and construction phases. This can be appealing to a Client dependant on the specifics of the project, and is often a preferred route if the Client is looking for a prompt completion date, a good quality finish is required and/or if risk and price certainty is important.[29] A "Design and Build" contract is advantageous to the Main Contractor as they are involved at a much earlier stage and can work with the Architect and typically results in the design and construction phases overlapping which reduces the overall project length and risk exposure.

There are key milestone dates which are linked to the start date of the academic school year which must provide necessary teaching facilities. If these dates are not met the Liquidated and Ascertained Damages (LADs) included in this contract are to cover for the cost of temporary provision of school facilities. This penalty is not a fixed LAD amount per week or a percentage of total contract value, which are typical in most contracts, but is whatever is seen as a reasonable penalty in regards to temporary school facilities. For example, if the first phase, the Primary School, is late then Willmott Dixon, the Main Contractor, would need to either provide a temporary accommodation or make available another area of the building if this is complete.

Payments to Willmott Dixon from the client are made against pre-agreed payment milestones that would have been decided upon and agreed within the Contract. Valuations are carried out on a monthly basis by the Contract Administrator and the Project Surveyor for Willmott Dixon (see section 3.1.4 for the Project Organisational Structure). These valuation dates are agreed from the commencement of the project. The Sub-contractor payments would be backed-off onto these valuation dates. The valuation meeting allows the Contract Administrator to go through the valuation, derived from the Project Surveyor's estimates, and come to an agreement on the value. The Contract Administrator is working on behalf of the Client, London Borough of Brent, and therefore aims to keep the valuation figures low as this will be the amount that London Borough of Brent then pays to Willmott Dixon for that months work.

There are many advantages and disadvantages to Willmott Dixon, the Contractor, in using a "Design and Build" Contract:

Disadvantage - The main disadvantage is that the risk is transferred from the Client to the Main Contractor. In this instance, Willmott Dixon are responsible for both design and build phases of the project which are based on the "Authority Requirements" document details the high level specifications and it is down to Willmott Dixon to determine, during the design phase, how they are going to provide them. If there are any un-foreseen issues, off-specs or mandatory change requests then the responsibility is with Willmott Dixon's and they must therefore manage these risks and the associated additional costs.

Advantage - The main advantage to the Main Contractor when using a "Design and Build" contract is that they get to choose the Design Team that allows the contractor to appoint the Architect, Structural Engineers, Landscape Consultants and the rest of the Design Team as they are responsible for the design. Therefore, Willmott Dixon can pick organisations that they have built a good working relationship. This relationship is important as there must be a level of trust between them as Willmott Dixon holds all the risk and so they need to ensure they have a team supporting them and one that they know they can work with to provide the best final product to the Client.

Another benefit on this project is that as Willmott Dixon have worked on other Academy buildings and, although the design is different, the projects often have similar characteristics. Generally this can simplify the process for Willmott Dixon during the design phase and when looking to appoint Subcontractor for the project. For this same reason this is also a benefit to the Subcontractors on the Supply Chain (see Section 4) as the policy favours subcontractors who have worked on similar schemes in the past.

Project Economics and Cost Management

Wembley Ark Academy is based on a Lump-sum form of contract, which means that the project value has already been agreed between the Client and Willmott Dixon. On the basis that Willmott Dixon deliver all of the requirements set in the "Authority's Requirements" Document and provide a building which is "fit-for-purpose" then this agreed amount will be paid to them.

The agreed Project value is £32million and it has been split into payment milestones. The entire project has been divided into phases and these phases must be handed over on certain dates. The project is to be handed over in the following phases:

The first and second phases are to be completed by September 2010 ready for the start of the new academic year and therefore it is vital that these dates are met as school facilities need to be available for the students.

The payment milestones are linked with the above phases and it is against these milestones that the monthly valuations are valued against with the Contract Administrator.

An advantage of this form of contract, on the Wembley Ark Academy project, is that as it is based on a lump-sum this gives cost certainty to Willmott Dixon, which also allows for more accurate budgeting by the Project Surveyor.

