1: The Construction Industry: Practices,

Performance and Development

Learning outcomes from this unit

At the end of this unit you should be able to fully appreciate the problems and challenges
facing the construction industry.

You should understand that traditional procurement systems and construction

management practices are increasingly being criticised as the reasons for poor
performance in the construction industry. You will appreciate the type and level of
problems the industry faces and the associated reasons. You will develop a good
understanding as to why the construction industry is currently rethinking its practices and
systems with specific reference to The Egan Report.

At the end of this unit you will appreciate the extent and magnitude of the challenges
facing the industry and the implications of these challenges on project management as a
discipline and on the industry’s practitioners.

1.1 Introduction
The construction industry is often criticised for poor performance. In the UK, over recent
decades there have been numerous government led investigations into why the
construction industry is lagging behind other industries. Most recently, there have been
two investigations that were led by Latham and Egan and as a result there is now a real
momentum for change. It is becoming evident that the industry needs radical change
rather than a step change to overcome the problems and challenges it is facing. The
industry’s clients are not satisfied with the products and processes delivered. The
industry’s workers and practitioners are not satisfied with the environment they are
working in. In addition, the level of profitability and investment is relatively low when
compared with other major industries.

The traditional procurement system, the structure of the industry and the nature of the
construction product all influence current practices and thinking within the construction
industry. Given that these practices are not delivering strong performance, there is a need
to re-think the traditional procurement system and industry’s structure. Innovations in
how projects are procured would undoubtedly influence project management practices
and hence the techniques and skills needed by project managers. Indeed, the project
management profession is becoming increasingly necessary as the industry moves to
more integrated and concurrent procurement systems.
1.2 Background
Consider this scenario. You have recently bought a house in an area of your liking and at
a price you could afford. You moved into the house and after couple of years you realise
that you need more space. You must decide whether to move into a bigger house or build
an extra living room. You rightly seek advice from your mortgage lender who suggests
that you get a rough quotation for how much an extension would cost. He also advises
you that property prices have gone up so much during the past two years, making the
extension option much more feasible.

In considering who to contact for an estimate of the cost of the work you ask friends and
colleagues some of whom tell you to contact an ‘architect’, some a ‘surveyor’ and some a
‘builder’. You make your first move by contacting an architect and by doing so you have
become what is called an ‘occasional construction client’. The architect visits your home
and tells you that given that the project is relatively small you would not need to
approach a surveyor for an estimate. He tells you that the average cost per metre square
for such work is £1,100 but adds that this would very much be influenced by design and
the type of finishes. You briefly discuss what you are looking for with the architect (i.e.
the function of the building product you are seeking) and you are told that you probably
require 20 m2 of space. You subsequently learn that this would be your best option and
the lender agrees to fund the project.

You confirm your intentions to the architect who sends you his fees and other costs
involved such as planning permission, etc. You study these proposed costs and decide to
approach others for comparison. You find significant differences in the figures quoted,
hence you decide to go for the most reasonable one. Next, the employed architect visits
your home to take measurements and discuss your requirements in more details. You
struggle to answer many of the questions relating to the shape and aesthetics of the
building but you are more confident about its functions. The architect suggests that he
present you with several ideas/options in a week or so. He does so in the form of
drawings or rather sketches (visualisation) and you struggle to imagine what the
extension would really look like in each option. You discuss this at length and you finally
agree on one of the alternatives. The architect takes the process one step further and he
presents you with more comprehensive drawings and you agree for the design to go
forward.

The following step would involve the architect working on planning regulations, building
warrant, etc. Once granted, you invite five builders to tender for the project. The first
estimate you receive is significantly higher that the £1,100 per m2 suggested by the
architect. You start to panic that the whole project may be jeopardised or at least you
might need to alter the design and hence reapply for planning permission, etc. The
following tenders are slightly more reasonable but still above the originally estimated
cost. You approach your lender and to your relief he agrees to fund the higher cost.
Next, you draw up a contract with the winning bidder. To your surprise, this does not
state the duration of the project. The builder tells you that he will finish the work within 8
weeks but he will not be able to guarantee that because of uncontrollable factors such as
weather, etc.

