This is the third in Tom Jarman’s series of 4 blogs. The fundamental premise that links them all is that construction could be a much more productive, innovative and attractive sector than it currently is, and deliver much better outcomes for society; stable employment, high quality structures, decarbonisation, a resilient supply chain. Tom muses “Why doesn’t it do these things, given that I meet people every day who work in construction who are passionate about transformation? My answer would be because by and large, clients don’t ask for it. The bulk of procurement is governed by lowest initial capital cost and minimum regulatory standards, meaning it makes more commercial sense to think and act in a short-term, transactional way. This drives dysfunctional practice that pervades the sector.”
If we want outcome and value to land as drivers for a transformed construction industry, what does the landscape look like where they are landing? An assessment…
And now the good news; my first blog argued that there is hope. New Road Ahead! talked about what Government are doing to drive procurement based on value and outcome in terms of the influence they have, namely their construction spending. No 2, Procuring for Value, focussed on a particular, practical development to reorientate clients around outcome and value; Procuring for Value (PFV) isn’t concerned with one stage (namely procurement) in the construction journey, but is concerned with how a client understands the intent of a project, and is able to articulate that intent and translate it into an effective, delivered outcome. Sometimes I think having Procuring in the title isn’t always helpful, but the fact remains that (1) the procurement stage is when project intent is most likely to be distorted and (2) I can’t think of a better name.
The fourth blog will look at client leadership; what do I think a client needs to do so they can procure outcome and value over the long-term, and why is leadership so critical to transformation of construction outcomes? Which brings us to this blog, which acts as a bridge by looking at where we are now. I want to look at the current landscape in which PFV principles – client-led, value-based, outcome-orientated and long-term – are trying to establish themselves.
#1 Differentiation based on price
In 2018 I presented with Tim Whitehill from Project 5 at a Constructing Excellence event for the launch of the report, The Organisational Resilience of the UK Construction Industry: Are We Built on a House of Cards? Tim used the diagram below to visualise how construction currently operates:
Within this diagram, there are many companies operating in the ‘Good’ space. The industry currently is driven by compliance, and this does have standards-driven benefits. But it does also create a situation where construction outcomes are limited by the quality of regulation, and it creates an industry that in general doesn’t go beyond Good unless pushed by regulation. It can of course be pushed beyond Good by clients, but most clients don’t operate in a way that demands this, so the vast bulk of the construction supply chain is in a similar place, and price becomes the key differentiator – especially as most clients find it relatively straightforward to understand cost as a comparator.
… it creates an industry that in general doesn’t go beyond Good unless pushed by regulation.
This drives commercial models that mitigate against investment in innovation, quality, performance, and so on, because this pushes up tender costs. This isn’t to say that all organisations fail to invest all of the time, but it does mean that the construction sector, as a whole, is not geared by to talk about outcome and value in a meaningful way. A better price/quality split at tender stage is not really the answer, because most organisations will not go for a tender if they aren’t confident they can score highly on the quality element. This levelling effect means that price remains the most significant factor behind contract wins.
#2 Construction procurement
In June, the Construction Leadership Council released its Roadmap to Recovery, which breaks recovery down into three phases; restart, reset and reinvent. Constructing Excellence published a Green Paper alongside the Roadmap, and I quote from p2:
‘Low profit margins and lack of commercial expertise are some of the biggest challenges facing construction procurement’.
During a webinar looking at the Green Paper, a comment was made that construction organisations are starting to see ‘opportunistic procurement’, ie enquiries from existing customers using the current crisis to try and negotiate prices down. I can understand this to some extent; many clients are considering their own viability and are desperately trying to conserve cash, but they are attempting to push down their costs through an industry that is already on unsustainably low margins, a point made well by the Farmer Review.
Construction obviously doesn’t operate as a single entity. There are different markets; infrastructure, housing, commercial buildings, etc, and different specialisms; Cundall aren’t competing with Persimmons, for example. Hence some of the statements I’m making a quite sweeping. But it is useful to think in terms of commoditisation. There was an interesting line in an Economist article recently, referring to the warehousing sector;
‘…investors used to think if it [warehousing] as “four walls and a roof you hope doesn’t leak” – in other words, highly commoditised’.
