House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Ninth Report

7 Raising standards

246. Ultimately, the industry itself bears the greatest responsibility for its standards. While lower standards in the short term may reduce costs and increase profit margins, in the long run they threaten the reputation of individual companies, and of the industry as a whole—high standards may give a competitive advantage. However, given the fragmented nature of the industry, it is sensible to support efforts to improve. Moreover, since the problems are compounded by the fact that, in many cases, clients focus on costs rather than value, and may have limited information about the way in which the industry works, or the competence of individual firms, it makes sense to invest in measures that help clients to demand more from the industry. In this chapter we look at the work of government in helping to raise standards across the industry. First, we analyse the role of research and innovation in achieving this. Second, we look at the function of the Building Regulations in defining minimum standards for buildings. Then we consider the various schemes for contractors, designed to help clients hire only firms that meet a required standard. Finally, we look at the current inquiry by the Office of Fair Trading (OFT) into price-fixing amongst contractors.

Research and development

247. There was near universal acceptance amongst our witnesses that the construction industry and government both invested too little in construction research and development (R&D).[399] Figure 2 below provides an international comparison of R&D spend as a percentage of industry value-added—the share in the UK is just one twentieth of 1%. The Building Research Establishment (BRE) told us that the UK spends just £43 million on construction R&D, compared to £206 million in France, and £750 million in Japan.[400]

Figure 2: Construction R&D expenditure as a percentage of value-added

Source: OECD

THE REASONS FOR POOR R&D PERFORMANCE

248. There are structural reasons for the low level of construction R&D in the UK. First, as noted already, the industry is highly fragmented—its largest company, Balfour Beatty, has a market share of less than 3.5%.[401] This means there are no significant market leaders able to create demand for new technologies or processes.[402]

249. Second, profit margins in the UK industry are low—typically just 2% to 3%. This means that any activities such as investment in R&D or training, which can be cut without short-term disadvantage, are frequently jettisoned to protect firms' profit margins. The Construction Confederation and BRE said countries such as Sweden and Japan have much higher rates of R&D investment because their markets are more concentrated and enjoy higher profit margins.[403]

250. Thirdly, the end-product in construction is usually the one-off result of a team of firms working together on a project. Process innovation may take place within the team over a project's lifetime, but there are no industry-wide means of capturing that innovation so that it can be used in subsequent ventures.[404] It is here that framework arrangements can be useful.[405] By creating a relationship between the client and the supply chain that endures over a number of projects, teams are able to apply lessons learnt and innovative processes from one project to the next.

251. A fourth reason for the construction industry's poor R&D performance is that it is almost impossible to protect intellectual property rights. As BRE put it: "Basically anything you invest in terms of advanced process, new integration, a new way of doing things will be copied the next day by anybody who visits your site".[406] Unlike manufacturing, construction firms do not benefit much from 'first mover advantage', and so gain little competitive edge from innovating.

252. A fifth factor is that firms are often unwilling to take risks with experimental products or processes because the cost of getting it wrong and having to put right a problem, can far outweigh the benefit. We were also told on our visit to the Royal London Hospital redevelopment project that the availability of high levels of migrant labour has reduced the incentive to innovate to increase productivity in the industry.

253. Yet more reasons for poor investment in R&D lie with the client. Those purchasing construction projects are often not able to differentiate between a more advanced product and that which the industry might produce ordinarily. This reduces the incentive for contractors to offer a more innovative solution. In addition, construction clients are naturally conservative, especially where they are purchasing a one-off project from the industry. BRE told us clients "want a good quality building but they do not want to be the test bed for new thinking".[407] Overall, the usual commercial drivers that lead businesses to invest in R&D are either missing or very weak for a large part of the construction industry. The only exception is for construction product manufacturers and suppliers—the part of the sector which most closely resembles other manufacturing industries.[408]

GOVERNMENT SUPPORT FOR R&D

254. The unique market characteristics of the construction industry have long been recognised, and the sector has accordingly received significant public sector funding to help raise the level of R&D. The Government co-funded the Construction Research and Innovation Programme, which provided support worth about £23 million per annum, until 2002. This funded research, as well as a range of knowledge transfer and best practice activities, including materials testing, development of codes and standards, general guidance, network groups, work underpinning changes to the Building Regulations, and the development of sustainability assessment tools.[409] It also provided financial support to the Building Research Establishment (BRE). However, in 2002 the then Department of Trade and Industry (DTI) closed the construction programme, making the UK the only advanced country in the world not to have a dedicated construction R&D funding stream.

