Written evidence from the Specialist Engineering Contractors SEC Group (ISP0027)

 

 

ABOUT THE SEC GROUP

 

  1. SEC Group is an umbrella body representing the specialist engineering sector in the UK construction industry.  Given the sector’s contribution to the built environment through designing, constructing/installing and maintaining the built asset over its life, it is the largest sector (by value) in UK construction.  The overwhelming majority of firms in the sector are SMEs.

 

If you would like any more information on any aspects of this submission or SEC Group, please see our website: www.secgroup.org.uk and contact Maria Balermpa: contact@secgroup.org.uk , mobile: 07508 559231.

 

SEC Group would be also available to provide any Oral Evidence to the Committee.

 

  1. The SEC Group’s organisations are:

 

British Constructional Steelwork Association

Building Engineering Services Association

ECA

Lift and Escalator Industry Association

SELECT (Trade association for the electrical contracting industry in Scotland)

SNIPEF (Scottish & Northern Ireland Plumbing Employers Federation)

Scaffolding Association

 

CONSTRUCTION SECTOR DEAL

 

  1. On 29 November 2017 the Business and Energy Secretary Greg Clark announced the Construction Sector Deal as representing a strategic partnership between industry and government to transform delivery processes through greater exploitation of digital and manufacturing technologies. 
     
  2. Since the Construction Sector Deal was announced two significant events have taken place.  The first was the publication on 18 December 2017 of the Interim Report of Dame Judith Hackitt on the Independent Review of Building Regulations and Fire Safety.  The Report is relevant in this context since Dame Hackitt bemoaned the lack of collaboration amongst all those involved in delivering construction works.  She also expressed reservations regarding the levels of corporate competence in the industry.
     
  3. Then on 15 January 2018 the collapse of Carillion exposed the financial fragility of the largest UK construction companies and their dysfunctional business models that require them to manipulate the cashflow of their supply chains in order to survive.  The total of the amount owed by Carillion to its supply chains could be in excess of £2 billion.
     
  4. The Business and Energy Secretary has intimated that the Construction Sector Deal will have to be re-visited to take account of these developments.  We agree.  In our view there are now three priorities:

 

 

CHANGING PUBLIC SECTOR PROCUREMENT

 

  1. It has become clear that large and poorly resourced organisations such as Carillion are incapable of assessing and managing the risks associated with infrastructure and project delivery.  Instead their usual strategy is to transfer all risk – whether known or unknown – to their supply chains.  This is facilitated by the onerous contracts and payment conditions imposed on SMEs in the supply chain.
     
  2. The practice of bundling up term service contracts (such as building maintenance) into large unwieldy contracts excludes SMEs – especially in the regions – from bidding for this work as direct contractors.  SMEs are generally “light of foot” and more responsive to the specific needs of service-related contracts.
     
  3. As far as construction works are concerned greater consideration should be given to construction management arrangements which enable public sector procurers to directly contract with the trade contractors delivering the works.  This cuts out middlemen such as the Carillion-type organisations.  Transport for London has already embraced this approach although it is not new.
     
  4. Currently the infrastructure pipeline is valued at approximately £600 billion.  Private sector investment in infrastructure is sorely needed but the Carillion debacle is likely to dampen any interest there might have been from potential investors within the private sector.  In 2016 the Chief Executive of Aviva – a £350 billion capitalised insurance company – declared that investment in UK infrastructure was too risky.  He was inviting government to share some of the risk.  In fact the McKinsey Report on Productivity in UK construction, published in February 2017, concluded that risk management processes were generally poor.
     
  5. To attract private sector investment in infrastructure it is no longer appropriate to appoint a Carillion-type organisation to deliver it on the basis of a tendered lump sum that is the lowest price.  A substantial amount of work has been undertaken by SEC Group in developing and promoting a more collaborative approach to delivery that engages the whole of the supply chain.  This is an Alliancing arrangement that involves all project participants in the design and planning of projects; risk management is at the heart of this process since the client and the team must draw up a credible cost plan that is underwritten by a policy of insurance.  The policy is referred to as Integrated Project Insurance.  It is a financial loss policy that pays out when there is a cost overrun subject to an excess shared by the team.  A pilot project has been completed and it is hoped that, at least two more pilots will be completed over the next 18 months.
     
