News
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The Construction Productivity Paradox
The productivity of the UK construction sector has been rising up the political agenda. Reports by the World Economic Forum (WEF) 1, McKinsey 2, the Infrastructure Client Group and the Institution of Civil Engineers 3 have all highlighted that over the last twenty years productivity in construction has barely changed whilst productivity in manufacturing has improved by around 80%. If the UK construction sector could achieve the levels of productivity seen in manufacturing, there would be a lot more money to invest in hospitals, schools, roads and railways. The construction sector isn’t short of advice on how to improve productivity. The WEF proposes six key areas for change, McKinsey suggests seven areas for action and, in its Construction Sector Deal, the Government lists yet more actions to support improvement. The recommendations include familiar themes like greater use of offsite construction, digital technologies and developing advanced manufacturing methods for construction. These innovations have been available for some time and are not widely used in construction. Perhaps we should ask why the industry is reluctant to invest in improving its productivity. And we could begin by understanding what we mean by construction productivity. “Simply put, productivity is the ability to get more economic output from any given level of inputs. Or, even more straightforwardly, the ability to make more stuff with the same number of workers.” Duncan Weldon, Two Hundred Years of Muddling Through – Little Brown 2021 Productivity is the value added by a business divided by the amount of labour employed in producing its products and services and is typically expressed as £/person employed or £/hour worked. The value added is the wages paid to the workers plus the business’s gross operating profit 4. The Office for National Statistics (ONS) calculates the productivity of the UK construction sector by aggregating the value added and the labour employed for all of the companies in the sector. The ONS defines the construction sector as all activities within sections 41 to 43 (excluding 41.1) of the UK Standard Industrial Classification of Economic Activities 2007. This includes the construction of buildings and civil engineering works and some trades such as plastering and scaffolding. It does not include consultancy services, computer systems or many manufactured items like precast concrete or transport equipment. Whilst most of these items are recorded as inputs to the construction sector, they are not directly included in the value added by the sector. Construction productivity is a measure of the value added per unit of labour for thousands of building and civil engineering contractors and specialist sub-contractors from the very largest national contractors right down to the smallest local building firms. It is an interesting economic statistic, but it is of little help in understanding how construction companies add value and in measuring the effects of specific initiatives to improve productivity. That requires us to investigate the productivity of individual businesses and, in particular, the large general contractors that have such influence over project delivery in the UK. For an individual business, productivity is defined as: A company’s gross profit is its revenues minus its cost of sales and is shown in the consolidated income statement that most large contractors publish in the financial statements in their accounts. A metric that investors often use when comparing the performance of different companies is the gross profit margin or gross profit expressed as a percentage of turnover. It reflects the company’s business model and is seen as a measure of how well it controls its cost of sales or how efficiently it uses labour and materials in its production process. Data from the accounts of quoted UK contractors suggests that their gross profit margins are typically in the range 5-10%. In comparison, many leading manufacturers have gross profit margins in the range 10-40%. Before the Covid pandemic, Boeing Inc’s financial reports showed a gross margin of 19.6% and Apple Inc a margin of 38.3%. This difference reflects the different business models in contracting and manufacturing. Most contractors obtain their projects through competitive tendering and then sub-contract up to 80% of their value. This means that the prices they charge for their projects and their costs of sales are largely determined by competition in the market, leaving few opportunities to improve their performance by investing in better people, new technologies or better processes. This approach also limits contractors’ opportunities to collaborate with their suppliers in reducing the costs of their inputs. If a supplier has been through arduous tendering and negotiations to win a sub-contract, they are unlikely to share information or collaborate in reducing their prices. It is possible for contractors to improve their productivity without reverting to the 1970s business model when they owned their plant, employed most of the labour on site and controlled the production process. It requires careful thought and some simple analysis based on the definition of productivity set out above. It is tempting for firms to just go ahead and implement some of the recommendations in the many reports on construction productivity. But, without careful thought and analysis, they risk wasting their efforts and possibly, reducing their productivity even further. An obvious strategy for improving productivity would be for a contractor to produce better projects without increasing costs and then persuade their customers to pay higher prices for them. Analysis shows that if a company could increase its prices by 5% without increasing its staff numbers or the costs of its sub-contracts, its productivity would improve by more than 30%. The challenge for the company would be to develop demonstrably better projects than its competitors and then persuade its customers to pay higher prices. This would require radical changes in current approaches to procuring projects