255. BERR told us the closure of the programme was a response to a review by the then Chief Scientific Adviser, Sir John Fairclough, which recommended that "the industry should take greater responsibility for defining and funding the research needed to support its future competitiveness". It also recommended that government should target collaborative funding programmes "selectively at the key competitiveness issues" and gradually withdraw funding outside of these areas.[410] However, we do not believe that this can be construed as a justification for the complete closure of the DTI's construction programme, especially given that the same report states that "the available resources for construction R&D are the minimum the sector deserves, bearing in mind its size and importance".

256. The programme may also have been the victim of departmental reorganisation. BRE told us that following the 2001 election, responsibility for construction was transferred from the then Department of the Environment, Transport and the Regions (DETR) to the DTI, which brought construction sponsorship alongside other sectors handled by the Department. At that time, the DTI was also undertaking a fundamental review of its business support activities and the way in which it supported innovation, which resulted in a move away from sector-specific schemes, such as the one that had benefited the construction industry, and the pooling of many funding streams into the business-led Technology Programme, managed by the Technology Strategy Board (TSB). BRE told us that the funding for the Construction Research and Innovation Programme, "to quote the Minister at the time, was 'snaffled' into the central coffers of the DTI and probably reappeared in the Technology Programme".[411]

257. The TSB provides funding in a variety of ways for 'key technology areas', such as nanotechnology and bioscience, and 'key application areas', which includes the built environment. It has established the 'Modern Built Environment Knowledge Transfer Network', led by BRE, which aims to increase the rate of technology and innovation take-up of the sector. The TSB has also recently announced its 'Low Impact Building Innovation Platform', which will provide £4 million of funding for collaborative research projects into new components and materials that reduce the energy and water use, and waste production of buildings.

258. Although the Research and Technology Organisations (RTOs) welcomed the funding provided by the TSB, they noted that it did not address the gaps left by the closure of the previous programme.[412] Indeed, Constructing Excellence believed "many of the strategic issues needing research in the industry are not technology driven" and therefore would not receive funding from the TSB.[413] Overall, BSRIA estimated that current public funding for construction R&D was between £5 million and £10 million per annum, with most of this coming from the TSB. That is less than half the amount spent prior to 2002. However, BERR told us there were a number of other sources of construction-related public R&D funding across government, including:

Engineering and Physical Sciences Research Council (c. £32 million per annum for academic-led research);
Department for Communities and Local Government (c. £5 million per annum for research underpinning the Building Regulations);
Highways Agency (c. £8 million per annum towards asset management issues, including construction techniques);
Environment Agency (c. £4 million per annum for R&D into flood management);
Carbon Trust (c. £4.5 million per annum); and
Funds available through European Research Framework Programmes.

259. The Department suggested that this "indicates there has not been any major shift of money away from construction but rather some redistribution".[414] The Minister responsible for construction also thought "the beneficiaries of the previous arrangements may have a bit of nostalgia for how things used to be".[415] The RTOs argued that there had been very clear negative consequences of the drop-off in funding following the closure of the DTI programme. The starkest evidence was the fall in the number of papers published by the RTOs in recent years, from an average of 173 new titles per year between 2000 and 2005, to just 63 in 2006—a decline of 63%.[416] BRE told us the underlying situation was even worse because a large proportion of these 'new' titles were actually just updates of older documents.

260. The RTOs listed a number of consequences of the lack of direct BERR funding for construction R&D. First, there is no longer sufficient monitoring of the performance of new technologies, such as microgeneration, and construction techniques to learn what does and does not work. Second, funding is no longer available to translate university research into 'applied advice' for industry. Third, the UK is increasingly absent from international forums and is no longer learning from international practice, whilst also ceding influence within Europe in standards setting.[417] This decline risks undermining the sector's international competitiveness and its export earnings.[418] BRE referred to the situation as a 'slow crisis' because it has to date gone largely unnoticed. Yet the RTOs believe "a critical part of the UK's competitive position and delivery capacity is being steadily undermined".[419] The Minister responded: "I have certainly not seen any evidence of damage to UK construction".[420] The RTOs' concerns were supported by the Strategic Forum for Construction, (although the Department claimed the contrary).[421] We are surprised that the Government appears to be unaware of industry concerns about such an important issue.

