CJ Construction Blog

There is a dangerous argument doing the rounds that our cash-strapped Government would be better off channelling whatever cash it has left into refurbishing our existing housing stock rather than pursuing grand projects.

The view carries merit because housing investment creates more jobs, will save energy and wins votes.

All good reasons it seems for focusing on domestic building. But it would be dangerously short-sighted to do this at the expense of major infrastructure projects.

Consider details of the expanding ripple of work emanating from the London 2012 Olympics. This brings to the surface some tangible evidence showing why major infrastructure projects are so vital to the UK construction industry.

So far more than 1,500 construction firms have directly picked up orders and more than 7,000 workers and engineers are at work.

The only thing that can be said to set the 2012 Olympics apart from other big infrastructure projects is the fact that somebody has taken the time to measure the positives.

Similar orders radiate from projects like Crossrail and the London Underground upgrade. In this week's article, the Case for Construction, both projects are expected to harness an extra £24bn in wider economic benefits. Even setting this gigantic sum aside, the direct impact of procurement spend alone - estimated at some £25bn - will reach firms and create jobs in UK regions far beyond the capital.

These are doom-laden times and major projects counteract the gloom. They exert their own power and ability to excite young people, they inspire us to develop new technologies and raise confidence throughout the economy.

That's why they should be viewed as an absolute priority.

The time has come for the industry to stand up and challenge the growing consensus about the need for slashing public spending.

While we can all agree on the need for cuts to sort out the public finances, we must make sure they are the right kind.

Cuts must be targeted at the battalions of civil servants running bloated public services, not the millions of people working to improve the UK built environment.

If the industry accepts, no matter how grudgingly, it is in for the chop then the battle will already be lost. Between now and the election construction cannot ever be allowed to be viewed as an easy target for the axe.

That is why the entire industry must throw its unified weight behind the UK Contractors Group's effort to set the record straight. At long last the industry is armed with detailed research about what construction really does for the UK economy.

The succinct Construction in the Economy: the Benefits of Investment report spells out a compelling economic case in pounds and pence why construction must be spared.

It amounts to a battle cry for commonsense. Its ammunition, a detailed list of benefits that would challenge any rationally-minded politician into thinking again about what construction contributes.

From now on the industry mantra is every £1 spent on construction directly delivers a £3 rise in GDP.

The fight back starts here.

Sir John Egan once gave construction 4 marks out of 10 for its faltering attempt to implement his Rethinking Construction plan.
That was a few years ago and if asked today he would probably be a little less generous and score construction a paltry two, given the way best practice has flown out of the window at the first sign of workloads drying up.
Respected engineer, Andrew Wolstenholme's assessment this week of the direction the rethinking agenda should take contains some blunt words for the supply chain.
He firmly believes contractors will have to find there own way out of this crisis. Clients cannot be relied upon to drive change for at least five years.
In his report "Never Waste a Good Crisis" he argues it is no longer a case of "would like to change" rather a case of "must change" if you are to survive the uncertain years ahead.
As chair of the review team, Wolstenholme makes good points about eradicating the silo thinking that is so prevalent in construction and dulls the enthusiasm and creativity of young talent joining the industry.
Above all he argues that the industry must sell the value of the Built Environment to society. This means understanding how value is created over the whole life cycle of an asset rather than concentrating only on building cost which is only after all a part of the equation.
The mantra for the future reads relatively small upfront costs of design and construction can have such huge consequences for future users.
Also it is high time that the construction industry marshalled its arguments and spelt out the true value that a zero carbon economy brings to clients as well as the UK.
In this respect, contractors are not alone and would do well to sidle up to the environmentalists, who could prove to be the contractor's ally in troubled times.
Some firms have made a few tentative moves in this direction, but how many directors can put their hand on their hearts and say the green agenda is their agenda?

We are in for more than a decade of sluggish growth before the workload slump is restored to 2007 levels. That is the sobering prediction from forecasters sitting on the industry's most influential economic panel.

Contractors already struggling with work falling off a cliff-edge will also be dismayed to hear that output will fall by a record 15% this year, followed by a further slide in 2010.

Rather than loose faith, now is the time to focus on the fact that this is not the first time construction has faced a long haul out of the mire - remember the early nineties.

The last 12 months have eroded much of what Latham and Egan championed, eaten away by the cut-throat bidding epidemic presently gripping the UK construction industry.

The full extent of the damage will not be known until next week when Constructing Excellence evaluates where we stand today on the process of industry reform.

It is tempting to tell it how it is and claim all is lost: best practice procurement shaken to its foundations, skills gone for good and the respect for people initiative just a distinct memory.