The cost to deliver the project was divided into construction packages which include the procurement budget and ultimately make up the cost of construction of the Academy Building. The packages are also used to monitor progress status and used to track the costs in the total Project Cost Plan. The Project Surveyor would cost each package from information in the quotations received during the tender stage, and knowledge from historic information of similar projects. As Willmott Dixon have completed a number of Academy project in similar stature to the Wembley Ark project, then the process of creating these cost packages was simplified and should, in theory, prove to be more accurate as there was more knowledge available.

The above Cost Plan is used throughout the procurement stages of the project by the Surveyors and provides a target figure which is used during the procurement of different Subcontract packages.

The Project Costs are monitored and managed throughout duration of the project by the use of a Cost Value Comparison (CVC) Report, which outlines the budgeted, target and the actual costs, and it is updated on a regular monthly basis. The purpose of the Report is for the Surveyors to control and manage expenditure on Subcontractors, Suppliers and Preliminary costs. Later in the Delivery phase, the CVC is used in conjunction with Cost to Complete (CtC) Report which is also completed on a monthly basis at the same time as the CVC document. The CtC lists each Subcontractor, Supplier and Preliminary and breaks down forecasted costs into months for the remaining duration of the project. This CtC tends to analyze each element in more detail so that a final cost can be reported more accurately to the Divisional Management Team.

Using a "Design and Build" contract allows the Main Contractor to look into different Value Engineering opportunities, by looking into improving the value of goods and/or services. To achieve this either the function needs to be improved at the same cost or the cost of the product or service is decreased but still providing the same function. This means that materials, products or systems can be revised from the original specification but must provide the same quality and function, or even better, at a lower cost.[30]

Management Roles and Structure

One of the key advantages of a "Design and Build" contract is that it puts the Main Contractor at the centre of the organisational structure (outlined in Section 3.1.2). Below is the Management Structure for the Wembley Ark Academy project:

Client

The London Borough of Brent, as the "Client" (also referred to as the "Employer"), has control over the overall project deliverables through the "Authority Requirements" Document, which includes the project's detailed requirements (see Section 3.1.2). As stated previously in Section 3.1, the London Borough of Brent's Building Schools for the Future programme is managed and controlled by Partnerships for Schools (PfS) who are in charge of delivering the Government's capital investment programmes. Therefore, PfS are the organisation that oversee the entire programme and London Borough of Brent therefore manage the Academy programme within their region, which includes the Wembley Ark Academy project, and makes the payments to the Main Contractor. The "Day to Day" management of the project has been delegated to the Willmott Dixon, and the key stakeholders (including the client) are updated on status and issues via the Monthly Review Meetings.

End User

Ark, as the "End User", is the organisation which will manage the Academy on the London Borough of Brent's behalf once it has been handed over for operational use. As a key stakeholder in the Academy project, who are a separate entity to the Client, attend the majority of the Design Team meetings to ensure that the end product is being designed and built is likely to be fit-for-purpose at the conclusion of the project. The End User's would also be included on decision making on the finer design details such as the colours schemes and furniture, fixings and equipment (FF&E).

Contract Administrator

Navigant Consulting as the Contract Administrator is responsible for carrying out the administrative duties under the contract on behalf of the Employer and is also responsible for the payment provisions, valuing the works and valuing any variations / changes. This role is normally carried out by a Cost Management Consultant, however on the Academy Project a decision was made by the client that the Contract Administrator would fulfil this role. The Contract Administrator meets with the Project Surveyor for Willmott Dixon on a monthly basis and agrees on the value of the works completed in relation to the payment milestones (as per section 3.1.2).

Main Contractor

The Main Contractor, Willmott Dixon, is responsible for the design and the construction of the Academy building. This includes appointing all of the Design Consultants, Sub-contractors and Suppliers that will deliver the Authority's Requirements. Willmott Dixon manages and controls all of the activities on a daily basis including Health and Safety Legislation and other legal requirements are being adhered to on site. They would also ensure that the project adheres to the Willmott Dixon's corporate Sustainability techniques for the whole building life-cycle.