261. The UK's National Platform for the Built Environment, managed by Constructing Excellence, was launched in 2005. It aims to increase the level of business-led relevant research. It provides a means for industry to articulate its R&D needs to the research community. It has published a set of research priorities for the future. However, despite a positive reception from the industry, Constructing Excellence said its progress to date has been hampered by a lack of available 'seed funding'.[422]

262. Overall, there was strong support for reinstating a dedicated construction research and innovation programme to address the concerns over lack of public funding. The RTOs believed this could be achieved without additional taxation. Rather, the Landfill Tax Levy, the Aggregates Levy and the Climate Change Levy could all provide potential sources of funding through a simple 'top-slicing' of a small proportion of the monies raised, a very large proportion of which come from construction industry firms in the first place.[423] It is likely, though, that this funding has already been allocated for expenditure or reduced taxes elsewhere. It is over-optimistic to suggest that re-allocating some of this money for construction R&D could be achieved without a cost; however, some of the funding from these levies is intended to support the industry, and it seems appropriate to consider how best it should be spent in the future.

263. Unlike most other developed countries the UK does not have a dedicated publicly-funded research and innovation programme for its construction sector. We believe this is unwise. Research and innovation is necessary to meet the Government's targets for sustainable construction and its own needs as a client. The structure of the construction industry and the nature of its work mean that the usual commercial drivers of R&D investment are either missing or very weak—if there is market failure, government support has to be provided. There needs to be an urgent assessment of the level of support, and how it should be supplied, followed by monitoring to ensure the support continues to meet the industry's needs. A Chief Construction Officer would be best placed to do this. We recognise that increased spending in one area has to be offset by decreases elsewhere, or an increase in revenue. However, the industry pays a considerable amount through the Landfill Tax and Aggregates Levies. We believe there is scope for recycling a proportion of these funds to the industry to help fund research, even if this means additional funds have to be provided, either from the taxpayer or the industry. Finally we note that a Chief Construction Officer could also co-ordinate public sector spending through the modest programmes that already exist to ensure its effectiveness is maximised.

The Building Regulations

264. The Building Regulations apply to most new buildings in England and Wales, as well as many alterations to existing buildings, whether they are domestic or non-domestic. The technical requirements with which buildings must comply under the Regulations consist of 14 'Parts', ranging from structural matters (Part A) and fire safety (Part B) to electrical safety (Part P). Their aim is to provide a minimum standard to which all building work should adhere to, and set a level playing field for competition between building companies. Although the content of the Regulations is determined by central government, compliance and inspection is devolved to building control bodies—either local authorities or privately operating approved inspectors. Where work is not compliant, local authorities can take a criminal prosecution, which may result in a fine of up to £5,000. They can also serve a notice on the building owner requiring the work to be brought up to the required standard.[424]

265. Construction firms had three main concerns about the Building Regulations. The first was complexity. The Regulations contain 14 parts and cover hundreds of pages. Witnesses said they were "too cumbersome", and needed "a greater emphasis on clarity".[425] Such complexity has even led to instances where different parts of the Regulations conflict with each other. A second concern was the notice period for changes to the Regulations. Final details are often not settled until very shortly before the industry has to implement them. This can be damaging if, for example, firms have invested in capacity to produce a material, which is subsequently not favoured by the Regulations.[426] It also creates difficulties for small firms, which often struggle to keep up with the changes.[427] Finally, witnesses complained there was a lack of longer-term strategic vision on the part of government as to the evolution of the Regulations over time. This can inhibit forward investment planning by the supply chain.[428]

266. In March 2008, the Department for Communities and Local Government published a consultation paper, The Future of Building Control. This seeks to address some of the above concerns. A key proposal is to introduce a periodic review system for the Regulations that runs over a three-year cycle. Changes would take place over a range of parts, following a structured process, and replacing the current approach whereby revisions to different parts are published in a piecemeal fashion. Furthermore, the Department has proposed a 'two-cycle rule' whereby a particular issue will not be addressed in consecutive cycles. In other words, no issue would be subject to change more than once every six years. The consultation also proposes the introduction of a 'standstill' period of six months between the publication of new legislation and its implementation. This should allow more time for the industry to prepare for any changes.

267. The consultation stops short of proposing a wholesale simplification of the existing regulations and their guidance. It argues that the amount of work involved would distract from the other reforms. Furthermore, it notes that the required standards for buildings would remain the same, regardless of how the information is presented. Nonetheless, the consultation does state that the Department will seek to remove overlaps, or points of confusion, by reducing the number of parts over time as part of the periodic review framework. The consultation closed in June 2008. The Government hopes to introduce the first review cycle in line with its commitment to review Part L of the Regulations (conservation of fuel and power) in 2010.