Construction starts and immediately you realise that the disruption to your daily routine
and comfort is much worst than anticipated. You are also stricken by the lack of
consistency of the builder in terms of working hours and days. You explore with the
builder the reasons for non-attendance (in some cases for a whole week) and you learn
that this is due to shortage of materials and labour. Halfway into the project, you discuss
progress with the builder and he informs you that the project is likely to be delayed
because of many reasons that are not of his making. You are not at all happy and the
relationship and trust between the two of you starts to deteriorate. This gets worse as you
delay interim payments to put more pressure on the builder and progress suffers further.

Things start to get back to normal until the builder informs you that the cost of finishing
the project will be higher than anticipated and that you would need to cover some, if not
all, of the extra costs. There is a whole list of reasons for the extra costs and you find
yourself in a difficult position: if you do not pay the extra money the builder will stop the
work and you will have to meet the significant costs of getting a new builder. You
decided on the former.

As the project is nearing completion your visualisation of the end product starts to
improve significantly and your ideas for the use of the extension develop further.
Subsequently, you decided that there are certain design elements that need changing
(either due to lack of visualisation at design stage or because your requirement has
changed) and hence with the help of the architect you instruct the builder to
accommodate these variations. This causes the project cost and duration to rise even
further.

At project ‘completion’ you make the mistake of paying the final payment knowing there
are very minor tasks still to be completed. Several weeks later these tasks are not attended
to despite repeated phone calls. As time passes you discover a leak in the ceiling and you
are daunted by the task of making the builder attend to and fix this fault. Problems go on.

On reflection, you and your partner agree that if you knew what the experience would be
like, you would never have started the project in the first place. You are certainly what is
referred to as a dissatisfied customer. You subsequently find out that many of those who
have been unfortunate to become occasional construction clients have been dissatisfied
with the quality of the product and services they received.

The above scenario is not exaggerated or uncommon. Indeed many small construction
clients have faced worst problems such as the builder becoming bankrupt, damage to
their existing property and legal disputes with significant cost implications. Moreover,
the scenario above refers to a very small construction job with a limited number of
suppliers and stakeholders. The construction of a large office block for example, would
be significantly more complex and stakeholders would be numerous and difficult to
identify.

This unit highlights the lack of performance of the construction industry and explores the
reasons for this. The unit will recommend a way forward for the industry both in terms of
structure and practices. Finally the unit will refer to Egan’s Rethinking Construction
report, which was written as a result of a government commissioned study aimed at
identifying a way forward for the UK construction industry.

1.3 The Construction Industry: Performance

The construction industry is often criticised for poor performance. Similarly, other
countries are undergoing a similar phase of rethinking and reengineering how
construction projects should be delivered and maintained. It is becoming evident that the
industry needs radical change rather than a step change to overcome the problems and
challenges its facing. These problems may be summarised under five headings:

1.3.1 Industry’s clients are not satisfied (cost, time and quality)
Reasons for client dissatisfaction are:

a) High cost and duration of the project

b) Failure to meet cost and duration pre-set targets
c) Failure of design to meet clients’ needs
d) Quality of construction is poor (repairs and reworks)
e) Inefficiency of the construction team to respond to clients’ complaints and enquiries
f) Contractors not flexible enough to accommodate design changes
g) Lack of innovation on behalf of the contractor and designer
h) Disputes and claims
i) Cost of occupancy and maintenance of building is high
j) As built drawings and other information about the building and its requirements are
incomplete.

According to the National Audit Office’s report ‘Modernising Construction’ (2000),

more than 70% of all publicly procured projects were over time or over budget. The
British Property Federation’s 1997 survey of major UK clients reveals that:

• More than a third of major clients are dissatisfied with contractors’ performance
in keeping to the quoted price and to time, resolving defects, and delivering a final
product of the required quality
• More than a third of major clients are dissatisfied with consultants’ performance
in co-ordinating teams, in design and innovation, in providing a speedy and
reliable service and in providing value for money.

