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The Construction Task Force conference reveals how to . . . - Get lean and get loaded
00:00 11 Nov 1998
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Everyone knows that making good money out of the construction
industry is about as hard as wringing blood out of a stone - even
harder if you happen to be at the specialist contracting end of the
market.
So when the managing director of a small roofing and cladding company stands up and says he has found a way to increase his profitability five-fold in as many years he immediately has his audience's attention.
That was the claim Todd Zabelle made last week at the industry seminar to mark the second stage of the Egan Task Force initiative. He told delegates that Pacific Contracting, his San Francisco-based company, had lifted its gross margin from just 6 per cent back in 1993 to 28 per cent this year. A collateral improvement in productivity has seen turnover grow by 20 per cent over the last 18 months without any increase in staff.
Those are numbers his hard pressed UK counterparts would love to emulate.
The moral of his story is that they can - provided they are smart enough and brave enough to completely change the way they do business. "I do not think it is enough to question the processes we use and [just] re-engineer them, or to train our people better, or to have trust [between the different parties]. We need to have a new theory of how to build."
beyond repair
The big contractors in this country agree that the traditional business model of construction is broken beyond repair. Keith Clarke, chief executive of Kvaerner, told the conference: "The construction industry in France and the UK makes 1 per cent margins. In Korea and Japan it is bankrupt. We need to change or we will die in a rather slow and painful way."
According to Professor Dan Jones of Cardiff University, the new theory Todd Zabelle speaks of starts with avoiding a fundamental mistake. Instead of expending energy searching for the (relatively few) ways in which value can be added to the construction process, successful businesses will look at the plethora of ways value is lost through waste and inefficiency.
Such waste may be physical or theoretical, a cluttered or unsafe site, or the irregular flow of project information. The first step toward a solution will be to integrate the project team and bring design and construction into unity. It will also require realignment of incentives to see the parties work for each other not against each other. And this is where it gets interesting for construction companies.
The practical outcome of this is that contractors will be appointed on the basis of best value and not cheapest price, and will be given three or four projects in a row to allow continuous performance improvement.
Delegates were surprised to hear Sir John Egan tell the conference that replacing tendering will be a priority for the high-powered steering group that will oversee the coming year of the Task Force's work. "One of our prime tasks will be to see that an alternative to competitive tendering is developed," Sir John told the conference.
The steering group - which comprises Sir John, paymaster general Geoffrey Robinson, construction minster Nick Raynsford, and chairman of the Construction Industry Board Tony Jackson - should have the influence to instigate fundamental change in both the private and public sectors.
Deputy Prime Minister John Prescott said the Government would provide the "essential political will" to drive such changes through. He said "the time is right for revolutionary change" in the way construction operates.
In a press conference he later added: "The Government is moving away from tendering towards best value forms of procurement. After all, it has not done us much good in the likes of local authority work."
He drew attention to the MoD's radical procurement initiative designed to reduce costs by 30 per cent, and added: "I and my colleagues want all Government departments to set similar targets."
Paymaster general Geoffrey Robinson took up the theme, telling delegates he would personally see that Government and Treasury turned to a culture of continuous improvement: "We wish to develop longer term relationships with our suppliers not based on tendering." Although he cautioned: "That doesn't mean a move away from selection based on competition."
What are the implications for companies that try to win work in the new way of doing things? According to Keith Clarke, they will have to plough far more resources into competing for work in order to show their clients they can deliver value. "In future we will be tendering less and investing more."
He predicted that contractors would no longer focus on turnover in future. "We will change to looking at return on assets employed, not return on sales. It will take up to five years for that to happen. But when it does it will be a sea change."
entry barriers
High performance would provide entry barriers and protect those that invested in better performance, he said. "The industry will in future be about fewer people doing more work that others cannot do. Around 60 per cent of the industry will follow this pattern."
Clarke and others warned that contractors would have to plough their assets into four kinds of investment to be part of this league:
l Investing to change the culture and working practices of their companies.
l Investing to develop efficient working practices with outside partners.
l Research and development.
l Investment in individual bids to understand and exceed customer requirements.
Clarke claimed Kvaerner was managing to put some of these principles into practice in some areas. Over a three-year period embankment stabilisation costs had been halved on rail jobs thanks to an alliance between Mott McDonald and Cementation, although it had required big up-front costs with a complete QA system in place before they even submitted their bid to LUL.
Some will not find it easy to make these kind of commitments. On their behalf, CITB chairman Hugh Try asked from the floor if clients would guarantee to place their work with the companies that invested in these processes. The answer in general was: "No."
Dan Jones explained the logic, saying that the huge potential for removing waste in construction processes and relationships would vastly outweigh the costs.
