THE REFORM OF THE SYSTEM

Despite considerable innovation in procurement routes during the last two decades, growing concern regarding the performance of the industry led to increasing demands for reform. Coupled with other long-term trends in developed economies, these have meant that the British construction industry is now at something of a cusp. The long term trends are the growing internationalisation of the construction industry within and between developed nations (Linder 1994 chap 12), and the fiscal crisis of the state throughout the western economies. The increasing internationalisation is occurring at the level of both clients and project actors. Clients are increasingly international corporations - they have the opportunity to compare the performance of the national construction industries of different countries. This has had the result of the commissioning of a number of specific comparative studies which will be discussed below. Project actors are both increasingly operating in other developed nations both in consortia for large projects and by establishing or acquiring operations. The period around 1992 saw a flurry of cross-border merger and acquisitions amongst construction corporations, and professional practices setting up European networks. Through such activities, project actors are increasingly aware of their relative strengths and weaknesses.

The fiscal crisis of the state became dramatically apparent following the crisis of 1973 as the unprecedented growth of the Wirtschaftswunder, trente glorieuses, and "never had it so good", came to an end. Mounting budget deficits in the USA generated by the financement of the Vietnam war and the Great Society programme by borrowing meant that the oil crisis sent shock waves through already ailing economies. The first response after 1973 was to cut back dramatically on public sector investment in built facilities. In Britain, at least, the crisis also generated a spectacular property crash. Over the next 20 years, the ability of the state to provide adequate amounts of capital to fund the investment needs to public built facilities, as a trend, deteriorated. Most recently, this trend has been particularly pronounced within the European Union as member states struggle to meet the Maastricht criteria on state debt. The inevitability of this trend has led to a shift towards concession contracting, a shift now known within the UK as the Private Finance Initiative.

The internationalisation of the construction industry also grew rapidly after 1973. As well as the internationalisation of clients, the boom in work in the Middle East, a direct result of the 1973 crisis, led many firms and individuals to work with actors and professionals from other nations. In particular, many of the Middle Eastern projects adopted US-style procurement routes and practices, and the rapidly growing economies of Asia-Pacific are currently providing similar opportunities for British firms. This new exposure led to growing levels of awareness of two features of the British system - the relatively poor performance in the production of built facilities in the UK, and the "adversarial" nature of relationships within the professional system. Earlier attempts at reform of the British system had taken a solely national focus, the later two were both informed by an international perspective, and were focused more on the increasingly important private sector client. These impressions were supported by an increasingly sophisticated research base.

A number of multilateral studies focused on cost comparisons, the earlier of which are reviewed by Meikle (1990). Summarisation is difficult, but as a general trend, it can be suggested that only France and Germany display consistently higher costs than the UK for standardised industrial and office buildings. During the same period covered by the international studies reported by Meikle, a number of bilateral studies of construction project performance with the United States were also undertaken. These were clearer in demonstrating poorer British performance. Nahapiet and Nahapiet (1985) and Flanagan and his colleagues (1986) provided two of the more influential studies which compared a small number of "matched" projects in the two countries. A number of complex issues were covered in these studies which defy simple review, but perhaps the main conclusions may be summarised thus. Buildings were clearly built faster in the USA, and tended to be cheaper. This was due to the greater use of standardised and pre-fabricated components; the greater involvement of the client in the process; and the greater capabilities of trade contractors. Procurement routes were also clearer in their allocation of responsibilities to project actors. They either more clearly and sharply separated the responsibilities of designers and contractors, or they adopted more flexible mediated forms. Quantity surveyors were not used - designers provide their own cost estimates, while bidders take off their own quantities. Such publicly available studies were reinforced by the internal studies conducted by many of the leading clients in the UK - the most influential being that for BAA completed in 1993 and widely reported in the construction press.