During the construction phase Willmott Dixon has a number of key personnel based on site. These include:

  • Project Director - has overall responsibility for the site and project and ensures it runs to programme and has key Stakeholder management duties including reporting to the client,
  • Design Manager - works with the Design Consultants and the Subcontractors to get all of the design elements and details that are required for works to take place,
  • Project Surveyors - deal with the projects finances, all of the procurement, the contract documents and valuations with the Contract Administrator and the Subcontractors.
  • Building Managers - liaise with the Subcontractors on site to co-ordinate the works, ensure the programme in stuck to and ensure that health, safety and environmental legislation is always adhered to and to try to improve on the standard required.

Services Co-ordinator

An external consultant to Willmott Dixon but works closely with them on site who act as a central point between the M&E (Mechanical & Electrical) Sub-contractor and Willmott Dixon to resolve any issues. They have expert knowledge in the M&E field and therefore can help with communication between the two parties when it comes to ensuring that the M&E Subcontractor delivers everything within their package and helps with any issues or problems that arise during that time.

Design Consultants

The Design Consultants, appointed by Willmott Dixon, are responsible for the design in their specific area of expertise. They would work with Willmott Dixon and design the Academy to meet the items stated in the Authority's Requirements Document. They attend weekly Design Meeting where the Design Team and the Design Manager for Willmott Dixon also attend to discuss design progress and issues.

Subcontractors, Suppliers & Trade Specialists

The subcontractors, suppliers and trade specialists are appointed by Willmott Dixon through the Supply Chain Management System (see section 4) to provide a product and/or service in order to meet the "Authority's Requirements".

Supply Chain

A Supply Chain definition is "the network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer"[31]. It is a connection of companies that work together, either through supply of materials, products or services to produce an end product for the Client. This therefore means that all Contractors, Suppliers and Subcontractors are a part of the Supply Chain.

For a Supply Chain to function efficiently each component of the supply chain must work collaboratively and have the same aims and objectives to deliver the end product to the Client within the Cost/Quality/Time Constraints. Supply Chain Management has a longer term view of the strategic relationships to deliver improved efficiencies and repeat work rather than the short-term project centric view.

Scoring within the Supply chain is essential to track the performance of the subcontractors and suppliers. Areas which should e focussed on are:

  • Pre-construction - tendering and design
  • Production
  • Design
  • Safety
  • Commercial
  • Sustainability
  • Defects

By scoring against these criteria it ensures that each member of the Supply Chain is performing to an expected level. If a company is not producing the right level of performance then they can be removed ad replaced.

There are many benefits to the Subcontractors, the Main Contractor and the Client with having a well managed supply chain.

Subcontractors - increases the likelihood of future works with the Main Contractor who are both able to build a long term relationship and trust in the delivery to the expected quality, competitive cost and to time. The long term relationship aspects enables the subcontractor to have a more accurate future workload, which then results in further benefits such as retaining of staff. Also, as the Supply Chain Strategy is not focused entirely on price, there are further opportunities to improve other efficiency metrics such as staff training and improved quality.

Main Contractor - By enhancing the relationship with Subcontractors and Clients, elements of uncertainty of price and quality is removed from the project process from Tendering through to delivery of the project. Supply Chain Management does not always lead to the most competitive prices; however, it does remove the risk of underperformance in delivery and quality from subcontractors. The supply chain understand the Main Contractor's processes and procedures and should share the aims and objectives with delivering a good product but also with issues such as sustainability. By building a relationship with a Client this can lead to future projects.

Client - benefits from an efficient Supply Chain as they receive a better level of service by the Main Contractor, that results in a better understanding of the client's needs and requirements and an improved level of trust between all parties. This therefore results in a finished product which meets the Clients needs, which is delivered to time and cost with a lower level of defects.[32]

Willmott Dixon's Supply Chain Strategy

Willmott Dixon has a dedicated Supply Chain Team whose role is to manage the Supply Chain, including relationships, strategy and Management System. At the core of the strategy is a centralised Supply Chain management System which the organisation have invested heavily in over the last 5 to 7 years to ensure that all information relating to the Supply Chain is correct and accurate and that the suppliers/subcontractors are scored on their performance correctly. Having a supply chain that performs well, has a good relationship with Willmott Dixon and is financially competitive in the market is vital to ensure that projects are delivered to the quality expected and therefore lead to future work, which in turn benefits the whole supply chain.

