Over the next four weeks, Tom Jarman will be talking about how he thinks we can transform construction and realise its true potential. The good news is that there is more happening to make this a reality than is often realised, as he’ll cover in his first blog. The second one looks at a specific component of this, Procuring for Value. He thinks this is a game-changer, but it needs construction clients to engage so that it really opens up a new marketplace for innovation, productivity, performance, quality and disruption. The third blog looks at preparing the ground; what needs to happen so that value and outcome have a decent chance to land effectively and grow into business as usual, displacing lowest capital cost and minimum regulatory compliance as the industry and client norm. The series will end by picking up this client-focussed theme and discussing client leadership. What is client leadership, why does it matter, what does it look like? Getting this right opens up real opportunities for construction to take its rightful place as a dynamic, attractive and exciting agent for a better society.
You can connect with Tom and continue the conversation via https://www.linkedin.com/in/tom-jarman/
“In this first of a series of four blogs, I want to draw attention to something that is happening within central Government procurement that is, frankly, great news. But let’s start with the situation we are familiar with, namely a construction sector that does not have a great reputation for innovation, productivity and outcomes. This impacts on the construction sector itself, for example its resilience and ability to attract talent, and it impacts on construction clients, who by and large are not getting a great deal. The industry and its clients are reasonably good at compliance, but there is a real struggle to lift above this. And that’s a problem because that means that construction outcomes are only ever as good as the regulatory environment that organisations operate in.
Construction outcomes are only ever as good as the regulatory environment that organisations operate in
I’m going to briefly touch on regulation before I move onto the good news. Regulation can never be a substitute for active and sophisticated clienting – I’ll talk about this more in the fourth blog but until then it’ll largely have to sit there as a statement of the bleeding obvious. But is it really that obvious? Regulation is what you do to stay out of jail.
Regulation is what you do to stay out of jail.
Clienting is what you do to translate investment intent into the best possible outcomes. But the reality of common practice is that it is focussed on regulatory compliance, and in my view the only outcome from an approach that doesn’t break the law at minimum cost is risk. Regulation simply can’t accommodate the range of projects that clients want to carry forward at any level of detail, because it is there to ensure the big ticket items – fire, security, structure – are covered to a sufficient degree. But even then it gets it wrong sometimes; the horrific fire at Grenfell showed the limits of regulation, and the importance of clients not confusing compliance with a holistic understanding of project intent and risk.
So we have a situation where McKinsey ranked construction in 21st place in its index of industry digitisation. There were 22 industries. No 22 was Agriculture & Hunting. But if clients procure compliant projects at cheapest cost, then where is the market place for organisations that want to deliver value and outcome? And as a very significant client, what is Government doing about this?
To give everyone hope, I want to flag a number of events that have taken place within Government that have started to shift the dial towards outcome and value, and away from lowest capital cost, to the extent that it is other clients, some public sector, some private, that are operating a risky and outdated cost-driven model. The two principal events I want to start with are establishing the Construction Leadership Council (CLC) in 2013, and the ‘Presumption in Favour’ [of offsite manufacturing] announced in the Spring Statement of 2017.
The CLC was mandated within Construction 2025, ‘to provide clarity of purpose and strength of leadership’. The current co-chair, Andy Mitchell (CEO of the Thames Tideway project) is keen to stress that this isn’t ‘one Council to rule them all’, and that the CLC works in close partnership with other industry leadership bodies, such as the CIC and Constructing Excellence. But back in 2013, when Construction 2025 was published, you get the distinct impression that ministers were fed up waving around their copies of the Latham and Egan reports and were aiming to more clearly produce signal from noise. Since its formation the CLC has carried out significant work to understand what the transformational levers might be within construction, capture these in the Construction Sector Deal, and mobilise action with industry and Government funding. Hidden in the Industrial Strategy (2017) on p197 is a very significant sentence:
‘In the months ahead the sector and the government will work to ensure construction projects across the public and private sectors are procured and built based on their whole life value, rather than just initial capital cost’
And there we have it; value as Government policy. This now being operationalised through the work being carried out by the Construction Innovation Hub and others, but it is time to wave the flag for value and outcome. To continue to procure at lowest capital cost, measured over the very short term, to minimum legal requirements is a client choice, not a policy requirement. I can understand why that client choice is taken, and why going down an unfamiliar path is seen as risky, but it is a choice.
This brings us to the Spring Statement of 2017, and the practical challenge of ‘the Government’ procuring in a coherent, collective way. In reality, while the collective construction purchasing power of Government is some 30%+ of total construction orders (see here, p12), spending decisions are split by department. The Spring Statement announced the presumption in favour of offsite manufacture by April 2019, focussing on five departments; Justice, Health and Social Security, Defence, Education and Transport. Progress has been mixed, and there is no consequence within departments for behaving in a more traditional and transactional, familiar way – but there have been genuine attempts within Government to shift onto a longer-term, outcome-orientated, value (not cost-) based approach to procurement. Education in particular has used visibility of pipeline and standardisation to drive better value and better quality projects.
I want to focus now on one of the most important documents that have accompanied this change in how Government intends to use it’s power as a client, namely Transforming Infrastructure Performance (2017), which aimed to ‘significantly improve the ways in which infrastructure is planned, procured and delivered to focus on the whole life performance of systems’. TIP was a response to the Spring Statement, intending to put some policy and operational teeth behind the presumption in favour, and drive the principles into long-term infrastructure planning and delivery.
There isn’t space here to talk about the other documents that have collectively given weight to this direction of travel in Government, but they are shown here (scroll down, download, slide 8). And you may have noticed that some significant departments, eg Communities, Housing and Local Government, were not part of the original line-up, which suggests some of the practical complexity of swinging Government as a whole behind one consistent line. But Homes England have recently announced a significant investment programme in piloting Modern Methods of Construction, so the original five depts are slowly becoming 5 + 1.
