by David Hudson
Throughout the history of construction in Britain there have never been such radical and fast-moving changes in the procurement of construction work as we have seen in recent years. A variety of reasons for these changes have been suggested:
- client dissatisfaction with “traditional” systems;
- increasing technological complexity in the construction of buildings;
- poor standards of construction management brought about by the short-term objectives of senior management decisions and lack of long-term management development and training;
- the demand to reduce construction times necessitating an increase in productivity;
- the desire to overlap design and construction without precipitating the typical adversarial attitudes prevalent in the UK;
- the pressures created by foreign competition; and
- movement away from the traditional labour-intensive trades, brought about both by technological advance and by the long-term failure of the industry to invest continuously in training in the traditional skills.
The need for a better and more suitable method of construction procurement has undoubtedly been influenced by these factors as it also has by the fluctuations in macroeconomic fortunes and developments in business attitudes generally. But underlying the changes that the UK construction industry is experiencing is a much-needed and fundamental restructuring which, for those wishing to survive and prosper, will require the abandonment of many long-held and hitherto sacrosanct assumptions.
In the same way that the influence of architects changed when they relinquished budgetary control, so, in the future, it may well be perceived that the decline of main contractors’ universal employment began when they allowed the direct control of site resources to pass from their hands. The generally accepted role of the contractor is being — and will increasingly be — called into question as the realisation grows that the “traditional” contracting relationships are costly, inefficient and often not in the best interests of the building owner. To support such a hypothesis the function of a main contractor must be examined in more detail.
Management
The system of main contracting grew in the UK in response to a desire for “single-point” construction responsibility with the main trades combined into a single organisation which would sublet only a few very specialised items of work. It is now generally accepted that, with few exceptions, main contractors no longer have the capability to carry out any of the work, with even the least technological of trades being sublet. The main contractor, it may be argued, still provides the skilled management necessary to organise construction works: this is clearly not the case. The management provided within the constraints of the standard British main contracting systems has been singularly inefficient and uninnovative. Even with the excessive contract periods sometimes allowed in the past, a project finished on time has been the exception. Management of the construction process has in very large measure been left in the hands of promoted “successful” tradesmen who have thus become managers (frequently with no training, formal or informal, and no continuing management development), while many of the personnel within contractors’ organisations who have the highest levels of intellect and articulation have been concentrated by senior management on improving profitability through claims-related activities — an obvious waste of valuable talent.
That such a situation exists is not merely a criticism of contractors but of an entire system that allowed complacent professionals and contractors alike to prosper in an environment of self-created disorganisation. It has been realised only in very recent years that, for construction projects to be managed effectively, innovation and pragmatic thinking are needed: these can be provided only by combining high levels of training and education with experience. Even today, despite all that the industry’s history has to teach, it appears that individuals of the necessary calibre are only employed sufficiently close to the building process itself in commercial environments outside those of traditional lumpsum contracting. This can be supported by examining the constituent parts of final construction costs: Figure 1 illustrates the greater relevance of management costs within a construction management system.
Risk
“Well,” it is said, “at least main contractors take on a substantial amount of risk.” But do they? There can be no doubt that, in common with all commercial businesses, there is a degree of risk in main contracting, but the amount of risk taken from the building owner is, in fact, considerably less than is usually supposed (see Figure 2). Main contractors invariably conduct a project with a positive cash flow: they rarely use their own money to finance the contract and, on average over its course, have money in the bank generated by the project which they invest short term to enhance profitability. The short-term financing of contracts is, in reality, provided by subcontractors, builders’ merchants and suppliers. And yet, when a project goes wrong, how often do the losses rest with the contractor? Mostly the contractor is either able to pass on losses to his subcontractors or, more frequently, to take advantage of client changes and the inefficiencies and errors of the design team so that the building owner finds that this “fixed-price lump sum” contract is almost infinitely variable.
Even training the future generations of construction operatives by main contractors is now largely defunct; they have no labour force, so they train no apprentices. More training initiatives appear to be taken by some major developers than by main contractors.
If all this is true — and many believe it to be so — then the days of the traditional lump-sum contractors are numbered, except perhaps on very small jobs. By using the traditional terms of contract, there appears to be little or no benefit to a building owner in paying the high overheads and profit margin of a large main contracting organisation, especially as much of that overhead is dedicated to sterile remeasurement and the generation of claims. That does not, of course, necessarily connote the demise of the existing contracting organisations — only that survival will depend on adapting to the requirements of the future.
Construction management
If the building owner wishes to maintain flexibility, utilise fast-track methods and gain the potential benefits of retaining control, accepting greater perceived risk in order that he can manipulate it to his advantage, then he will increasingly turn to the “construction management” method of procuring work. Many clients will not have, nor wish to retain, the necessary skills in-house and will seek specialist firms of construction managers who have highly trained, highly motivated and professional management personnel who operate in the context of a lean and efficient company. It is clear that main contractors who have opened management contract divisions to jump on the bandwagon have, with a limited number of exceptions, been unable to provide the attitudes and expertise necessary to make such a system work. To date, the management and commercial personnel within most contracting organisations have failed to grasp that an entirely different approach is required where the overriding consideration is professional representation of the client as opposed to their own company’s profitability. Without that understanding any attempt to move into a professional managerial role is doomed to failure.
Genuine lump sums
If a building owner wishes to minimise his risk, can be sufficiently definite as to his requirements at an early stage and has time for comprehensive pre-construction design to be carried out, then his only sensible option is to select a truly fixed price contract (as opposed to the lottery often created within the context of JCT contracts). That is, a contract where the price is not adjusted — neither for design development, errors in quantities, deficiencies in the drawings nor inflation — except when there is a change in his requirements. Contractors must be prepared to respond to their clients’ desires — it may mean that the initial tender price is higher, but the claims department can be disbanded and management resources can be concentrated on completing the project to time and price. Clients are increasingly showing a desire to adopt this approach in order to obtain the benefit of certainty of out-turn cost at the time the contract is awarded.
Conclusion
In selecting the method of letting their construction projects, a growing number of clients are choosing construction management or genuine lump-sum contracts — the former to achieve speed, despite a largely mistaken perception of increased risk to the client and the latter, whether including or excluding contractor’s design, to achieve financial and commercial certainty. A growing number of small but specialist companies offering these services are, therefore, taking an increasing share of the construction market. Will this trend continue, or will established contractors be able to meet the challenge?