Over the last few years the company have been working to decrease the overall size of the supply chain with a target of four companies per trade available. This helps to build a better relationship with the Subcontractors and also promote collaborative working and partnering. This ensures that there is trust between both parties and also know and understand each others procedures on working practice, health and safety and sustainability. The construction industry is working very hard on environmental and sustainability issues and therefore it is essential that everyone has the same goals in regards to this. Education and promotion of different techniques, methods and systems which can be used by the Subcontractors, the Main Contractor and the Client are essential.

The project Surveyors on each project use the Supply Chain Management System to choose Sub-contractors and suppliers to send enquiries to for each works package. The system shows the projects they have previously worked on and their performance measurement score to ensure the companies are performing well with Willmott Dixon. This system enables the Surveyors to contact companies who have worked with the company previously and therefore have a good working relationship already established.

Analysis

In this section, the Impact of the Recession on the Construction Industry, including analysing the Industry as a whole, the ARK Academy Project including the associated Supply chain, the Main Contractor and the Client. Along with the impact on the Construction Industry, this section will also analyse what are strategies have been implemented, especially those that were developed as a "lesson learnt" from past recessions.

Construction Industry

The circumstances which caused the current recession are different to those of the late 80's early 90's recession the impact on the construction industry are very similar. Unemployment rates have risen, large numbers of companies, both in and out of construction have gone bankrupt and into administration and many others have faced huge drops in profit and company size. Many companies have needed to look internally at their own company strategies and structure. This has resulted in many cutting costs, which has included downsizing the workforce and making redundancies. This has added to the growing unemployment rate and the decreasing number of job vacancies available.

All companies at all levels are trying to cut costs wherever they can which often leads to relationships being lost as everyone no longer works together and has the same aims and objectives, and instead are working against each other. This leads to disputes and litigation between parties more regularly.

A lack of potential investors and funders is key to the drop in project availability in the private sectors especially. Financial Institutions are hesitant in lending money as they are not as confident about the economy which results in private investors finding it more difficult to obtain the credit required to carry out projects. This decrease in projects has resulted in companies looking to change their company strategy and in some cases diversify into other markets if theirs is too slow to stabilise their organisation. This has led to an increase in competition for projects in each market as there are a large number of companies bidding for work in markets that they have not worked before. Companies are also cutting their profit margin to extremely low levels to ensure that they can win a project. By breaking even on a project this means that staff and overheads are covered which will allow the organisation to carry on and see-out the recessionary period.

Another consequence of this recession is the large numbers of skilled labour which are leaving the industry. Many people are choosing to change careers, go back in education, travel, and many foreign labour are returning home due to lack of work available. This means the skill base with its knowledge and experience in the United Kingdoms construction industry is being lost and once the economy has recovered it will take time, resources and money to re-train the workforce and get skilled labour back again.

Government Stimulus Packages

Government Fiscal and monetary policies have been introduced and used during this recession to try bring the country into the recovery phase as soon as possible.

Public Spending initiatives - The Government's Fiscal Policies include continued public sector spending in the construction industry as their belief is to spend their way out of the recession. Due to the large drop in private sector works the industry has benefited enormously from the continued public sector spending and works. Government spending in healthcare and education through programmes such as Partnerships for Schools has provided work and employment for Construction Industry. Although the amount of projects is very limited, with increased competition, the number of companies falling into financial difficulties could have been far greater without these initiatives.

Stamp Duty Incentives - Another policy change made by the Government was a change in the Stamp Duty threshold level. On the 3rd September 2008 the 1% Stamp Duty Land Tax (SDLT) was raised from all properties bought over the value of £125,000 to properties over the value of £175,000. This SDLT policy change was to take place between the 3rd September 2008 and 31st December 2009 in order to stimulate the house buying market which was suffering from house value reductions and decreased demand. This could result in the new-build housing market in the private sector picking back up if demand for housing was to increase, therefore influencing the construction industry by providing more work for companies and more employment opportunities for people.