This is too defeatist.

This time round it is even more important for the industry to face up to the unpleasant truth of stagnant growth and use it as an opportunity to place construction on a firmer footing.

The contracting industry will emerge from this stronger, if somewhat smaller. And those fit enough to survive the monumental slide must take a deep breath and start talking about how to create a more resilient industry for the future.

 

It is hardly surprising that up to a third of the firms fined for bid-rigging are said to be considering appeals.

The woolly explanations behind such wildly varied fines naturally leaves contractors feeling unfairly treated. What is very worrying from a jobs perspective is that while most big contractors can pay up without to much damage to their balance sheets, many smaller contractors feel they have little left to lose.

Whatever the final count on who finally decides to risk stirring up further OFT wrath with an appeal, it is a fair bet that the whole sorry matter is going to drag on for sometime yet.
Since that is the case, at this juncture it is worth dwelling on how much cover pricing really cost tax payers and clients.

In most of the cases, the OFT's own inquiries suggest just two bidders pitched cover prices, the rest - usually four firms - put in market rates. While it is hard to say for certain that the winning bid was unaffected, it seems a fair bet that in most cases the client achieved a similar value for money. Of course there were a few cases where big kickbacks were handed out, but these were in the minority.

One other issue that needs to be properly aired is why cover pricing toot root in the first place.

Between 2001-2006, firms were trying to cope with a glut of tenders with precious few estimators to call on. More importantly the quality of public sector tender information was quite poor in that period. Estimators complain that around that time the detail in tender documents was at best sketchy and often insufficient time was allowed to build reliable bids.

Against this background, are contractors entirely to blame? Weren't many simply trying to reduce their risks while not offending the sensibilities of clients operating important frameworks?

Of course a lot has changed since then and now the real threat to outturn costs comes from another direction, suboptimal bidding. Most construction firms say there is an epidemic of  suicidal bids sweeping through the industry. This will ultimately be damaging for clients and the supply chain.

In the spirit of level playing fields and value for money, perhaps the OFT should ask a few public sector clients how far they feel it is fair to squeeze contractors' prices. Encouraging and then taking suicidal prices, may not be bid-rigging, but it can have even more dire consequences for the public purse.

HM Revenue & Customs' attempt to raise £350m by pushing what it sees as falsely self employed workers into employee status raises several important questions.

It will undoubtedly drive up costs by the 12.8% NIC contribution contractors make for their PAYE staff.

But does it really end there? Out-of-pocket workers will not easily accept a fall in take-home pay, even if it is blamed on the Revenue. The fact is that they may reluctantly accept some erosion of wages but somebody will ultimately have to make up the shortfall in take home pay. Whether this is the contractor or client will be the source of heated debate.

Beyond that the proposals are splitting the industry along unfamiliar lines. Firms that typically directly employ argue the move puts everybody on an equal footing for the first time

This is a compelling argument, but it is not as clear cut in reality. The wet trades will feel the pinch more than building services contractors. Whether everybody will really be on a level footing in the eyes of tax inspectors is another thing.

If past experience is anything to go buy, it is the firms who pride themselves on trading legitimately and belonging to trade associations that will come under closest scrutiny. They are the easiest to find and visit. The real rogue traders out there will just disappear and set up under a new name.

But there is a bigger question on many people's lips and that is why is construction being singled out from all other parts of the UK economy in the first place?

The new law is only being applied to construction, which is also one of the hardest hit by the downturn.

The answer may lie in the proportion of the workforce that is self employed, 34% against a UK industry average of 11%. This is something that sticks in the craw of Government.

It is high-time the Government recognised that construction remains a largely transient industry, where workers move from one job to another, often travelling to other parts of the country. The industry also suffers dreadfully as the economy swings from boom to bust which means in times like these contractors need flexibility to survive.

Piloting the new tax law in construction is not just bad timing, it is simply a bad decision. This is no time to burden construction with extra costs and the havoc a shake-up in worker tax status inevitably causes.

For some time there has been a nagging fear that the big advances in attitudes to construction health and safety will fall victim to the downturn.

The evidence that good practice is being eroded by suicidal bidding is at best anecdotal, but several contractors have approached Contract Journal in recent weeks bitterly complaining that they are losing out to firms that have sprung up from nowhere.

They all complain they have spent a small fortune in recent years quite properly improving safety procedures and jumping through various financial hoops to comply with main contractors' prequalification requirements. Now they are losing out to bids that are unsustainable.