More recently, attention has turned more towards Japan. The report by Bennett and his colleagues (1987) created a considerable impression, while later publications in the US (Hasegawa 1988; Levy 1990) reinforced the picture of a highly competitive industry that was going to conquer world markets. The Reading report examined the role of construction in the Japanese economy and the organisation of the construction process. Hasegawa and his colleagues from the Shimizu corporation placed the emphasis upon strategic management issues. Levy provides much greater detail on the construction process in Japan, but is mainly focused upon the strategic issues of countering competition from the Japanese in international markets. More recent attention in Britain has focused upon the relatively high levels of spending on research and development of the Japanese construction corporations which Reading, Hasegawa and Levy all identified. A report sponsored by the Chartered Institute of Building (1995) showed how the percentage of turnover spent by Japanese construction corporations was much higher than any counterparts in the UK , and that government played a relatively minor role in funding research. The report laid considerable emphasis upon the learning cycles generated in the Japanese system, and the emphasis upon a learning rather than a learned culture.

However, the expansion of the single European market meant that intra-European comparisons were not ignored. The Secteur study, commissioned by the European Commission (European Commission 1994) and executed by a British firm (W.S. Atkins), carried out multilateral comparisons of construction costs. These again tended to show that Britain had relatively high construction costs, but noted that much of this may be due to differences in specification. However, it also noted that British costs in civil engineering were high, despite the very low level cost of labour inputs. More detailed and carefully controlled bilateral case study comparisons of projects for a variety of commercial building types constructed for common clients (Business Round Table 1994) told a similar story.

More subjectively, many clients came to abhor the increasing tendency of projects to culminate in litigation. The number of construction cases tried in the High Court Official Referee's Division more than doubled between 1973 and 1991 (Cooney 1993 p 79). One response has been a tendency to idealise the allegedly harmonious Japanese system. A stream of reports have advocated aspects of the Japanese system while ignoring its negative aspects. The principal amongst these is the system of dango, or price ringing (Kurosaki 1994; Reeves 1995) which led to the virtual implosion of the Japanese contracting system and the fall of the Liberal government. It is difficult to escape the conclusion that the main reason that the Japanese system appeared to be so harmonious was that contractual relationships were collusive, and that disputes were resolved under the table rather than openly. Such idealisation was more surprising in the absence of any evidence that the Japanese system was more efficient, and anecdotal indications that the competitive advantage of Japanese contractors internationally derived mainly from their access to relatively cheap capital rather than greater effectiveness in construction. Certainly Reeves' (1995) study of a Tokyo social housing project does not confirm the supposed superiority of the Japanese industry.

More serious attention turned towards the reform of the British system. The British Property Federation (BPF) is a trade association of UK property developers, many of whom are active internationally, and one of whom had commissioned the first international construction costs survey - Slough Estates. It set out to provide an new framework for construction procurement which became known as the BPF System (Masterman 1992 chap 6). The route assumed a separated system of the hybrid design and build type providing for the separate appointment of the both the designers and principal contractor on a competitive lump sum basis. The client itself was to take on much of the burden of coordination, although provision was made for the appointment of the client's representative, should the client prefer. Bills of quantity were to be abandoned, and contractors encouraged to make variation proposals, the benefits of which could be split between the client and the principal contractor. An adjudicator was to be appointed for all phases of the project to facilitate dispute resolution. The aim was to provide a better incentive framework for the project coalition and to allocate risks where they, as a client body, thought they ought to belong, and thereby to provide better performance from the industry. Experience of the route in practice is limited as few clients have adopted it, even amongst the members of the BPF. It would appear that the proposals were rather overtaken by the line of less resistance towards the development of mediated routes.

However, by the early 1990s, considerable momentum for change had built up. A series of reports from the National Economic Development Office (NEDO) during the eighties (notably Building EDC 1983, 1988) raised serious questions about the organisation of the separated system and were influential in the development of the integrated and mediated routes. The evidence discussed above on comparative project performance, incomplete and methodologically flawed as it was, continued to mount. However, against this somewhat gloomy background, it could be noted that the international competitiveness of UK firms was sustained and improved through the period on the projects reported in ENR (Soubra 1993). For architecture and engineering services, British firms were, by a long way, taking a greater share of the market than any other European country, and were second only the USA. So far as construction services were concerned, British firms tended to increase market share, at the expense, principally of the Americans, and were on a par with the other leading European contracting nations by the end of the period. These data strongly suggest that the problems with the performance of the British system lie with not with the capabilities of the individual actors, but their interactions within the national contracting system, and its regulatory context.