In a highly commoditised market, it doesn’t make sense to invest in value and outcome over the long-term, it makes sense to build cheaply and flip. And there are developers whose business model is based on commoditisation because they are good at it. This isn’t a criticism, but it does mean that they will remain driven by regulatory requirements; they’ll write the assumed cost of regulation into their bids, and if they win the tender they’ll build accordingly.
But outcome and value, and commoditisation, aren’t happy partners. I don’t personally believe that outcome and value can be regulated to great effect because they are cultural in their nature, not process-orientated. In any case I would always regard the regulatory baseline as the standard that keeps you out of jail, but never as a substitute for project intent and the client’s responsibility to have a sophisticated and active understanding of value, outcome, quality, performance and risk.
… outcome and value, and commoditisation, aren’t happy partners.
So we do need to separate out the marketplaces where outcome and value have a fit. I would argue these include clients within infrastructure, as well as Local Authorities and social landlords. In my first blog I argued that infrastructure is doing much more to focus on outcome and value than is often recognised, but I have too often heard examples of Local Authorities and social landlords acting in a way that reinforces a commoditised marketplace, rather than build one that has the potential to effectively deliver on their organisational and social values.
#4 ‘Value structures’
When I talk about value structures, I am talking about two things; firstly, the extent to which clients have ‘PFV skills’, and secondly the extent which they have created and coherently organised the internal structures that mean they can act as an active and sophisticated client. PFV skill is fundamentally the ability to understand, articulate and value project intent; what do you want your investment to do, what outcome do you want over time, and how do you know you are getting this? Active and sophisticated clienting means that you are taking conscious choices to create the mechanisms you need to understand your practice, link input, outcome and value, and to learn.
PFV skill is a reaction to the extent to which clienting skill has been hollowed out in the past two decades with the predominance of design and build. Very few clients now, even major ones, can have a challenging dialogue about value, outcome, quality, performance and risk, which is why cost and regulation have stepped into the void. PFV skill is about your cultural approach to your capital spend, is therefore a challenge of organisational culture, and consequently takes leadership and determination, consistently over time, and investment to create the desired culture.
There are a number of mechanisms I would urge clients to consider to become active and sophisticated clients, rather than passive:
- Consider novation and two-stage procurement. This gives you much more opportunity to develop project intent, discuss and manage risk over the long-term, and connect initial capital cost and outcome;
- Post-project reviews. These are rarely used to their full potential, but are a great opportunity to really understand, at an early point in time, how project intent has been understood and translated into delivery. And they are critical in terms of learning loops; what was learnt, how does this make the next project better?
- Adoption of BIM. This isn’t just about building stuff, this is about effectively procuring the data you’ll need to safely, cost-effectively and efficiently manage a structure;
- Do you have a ‘Green Building Team’ or equivalent? I am calling them Green to link them to decarbonisation, but their role encompasses delivery, mentoring, quality assurance, feedback, customer communications and induction. But such a team is crucial to effective, operationalised learning;
- Learning loops; what do you have in place to ensure your organisation learns and improves as a construction client? If you want your projects to deliver outcomes, you need a core capability that allows you to link investment and outcome, recognise valid trade-offs, and have a real dialogue about value, outcome, quality, performance and risk;
- Supply chain engagement and development. Anglian Water has built a very effective supply chain by engaging with them over the long term on the basis of what outcomes it wants to deliver for customers. Project 13 encourages clients to work in a similar collaborative, outcome-based manner, with its report From Transactions to Enterprises highlighting the limitations of traditional procurement and making the argument for a better way. As I heard Steve Crake from Northumbrian Water say a few years ago, ‘A great organisation has a great supply chain’. This has to be actively created with a vision in mind of what it looks like, but it is very different to cost, contract and specification-driven transactional relationships;
- Post-occupancy monitoring and development. Although this may become a requirement to some degree within the Future Homes Standard due in 2025, it remains a minority sport. I’m going to sweep a number of things into the POME orbit, including the use of more sophisticated metrics, but these are united in rarely being used. I regard POME as due diligence; how do you know whether you have maintained intent if you don’t measure the operational outcome? How do you manage financial, operational and reputational risk (eg to take a timely example, how do you know a building having undergone deep retrofit is not suffering from mould spores and poor indoor air quality, both invisible to the human eye)? The implication of value and outcome is a requirement to understand linkages, flow and performance – hence my push for POME.
