Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Sir Richard, welcome.
  (Sir Richard Mottram) Thank you, Chairman.

  2. My apologies for keeping you waiting. We had a little exercise to complete, I am sure you will note at some point. The vote has made us a little later than we expected. My apologies to you and your people for the delay. Welcome, Mr Gershon, this is your first meeting, I understand. Who is your colleague?

  (Mr Gershon) Deryk Eke, OGC Director of Construction, who is on secondment from the BAA.

  3. Welcome to you. I trust your secondment is more peaceful than your original job, given where you are from. I am going to start off with a question on modernising construction relating to the Comptroller and Auditor General's report on that. I am going to start with Mr Gershon rather than Sir Richard. Mr Gershon, I try to give you at the beginning of each question the reference point in the NAO document so you can see what I am talking about. My first question to you is Figure 10 on page 19. That indicates to us that numerous initiatives, the most recent listed there, have emphasised the need to improve the performance of publicly funded construction projects. In 1999, 73 per cent of projects were over budget and 70 per cent were late. That is in Figure 2. How are you going to succeed on achieving better performance when the early initiatives have failed?
  (Mr Gershon) The figures you refer to came from a report that was a benchmarking study that was done for us by Bath University, in order to establish a firm baseline against which we could get a true understanding of the current situation and then start to determine the scope for improvement initiatives. It was only in 1999 that the Achieving Excellence programme was launched, so that report you refer to defines the starting point, which is not very good, and indicates that there is plenty of scope for improvement. It reflects, clearly, the historical position that has arisen as a result of previous procurement and project management practices.

  4. It does indicate a systemic problem, you have to deal with it.
  (Mr Gershon) There are systemic problems we have to deal with in terms of improving the performance of the Government's construction projects.

  5. Others I am sure will come back and elaborate on that question. The second point is, how you are you going to persuade departments to put in the extra work needed to make procurement decisions based not just on the apparent initial costs but on the full-term costs, quality and reliability of projects?
  (Mr Gershon) There are a number of aspects to that. Firstly, we have now issued clear guidance on the subject. Secondly, through training. Thirdly, through the promulgation of case studies that illustrate to departments the clear benefits of taking a whole life approach rather than just making decisions on the basis of initial purchase price. As referred to in the report, on the larger, more complex and novel projects using a system of independent peer reviews at critical points, particularly in the early life cycle of projects, will give us a clear view as to whether project sponsors are making decisions based on whole-life costs and the overall value for money, rather than the initial purchase price.

  6. Good. Again, I suspect others will come back and press you on that. I want to move on to page 12, paragraph 13, which recommends that you disseminate good practice more widely to ensure that it is in smaller departments. I also see from paragraph 1.15, on page 26, you started discussions to fund large capital programmes indirectly and how they help to improve procurement. I have in mind, we have had in front of this Committee, for example, the Arts Council—the Lottery Grants issue, which have shown spectacular overruns. No doubt there are others elsewhere in Government. Can you tell us what progress you have made in them? What are you doing to encourage training on a large number of firms who individually spend smaller amounts on construction, but are actually responsible for a large amount of expenditure?
  (Mr Gershon) This report has correctly identified that within the OGC we need to spend more effort now focusing on the smaller departments and those departments which then pass money on further through the public sector, through NDPBs, and beyond. As a result of a reorganisation that we are undertaking now within the OGC in the next fiscal year we will have the equivalent of 35 people focused on the construction agenda compared to this year, where we have had the equivalent of ten. There will be a substantial increase in the resources. Part of that increase in resources will be focused on, firstly, documenting more case studies, promulgating those case studies through road shows, some of which will be done in conjunction with the DETR, and also supporting a number of project enablers, who will get out amongst the smaller departments, and the NDPB to help on specific projects, in the sense that we are not just dependent on them reading the material and going to seminars, but they will be able to have direct hands-on help to help them with this these types of projects. Also OGC's supervisory board, which is chaired by the chief secretary, and comprises a number of the key permanent secretaries—who will be taking a paper on the subject of Achieving Excellence in Construction at its meeting next week. One of the issues I will be discussing with them is how we might approach with NDPBs the possibility of changing their financial memoranda to reinforce the measures we expect them to undertake now relating to construction procurement, both of new buildings and repairs and maintenance, in accordance with the best practice guidance that is emanating from the OGC and the DETR.

