Memorandum submitted by Association for
Consultancy and Engineering
1. Construction is the UK's largest industry,
employing over three million people on-site, in material supply,
and in professional services. The industry is worth £100
billion each year and contributes almost 10% of UK GDP.
2. The consultancy and engineering sector
comprises 10% of this total. The Association for Consultancy and
Engineering (ACE) represents the business interests of the consultancy
and engineering industry in the UK. We are the leading business
association in this field, counting over 800 firms—large
and small, operating across many different disciplines—as
our members. Providing the professional services necessary to
make construction a thriving industry, our members, through ACE,
are in a unique position to comment on its health.
3. ACE welcomes the Trade and Industry Committee's
inquiry and the opportunity it provides to highlight the importance
of consultancy and engineering to the construction industry. There
are a number of key issues that are affecting the competitiveness
of this sector, and we hope this opportunity to make strong and
aspirational recommendations to government is not missed.
KEY POINTS
4. The UK Government has to act to create
and maintain the best possible business climate to allow UK industry
to thrive. In the case of the UK construction industry, the following
issues are key to achieving this:
(a) ACE members are finding it increasingly
difficult to recruit and retain graduates with skills in specialised
areas across all engineering sectors. These specialisms will grow
in importance and failing to fill these skills gaps now will be
to the detriment of the UK economy in the future.
(b) In the current economic climate, consultants
and engineers are being overcharged for Professional Indemnity
Insurance (PII). They are bearing the burden of a higher proportion
of risk on construction projects than they should. The law needs
to be amended on this issue to ensure liability is apportioned
in a more equitable and proportionate manner.
(c) Late payment of contracts and low fee
levels across the industry significantly impinge on consultancy
and engineering firms' productivity levels. Government needs to
look at the guidelines that need to be put in place to ensure
payment terms are fair.
(d) The period of transition from British
Standards to Eurocodes needs to be extended to allow the construction
industry—especially the 100,000 engineers who need to retrain—to
become familiar with the new regulations. The UK government should
assist in implementing training schedules for this, which should
include extending the implementation period.
(e) Public procurement processes put onerous
demands on the construction industry as a whole. pre-qualification
questionnaires and accreditation schemes require large amounts
of resources to complete without any guarantees of work at the
end.
(f) Sustainability needs to be ingrained
into every aspect of the construction industry. Consultants and
engineers are best placed to take the lead on this. Government
should support consultancy and engineering firms in research and
development to provide innovative solutions to sustainability
questions.
RECRUITMENT AND
RETENTION (SKILLS)
5. Skills shortages are an issue throughout
the construction industry, whether for semi-skilled workers such
as bricklayers and plumbers, or for graduate consultants and engineers.
As the business association representing the interests of consultancy
and engineering firms, ACE is particularly concerned with the
latter of these areas. Our 2006 State of Business survey showed
that three quarters of firms ranked internal resourcing and recruitment
as one of their top five concerns. Of those with a turnover of
over £10 million per year, nearly nine out of 10 firms faced
issues in this area.
6. The shortage is exacerbated by UK engineers
being targeted by overseas firms, the higher wages on offer in
other professions, especially finance, and clients moving work
in-house. The dubious practices carried out by some recruitment
companies in recruiting engineers from consultancy firms leaves
a lot to be desired.
7. This situation has been worsened by the
recent removal of engineers from the list of professions allowed
for UK work permits.
8. ACE would welcome the opportunity to
give oral evidence to the committee on the key issue of recruitment
and retention in the consultancy and engineering sector. We are
currently undertaking an extensive survey with our members looking
at skills shortages affecting the industry, including a comparison
of the UK construction industry with other countries. The results
will be ready in time for oral presentation to the committee.
PROFESSIONAL INDEMNITY
INSURANCE
9. Excessive levels of Professional Indemnity
Insurance (PII) have been highlighted as a top five concern by
consultancy and engineering firms. The levels paid out, not just
in terms of premiums but also excesses, will have an impact in
terms of an organisation's profitability, and inevitably will
have a knock-on effect in other areas of concern such as internal
resourcing, recruitment, skills shortages as well as the level
of fees.
10. These excessive premiums are due in
part to a general hardening of the insurance market over a number
of years. However, the current legal system is intensifying this
difficult situation for consultants and engineers.