He said the evidence was that a 90 per cent reduction in defects, 50 per cent reduction in speed and unit costs was achievable by putting the Task Force principles into practice. "Those companies that seize this opportunity and do, don't talk - can scare the rest of the industry into copying them. All we need is half-a-dozen companies to double their headcount with the same turnover and the rest will have to follow."
eligible
Sir John Egan said that if companies made themselves eligible for this kind of work, they would protect themselves against a downturn. He believed costs could be cut so radically that offices, for example, could be constructed at costs that would continue to be viable in leaner times.
He cited the example of Whitbread, which has recently cut back its investment programme, with the exception of Travelodge, where it was achieving such exceptionally low construction costs it could continue to make money by investing.
John Prescott applied the same argument to Government. He said the Treasury was no longer trying to 'punish' departments that allowed cost overruns, but was looking to direct investment to those departments and programmes that achieved value for money.
He said Government was pledged to improving public services, and had plenty of work for the construction industry to do in repairing and building schools, hospitals and homes.
While much of the seminar trumpeted the benefits of lean construction, half of the day was occupied with drawing up a battle plan for widespread implementation.
John Prescott announced that £1 billion of demonstration projects had been offered to the DETR to model Egan in action - more were also being sought from across the spectrum of construction. The department will now choose those which address at least one of four key processes:
l Product development (specialisation in a certain kind of project leading to a degree of standardisation).
l Project implementation (better integration and smoother workflow).
l Partnering suppliers.
l Standardising components to improve quality and reliability.
The projects will be lumped together into clusters of 8-10 schemes. Each cluster will represent a wide variety of projects from large to small, public to private. Each project will put forward a champion to feed lessons and information into the cluster, which in turn will send a champion to report at national level.
"If we can just get the young people working on these projects, talking together, it will be a huge benefit," said Sir John Egan.
The benefits from the projects will have to be measured so others can see what works and why. A new executive, chaired by Alan Crane, chief executive of Christiani Nielsen, will define benchmarks and key performance indicators to achieve this.
For those who still 'don't get' the idea of lean construction, or have not read the report, six regional seminars will be held. A second national seminar next May will draw together all the threads and review the next stage.
While the devil will be in the detail of all of this, there was no disguising the excitement of the delegates at the conference and their desire to go out and make things happen.
As 400 executives returned flushed with enthusiasm from their breakout sessions and brainstorming bouts, Ian MacPherson of Mace leapt on to the stage and announced: "This is construction's answer to Viagra!"
But will Egan have staying power? And can construction really change? Todd Zabelle offered this encouragement: "There has to be an urgency for change. There isn't that urgency in the US, but you have it here."
John Prescott, flanked by ministers from DETR, the Treasury and MoD, confirmed: "Today is the turning point for the UK construction industry, we have a unique opportunity to drive the industry to the top of the world league."
Time will tell if they are right.
So when the managing director of a small roofing and cladding company stands up and says he has found a way to increase his profitability five-fold in as many years he immediately has his audience's attention.
That was the claim Todd Zabelle made last week at the industry seminar to mark the second stage of the Egan Task Force initiative. He told delegates that Pacific Contracting, his San Francisco-based company, had lifted its gross margin from just 6 per cent back in 1993 to 28 per cent this year. A collateral improvement in productivity has seen turnover grow by 20 per cent over the last 18 months without any increase in staff.
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Those are numbers his hard pressed UK counterparts would love to emulate.
The moral of his story is that they can - provided they are smart enough and brave enough to completely change the way they do business. "I do not think it is enough to question the processes we use and [just] re-engineer them, or to train our people better, or to have trust [between the different parties]. We need to have a new theory of how to build."
beyond repair
The big contractors in this country agree that the traditional business model of construction is broken beyond repair. Keith Clarke, chief executive of Kvaerner, told the conference: "The construction industry in France and the UK makes 1 per cent margins. In Korea and Japan it is bankrupt. We need to change or we will die in a rather slow and painful way."
According to Professor Dan Jones of Cardiff University, the new theory Todd Zabelle speaks of starts with avoiding a fundamental mistake. Instead of expending energy searching for the (relatively few) ways in which value can be added to the construction process, successful businesses will look at the plethora of ways value is lost through waste and inefficiency.
Such waste may be physical or theoretical, a cluttered or unsafe site, or the irregular flow of project information. The first step toward a solution will be to integrate the project team and bring design and construction into unity. It will also require realignment of incentives to see the parties work for each other not against each other. And this is where it gets interesting for construction companies.
The practical outcome of this is that contractors will be appointed on the basis of best value and not cheapest price, and will be given three or four projects in a row to allow continuous performance improvement.
Delegates were surprised to hear Sir John Egan tell the conference that replacing tendering will be a priority for the high-powered steering group that will oversee the coming year of the Task Force's work. "One of our prime tasks will be to see that an alternative to competitive tendering is developed," Sir John told the conference.
The steering group - which comprises Sir John, paymaster general Geoffrey Robinson, construction minster Nick Raynsford, and chairman of the Construction Industry Board Tony Jackson - should have the influence to instigate fundamental change in both the private and public sectors.