One civils firm said his contract win rates have slid from 25% to just 5% of tendered work. In his words "something is going wrong".

The perennial problem for construction is it is often difficult to prove corners are being cut until it is too late and somebody is seriously injured or killed.

That is why the latest safety initiative to stamp out poor site supervision, agreed by all 29 major contractors in the UK Contractors Group, must be welcomed by the whole industry. 

In the current economic climate this is a bold attempt to answer real concerns about the quality of site supervision in the industry, particularly surrounding the enforcement of good health and safety practice.

From the start January 2009 any supervisors who are not properly qualified will be banned from overseeing workers. From that day on all supervisors will need to submit an accepted training certificate or card proving they have the appropriate safety and supervisory skills.

The rule applies to all site supervisory staff, but is targeted at those working for subcontractors. Of course many foremen working for subbies will sigh in despair at the thought of having to deal with yet more red tape.

But this time round it looks like a small price to pay to avoid a dangerous slide into second-rate supervision that undermines hard-won safety standards.

Supervisors carry a lot of responsibility as the frontline enforcers of site safety and as such should be properly qualified.

 

At last the waiting is over and contractors are being invited to bid for the main tunnel drives on the £16bn Crossrail project.

The excitement and optimism about Crossrail is palpable even among hard-bitten civil engineering contractors. This is an important milestone because it is the clearest signal yet of the mood of confidence growing among the project's backers.

Preliminary works are underway, design work is well advanced and all the key engineering posts are filled.

For its part the contracting fraternity is primed and organised into consortia ready to get their teeth into bidding for the mammoth tunnelling contracts that make up the core of the biggest London transport project since the Underground.

Everybody needs Crossrail to progress. Not only because it is a boost to construction at a time when the going is tough, but also because this vital infrastructure project is capable of delivering wider economic benefits, estimated to be worth £38bn.

A project of this size will take months and thousands of man hours to bid, a cost that each consortium is happy to bear in a fair chase to win such a big prize.

But what happens if the project is significantly delayed or worse mothballed.

Cancelling the project at this stage would clearly be lunacy, but that doesn't mean that the prospect of a new Government reneging on funding should be ignored. On a project of this scale all possibilities have to be considered at the outset.

In such an event, it is clear there should be some provision put in place to refund contractors that will have spent millions of pounds bidding the project.

This does not undermine the process but serves to sweep away any nagging doubts in the bidding process.

There's an air of optimism about at the moment and it isn't entirely down to England triumphantly winning the Ashes.

A near two-thirds jump in housing starts in the second quarter compared to the preceding period offered a welcome surprise start to the main holiday season.

To throw in a bit more bank holiday cheer a growing band of house builders are revealling they are planning to get their chequebooks out to snap up some cheap land in coming weeks. Certainly Bovis Homes and Persimmon are more upbeat than they have been for nearly two years.

Even Irish developer Ballymore, which made its name developing ambitious apartment schemes, is talking to potential backers about restarting stalled projects like its Piccadilly project in Manchester.

So anyone tired of staring into the abyss of expected public spending cuts would do well to take another glance at the house building industry.

Any construction contractor with a bit of cash has a golden opportunity to pick up some good building plots with land prices 70% below the peak. Even struggling trade contractors would do well to revist the bigger name house builders to re-explore the chances off winning some much-needed work.

Of course, it is all too easy to overstate the prospects for housing. After all the entire house building industry is united in warning that the recovery is on a knife-edge with growing unemployment threating to kill off renewed optimism.

Many of the city analysts who made a name talking the market down last year, still argue a 15% drop in house prices is in the offing.

The jury is still out. But Contract Journal for what it's worth believes the market has bottomed out and house building activity is on the rise.

Of course, it all depends on where you are. In much of the country there has been a shift from appartments to houses, which will favour trade contractors over tier 1 firms.

London and the south east will be the first to experience a proper recovery, with the north of Britain struggling on for some time ahead.

But if its growth and a bit of certainty you are looking for, house building is the place to find it. Housing was the first industry to tumble off the cliff. It is cautiously clambering up from the bottom and looks set to be the first out of recession.

Maybe the time has come to dust down that now unfashionable model of running a contracting business alongside a house builder.

For all those attempting to wade through the 90-page UK low-carbon industrial strategy launched by the Government today, this is the word cloud summary of the section on the built environment.

There is much sentiment about construction's central role in delivering a low carbon environment, but not much to be had in new investment.

Key initiative: The Government is investing up to £6 million to construct 60 or more low carbon affordable homes built with innovative, highly insulating renewable materials.

Much more for those into energy infrastructure.