By Alan Wilson, managing director at SELECT
IN issuing its report “Under Construction: Building the future of the sector in Scotland”, Holyrood’s Economy, Energy and Fair Work Committee said that it wanted to understand the industry’s challenges “to ensure it realises its full potential”.
It was a valuable exercise, since the construction business touches every part of the economy in Scotland, generating £21.4 billion per year, employing 170,000 people – or 10% of all Scottish jobs – and sustaining 45,000 businesses.
When giving our evidence to the committee, we suggested that any programme for improvement should focus on Four Ps: Procurement, Payment, Professionalism and Policing. As well as a requirement for government to take proactive action, there always remains the challenge of effective implementation and review.
At the root of most of the contentious areas in construction is the business model for procurement, where practices and procedures have not fundamentally changed over many years. In usual circumstances, a main contractor, appointed to deliver a contract, proceeds to sub-let the works to myriad sub-contractors who may then further sub-sub-contract. There is very little if any engagement with sub-contractors on issues such as design or risk before the work starts on site and this often leads to a spiral of issues, including challenges over costs for extras, extensions of time etc. etc.
This highly fragmented and costly delivery process, driven by the lowest price and the most onerous of contract conditions aimed at wholesale transference of risk, creates a race to the bottom which places an intolerable burden on businesses who often don’t appreciate how exposed they are. Often this race is won by businesses that spend little time and capital in investing in up-skilling their workforce or recruiting and training the workforce of the future.
The Scottish Government has made some sterling efforts to address some of the issues, but many others still require to be addressed including:
• avoiding the use of multiple schemes of pre-qualification;
• requiring contracting authorities to consider if the work could be done by SMEs or SME joint ventures;
• encouraging early involvement of key specialist contractors to inform the design and planning process; and
• insisting on approval of sub-contract conditions to deter tier 1 contractors from transferring risk along the supply chain.
Above all else traditional procurement systems are no longer fit for purpose. We need to be radical and bring in more innovative systems such as insurance-backed alliancing. Research from 10 years ago suggested that every £1 spent on construction created up to £5 in GDP growth. We believe that the economic impact could be far greater if we were able to eradicate the endemic process waste in delivery systems. For example, failure to engage the supply chain early enough to inform design decisions often means that construction costs are increased to reflect changes to designs to make them fit for manufacture.
Section 15(5) (d) of the Procurement Reform (Scotland) Act 2014 – a measure widely welcomed – requires contracting authorities with an annual spend of more than £5 million to include strategies for 30-day payment to sub- and sub-subcontractors. However, our surveys show that, in 2016, 45% of reporting authorities were non-compliant. New figures will be available soon, but in order for this objective to be fully realised, the government should now legislate to mandate 30-day payments.
Project Bank Accounts are the most effective way of ensuring that cash is disbursed to the supply chain without delay and, we were delighted when Scottish government reduced this to £2 million. We are keen to work with government to see how we can promote the use of PBAs more widely.
We believe that the Scottish Government should have the courage of convictions over their own Approved Certifier of Construction scheme and mandate that for all directly funded work that only those on the scheme to ensure that only properly qualified people carry out public sector work.
In addition, recognising and legislating on our campaign to introduce Protection of Title would raise the bar of the status of electricians who work across Scotland.
We must invest more resource in ensuring compliance with regulation and best practice. To this end we have been urging the Scottish Government to create a properly resourced Office of Public Procurement Regulator. The Regulator would have powers to challenge poor practices and, if necessary, impose penalties on regular offenders.
We need to move the sector towards the value systems inherent in many other sector supply chains – close collaboration; payment security shared risk and reward; effective communication; and a shared focus on the product. Only then will construction take its rightful place in 21st century business.