that are unlikely in the medium term. An alternative strategy would be to reduce the cost of sales by improving efficiency in the company’s supply chain. The contractor could collaborate with its suppliers and invest in its supply chain to reduce costs, sharing the benefits with the suppliers. If it was able to reduce the costs of its sub-contracts by 10% and share this 50:50 with its suppliers, its cost of sales would reduce by 5% and analysis shows that productivity would increase by nearly 30%. Unfortunately, the improvement could be short lived, as other contractors would adopt the new approach, and competitive tendering would pass the cost reductions on to customers in lower prices. The most promising strategy for improving productivity could be to reduce the time it takes to deliver projects. If a contractor was able to deliver its projects in half the time without increasing its staff and with continuity of work, it could effectively double its revenues. Allowing for the fact that the cost of its sub-contracts would also double, it would still deliver the same gross profits, and analysis suggests that its productivity would more than double. A 50% reduction in time would require a radically different approach to planning and managing the project from detailed engineering through the manufacture of components to assembly on site. But the benefits would more than justify the investment. It is in all our interests for construction to improve its productivity, but the industry is not going to achieve this by randomly implementing the initiatives set out in the many reports on the subject. We should begin by creating market conditions that encourage improvements in productivity, which means helping customers define value in their projects and creating procurement practices that reward the delivery of value. The construction industry could then start the painful process of adjusting its business models and integrating supply chains to reward every participant for the contribution they make to the value delivered to the customer. In time, these arrangements would lead the construction industry to focus on productivity as a priority and measure productivity consistently across projects. It would also encourage contractors and suppliers to work together, investing in new technologies and practices that would continuously improve productivity. As the economist Sir John Kay put it in an article in the Financial Times: “modern humans – uniquely – are productive because they engage in cooperative activity.” John Kay, FT Weekend 28/29 July 2018 References 1. Shaping the Future of Construction – Future Scenarios and Implications for the Industry. World Economic Forum, March 2018. 2. Reinventing Construction: A Route to Higher Productivity. McKinsey Global Institute, February 2017. 3. From Transactions to Enterprises, A New Approach to Delivering High Performing Infrastructure. Institution of Civil Engineers and the Infrastructure Client Group, March 2017. 4. The Value of Everything, Making and Taking in the Global Economy. Mariana Mazzucato, Allan Lane 2018
3 replies · Posted by Simon Murray,
- integration
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Transforming Infrastructure Performance: Roadmap to 2030 sets the context for the Project 13 Principles to thrive
Dale Evans, Chair Project 13 and member of the drafting team, explains how the Project 13 Principles align with Transforming Infrastructure Performance and how it supports the creation of outcome-focused, collaborative delivery models. Transforming Infrastructure Performance: Roadmap to 2030 (TIP) published today, sets out a clear direction for infrastructure and recognises the role infrastructure plays in ensuring people and places thrive. It is recognised that the current transactional model for delivering major infrastructure projects and programmes is broken. The outdated transactional approach prevents efficient delivery, prohibits innovation and as a result fails to provide the high-performing infrastructure networks that businesses and the public require. Doing things differently TIP offers a different direction and is prepared to tackle the restrictive practices embedded in the industry. By focusing on people and nature thriving, building on the Construction Playbook and Our Vision for the built environment, TIP contains a concrete Action Plan to ensure the right environment is created to enable better delivery. The opportunity offered by Enterprise models like Project 13 and digital transformation can be realised more fully, achieving benefits for society and nature. Our Vision highlights that this is the right time for change: we know what best practice looks like, we understand the opportunity from digital transformation and we now have the opportunity to deliver differently. Made up of the Built Environment Model, five Focus Areas and an Action Plan, TIP is committed to putting these better ways of working into practice and making them the norm. Focus Area 1: Delivering new economic infrastructure to drive improved outcomes for people and nature As with the Construction Playbook, Government has consulted widely with industry and the result is the richer for this consultation. Focus Area 1 is most aligned with Project 13 and illustrates why the Enterprise model is most effective in responding to the system of systems that make up our built environment: "Aligned outcomes and corresponding incentives: Greater impact from investment, at the societal level as a direct result of outcome-led and value-based decisions. Greater realisation of benefits that industry can bring through innovation. Adopters of Project 13 are demonstrating how engaging partners to deliver the required outcomes and aligning reward models accordingly, enables a broader system perspective, for example opening up opportunities to incorporate the optimisation of existing assets alongside the delivery of new assets and also enabling modern methods of construction." Project 13 is looking forward to working with Government and the industry to implement TIP. The need for change has never been greater and we can only do it thorough collaboration and concerted effort.
