Transforming Construction?
2 The Nature and Extent of the Industry's Strategic Challenges
It may seem arbitrary to focus on just two of the many problems
confronting the UK construction industry at the present time. Why
predictability and profitability particularly? Why not
sustainability, environment, collaboration, safety, skills, or a
host of other, generally more topical problems? The answer is
simple. Although these are all hot topics, they are actually second
order issues. They are not fundamental threats to the viability of
construction firms; predictability and profitability are.
Predictability is essentially a matter of completing projects on
time, on budget, and to the agreed level of quality. Constructing
Excellence (CE) record that small improvements in perceived quality
of both process and product have been achieved over the past ten
years. However, as Figure 2.1 below, an extract from last year's
CE Report, shows, the cost and
schedule picture is really quite discouraging.
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| Figure 2.1 - UK Construction
Project Predictability: 2000-2008 |
More than half of all UK construction projects exceed either
their contract budgets or agreed schedules, or both. Over the past
ten years the CE programme has demonstrated that this is true
regardless of project size or mode of procurement. The headline
figures shown in Figure2.1 above are extracted from CE's most recent
report on the industry's performance. What this chart doesn't show
is that half of these projects - that is, a quarter of all UK
construction projects - overrun budgets or schedules by 10% or more.
This sort of outcome can have devastating effects on businesses and
on the careers of individual people who work for them.
Un-Predictability has two main adverse effects. First, schedule
overruns have the direct effect of increasing overheads and
preliminary costs. These may be recoverable, but usually only if
they are pursued as claims with the client. This process is
generally disruptive of good relations and can be downright
confrontational. However they are handled, schedule overruns usually
result in direct loss of margin to the contractor.
However, the main adverse outcome of project unpredictability is
disappointed, often distressed clients. The effect of this is to
make those clients - the firms, as well as the individuals concerned
- reluctant to repeat the experience and generally averse to dealing
with the industry. No data exist to support this suggestion, but it
would seem reasonable to suppose that on aggregate, across the
economy, the overall level of demand for construction services is
suppressed by at least one or two percent, as potential clients seek
alternative means of solving their accommodation problems.
The combined result is that industry profits are hit twice.
First, by the direct impairment of margin caused by overrunning
projects, and secondly by the loss of business volume caused by
disaffected clients seeking alternatives to construction.
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| Figure 2.2 - Major Contractors'
Contracting Margins: 1987-2007 |
Serious overshooting of project schedule and cost targets can be
disastrous for the individuals and firms involved. But it's
conceivable that the situation might not be a major cause for
concern for companies if their losses on failing projects were
offset by substantial profits on other jobs. Unfortunately, they're
not. Hewes Associates' - compilers of Building Magazine's
construction league tables - carry out an annual assessment of the
margins (profit on contracting turnover) of the top firms in the
industry. Figure 2.2 plots the results for the past twenty years. It
paints a pretty dismal picture. This level of profitably leaves no
margin for error and, depressingly, little margin for investment.
Two supplementary points are worth noting. First, few of the main
contractors in the UK industry self-perform any significant
proportion of the work on their projects; they use specialist
sub-contractors almost entirely. They don't therefore employ any
substantial amounts of fixed capital on their projects. So any
positive margin could be said to represent a high level of return on
capital - the basis on which most investment decisions are made. The
reality is that the main contractor is usually the one with overall
liability for delivery of the project; any failing redounds on him.
So the risk weighted return is a great deal less than the headline
number.
The second, related, point to note about this situation is that
it is almost impossible for players in this market to maintain
effective barriers to entry. Capital, in the traditional form of
construction plant and equipment, is no longer required; people are
increasingly mobile; and as they are the carriers of the company's
experience, there is no basis, even in knowledge, on which to build
such barriers and no capability by which they might be defended.
One might therefore characterise construction as being a high
risk, low profit, low skills industry, eschewed by potential
customers as far as possible, denigrated by the general public and,
ostensibly, deeply unattractive as a career option. Yet, despite all
that, construction survives and actually provides truly challenging
and rewarding careers for most of the people who work in it. What
could the industry be if it were not held back, held down, by these
awful failings? The remainder of this paper will show how a
liberated, predictable, profitable industry might come about, and
might come about surprisingly soon.
Note 1. Constructing Excellence in the Built
Environment, Annual
Report 2008.(London, Constructing Excellence, 2008)