Deputy Prime Minister John Prescott said the Government would provide the "essential political will" to drive such changes through. He said "the time is right for revolutionary change" in the way construction operates.
In a press conference he later added: "The Government is moving away from tendering towards best value forms of procurement. After all, it has not done us much good in the likes of local authority work."
He drew attention to the MoD's radical procurement initiative designed to reduce costs by 30 per cent, and added: "I and my colleagues want all Government departments to set similar targets."
Paymaster general Geoffrey Robinson took up the theme, telling delegates he would personally see that Government and Treasury turned to a culture of continuous improvement: "We wish to develop longer term relationships with our suppliers not based on tendering." Although he cautioned: "That doesn't mean a move away from selection based on competition."
What are the implications for companies that try to win work in the new way of doing things? According to Keith Clarke, they will have to plough far more resources into competing for work in order to show their clients they can deliver value. "In future we will be tendering less and investing more."
He predicted that contractors would no longer focus on turnover in future. "We will change to looking at return on assets employed, not return on sales. It will take up to five years for that to happen. But when it does it will be a sea change."
entry barriers
High performance would provide entry barriers and protect those that invested in better performance, he said. "The industry will in future be about fewer people doing more work that others cannot do. Around 60 per cent of the industry will follow this pattern."
Clarke and others warned that contractors would have to plough their assets into four kinds of investment to be part of this league:
l Investing to change the culture and working practices of their companies.
l Investing to develop efficient working practices with outside partners.
l Research and development.
l Investment in individual bids to understand and exceed customer requirements.
Clarke claimed Kvaerner was managing to put some of these principles into practice in some areas. Over a three-year period embankment stabilisation costs had been halved on rail jobs thanks to an alliance between Mott McDonald and Cementation, although it had required big up-front costs with a complete QA system in place before they even submitted their bid to LUL.
Some will not find it easy to make these kind of commitments. On their behalf, CITB chairman Hugh Try asked from the floor if clients would guarantee to place their work with the companies that invested in these processes. The answer in general was: "No."
Dan Jones explained the logic, saying that the huge potential for removing waste in construction processes and relationships would vastly outweigh the costs.
He said the evidence was that a 90 per cent reduction in defects, 50 per cent reduction in speed and unit costs was achievable by putting the Task Force principles into practice. "Those companies that seize this opportunity and do, don't talk - can scare the rest of the industry into copying them. All we need is half-a-dozen companies to double their headcount with the same turnover and the rest will have to follow."
eligible
Sir John Egan said that if companies made themselves eligible for this kind of work, they would protect themselves against a downturn. He believed costs could be cut so radically that offices, for example, could be constructed at costs that would continue to be viable in leaner times.
He cited the example of Whitbread, which has recently cut back its investment programme, with the exception of Travelodge, where it was achieving such exceptionally low construction costs it could continue to make money by investing.
John Prescott applied the same argument to Government. He said the Treasury was no longer trying to 'punish' departments that allowed cost overruns, but was looking to direct investment to those departments and programmes that achieved value for money.
He said Government was pledged to improving public services, and had plenty of work for the construction industry to do in repairing and building schools, hospitals and homes.
While much of the seminar trumpeted the benefits of lean construction, half of the day was occupied with drawing up a battle plan for widespread implementation.
John Prescott announced that £1 billion of demonstration projects had been offered to the DETR to model Egan in action - more were also being sought from across the spectrum of construction. The department will now choose those which address at least one of four key processes:
l Product development (specialisation in a certain kind of project leading to a degree of standardisation).
l Project implementation (better integration and smoother workflow).
l Partnering suppliers.
l Standardising components to improve quality and reliability.
The projects will be lumped together into clusters of 8-10 schemes. Each cluster will represent a wide variety of projects from large to small, public to private. Each project will put forward a champion to feed lessons and information into the cluster, which in turn will send a champion to report at national level.
"If we can just get the young people working on these projects, talking together, it will be a huge benefit," said Sir John Egan.
The benefits from the projects will have to be measured so others can see what works and why. A new executive, chaired by Alan Crane, chief executive of Christiani Nielsen, will define benchmarks and key performance indicators to achieve this.
For those who still 'don't get' the idea of lean construction, or have not read the report, six regional seminars will be held. A second national seminar next May will draw together all the threads and review the next stage.
While the devil will be in the detail of all of this, there was no disguising the excitement of the delegates at the conference and their desire to go out and make things happen.
As 400 executives returned flushed with enthusiasm from their breakout sessions and brainstorming bouts, Ian MacPherson of Mace leapt on to the stage and announced: "This is construction's answer to Viagra!"
But will Egan have staying power? And can construction really change? Todd Zabelle offered this encouragement: "There has to be an urgency for change. There isn't that urgency in the US, but you have it here."
John Prescott, flanked by ministers from DETR, the Treasury and MoD, confirmed: "Today is the turning point for the UK construction industry, we have a unique opportunity to drive the industry to the top of the world league."
Time will tell if they are right.
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