The Latham Report (1994) marks the latest stage in this glacial process of reform of the contracting system. Initiated in July 1993, and published in its final form 12 months later, the Latham Report is, arguably, the most comprehensive attempt yet to grapple with the widely accepted problems of the British contracting system. It was funded jointly by the Department of the Environment (the UK construction ministry), the Construction Industry Council (an association of 27 professional institutions), the Construction Industry Employers Council (a grouping of the trade associations for general contractors), the National Specialist Contractors Council (representing trade contractors) and the Specialist Engineering Contractors Group (representing services engineering contractors). Notably, client associations such as the BPF were absent. The report is explicitly focused upon procurement and contractual arrangements, but also saw fit to comment on a number of other matters. Only the principal recommendations will be reviewed here.

The main conclusions were:

  1. Clients are the key to project performance, and they should come together in a Construction Clients Forum.
  2. Tendering procedures for both consultants and contractors are in need of reform, and should both be developed to include quality as well as cost criteria in tender evaluation.
  3. Existing standard forms of contract are inadequate and generate adversarial relations. New forms of contract need to be established, and the New Engineering Contract was recommended as a model. These standard forms should also be given statutory backing.
  4. A target of a 30% reduction in construction costs should be set for the year 2000.

Additional recommendations paid, inter alia, attention to education and training, equal opportunities, research and development, and proposed project insurance on the French model.

Very much in parallel with this report, an initiative deriving from the government's review of industrial policy and, more specifically, the Realising Our Potential White Paper of 1993 on research policy led to the Technology Foresight programme across 15 industrial sectors. The basis of all these studies, including the one for construction (OST 1995), was a Delphi study of construction experts exploring the future role of construction in the economy, the type of technologies that were becoming the most important, and an assessment of the competitive strengths and weaknesses of the UK industry. The general argument of the report re-iterated the points made earlier regarding performance, and research and development spending, but also noted that the oil and offshore sector of the industry was highly competitive, that British architects and engineers were highly competitive internationally, and that the country possessed some of the world's leading construction research institutes. The challenges for the future were identified as sharpening international competitiveness; environmental issues; strengthening technological capability; education and training; financing the upgrading and replacement of the stock of constructed facilities; and reengineering construction business processes. The "engines for change" were argued to be the creation of learning networks; information technology; establishing a favourable fiscal regime; and fostering a culture of innovation. Also stimulated by the same white paper, is the Innovative Manufacturing Initiative, and within it the Construction as a Manufacturing Process research programme, which is funded by the Research Councils. This also places at its centre, business process reengineering.

A third recent development, not formally linked to this new attempt to orchestrate industrial and research policy to improve the competitiveness of the industry, but perhaps of more profound implication in the long run, is the growth of concession contracting. Pioneering projects such as the Channel Tunnel and the Dartford Bridge, together with a slightly later generation including the Skye and Severn Bridges, and a number of urban tramway systems on a mixed finance basis (e.g. Manchester and Sheffield), have strongly influenced the development of what is now know as the Private Finance Initiative (PFI). Launched in 1992, the PFI has taken a growing role in the governments capital investment plans. All government investment projects are now subject to scrutiny for viability under the PFI. The major projects to go ahead under the initiative to date are the modernisation of the Northern Line, awarded to GEC Alsthom, and the Channel Tunnel rail link awarded to the London and Continental Railways. The PFI has also seen a number of new prisons being built and privately operated. New tramways (Birmingham, Nottingham, Croydon), the extension to the Docklands Light Railway, all new major roads and new health facilities are presently under consideration within the PFI.