0 replies · Posted by Melissa Zanocco,
- capable owner
- governance
- integration
- organisation
- digital transformation
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Case study - Six Steps for Capable Ownership
Anglian Water began its journey to set up an alliance of organisations in 2004. Head of Commercial Services Andrew Page discusses the six key steps that continue to fuel its success. Anglian Water’s Alliancing Journey. Back in 2004, Anglian Water began its journey to set up an alliance of organisations as part of its Assessment Management Plan (AMP). Now, the business has seven different alliances, each of which cover many facets, from large scale infrastructure projects to IT solutions. Together, the Alliance is focused on Anglian Water’s investment programme to build a sustainable world. 1. Commitment starts at the top. “We knew that changing the way we procured large programmes would be a challenge. We shifted the delivery of a multi-billion-pound regulatory investment programme to an entirely new commercial model. Our success was achieved by the unwavering commitment of our management board and investors, after 17 years, this commitment remains firm. As part of this process, our CEO continues to chair a quarterly Alliance Principals Group meeting with senior executives from each of our partnership organisations. This is a real, B2B conversation that not only demonstrates the commitment from our most senior members of the business but ensures that our focuses are consistently aligned.” 2. A Sustainable Commercial Model “Adopting a sustainable commercial model delivers the efficiencies required by the owner and the returns required by each of our partners. A sustainable model must drive the right behaviours; behaviours that focus on delivering the outcomes required by the owner, whilst constantly delivering increased rewards to the shared Programme Pool. It’s important to note that this commercial model must also increase the size of the programme pool, and not increase the share generated for individual members.” 3. Choosing the Right Partners “At Anglian Water, we understand that we don’t have all of the answers to every challenge. This is why our Alliance is made up of organisations that bring varied skill sets to tackle said challenges. We keep skills at the forefront of our minds when scoring tenders submitted for our alliances; fewer than a third of the marks available are for cost-based responses. We have a genuine focus on an organisations’ ability to demonstrate the right approach, the right people and partners, the right processes and systems, and the right environment.” 4. Creating Symbiotic Relationships “Success requires an understanding that every partner in the enterprise has an equal voice. We have an unwavering acceptance that the enterprise will only succeed if all recognise the importance of each partner in delivering that success. These relationships are long-term, and the trust developed is an essential ingredient.” 5. Developing High Performing Teams “In the early days it is all too easy to confuse great team spirit with a successful enterprise. The measure of the success of an enterprise is how it responds to challenges, and how open and transparent the team is. The key to success is absolute clarity of purpose around aligned outcomes. Anglian Water introduced a High Performing Teams development plan very early in the journey. It has proven to be an essential tool in helping newcomers adopt a new model and progress their journey with us.” 6. Deliberately Deliver Differently “Anglian Water is now in its 17th year of its Alliancing-type delivery model. Throughout this time, we have had continuous support from the leaders of the business and have adapted the commercial models to meet each new regulatory period. We have worked through all challenges together, as an alliance. Each of our partners have been integral in delivering our Business Plan submissions to our regulators, this collaborative approach creates the conditions required for innovation and creativity to deliver our desired outcomes.” Anglian Water’s alliancing journey is the cornerstone of what collaboration and alignment can achieve. As the regulated infrastructure owners in the UK increasingly look at various delivery models for major infrastructure investment, these are exciting times for further development of the P13 enterprise approach. We will continue to follow alternative routes for financing, designing, building, and operating assets that are our customers rely on in their daily lives.
0 replies · Posted by Andrew Page,
- capable owner
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Covid-19 digital transformation response revisited - what has really changed?