268. The construction industry believes the Building Regulations are too complex, and changed too often. We agree. We welcome the Government's proposals to create a framework to manage changes to the Regulations over a three-year cycle, and to limit amendments on any single issue to once every six years. We hope that this will effectively address the industry's concerns on the timing of changes and the way in which frequent changes hinder its strategic planning. We hope too that the Department for Communities and Local Government will use the first review cycle, which will begin in 2010, to address inconsistencies and overlaps in the current Regulations. We are, though, disappointed that a more radical simplification of the rules is not under consideration and believe the possibility should be re-examined.

Helping clients make informed decisions

269. The standards set by the construction industry vary hugely. The Construction Industry Council told us that although the sector was "absolutely world-class at the top", there is also "a very long tail" of firms at the other end, which adversely affect the public's perception of the rest of the industry.[429] Because of this variability it is important for clients, be they government or homeowners, to be able to identify which companies are 'competent'. In this section we look at the main scheme for protecting homeowners from 'cowboy' builders—TrustMark. We then consider the Government's own scheme for ensuring the public sector only hires competent firms—Constructionline.

TRUSTMARK

270. BERR estimates that botched home improvement work costs around £1.5 billion a year and that Trading Standards Officers receive over 100,000 complaints about cowboy builders a year.[430] The Department, in partnership with the industry and consumer protection organisations has established the TrustMark initiative. Firms carrying the TrustMark badge have had their technical skills independently checked through regular on-site inspections. They will also have adopted a code of practice that includes insurance, good health and safety practices and customer care. The scheme provides a complaints procedure in the event of a problem or disagreement between the client and the firm.

271. To date some 16,000 firms have registered for the scheme, which now has 25 operators.[431] However, one of the scheme's operators, the Federation of Master Builders (FMB), was concerned by the low level of consumer awareness of the TrustMark brand. Because clients are not routinely requesting TrustMark registered firms, they see little business advantage in joining the scheme. FMB suggested marketing had been hindered by a recent reduction in government funding.[432] In response, the Minister said the initiative had been designed as self-funding from the outset and that BERR was working with the TrustMark scheme operators to establish a consumer forum to help raise the brand's profile.[433] The scheme is still in its infancy, and was only launched to consumers in January 2006. Given the infrequency with which most homeowners employ builders, arguably it will take some time for brand awareness of the TrustMark logo to develop. This should happen over time, so long as the scheme retains the support of government and its current branding.

272. Companies need to be able to show that they are competent to give their clients confidence and to ensure a level playing field for competition amongst suppliers. We hope the TrustMark scheme will, in due course, become a recognised symbol of quality for builders in the same way that CORGI is for gas installers. This will take time, but with some 16,000 builders already registered, the initiative has made good progress since its launch in 2006. It is in the interests of reputable companies that the scheme should succeed and we believe that the onus for funding and publicising the scheme falls on the industry and not the Government.

CONSTRUCTIONLINE

273. Firms are usually required to 'pre-qualify' before they can tender for public sector construction work by submitting a range of information including their contact details, financial standing, evidence of health and safety credentials, and references. This is often administratively time-consuming and repetitive. Several witnesses highlighted the plethora of different qualification schemes that existed across the public sector, many of which required very similar information, but were tailored to suit particular clients.[434] The Association of Consultancy and Engineering said more than half its members had to sign up for multiple accreditation bodies. For those signing up to four schemes the fees can total more than £8,000.[435] The Specialist Engineering Contractors' (SEC) Group told us that small and medium-sized firms might have to pre-qualify for 30 or more different schemes to obtain work, and the time and cost of the process present a significant obstacle to SMEs winning public sector contracts.[436]

274. The 1994 Latham report, Constructing the Team recommended a national database of pre-qualification information which all public sector procurers were to use. In response, the then DTI established Constructionline—a joint venture with Capita. Since its inception, the database has registered 14,500 members, ranging from sole traders to large contractors, and it is used by 1,600 client organisations.[437] However, Constructionline drew sharp criticism from all the construction umbrella bodies. The Construction Confederation noted that public sector clients, especially local authorities, continue to use their own bespoke pre-qualification procedures, because the system relies on self-certification, and therefore does not command clients' confidence.[438] The National Specialist Contractors' Council (NSCC) told us "it had not delivered", while the SEC Group said "it is not what we are looking for in the industry".[439] In response the Minister said the scheme "is performing a useful role, but I would like to see that further extended".[440]

275. One solution suggested by the SEC Group was to develop a set of core criteria for different pre-qualification schemes that would allow mutual recognition. Firms that registered under one scheme that met these core criteria would then not need to qualify for another scheme that also held the same standards. For example, in health and safety a set of core criteria now exists within the Approved Code of Practice, accompanying the Construction, Design and Management Regulations 2007.[441]

276. The Government must reduce the burden that multiple public sector pre-qualification schemes impose on construction firms, particularly SMEs. Constructionline was set up to address this, but it has proved unsatisfactory for the industry. The Government should either make it work, or abandon it. If the consensus is that Constructionline cannot work as intended, then the Office of Government Commerce should consider how it might develop core criteria and mutual recognition between schemes.