  7. Thank you for that. You have been broken in. Sir Richard, Figure 8, page 17, shows that the construction industry is very fragmented with 163,000 firms. That is reflected in a cat's cradle of bodies and initiatives to improve the industry's performance shown in Figure 18. Paragraph 1.15 of the report points you to this dissemination. Can anything be done to refine or coordinate this issue further? If not, how are you going to address that challenge of complexity of organisations and initiatives?
  (Sir Richard Mottram) The way the diagram is drawn in Figure 18 certainly does produce this cat's cradle effect. If you recognise that this is an industry with 1.9 million employees and there are about 140 different institutions that represent what is a very broad ranging set of industries then, in my view, it would be very surprising if could you draw a simple diagram. I think this diagram rather over-complicates the position.

  8. It does look like a Florida ballot paper.
  (Sir Richard Mottram) Chairman, you know me, I do not think I will get into that. I was really going to make two points, if one thinks about the right-hand side, the Pan Industry Bodies—we could draw this diagram differently, I am not arguing about the diagram, you could draw the diagram differently because the construction industry board sits, effectively, on top of a number of these bodies underneath who, in turn, are representative of a large number of bodies underneath them. To that extent, on the industry side there is a structure that we are trying very clearly to work with to make a success of, built around the Construction Industry Board. Just as in any other industry, a training board, somebody who looks at research, somebody that looks at innovation in the long-term, a lot of that will be unsurprising for an industry of this size. If one looks at the left-hand side of the diagram I do not think that that is particularly complicated. What we have done is post-Egan we have created a set of structures for innovation, for example, which are quite clearly sector related and it is not difficult for people to understand how they relate to those. We have a consolidated approach to disseminating best practice, in ways I can explain, and we are focused on strengthening the role of clients in relation to this improvement programme. We are working with the industry to facilitate an over-arching client body that can help determine messages. It is very complicated[1]. If you were in the structure and you were either a small player or a big player you can relate to your own industry body, you can relate to the industry body above, you can relate to the various DETR/industry programmes that we are putting out in ways I can describe.

  9. That is fair enough. Can I move to paragraph 1.9, which explains, that contractors should be encouraged to put forward Demonstration Projects, which show how the Egan Targets can be achieved and lessons can be passed on to others. Initially all suggestions for Demonstration Projects were accepted. That is 1.13. I see that by May of last year only 31 cases were generated out of 171 projects finally accepted. I think that is right.
  (Sir Richard Mottram) Yes.

  10. How are you ensuring all of the projects are providing lessons that can be properly learned?
  (Sir Richard Mottram) I think this has been a two stage process. When we were moving on from the Egan Report itself and the movement for innovation was created, each of the demonstration projects that were included in that process had to illustrate lessons of value in relation to at least one aspect of the Egan agenda. I think that it would be true to say that the key thing at that stage was to get this process running, to get demonstration projects—in other words, to capture the enthusiasm of the industry to participate. As that process has gone on, the way in which it is being run is now stricter, really, about what you have to do to qualify as a demonstration project. In the last year, or so, the criterion has been tighter. The aim is that in relation to every project that is a demonstration project, whether it is coming on now or was one of the initial ones, it clearly illustrates, at least, one aspect of Egan Agenda and the results of the projects can be measured—I have lots of lovely glossies, Chairman, which show how the results of these demonstration projects are being disseminated around the industry in ways which illustrate how they relate to all of the component parts of the Egan Agenda.

  11. It will be interesting to see how that works out. Paragraph 8 shows that partnering on long term, collaborative relationships are considered to have good potential for improving both the cost and the quality of construction, with savings as high as 30 per cent in the costs have been reported to the private sector. How does this compare with regard to departments and firms, about which I am mighty suspicious?
  (Sir Richard Mottram) In what way?

  12. You carry on and answer my question before I answer yours.
  (Sir Richard Mottram) I think the report brings out a number of examples, does it not, of how in relation to particular areas of the public sector, and we can look at one or two of those, this best practice is being implemented, including in relation to partnering. The improvement in value for money that is being achieved is a key criterion and also in relation to the standard considerations about procurement on time and in relation to what you are trying to get. There are plenty of examples. The spread of value for money savings that have been achieved is quite wide, as the report brings out very clearly, which is, I think, rather what would one expect when you are rolling out a process which requires a lot of people to change their practices, to buy into new ways of doing things. Some of what is currently being built, so to speak, or a lot of what is being built reflect practice which goes back a number of years. We can look at some of the examples which the NAO brought out, about how they illustrate various aspects.