VAT Reduction - Around the same time the Government also decreased the VAT (Value Added Tax) rate from 17.5% to 15%. This change took place between 1st December 2008 and 1st January 2010 and was introduced to try to encourage consumer spending. By reducing this lower rate products and goods prices were lower therefore making consumers money go further. In the previous recession it was a Fiscal Policy which sparked the country into an economic downturn whereas this time the Government is using policies to try to encourage consumer spending and confidence.

Quantitative Easing - The Bank of England (BoE) is responsible for any Monetary Policies that are introduced into the economy. The BoE have used quantitative easing to inject more money into the economy to helps reach the inflation target set and also to increase the amount of money available in the economy in the hope that this will also encourage consumers and investors to spend their money. The BoE has also lowered the Interest Rates from 5.75% in July 2007 to 0.5% in March 2009[33]. This has been brought about to try to increase consumer spending as saving money does not look as appealing due to the low rate of return that would be achieved by investing it. Instead the lowered interest rates would increase lending of money, consumer spending and investment in construction projects. In the previous recession the interest rates were increased which deterred spending and instead encouraged saving resulting in less money circulating. This meant that the banks benefited from the saving and investment but other industries like construction suffered as lending rates were too high, due to such a high interest rate, and saving and investment yielded a higher rate of return than investment into construction projects.

Project Level

This section will focus on the impact the economic downturn has had at a project level and in particular on the Wembley Ark Academy Project.

Economic Climate Impact

One of the main factors which influences whether a project is going to be financially successful or not during a period of recession is when the project was priced during the tender stage. If the project was priced and financial close agreed prior to the recession then it is likely that the value agreed would be based on higher "boom" prices and then the project would take place during a period when prices are lower as competition is higher. This means that the Main Contractor is able to take advantage of the situation and negotiate better deals with Suppliers and Sub-contractors within their supply chain. If a project is priced during a recession then the Client would be looking for a lower price due to the availability of finances and due to the increased in competition from other Main Contractors all wanting to win the project. If this project is then carried out during the recession then the project should breakeven, depending on any risks, issues and cost management by the Main Contractor. On the other hand, if a project is priced and the value and contract agreed during the recession but the works take place once the economy has recovered then the challenge will be to deliver within the original financial constraints.

Focussing on Wembley Ark Academy project there are a number of effects that this recession has had directly on the project. As stated above in Section 5 costs are being cut at all levels of the Supply Chain.

Cost Cutting - One way that organisations are cutting their costs is by making redundancies and re-structuring organisations to reduce the size of the work force and therefore reduce costs. This has resulted in many Sub-contractors not being able to provide the same level of labour as they would have previously to carry out work. The outcome of this is that many Sub-contractors have struggled to keep to the agreed contract programme and therefore risk delaying the entire project. Another problem that Wembley Ark project has experienced is that due to the decreased levels of labour Willmott Dixon are not getting same level of service and quality as they would have had previously from these companies. This includes the amount and quality of supervision normally provided as this has been reduced and therefore standards can slip (e.g. house-keeping on site).

Value Added - Suppliers and Sub-contractors are looking at making a profit from a different angle. This is because they have had to cut their profit margin down to win the works package and therefore are trying to claw back some money. Relationships with some of the Sub-contractors can suffer as everything is so tight. This is happening more often with newer companies on the supply chain as the relationship is not as strong.

Exchange Rates - Another impact of the recession on the Wembley Ark project is the decreased value of pound sterling. The value of the pound has resulted in many materials and products being more expensive as often these are shipped from abroad as whole finished items, or raw materials. The outcome of this is that more is sourced locally which makes the cost higher, but this is better in regards to sustainability issues as it means more work locally and less CO2 emissions from transportation.

Mitigation of Impact

The Main Contractor on the Wembley Ark project have found it necessary to look into different options and utilise the Supply Chain management system to ensure that the project is successful for both the Client and Willmott Dixon.

Supply Chain Management System - With all companies facing hard financial times many companies are going bankrupt or into administration. It is essential to look at the liability of this happening to an appointed Sub-contractor and carry out background checks on their financial status and a risk assessment to mitigate against any cost or time implications that this may have. For example, the ground-works sub-contractor on another project went into administration part way through the contract which left the project team without a company to complete the external works. As these other ground-work companies have a close relationship with Willmott Dixon due to being part of the supply chain for a number of years this helped to speed up this process as they were more willing to assist than a one-off sub-contractor.