  6. Integrated Project Insurance has been supported by the Infrastructure and Projects Authority as a model procurement option although its wider use will be dependent on the outcome of the pilot projects.  The aim is to achieve up to 20% savings for the taxpayer through reducing process waste.  Unfortunately other priorities have prevented the Authority from continuing to support this work.

    WE INVITE THE SELECT COMMITTEE TO RECOMMEND THAT THE GOVERNMENT PRIORITISES THIS WORK IN THE CONSTRUCTION SECTOR DEAL.
     

PAYMENT SECURITY

 

  1. Levels of productivity in the construction industry have remained stagnant over the last 20 years.  This is the result of a continuing lack of investment in high grade skills and cutting edge technologies.  This is, in turn, partly due to the lack of payment security for the industry supply chains which, for the most part, comprise SMEs.  With payments having to pass through different organisations at each level of contracting there is the inevitable tendency for each organisation to retain the monies as long as possible.
     
  2. A particular practice that is damaging to the livelihood of SMEs is the practice of retentions.  Retentions are deducted from due payments (usually 5% of progress payments) ostensibly as security in the event that a firm fails to return to rectify non-complying work.  In practice the monies are used to bolster the working capital of the party withholding the monies.  These monies should be released within 12 months of handover of the works but SMEs often wait 3 and more years for their release; they often incur substantial costs in chasing them.  Research commissioned by BEIS has indicated that, as a result of upstream insolvencies, £700 million worth of retentions was lost over a 3 year period ending in 2016.  This means that the industry is haemorrhaging almost £1 million per working day.  The retentions lost by SMEs following the Carillion collapse could be in the region of £½ billion.

 

 

 

 

 

WE INVITE THE COMMITTEE TO RECOMMEND THAT:

 

a)      The Government mandates the use of project bank accounts (PBAs) for all public works over £1 million.

 

[A PBA is a ring-fenced bank account protected by a trust arrangement.  All project participants receive their payments simultaneously from this one “pot”.  Highways England use PBAs for all their works and, as a result, all supply chain firms are paid within 18 days.  If PBAs had been in place for all Carillion projects the losses suffered by firms in the supply chain would have been significantly less.]

 

b)     The Government gives its support to the Construction (Retention Deposit Schemes) Bill 2018.  This is a Private Member’s Bill introduced on 9 January 2018 by Peter Aldous MP.  The Second Reading is on 27 April 2018.  The Bill requires that all cash retentions are protected in a retention deposit scheme similar to the protection afforded to shorthold tenants whose deposits must be placed in a government approved tenancy deposit scheme.
 

c)      The Government urges all public sector clients to operate a yellow card/red card system.  Where lead contractors fail to pay their supply chains within 30 days they should be warned that, unless they address this, they may be excluded from bidding for public sector works for at least 2 years.  This system already operates in Northern Ireland.

 

PROFESSIONALISING THE INDUSTRY

 

  1. In a report, Rethinking Construction, produced in 1998 for the (then) Labour Government, Sir John Egan stated:

 

“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.”

 

  1. The “race to the bottom” that characterises much of construction procurement is a major barrier to growth and productivity in the sector.  Carillion’s business model depended on it using its immense bargaining power to drive down its supply chain prices in order to out-bid its rivals.  This process does not, of course, favour those reputable firms that invest in skills, in the latest technologies and in maintaining high standards of health and safety.  Other countries such as the United States and Australia have statutory licensing schemes which ensure that the necessary standards and competencies are maintained.  In the UK many of the trade associations in the specialist engineering sector have developed arms-length accreditation schemes that demonstrate the technical capabilities of their member firms. 

 

WE INVITE THE COMMITTEE TO RECOMMEND THAT THE CONSTRUCTON SECTOR DEAL PRIORITISES WORK ON DEVELOPING A LICENSING SCHEME FOR CONSTRUCTION FIRMS THAT BUILDS ON AND RE-INFORCES EXISTING ACCREDITATION SCHEMES OPERATED BY REPUTABLE TRADE ASSOCIATIONS.

 

SUMMARY

 

  1. Placing the focus on modernising procurement, improving payment security and professionalising the industry will help firms to grow and, thus, will enable them to make the necessary investment in innovation, in skills and in the technologies that will, over the longer-term, raise productivity levels within the construction industry.
     

 

 

 

31 January 2018