11. English common law does not recognise
the doctrine of proportionate liability, instead recognising the
rule of joint and several liability. Where a number of contractors,
sub-contractors, consultants and other parties are engaged on
a construction project, if loss or damage is suffered by the plaintiff,
then, relative to the plaintiff, all the parties are individually
liable for the full amount of any loss. The plaintiff can recover
the full loss from any of those liable, irrespective of their
share of the liability. This leads to a situation where insured
consultants, for instance, are bearing the risk of the insolvency
of others who may have been equally, if not more, responsible.
12. ACE conducted a survey in May 2005 on
joint and several liability, revealing that it occurs in nearly
a quarter of all cases against consultants and engineers. On average,
liability in such cases is apportioned equally between contractors
and consultants. However, this is unfair for consultants and engineers
in two ways:
— The frequency which consultants
are apportioned liability is higher than for contractors. This
is not due to consultants being negligent in any way, but due
to the higher likelihood of contractors becoming insolvent, leaving
consultants to carry the full burden of the claim.
— Contractors invariably get paid
a much higher proportion of the overall project value but, with
consultants and contractors each carrying on average one-third
of the liability, their liability as a percentage of their income
is much smaller. Consultants are effectively being disproportionately
disadvantaged.
13. In the formulation of its 2004 report
on the case for reform, ACE sought the advice of Sir Michael Latham,
author of the 1994 joint government/industry report Constructing
the Team. Sir Michael advised that the peculiarities of the construction
industry made proportionate liability a reasonable proposition,
whereas in other areas it has been concluded not to be.
14. With the above in mind, ACE believes
the Government should promote a bill to change the law on joint
and several liability relating purely to the construction industry
and specifically to commercial and public developments. This should
include a full consideration of the rational statutory capping
regime to alleviate the problems of disproportionate liability.
PAYMENT PRACTICES
15. Over the last few years, consultancy
and engineering firms have highlighted a number of poor payment
practices carried out by clients, both public and private. The
major concerns include delays in payment and low fee levels.
16. Increasingly, clients are expecting
consultancy and engineering firms to increase payment terms from
30 to 60 days. This move impacts on the profitability and competitiveness
of such firms. ACE believes such an increase is unfair and unwarranted.
17. Further concerns stem from calls from
clients and contractors to insert pay-when-certified clauses into
contracts, whereby appropriate payments are triggered by the receipt
of a certificate reflecting the work done. ACE believes there
are no circumstances in which this is appropriate.
18. Pay-when-paid clauses are not beneficial
to the construction industry, leading to more insolvencies than
is necessary. The parties in direct contract with each other should
bear the risk, and everyone in a supply chain should be expected
to take the necessary steps to ensure the credit-worthiness of
their own payers.
19. The payment framework should provide
a mechanism for fair and adequate payment. The payee knows how
much is to be paid and in what time period ie there needs to be
certainty of payment. An adequate mechanism should be expressly
required to include terms stating:
— what amounts constitute the
payment under the contract;
— when a payment is to be assessed
under the contract;
— how are the amounts to be determined;
— the period of time that should
elapse from the point assessment of the payment is to be ascertained
before the final date for payment; and
— what information is to be communicated
between the parties (who provides what, to whom and in what level
of detail during the process).
20. Low fee levels are affecting the entire
consultancy and engineering sector. Increased responsibility from
the introduction of such regulatory standards as BREEAM has increased
the responsibility on their shoulders. This increase has not been
met with an increase in fees, with many clients assuming these
new responsibilities are included within the current contract
framework.
21. Clients need to be better educated about
the increased responsibilities of consultants and engineers and
be prepared to raise fee levels in accordance with this increase.
REGULATORY FRAMEWORK
22. Firms will need to invest in training
plans to ensure all aspects of the new Eurocodes are explained.
Yet with so little time to educate its staff, by 2010 many engineers
will still be unfamiliar with them. The industry will be exposed
to the risk of design errors and structural failures.
23. This training will be a requirement
for over 100,000 engineers employed in the construction industry
in the UK. With no government assistance, the responsibility for
integrating the largest ever code change into industry practice
falls directly and heavily on individual companies. A study by
the Institution of Structural Engineers (IStructE) estimates that
each fee earning staff member will require 15 days to familiarise
themselves with the codes. The UK Government should assist in
implementing training schedules.
24. Compounding this will be the obvious
loss of productivity the engineering sector will have to absorb.