A recent survey by the Design Build Foundation in the UK shows that:

 • Clients want greater value from their buildings by achieving a clearer focus on
meeting functional business needs
• Clients’ immediate priorities are to reduce capital costs and improve the quality of
new buildings
• Clients believe that a longer-term, more important issue is reducing running-costs
and improving the standard of existing buildings.

1.3.2 The supply team is not satisfied

Common causes for dissatisfaction are:
a) Bad working conditions (weather, facilities, etc)
b) Bad health and safety record (too many accidents, etc.)
c) Low wages and salaries
d) Job security
e) People are not valued
f) Frequently changing location of work
g) Bad training and carrier development.

According to Egan’s rethinking construction report, the health and safety record of
construction is the second worst of any industry. According to DETR statistics and other
sources, people working in the construction industry:

• Are getting older (10 years ago, 33% of the workforce was under 30 years old, this
proportion is now 25%)

• Tend to be white males (the current proportion of women in all positions in

construction is 8.6% compared with 8.4% ten years ago. The proportion of the
construction workforce from ethnic minorities is 2.3%, compared with 5.4% of all
economically active adults.)

• Are likely to work for a small firm (93% of people in construction work for firms
employing less than 8 people; 83% work for firms employing only 3 people or less.)

• Are quite likely to be self-employed (36% of all people in construction are self-
employed (second quarter 2000) compared with 45% five years ago)

• Are working longer hours than other industries (on average, including overtime, male
manual workers work 46.4 hours/week (of which 5.9 hours on average is overtime),
their non-manual counterparts work 41.4 hours per week. These figures are 2
hours/week higher that the average for all industries and services).

• Are more likely to be involved in an accident (the reported accident incident rate for
construction was 1,254 per 100,000 employees in 1998/9, 30% lower than in 1991/2.
This compared with 666 per 100,000 employees for all UK industries, 16% lower
than in 1991/2)
• Are paid around the average for all industries and services (male manual workers earn
£351 per week gross (compared with the average for all industries of £335), whilst
male non-manual workers earn £509 per week (£525)).

1.3.3 Industry’s bad reputation (not attractive to young generation)

Causes of bad reputation:
a) Lack of performance
b) Lack of innovation and development
c) ‘Cowboy’ builders
d) Industry dominated by the old craft culture and less technology
e) Fragmented and adversarial.

This perception of the industry is seriously damaging its image and reputation, and is
discouraging potential recruits of all abilities from joining or remaining within it. This
has led to a skills shortage. The Construction Industry Training Board (CITB) estimates
the industry will require about 73,000 new recruits each year for the next five years.
Applications to university courses have gone down dramatically over the last five years,
by 34% in the case of architecture, and by 50–52% for construction and civil engineering.

Recruitment into the industry is not just about convincing people to join the industry, but
it is also about maintaining and developing the best talent necessary for a top class
industry. The competition for the best talent is very high (for example the choice between
becoming a doctor, lawyer or civil engineer).

1.3.4 Low profitability (short cuts, bankruptcy, lack of investment in

research and development)

Causes of low profitability are:

a) High competition
b) Competitive tendering
c) Client focus on cost rather than value
d) Lack of investment in assets
e) Inefficiency of industry and too much waste.

According to the Egan’s rethinking construction report, the construction has a low and
unreliable rate of profitability. Margins are characteristically very low and share prices
often lag behind companies in other industries. The under-achievement of construction is
graphically demonstrated by the City’s view of the industry as a poor investment. The
City regards construction as a business that is unpredictable, competitive only on price
not quality, with too few barriers to entry for poor performers. With few exceptions,
investors cannot identify brands among companies to which they can attach future value.
As a result there are few loyal, strategic long-term shareholders in quoted construction
companies. This adversely affects the industry’s ability to generate funding for long term
investment and development. Low margins are often associated with bankruptcy, claims,
litigation and poor quality. The Rethinking Construction Client report states that
traditional capital and service contracts selected on lowest price are delivered late, over
budget and do not meet clients’ needs.