There is also some existing practice to point to when it comes to value and outcome. Katherine Bew has written on the MPKH about outcome-based contracting at Sellafield, for example; this is worth reading partly because of the principles but also because of the operational detail that makes outcome and value work.
So let’s take stock of where we are…
The CLC continues to engage with Government and industry, exploring what a much more dynamic, innovative and productive construction industry could look like and what it could deliver. It continues to develop its ‘Strategic Outcomes’ – Digital, Manufacturing and Performance, with these being the transformative levers to reach the targets laid out in Construction 2025 – and the ‘Strategic Enablers’, Procuring for Value, Industry-led Innovation and Skills, that are the mechanisms that allow the levels to be pulled effectively. At a practical level, examples of our work include the Smart Construction Dashboard and Smart Construction, and engaging with clients as much as humanly possible so that they are using active and sophisticated clienting to raise the bar in supply chains beyond compliance, and create a market for organisations that want to transform, invest, and deliver much better quality and outcomes. And we haven’t forgotten the 98%:
Most people in the construction sector are small SME’s and the self-employed, and they don’t want to get in a room and discuss transformation or strategic whatevers – they want a decent margin, greater predictability, and the space to upskill, invest and grow their business.
Fair payment, retentions, margin and quality expectations are overwhelmingly more important to them, so we are doing everything to work with Government and clients to build a better operating environment.
The Construction Innovation Hub is looking at standardisation, business models (with ACE), technology, the flow of project design and implementation, the role of manufacturing and how it fits into a holistic process, how this process can be unblocked, made more effective… It is very busy leading on the Industry-led Innovation aspect of the CLC’s work, enabled by the Transforming Construction fund. This includes a Procuring for Value Tool or Investment Index, that will help clients understand what holistic outcomes they want, and translate these into cost, value and outcome so that they become realistic and deliverable. This is will fill in a major gap for clients that want to move much more effectively toward value and outcome over the long-term, as opposed to short-term capital cost and compliance-driven considerations.
The Presumption in Favour departments continue their journey; there is no turning back on this. The Smarter Infrastructure Working Group was formed last year from the MMC and BIM Working Groups to embed this journey, co-ordinate departmental work and give weight to the work that is being done. This is a journey that is fully supported by the National Infrastructure Commission and the Infrastructure and Projects Authority. They have a £600bn pipeline of work to deliver, and they are very aware that the c.15% productivity gap in construction compared to other industries, which translates into some £90bn-worth of either lost value or unnecessary spend over the 10-year lifetime of the programme. At a more local level, organisations like the GLA are part of the thinking – and adding to the momentum with reports like Designed, Sealed, Delivered (2017) setting a policy direction of travel, and systems such as PRISM now translating this into operational practice.
Transforming Construction has now allocated all of its funding into some really exciting projects that will operate over the next four years. The investments range from the very big – the Construction Innovation Hub (£72m) and the Active Buildings Centre (£36m) – to the big, such as £6.5m for the Advanced Industrialised Methods for the Construction of Homes project, to smaller, collaborative, research-focussed work, eg the Transforming Construction Network Plus programme. But this is the best opportunity that the industry and clients have had for many years to show what it can do, what they can transact, with this investment, and build momentum and confidence.
This momentum and confidence are absolutely critical, because we are at a tipping point where they matter. My view is that the recovery from the 2008 crash was a wasted opportunity. Money was invested in business as usual – compliance-driven housing units for example, rather than housing quality and outcomes, and decarbonisation was hastily pushed to one side. I’m not inherently a great fan of regulation, but I am a fan of conditioning outcomes and driving ambition. On the positive side, lessons have been learnt from the 2008 recovery, including that austerity as was is not an option this time round, meaning that there is only one game in town; productivity.
HM Treasury are well aware of the level of debt the UK will carry post-Covid. Although servicing costs are at an all-time low, this still equates to some 4% of Government revenue -that’s more than Defence spending. With austerity mk 2 not an option, they want every £ spent to carry weight, and the best way to do that is to focus on outcome and value. They are more receptive to this than ever before. But this also means the route to access is a sector narrative – for any sector – based on value, outcome and productivity. This is a real challenge for some client groups, where cost and regulation are very heavily hard-wired into client culture. But it is the only viable conversation with Government going forward.
My advice is do not join the queue marked ‘subsidy and regulation’; it’s too long, and it isn’t moving.
I can understand that it is familiar and therefore tempting, but there are people waiting at the door marked ‘value, outcome and productivity’ and they are desperate for an adult conversation.
There was a time when Government procurement practice and culture was part of the problem, not the solution. As Rupert Soames, CEO of Serco, beautifully put it in 2018, ‘The objective of Government procurement should not be to create a market in which the only bidders are the dumb or the desperate’ (link). We aren’t completely out of the woods, but I hope I have given you confidence that if you are impatient for construction sector that is dynamic, attractive, resilient and genuinely delivering the fantastic outcomes it is capable of, then you aren’t alone. But I’d suggest that you start translating your impatience into conversations with colleagues, clients and your supply chain about what the alternative could look like, because this will involve real challenges to the dominant culture in most organisations. I’d be interested to know what help you think you need to make this happen.
In my next blog I’m going to look in more detail at Procuring for Value; what is it, and why do I think it is so significant as an agent of transformation? As a thought between now and then, I don’t care what you call it – if you are thinking value and outcome over the long-term you’re in the ‘PFV space’. Welcome. And if you are a construction client, then have a virtual red carpet, because you are key to transformation.
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.