Early Engagement - It has been essential to spend time going through all details of a package and working with the Sub-contractor's before the order is placed and in the pre-order meeting to make sure everyone is clear on exactly what is included in their package. It is then imperative to transfer this clearly within the order documentation between Willmott Dixon and the Sub-contractor as if anything is ambiguous or if any item is missed out then during these harder times Subcontractors are more likely to spot and use this to their advantage. As many companies are cutting their costs and profit margin in order to secure work on a project, this therefore results in many of them looking to try get some of this money back through the course of the project from changes, items missed and mistakes made by the Main Contractor. More time is being spent on each package identifying every item at the tender stage. Lump-sum orders are being used more regularly including all items including access equipment and waste removal. This has meant going back to traditional methods of measurement which takes more time and resources, but also gives more cost certainty. The bidding period has also been lengthened with more time spent going through these details, on many packages this has resulted in more time to think of ideas to reduce costs and identify any design issues.

Procurement Methods - The project team at Wembley Ark Academy have looked into alternative procurement methods when looking to place orders for works and products. Previously sub-contract orders would be placed for the manufacture, supply, delivery and installation with one company per trade. When placing orders like this the total cost tends to be slightly higher as the sub-contractor would add their mark-up onto the cost of the materials or products but during times of economic stability this is a more convenient option as there is only one point of contact for each trade. To reduce the cost it has been necessary to break down packages and place separate orders for the supply and the installation for a number of different packages. A few of these include the WC Cubicles and vanity units, beam and block flooring and the windows, where a supply only order has been placed direct with the manufacturers and a fix only order has been placed with a separate company. This method of procurement has enabled costs to be lowered and budget targets met, however there is an increase in resource costs and management time from Willmott Dixon project team to check deliveries, liaise with both companies and co-ordinate deliveries with installation. On the majority of the packages placed in this manner, there have been little issue to date as sub-contractors have been willing to liaise with the suppliers also to therefore assist in the co-ordination.

Economies of Scale - Another method that is being used on the Wembley Ark project is integrating and combining different packages into one works package. The flooring and the ceramic tiling packages are usually kept separate but by placing both of these through one member of the supply chain this has reduced the overall cost due to being able to secure a better deal owing to economies of scale. This has also reduced the amount of co-ordination needed by Willmott Dixon as there is only one point of contact rather than two separate sub-contractors. This same method has also been used for the external doors and fire shutters, and sports pitches and fencing.

Generally, the time spent on procurement has increased with enquiries sent out to more companies on the supply chain and also broadening the supply chain by contacting new sub-contractors.

Construction Division Level

The Wembley Ark Academy project is within Willmott Dixon Construction Hitchin's Divisional, which is a part of the Willmott Dixon Group. This next section will focus on the impact that the recession has had on Construction Hitchin and any strategic changes that have had to take place.

Economic Climate Impact

The Willmott Dixon Construction Division has generally experienced changes in tendering including the amount of projects available, the types of projects and the sectors.

Historical figures suggest that the Construction Industry is likely to lag behind the rest of the economy during the Recovery phase. The reason for this is that projects that are in construction would have been priced using historical prices from during the recession with very low profit margins. These projects will be running once the rest of the economy is out of recession and therefore their prices would have increased and would be higher than those budgeted for. It is believed that it will be a couple more years before this recovers back up and prices used during tendering and costs incurred during construction level off.

Tendering Process - Many Clients have returned to single-stage tendering rather two-stage so that they are able to take advantage of the competition in their tenders. This has meant that the Main Contractors cannot get involved in the design process which limits their understanding of the project, slows the process down and does not allow their knowledge and expertise to help during this phase. The submitted cost from the winning Main Contractor, after the single chance to price the project, is the contractual figure which is used. It is therefore essential that all of the information provided during the tender stage is thoroughly checked as any items which are missed could have a negative effect on the project at a later stage.