  Chairman: Others may want to raise that. I am always suspicious of partnering, because they get too cosy.

Mr Davies

  13. Can I ask some general questions, first of all, to Sir Richard, one of the inherent problems of the construction industry in terms of productivity and profitability is some boom/bust economy that we have seen prior to this government?
  (Sir Richard Mottram) Yes.

  14. Are you finding—now there is more stability, there is more investment in training fundamentals—that you are getting away from the situation where construction companies did not want to put down investment in case they had to shed their labour and skills every few years?
  (Sir Richard Mottram) We think that there obviously are, actually, important macro-economic aspects to this problem. If you look at, for example, which I think is your question, employment in the construction industry, it has been very cyclical in relation to economic activity. That does make things more difficult, I am not getting into when the boom was and when the bust was.

  15. Is it not the case that we will see the productivity benefits, et cetera, that you are predicting, for other reasons, because the economy is more stable?
  (Sir Richard Mottram) I do not think so. The industry faces a number of fundamental problems which will take a lot of effort. The DETR role is really quite a small one. It is trying to shape an agenda and work with the industry to make a success of it. What we can see is an industry, where profitability is very low, that is still the case, I think, where they have serious problems in the way in which they recruit and retain people and where because, actually, there is now a stronger economy they face serious skill shortages. They are also very weak on research and development. Unless we can do something across the range of these areas, do something about profitability—we can talk about how—to improve the way in which the whole industry is project managed and manages its supply chain, improve the role of clients, create a much more appealing working environment that will persuade people to come in and to stay, unless we can do all those things then I think the industry will be in trouble, yes.

  16. Given there is a skill shortage, what are you doing to ensure there are sufficient skills quickly enough to avoid the taxpayer paying over the odds because there is a shortage of skilled people to deliver the projects we want.
  (Sir Richard Mottram) My department are not responsible for the industrial training side of this industry, that is a DfEE responsibility. What we are trying to do, for example, in all of the work that we have been doing on a better framework for people in the industry is that people see this as an attractive job and once they join they stay. We can go through some of those things, which are about health and safety, about the working environment, about all of those considerations, alongside ensuring that the training mechanisms across the economy as a whole are producing the people that are needed. If you look in the report at the balance of the work force you can see that actually it is, like other areas of the economy, ageing—including me—and it is heavily skewed, only nine per cent are women, for example, and two per cent ethnic minorities. Those balances have to change if you are going to be confident that this is an industry that can get people in.

  17. Do you feel that given the labour market is tight, there are more jobs, and given historically the construction is high risk/low margin and cyclical, do you feel enough people are coming forward for future demands at the level of productivity we want to get value for money? Are you not doing any of that?
  (Sir Richard Mottram) We have to have a range of measures which include, for example, as you say it is low profitability/high risk. We want it to be managed risk, higher profitability. That is one of the things we are trying to work on with the industry.

  18. Do you think those problems we have been very briefly discussing are, perhaps, more fundamental than a complete preoccupation with methods of procurement? My understanding is that we have moved from traditional procurement of the lowest price, with a claw-back when people say you have broken the contract, we want some more money and change the design, we should move towards PFI design or build and prime contracting. Is it not the case that all those three suffer from that same problem, that in PFI there can be endless wrangling about breached clauses and lots of lawyers being paid a lot of money. The bottom line is there is a more fundamental issue about the supply of skilled labour to deliver construction productions. Is your whole department being completely sidetracked into all these complex procurement things people talk about, when it would be simpler to get on with the job?
  (Sir Richard Mottram) If you think that a fundamental problem is that this is a cyclical, a high risk, low profitability industry which booms and busts then you have to try and do something about that. These technical procurement methods are about changing the climate in which the whole industry operates, out of which you should get better labour productivity, which will help, you will have less waste, which means you can produce more for any given input, etc. They are fundamental to getting an output matched to what is going to be, in my view, quite a tight labour situation while the economy is very strong.

  19. The Chairman mentioned in the 1999 report it showed that 73 per cent of public sector construction projects were over budget and 70 per cent were delivered late. How does that compare with the private sector or do you not know? I would imagine the private sector delivers late and goes over budget anyway, it is in their interest to do so?
  (Mr Gershon) For the private sector?

1   Note by Witness: To facilitate an over-arching client body to help determine messages is not very complicated, not complicated, as previously stated. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 11 July 2001