Juned Ahmed, business analysis and improvement graduate, Openreach, summarises the main points from the DTTG Peer Review Programme Covid-19 re-visited session. The Infrastructure Client Group’s Digital Transformation Task Group (DTTG) is made up of Chief Data Officers and their equivalents from the most progressive economic infrastructure clients and evolved from the Project 13 Digital Transformation Pillar. DTTG members met virtually in April 2020 for a special session to share initial learnings from the Covid-19 crisis along with common lessons, challenges and successes and the place digital transformation had in managing the pandemic in their organisations. You can read the initial reflections here. One year on, the DTTG members met in May 2021 to reflect on the lessons from the pandemic. Members gave their thoughts regarding the ‘digital’ changes that were taken in response to COVID-19 and the lessons learned. They then looked forward and reflected on the extent to which those lessons will be incorporated / embedded into their ongoing strategy and culture. A high-level summary from the discussion can be found here but highlights included: Digital is now accepted by all parts of the organisation as inevitable. Doubters and laggards have been forced to switch their mindsets, suspend their disbelief, and change the corporate mindset of ‘this won’t work for us because people won’t do it’. The gulf between the extent that people have personal readiness for digital and their level of expectation, which was significantly higher than the business was ready to make before, is now closing. ‘Resilient as a business, fragile as humans’: The importance of mental health and seeing the requirements of people, not just business needs, is now obvious. Methods and expectations in the delivery of training particularly for field-based operatives has had to change and adapt. The ideal state would be to create tools that need minimum or no training as they are intuitive and user friendly. Learning to trust employees to do their work even when they are not being physically overseen and to believe that people can adapt and be effective away from the office took time but is now reaping benefits. ‘Work is something you do, not somewhere you go’. There is an increased need for collaboration spaces in “the office” less need for desks Success breeds success approach: Building a constructive culture that celebrates success rather than focusing on the 2% that went wrong. What can we do better? If something went wrong, asking how we can help and offering thanks when it is fixed rather than having a blame culture leads to a more productive and innovative workforce. Miranda Sharp, Chair, DTTG Peer Review Programme, commented:
0 replies · Posted by Melissa Zanocco,
- digital transformation
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ECITB Project Collaboration Toolkit and Project 13
A number of Project 13 adopters have benefited from application of the ECITB (Engineering Construction Industry Training Board) Project Collaboration Toolkit. First developed to support project teams working in the oil and gas sector, the Toolkit incorporates learning from across a range of oil and gas projects to provide a ‘go to’ guide based on the principles of collaboration. In seeking to drive the changes in culture and behaviour that underpin successful projects the toolkit shares common ground with Project 13 – and it is apparent why the adopters will have recognised this alignment in using the Project Collaboration Toolkit to support their change programme. This relationship is now being further developed, with the ECITB’s Collaboration Toolkit being made available through Project 13 to help bring both improved productivity and cost savings on major infrastructure projects. Background The Project Collaboration Toolkit is a practical ‘go-to’ guide, created by the Engineering Construction Industry Training Board (ECITB) and aimed at supporting and benefitting projects through improved collaboration and smarter ways of working. Originally designed for the offshore oil and gas sector, the toolkit is freely available for projects across other engineering construction sectors, helping to guide clients and contractors on how to work together more efficiently whilst sharing industry best practice on joint working. Use of the ECITB Project Collaboration Toolkit across major offshore projects – such as Shell’s Brent Bravo topsides decommissioning project which achieved cost savings of 40% – shows that collaboration between investors, developers and the supply chain network can achieve significant efficiencies, greater productivity and faster project completion. Now in its second edition, and closely aligned with the ISO 44001 standard on collaborative business relationships, the toolkit has been updated to fit all industry sectors engaged in capital projects. Presented as a workflow aligned to a typical project lifecycle, the toolkit is designed to be used at all levels of the supply chain, from regulators and operators through to contractors and suppliers, with the intention of building on existing synergies to help them become even stronger over time. The whole toolkit can be used to support project collaboration from inception to completion, or individual phase steps and activities can be applied by project managers to projects which have not been established on a collaborative strategy. Next Steps for Project 13 and the Project Collaboration Toolkit. Both Project 13 and the ECITB Collaboration Toolkit have sought to consolidate industry learning and to share this learning across the wider sector. In both cases this open sharing of best practice has served to accelerate broader industry progress. It is no surprise that the two initiatives are now looking to develop a closer relationship, sharing progress from two sectors that are underpinned by significant investment programmes. As a first step the Toolkit is now available through the Project 13 network. The start of what will be a mutually beneficial relationship. Find out more and download the free toolkit HERE
