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Simon Murray

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Simon Murray last won the day on September 5 2022

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  1. We were just getting to grips with the disruption to supply chains that resulted from the pandemic when along came a 50% increase in the price of diesel and a four-fold increase in gas prices. Businesses that use large amounts of energy are talking of suspending their operations and we haven’t begun to understand the impacts this could have on the supplies of the materials and components we need to build our infrastructure projects. There is no way that the market will sort these problems out for us. We have to pool our knowledge and our relationships and use them to understand where there are most likely to be disruptions to our supply chains and what we can do to fix them. And an enterprise structure is a helpful place to start from.
  2. Hi Ian, I like your Robert Kaplan quote. I think it was Lou Gerstner - the CEO who rebuilt IBM in the 1980s - who said "Nobody ever built a great business by cutting costs". I will reply to your other comments when I have had a chance to think about them.
  3. Ian, many thanks for your comment and I am sorry for the delay in replying. Unfortunately our website doesn't notify us when somebody has posted a comment. The BSRIA report does explain the immediate causes of people standing around on construction sites and this analysis has been confirmed by several studies amongst the lean construction community. The typical cause of people standing around on construction sites is that they are waiting for something they need before they can start work - tools, materials, information or for the previous task to be completed. And, in my opinion, the root cause is inadequate management of the work by general contractors and their sub-contractors. To be fair to the general contractors, decades of being asked by their customers to accept large risks has encouraged them to transfer risks to their sub-contractors and discouraged them from getting involved in their sub-contractors' management of the works. And to be fair to the sub-contractors, the general unpredictability of the construction environment has limited their appetite for investing in modern production management systems. As a result, about half of the available man-hours worked on construction sites in the UK and the USA are wasted.
  4. I was fortunate to be invited to visit the A14 project several times during its construction and to spend time with Mark and his team as they developed their digital platform and the culture that supported it. Thanks to the team's efforts, the A14 project marked a major step forward in the use of common information systems to manage large infrastructure projects. But, it was just one step forward and, if we are to realise the team's vision of a single source of the truth on our infrastructure projects, we have to solve the problem of creating a common information architecture for these projects around a single production system. And we have to develop commercial relationships with suppliers that enable them to share their production information without fear of it being used against them.
  5. Ian, many thanks for your comment. I agree that change has a significant impact in reducing productivity, but I suggest that change is just one aspect of the wider problem of instability in our design and construction process. Back in the 1990s, I was privileged to work for Sir John Egan and he used to tell us that you can't improve a process until it is predictable. At around that time BSRIA published an excellent report titled Improving M&E Site Productivity - you can still buy a copy on their website. The report presents a body of data that shows how productivity on site is reduced by people standing around waiting for things - information, materials, tools and for the previous task to be completed.
  6. 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
  7. When it opened in May 1931, the Empire State Building (ESB) in New York was the tallest building in the world. It had also been delivered in record time. “Within just twenty months – from the first signed contracts with the architect in September 1929 to opening-day ceremonies on May 1st 1931 – the Empire State Building was designed, engineered, erected and ready for tenants.”1 This challenging schedule included the demolition of the Waldorf Astoria Hotel on whose site the ESB was built. It is tempting to argue that the construction of the ESB reflected conditions in the US in the early 1930s and cannot be used to benchmark the construction of tall buildings today. It was built at the beginning of the Great Depression, so there were no shortages of labour or materials. It was also built at a time when there was less concern with the health and safety of the workforce. Seven people were killed during the construction of the ESB – one of them was a young woman in the street below who was injured by a piece of wood that fell from the building and who subsequently died from sepsis. But by making these arguments, we ignore the fact that the design, engineering and construction of the ESB was delivered by an integrated team of experienced architects, contractors and suppliers using the most advanced production methods available at the time. Fortunately, we have accounts of the construction of the ESB that we can use to explore how this remarkable building was delivered. In 1928 William Starrett published Skyscrapers and The Men Who Build Them which is a personal and detailed account of the design and construction of tall buildings. Starrett was a partner in Starrett Brothers and Eken – the contractor that delivered the ESB. After the building was opened, staff in the contractor’s office wrote up detailed notes of the planning and construction of the building and these have been published by The Skyscraper Museum. Since then there have been several academic studies of the project including a recent paper from Indiana University. Taken together, these sources paint a picture of an approach to promoting, designing, engineering and constructing the building that is different to the approaches we use today. The promoters were a small group of wealthy men who had intimate knowledge of the economics of tall building and were clear about the outcomes they required. They appointed the architect and the contractor at about the same time and based on capability and experience rather than on price. And they engaged the key suppliers like the Otis Elevator Company at the outset in completing the design of the ESB and planning its construction. In many ways they were following the principles we advocate today through Project 13. Integrated processes and information Starrett Brothers and Eken were experts in the construction of tall buildings. It is clear from William Starrett’s book that they understood how every component in a tall building was made and how much labour, materials and plant were consumed in making it. The processes they used to plan and manage the construction of the ESB was based on this deep knowledge and reflected their culture and attitudes. They were respected as experts in their field and, although they sub-contracted large elements of the project, they took responsibility for its engineering and construction. In the accounts of the project, there is no mention of transferring risks to sub-contractors. Starrett Brothers and Eken took most of the risks and expected to keep most of the rewards. The estimates were developed from first principles using the contractor’s knowledge of the costs of materials, plant and labour. From their experiences of building similar skyscrapers, the contractor knew how much labour was needed to construct a cubic foot of concrete floor or a square foot of limestone cladding and this Labour Unit Cost was a key metric in monitoring construction and assessing whether the project was within budget. During construction, the contractor employed a team of inspectors that visited every part of the project several times a day and recorded the amount of work that had been done. This information was summarised in the Daily Construction Report and was used to calculate the actual labour unit cost for each element of work. If this number was above that used in the initial costs estimate, the contractor was losing money and if it was less, they were making money. And because the information was available within hours of the work being completed, the contractor was able to take action before any problems became too large. This approach to monitoring the construction also ensured that in respect of the current status of the project, there was one version of the truth that was available almost in real time. The inspectors measured the work that had been done that day, the staff in the project team consolidated it into a summary report and it was presented to the Superintendent and to Paul Starrett within hours of the work being completed. The whole team seemed to have been aligned towards achieving the targets rather than challenging the data. To read more from Simon on the Empire State Building click here
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