Change in Corporate Strategy - Willmott Dixon Construction Hitchin' s strategy was to only pursue projects that were two stage design and build projects in certain sector and certain types of build previous to the recession. They tended to stay away from projects with a high amount of refurbishment works and stuck with new builds due to the high risk and uncertainty on refurbishment projects. Since September 2008 the strategy of the division has needed to change due to the numbers of projects coming in to tender and the amount of competition for this work. All projects have been looked at irrespective of procurement route, build type or sector and each has been assessed on an individual basis. It was very rare for single-stage design and build projects to be tendered for prior to this period, whereas the majority of the projects being priced and won are this type.

Competitive Advantage - Construction Hitchin, and many other Main Contractors, have been required to look at their core competencies and to identify their niche skills and competitive advantage. Sustainability is a subject which is important across all industries and not just construction and includes looking at social, economical and environmental factors. Willmott Dixon has invested time, money and resources into sustainability targets for the company to reach in certain timeframes which will give the company a competitive edge over other offerings in the market.

Public Sector Projects - Due to the Government initiatives investing in public spending to encourage growth out of the Recession has resulted in the increase in public sector construction works. Willmott Dixon tends to do the majority of their work in the public sector which has been an advantage and help the company to work through the recession.

Client Level

The following focuses on the Client Level of the Supply Chain, the impact the current economic climate has had on their behaviour and any changes they have made.

Economic Climate Impact

Credit Availability - The economic downturn has resulted in a loss of consumer confidence across all markets. Clients and investors are less confident about funding projects as they are unsure of the buildings value or demand once the construction has taken place.[34] Construction of new build projects tend to be long process which makes it difficult for investors to forecast the future during unstable economic times. This has resulted in the majority of private sector Clients reducing their commitment from investing in construction. Financial Institutions are also less confident in the economy and therefore are not lending money or financing projects as easily. Clients have found it much harder to obtain credit for any projects from banks which has also played a part in the decrease of private sector projects which have been available during the recessionary period. Organisations and individuals who may have been looking to expand or to move properties prior to the downturn have instead looked into refurbishment, extensions or even making-do with what they currently have instead.

Procurement Methods - Many Clients have also changed their procurement method and tendering process to "Single-stage" tendering and even "Design and Build Single-stage" tendering. One reason for this is that there is an early agreement on the contractual price with the Main Contractor and therefore there is less risk and more cost certainty for the Client. Using a traditional form of contract the design of the building takes place and is completed prior to the Main Contractor being appointed and the construction works taking place. This ensures that the Client knows exactly what the final product will be and also enables very competitive tendering as many Main Contractors can be approached, and due to the high amount of competition between Main Contractors for projects many have lowered their profit margins extremely low. The disadvantages to the Client with using single-stage tendering are that the price is based on the design information available during the tendering period and therefore there could be changes and variations at a later stage which the Main Contractor can claim additional funding for. Also the design and construction works are carried out sequentially and therefore this can prolong the total period from inception to hand-over which makes it less likely that the project can be accelerated as there is no overlap between design and construction.

Sub-contractor Level

The sub-contractor level of the supply chain has also been affected by the recession in different ways. Through feedback from questionnaires (see Appendices A and B) sent to members of the Willmott Dixon Construction Hitchin Supply Chain, this section concentrates on the sub-contractors, the affect the downturn has had on their business, any changes they may have had to make and if being part of the supply chain has helped.

Economic Climate Impact

As the Clients are unable to seek funding or are unwilling to invest during this time, this has reduced the amount of projects available to Main Contractors which in turn reduces the amount of work available for the sub-contractors. This also results in more companies bidding for the same projects as there is less work available and therefore more competition.

Questionnaires were issued to members of Construction Hitchin's supply chain and 31 responses were received (see Appendix B). These questionnaires looked briefly into the sub-contractors background, whether the recession has affected their company's financials and their opinion on the supply chain within an economic downturn.

Subcontractor Backgrounds - The companies are spread quite evenly across a number of different trades giving views and opinions from different markets. The size of the organisations was anywhere between 18 and 900 employees with the majority of results from companies with 50 employees or less. For these questionnaire results to show a true reflection of the supply chain, when analysing whether the supply chain has played a part in helping any companies t