1.3.5 Lack of innovation and development

a) Lack of high technology in design and construction
b) Lack of branding
c) Building products are behind in terms of value and intelligence
d) High reliance on site based and unskilled labour
e) Pace of development is slow
f) Demand for buildings is largely client led (industry does little to create demand for
new products).

According to Egan’s rethinking construction report, the construction industry invests

little in research and development and in capital. By 1996, in-house R & D had fallen
by 80% since 1981 and capital investment was a third of what it was 20 years ago. This
lack of investment is damaging the industry’s ability to keep abreast of innovation in
processes and technology. Innovation has been defined as the actual use of non-trivial
change and improvement in a process, product or system that is novel to the institution
developing the change.

1.4 Current State: Industry and Practice

The traditional procurement system, the structure of the industry and the nature of the
construction product all influence current practices and thinking within the construction
industry. Whilst there have been recent changes in the way the industry operates, the
majority of construction projects are still delivered using traditional practices. The main
features of the current state of construction are listed below:

• Design and construction are two separate processes. This leads to:
a) Longer than necessary duration (design and construction can overlap: there is no
need to complete the whole design for construction to start)
b) Inefficient design (this could increase the cost of construction as some design
features could be hard and costly to construct)
c) Tension and adversarial culture (lack of trust and confidence between designers
and constructors).

• Architect is the project leader. This leads to:

a) Focus on design and aesthetics rather than cost, time and quality of service
b) Limited project management skills.

• Competitive tendering is the most common way in which contractors and

professionals obtain work. This causes:
a) Focus on cost rather than value
b) Innovation suffers
c) Discontinued project teams
d) High tendering costs, which would eventually be passed to clients
 e) Planning and estimating suffer as practitioners cannot spend much time on the
tender unless confident of winning.

• Construction is dominated by the old craft culture (site based). This leads to:
a) Quality control suffers
b) Sensitivity to weather and site conditions
c) Less reliance on technology and modern production methods
d) Limited standardisation and hence high cost and duration
e) Increase in fragmentation and professions/trades.

• The industry is fragmented and construction is performed by specialist

subcontractors. This causes:
a) Long supply chains that are difficult to manage and control
b) Training and development suffers
c) Disputes and tension rise.

• Different projects are procured by different temporary teams. This leads to:
a) Discontinuity of teams means that on each new projects practitioners face an
initial period of team building which slow progress
b) Different organisations would have different processes and technology
c) Long term and co-ordinated planning and development are non-existent
d) No branding and strategic product development between design, manufacturing
and assembly.

• Project team responsibility ends at completion of construction. This means that:

a) Life cycle costing (cost of occupancy, maintenance and repairs) is not taken into
account
b) Information on the performance of the building in meeting consumers’
(occupiers) needs and expectations is not fed back to those responsible for
design and construction.

• Client is not the consumer (occupiers and users of the building are often temporary
tenants) and the industry is dominated by occasional clients. This causes:
a) Lack of real customer focus
b) Misalignment of interest within the supply chain and between stakeholders
c) Clients are inexperienced and have limited power to exert change in industry.

• Need to price before production. This causes:

a) High financial risk
b) Need to complete all design before the construction cost can be estimated and
agreed on
c) Project performance is judged by the extent to which cost can be kept to that
estimated (rather than the extent to which value is maximised).

It is clear from the above that the traditional procurement system is a cause of many of
the problems within the industry. This, and the fact that construction is very much
influenced by economic cycles and governmental interventions, leads to an industry that
lacks innovation, customer focus and long term planning. The gap between construction
and other industries in terms of performance and client satisfaction is becoming
significant. This has resulted in an overwhelming call for reengineering the way in which
construction projects are procured. As a result a number of initiatives and alternative
delivery systems (procurement systems) have been developed (e.g. design and build).
How would these initiatives affect project management and how should project managers
contribute to the whole reengineering process?

