Evolving business: a fresh approach
12 September 2018
Can the current business model for construction in the UK survive, asks Richard Saxon?
Under the current model for construction in the UK, main contractors refer to themselves as 'tier ones' and complete projects by managing a flock of 'tier twos', which are specialist contractors for all the trade work and often the professional work, too. The tier ones win clients’ projects, receive payment, and then procure and organise the flow of design information and site work. Risk is passed down the supply chain and money meted out frugally.
Tier ones have often become effectively hollow builders, with little involvement in the craft and a focus on commercial management to make wafer-thin profits. The tier twos, in turn, have become ever-more vulnerable, too weak to train and retain staff, unable to innovate and liable to fail more than many other kind of business. Quality, productivity and capacity are falling as the workforce ages and investment cannot be made. It is easy to see why this fragmented pattern has emerged. Vertically integrated contractors found it hard to survive the big swings in demand that come with the business cycle, especially when government doesn’t invest countercyclically. By retreating to their management core, tier ones in the UK can last out the cycles but have failed to grow into globally competitive firms.
However, there are signs that integration is coming back into fashion. Collaboration is the new buzzword, with forms of contract and digital toolkits all stressing the value of early involvement, shared endeavour and managed risk. Construction management, the procurement approach where the organisation of the specialists is carried out for a fee but without the commercial pressure and transfer of risk, is returning. It provides a context for architects and engineers to work with their preferred specialist contractors early in the design phase, rather than having to redesign when the winning tier twos emerge later.
Quality, productivity and capacity are falling as the workforce ages
Value-based procurement, emphasising whole-life outcomes rather than a first-cost fixation, further reduces the risk of disruption to the project flow. Framework agreements that line up designers and constructors for a programme of work emphasise investment for innovation, skills, social value and customer satisfaction. Insurance-backed alliancing, formerly known as integrated project insurance, is gaining converts as it demonstrates that even a team built from scratch can – with coaching help – behave as a virtual business, collaborating without duplicating effort and fear of liability.
The infrastructure sector is also launching alliancing as a core method, forming long-term businesses between clients and suppliers to complete huge programmes with the confidence to innovate and develop people for the task. Project 13 – an approach to providing high-performing infrastructure led by the Institution of Civil Engineers – and its like could change the way some tier ones approach building work. The term 'integrator' is being used to describe the role of the organiser that manages the relationships between parties and moderates their behaviours.
Perhaps the biggest threat to the hollow tier one is the rise of off-site construction. In some approaches, the principal specialist contractor becomes the integrator, bringing together structures, fabric, services and finishes in the factory. Suppliers are set up for the long term, with integrated information management. Design has to be integrated, too, with the consultants working in a design for manufacture and assembly mode from RIBA stage 2.
It is possible that some of today’s modular manufacturers will rise to tier one, and that more of them will join Laing O’Rourke, a former specialist contractor, in becoming integrators. But it is a capital-intensive business that brings back the risk from the business cycle. Making your own market, as Legal and General has done by manufacturing build-to-rent homes to meet its investment programme, creates an integrated client–constructor. In the USA, for example, the rising star of off-site manufacturing Katerra has recently acquired several architectural practices to give it scope to create more site-specific projects as developer–designer–builder.
With the present disintegrated approach looking unsustainable, integration in one form or another is on the way back.
Richard Saxon CBE FRICS is a client and business advisor. He is Chairman of JCT, though writes here in his private capacity