Cover pricing

277. In April 2008, the Office of Fair Trading (OFT) issued a 'Statement of Objections' (SO) against 112 construction firms in England over alleged incidences of 'cover pricing'.[442] This is a practice whereby a contractor aims deliberately to lose a tender by submitting an uncompetitive bid. They might choose to do this because they have discovered late on that they are not able to carry out the work, or because they wish to stay on a client's preferred bidders lists. This practice is not illegal in itself. However, the law forbids firms bidding for the same contract from contacting each other during the process to gain an estimate of what might represent a plausible bid, but which would still not win the contract.[443]

278. The OFT's inquiry, which began in 2004, has focused on 244 infringements. In the case of 12 of these (involving 9 companies out of the 112), it is investigating more serious potential incidents of a successful bidder paying an agreed sum of money to the unsuccessful tenderer. The OFT's press notice states that "no assumption should be made at this stage that there has been an infringement of competition law by any of the companies named in the SO".[444] Those companies concerned now have an opportunity to respond in writing or orally to the OFT before it reaches a final judgement. This is not expected until 2009.

279. The statement of objections is not publicly available, so the only available information relating to the latest developments has been the OFT's press notice and briefings it provided to the media on the day of its release. The Construction Confederation has stated publicly its concern at the "sensationalist" reporting of the OFT announcement, which it believes has adversely affected the public's perception of the industry.[445] The Construction Confederation believe that the practice of cover pricing was mostly a symptom of inadequate procurement regimes within the public sector. It also argues that the use of cover pricing had all but died out in more recent years because of a move away from procuring on the basis of lowest price.

280. The controversy has also potentially created confusion among public sector clients about whether their own contracts have been subject to cover pricing. If it has taken place, it is not clear either whether the practice would have cost the taxpayer. There were press reports that customers may have overpaid by around 10%, although the Construction Confederation argue that cover pricing itself did not give rise to higher prices for clients.[446] Given the low average profit margins for the sector—typically 2-3%—it seems unlikely that if clients did overpay, that it was by the amount speculated.

281. The industry's low profit margins also have implications for the OFT's final decisions on the case, once it has completed taking evidence. The Office has the power to fine a firm up to 10% of its worldwide turnover if it is found to be a member of a cartel. However, this is not likely to apply for any companies found guilty of cover pricing. Many have also applied for leniency in exchange for cooperating with the investigation. There is a risk, however, that highly punitive fines would send those companies into administration, giving rise to the paradoxical result of an inquiry into anti-competitive behaviour actually reducing the competitive capacity of the market.

282. The current controversy over 'cover pricing' can only have damaged the construction industry's reputation, and is at odds with the drive to raise standards. We cannot pre-judge the final verdict of the Office of Fair Trading's investigation. However, we do believe that its outcome should be to ensure that the practice of firms coordinating with each other to lose tenders for public sector work, as well as more serious instances of making compensatory payments, are both stamped out. It must, however, achieve this without damaging the industry's capacity. We also recognise that sensible clients should have procurement systems which do not create incentives to engage in cover pricing in the first place.

399 Ev 231, para 12 (CIC-East Midlands), Ev 280, para 12 (Local Authority Building Control), Ev 233 (CIRIA), Ev 169 (BSRIA), Ev 213, para 50 (Construction Confederation, CIC and CPA), Ev 163 (BRE et al), Ev 314, para 6.1 (Royal Institution of Chartered Surveyors) and Ev 225, para 27 (Constructing Excellence) Back

400 Q 262 (Building Research Establishment) Back

401 See Chapter 1 Back

402 Ev 173, para 43 (Building Services Research and Information Association) Back

403 Qq 82 (Construction Confederation) and 266 (Building Research Establishment) Back

404 Q 263 (Building Services Research and Information Association) Back

405 We discuss these in Chapter 2 Back

406 Q 259 (Building Research Establishment) Back

407 Ibid. Back

408 Q 82 (Construction Products Association) Back

409 Ev 141, para 3 (BERR) Back

410 Sir John Fairclough, Rethinking construction innovation and research, 2002 Back