An industry already under great financial and staffing pressures
can ill afford the intensive period of training that is required
over the next three years. The IStructE estimates a 10% loss of
productivity during this period. Extending the transition period
will decrease the annual cost of training to engineering firms.
25. As a solution, we propose that each
structural design code be reviewed by the relevant BSI committee
and updated prior to 2010. These should then be allowed to run
up to 2015. This would provide sufficient time for the industry
to fully retrain and complete the switchover to Eurocodes with
confidence.
PROCUREMENT PRACTICES
26. An ACE survey of UK consultancy and
engineering firms shows that more than two thirds of all firms
have been asked by clients to register with accreditation bodies.[10]
Of these more than half have been asked to register with multiple
schemes, with 12% being asked to register with four different
accreditation agencies.
27. Companies being asked to sign up to
four schemes can be paying more than £8,000 in fees. This
could cost UK firms around £40 million. These figures take
no account of the costs in terms of resource and lost revenue
from fee earning work as each accreditation body is governed by
its own rules and regulations and requires incremental effort
for registration.
28. The figures also take no account of
non-third party accreditation schemes, such as those used by the
Highways Agency and NHS Estates. The average financial investment
for each firm accrediting with CAT 2 was £66,000, with an
average of 259 man days being spent on gathering enough information
for the accreditation to be possible.
29. The consultancy and engineering sector
is an industry with resource shortages and working at a utilisation
rate of 80%. Under these circumstances the costs of burdensome
accreditation system combined with duplications in the pre-qualification
stage, will inevitably pass to clients in the form of increased
fees or reduced choice.
30. ACE recommends the implementation of
a single accreditation body to which all public and quasi-public
sector clients can refer. The role of this body should be extended
to ensure a reduction in the number of questions which firms are
required to complete at pre-qualification stage. ACE is happy
to engage government in a dialogue on how such an accreditation
body could be established.
SUSTAINABILITY
31. The construction industry will play
an important role in the future development and implementation
of the UK's sustainability strategy. Consultants and engineers
provide a sensible, informed voice on sustainability issues. They
are the key implementers of sustainable development policy in
the construction industry.
32. Consultants and engineers believe there
needs to be a ramp up in client buy-in to climate change issues.
There is a growing enthusiasm across the UK in all sectors to
engage with the sustainability agenda, but there is a lack of
education on the understanding of what actions can and should
be taken. Engineers do and will continue to play a critical role
in improving this understanding.
33. Research and development is one of the
main drivers of innovation in the construction industry, and will
be key to meeting sustainability targets. However, despite this
importance, a low level of investment is evident in construction
R&D due to a lack of reporting of expenses and unawareness
of the achievement of milestones. Government should prioritise
and grandstand the construction industry as an exemplar of sustainable
development in action, and support the industry to further develop
sustainable products and processes, spurring on the industry to
further improve its performance in this critical area.
34. Further to this, environmental policies
need to be developed which allow the construction industry to
use resources more efficiently. Incentives, such as reduction
in stamp duty for domestic householders and businesses, should
be provided to encourage them to improve the energy efficiency
of their properties.
CONCLUSIONS
35. This inquiry is very timely, coming
as it does at in a period of increasing workload for the construction
industry across the UK. If they are to be delivered on time, planned
major infrastructure developments—be they transport, buildings,
energy, water, or the London 2012 Olympics—demand a strong
and dynamic UK construction industry.
36. ACE believes work is required from government
to ensure this demand is met. Without immediate action, there
will not be a sufficient skills base available to UK consultancy
and engineering firms. Without the development of new liability
legislation for the construction industry there is the strong
possibility of insolvencies amongst these same firms. And without
an investigation of current payment and regulatory regimes, there
will be continued imbalance at the heart of the UK construction
industry.
37. ACE calls for government to make these
necessary changes if the UK construction industry is to be able
to meet its future challenges.
38. ACE hopes that government will make
these changes. We believe they are necessary if the UK construction
industry is to be able to meet its future challenges.
39. We welcome this opportunity to engage
the select committee in dialogue and would be delighted to be
involved in any of your future discussions. If there are further
ways we can input into your deliberations we would be more than
willing to assist.
40. As previously highlighted in this submission
ACE would welcome the opportunity to meet with the committee to
discuss how our sector can work with you and to share our thoughts
on how we can continue to keep the UK construction industry ahead
of the field in a competitive business environment.
3 May 2007
10 Such bodies include ConstructionLine, LinkUp, Achilles,
Exor and BiP. Back
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