So where are we now?
My conclusion is that we are at an early stage of getting the allotment ready. Your view of what value structures look like may differ from mine, but I think it fair to say that overall practice is patchy and inconsistent. There are good examples out there, eg the AIMCH project, and of course the Supply Chain School’s work to highlight best practice – but to me this demonstrates the extent to which we have a cultural as well as technical challenge. There are technical elements of deploying PFV principles across the sector, but for the principles to land effectively and drive transformation, clients need to operate quite differently to BAU, and the Government has a critical role in setting expectations about what the future looks like, and what the criteria for access – to tender opportunities, grant, other assistance – looks like, acting more as an exemplar client.
I can see two things coming together which are a threat to a transformed construction sector; firstly, the lack of resilience within the sector which means that people will respond to opportunistic procurement simply because they want to survive. 98% of the sector is small SMEs, worried about the retentions, fair payment, stability of work and very low margins, and they have even less power to resist this trend. Clients, especially those with a broader set of organisational values, need to think through how their behaviour will impact on the 98%, either directly or via their Tier 1 relationships. This is the purpose of supply chain engagement and development.
The second barrier is the flip-side of the current direction of travel, eg the Government losing confidence, and not taking opportunities for alignment (eg the Homes England Strategic Partnerships, or the multi-billion National Infrastructure and Construction Pipeline). This loss of confidence could translate into prioritising a V-shaped recovery by investing in BAU, and clients reacting to uncertainty by reinforcing BAU. Naysayers have a good track history – think Zero Carbon newbuild 2016, and continuing pressure to reduce the scope of the Future Homes Standard on the basis of increased cost – so we absolutely need clear, persistent, consistent and long term messaging to counteract this.
As I have discussed above, there is a lack of practical skills. The Construction Innovation Hub are doing great work to develop the tools that mean clients can understand value and implement a value-orientated approach, but very few clients are really very good at discussing or understanding value and outcome, and it is probably difficult within most organisations to argue there is a clear commercial advantage to investing in these skills. This is why messaging and criteria for access, and not just from Government but clients much more widely, is so critical. But we do need to give some thought to how client skill can be built and supported, including financial support for clients in different sectors who want to pathfind and transform. Familiarity is an enormously powerful force in times of uncertainty, so we need to find ways to derisk the cultural transition within clients and give confidence to the leaders.
So what can you do? Keep in touch with the CIH and the Construction Leadership Council, engage with the peer networks that work for you, and challenge yourself; is your baseline in reality the procurement of buildings that don’t break the law at lowest cost? How is this creating risk and cost?
… challenge yourself; is your baseline in reality the procurement of buildings that don’t break the law at lowest cost?
To what extent are your technical teams really talking about value, outcome, quality, performance and risk? It’s a big allotment, and there’s a lot to prepare. But doing what you can will make a difference.
Read other posts in Tom’s series
Tom Jarman is Director of Low Carbon Journey, a consultancy based in North East England that specialises in helping clients and their supply chains understand outcome, value and resilience. He has worked in housing for 15 years, including project development, project and programme management, sustainability, Planning, newbuild, retrofit and Building Information Modelling. This extensive client-side experience has informed his views on client leadership, organisational risk and resilience, and procurement, particularly how organisations can invest in outcomes, performance and quality, and maintain a clear line of sight from project inception to operation.
Tom is a member of the Construction Leadership Council, where he is engaged in the Procuring for Value and Innovation in Buildings workstreams. He is on the Advisory Board for Constructing Excellence in the North East as well as IC3, the International Centre for Connected Construction. He is a Certified Member of the Chartered Institute of Housing, and his professional commitment includes writing, blogging and presenting on key construction and clienting issues. In 2019 he received the CENE Award for Outstanding Achievement.