1 reply · Posted by Melissa Zanocco,
- integration
- organisation
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How to identify and recruit infrastructure leaders
What competencies, skills and experiences are required by leaders in a Capable Owner organisation? How does an Owner find these individuals and what barriers might it face to securing them? Project 13’s Capable Owner working group has published considered advice on the composition and recruitment of leadership teams. The Identifying & recruiting infrastructure leaders report reflects the research and discussions that took place during the Capable Owner working group on the skills and experience required by the leaders of Owner organisations. It suggests factors to consider when recruiting such individuals, and practical steps that an infrastructure organisation should take to maximise its chances of recruiting the best leadership possible? About the report Between July and October 2017, the Capable Owner working group of Project 13 considered the necessary qualities, capabilities, and behaviours of infrastructure Owners. It summarised its findings in a Capability Maturity Model. This model provides an effective tool by which an Owner can evaluate its current approach and measure its progress towards Capable Owner status. <br> <br> In parallel, the Capable Owner working group explored the competencies of leaders within Owner organisations as ultimately it is they who will set the goals, priorities and culture to ensure the Owner organisation achieves its specified outcomes. <br> <br> Regardless of whether they are employed directly by the Owner or come from a consultancy, integrator or supply chain partner, the quality of leaders is vital. Selecting them and ensuring that they operate effectively is one of the most important decisions the Owner organisation will make. <br> <br> So, what competencies, skills and experiences are required by leaders in a Capable Owner organisation? How does an Owner find these individuals and what barriers might it face to securing them? To answer these questions, the Project 13 Capable Owner working group with the support and facilitation of Professor Graham Winch and his team from Alliance Manchester Business School, examined the skills required by leaders in a Capable Owner organisation in the infrastructure sector. The report and its conclusions can be downloaded via the resources section of the Project 13 Network website Please note that you must be signed in, or register as a member of the Project 13 network to access this report. It is free to become a member, and you simply need to complete the simple registration details here
1 reply · Posted by Adam Kirkup,
- capable owner
What is Project 13?
Project 13 is an industry-led response to infrastructure delivery models that fail not just clients and their suppliers, but also the operators and users of our infrastructure systems and networks.
It seeks to develop a new business model – based on an enterprise, not on traditional transactional arrangements – to boost certainty and productivity in delivery, improve whole life outcomes in operation and support a more sustainable, innovative, highly skilled industry.
Recent Discussions
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Tom Barr replied to a discussion
CDM - Legal entities within an Enterprise
CDM clearly describes the role and responsibilities of a Principal Contractor and a Principal Designer for a project - and thereby the potential consequences, for those appointed parties, if they breach their duties. A P13 Enterprise doesn't appear to address the legal necessity to appoint legal entities as PD and as PC. Is there any experience, that can be shared, about PC and PD appointments for a P13 Enterprise? -
Adam Kirkup replied to a discussion
Energy price rises and the impact on construction - Concerned?
I'm sure it will not have escaped anyone's attention in recent weeks, of the significant rises in energy costs. It would be interesting to know if anyone in the Project 13 community is becoming concerned about the energy price rises & labour shortages and the potential (or actual) impact on construction costs? It would be great to hear members thoughts in this forum, and even any moves which were currently being considered to mitigate these impacts?- capable owner
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Simon Murray replied to a discussion
Construction productivity - measuring productivity on projects and within companies
There has been much discussion about productivity in the construction sector and many suggestions as to how we can improve it, but if we are not measuring productivity on our projects and within our companies, it is unlikely that these efforts will be successful. After all, you get what you measure. The Office for National Statistics (ONS) publishes data on the productivity of the whole of the construction sector and, whilst it is of interest to economists, it is meaningless when it comes to u- integration
- digital transformation
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Simon Murray replied to a discussion
A systems approach to delivery
I like the eight principles in the ICE's proposals for a systems approach to infrastructure delivery. The challenge is applying these principles within organisations that have developed over decades around the old ways of doing things. The advantage Elon Musk had when he created Tesla and SpaceX was that he wasn't starting out owning General Motors and NASA and was therefore free to recruit the right people and create the new organisations around new and more effective ways of working. Infras- capable owner
- organisation
- digital transformation
- integration
- governance