1.5 Current State: Project Management

Project management as taught by professional societies, academia and applied practice
must be reformed because it is inadequate today and its performance will continue to
decline as projects become more uncertain, complex and pressed for speed. There are
three main principles that shaped project management principles and techniques:

• The main focus was on setting cost, time and quality targets and then meeting these
targets.

• Construction was unique and hence management concepts and tools had to come
from within.

• PM in the main is to do with maximising efficiency and predictability given the

scenario. Boundaries and ‘rules of the game’ were assumed to be fixed (e.g. use of
standard forms of contracts).

In traditional project management, a project has a well-defined scope and can be

understood as a sequential dependent series of activities. The project is managed by a
central authority to ensure activities meet schedules and budget targets. The relationship
between activities is assumed to be simple and sequential. Control is the act of comparing
variances from the plan and taking action. Control actions attempt to return the project to
its plan or manage the change. There is constant pressure to reduce time and/or cost of
activities’ even if there are no negative variances’ because the project manager is always
trying to meet or exceed requirements. This effort almost always involves trading
between time and cost.

So how would project management look if, for example, design was not completed at the
start of construction (i.e. no cost target is fixed and indeed project definition remains
flexible)?

1.6 Questions to be asked

• How can the construction industry be improved?

• What are the developments needed?

• How can project management contribute to this development?

• Assuming that the road to change is a long one, where do we initially put our effort
to get maximum returns?

1.7 Initiatives to influence the construction industry

In the UK, there have recently been major initiatives aimed at reengineering how
construction projects are procured. Amongst these are:

• Major government led studies and investigations (Technology Foresights, Latham,

Egan)

• Related organisations and departments (DTI, CRISP, Rethinking Construction)

• Major initiatives (M4I, CBPP, IMI, KPI, RfP, Trust and Money, etc.)

1.8 Main findings and the change agenda

• The procurement system should be concurrent and integrated (concurrent
engineering)

• Tackle fragmentation and adversarial culture by partnering and teambuilding

• Improve productivity, quality and cost by adopting ‘new’ management concepts for
example, ‘lean production’, ‘benchmarking’, ‘value management’ (VM), ‘supply
chain management’ (SCM), ‘process mapping’ and ‘reengineering’)

• Industry must measure its performance and define scope for improvement (using
key performance indicators: KPI)

• Briefing the team (client empowerment, visualisation)

• Move away from competitive tendering and cost as the selection criteria

• Incorporate whole life-cycle costing (WLCC) and sustainability in design

• More use of standardisation and pre-assembly

• Respect the people working in the industry (training, better working conditions, etc)

• Take full advantage of IT and other new technology

• Develop people and culture necessary to facilitate all of the above.

1.9 Reading exercise: Rethinking Construction by Sir John
Egan
The report at Appendix A presents an investigation that was led by Sir John Egan in
1998. The aim of the investigation was to appraise the construction industry in the UK
and propose a way forward. The report underlines many of the points raised by this unit.
After reading the report, you will realise that the construction industry requires major
rethinking in the way it procures its products. You will also realise that construction
under-performs when compared with other industries and that lessons learned from other
industries need to be communicated and adapted into construction.

The report targets practitioners and all concerned with the future of the construction
industry, hence you will need to read it fully and understand the issues raised. When you
finish reading this report together with this unit you should be able to answer the
following questions:

• What are the main problems the construction industry in the UK (and elsewhere)
faces?
• Why would fragmentation in the construction industry be viewed as both a strength
and weakness?
• To what extent there is scope for improvement and what are the main drivers for
change?
• What are the most important recommendations and initiatives proposed by
‘rethinking construction’ in order to improve performance of the construction
industry?

Self Assessment Questions

1. What are the main advantages and disadvantages of having competitive tendering as a
source for awarding construction contracts?
2. What would be the consequences of having design and construction as two
consecutive processes?
3. Discuss why the current construction industry culture is seen as one of the main
problems facing the industry?
4. ‘Innovation in construction is seen as limited.’ Discuss this statement.