Memorandum submitted by Davis Langdon
1. EXECUTIVE
SUMMARY
Given current concerns regarding the capacity
of the construction industry to cope with forecast demand through
to 2012, and beyond, we believe this Inquiry is both timely and
warranted.
Davis Langdon LLP is one of the largest construction
consultancies in the UK and we believe we are well placed to comment
on topics that would be of relevance to the Committee.
We provide evidence concerning the following
issues within the UK construction industry:
— The long term capacity for the delivery
of large infrastructure projects, including delivery of the Government's
capital investment programme (1.3.1)
— UK dependence on imported labour
and expertise (1.4.1)
— The UK industry's performance against
other countries (1.5.1)
It's fair to say that there have been several
recent studies examining both capacity and productivity issues
in the industry, however these often appear to be one-off research
commissions with little follow-up and certainly limited buy-in
from industry participants. We believe that a coordinated approach
is required to consider these significant issues/challenges going
forward, our evidence suggests a number of possible approaches
that could be adopted to examine both the capacity of the industry
and to establish the productivity of UK construction compared
to other countries, specifically:
— Research into the effects of alternative
procurement mechanisms on construction firms' willingness to bid
for projects and the resulting prices tendered (1.3.10)
— Comprehensive study of migrant labour
in UK construction (1.4.4)
— Examination of demand composition
on productivity levels (1.7.1)
— The effect of construction industry
size and structure on productivity levels (1.8.1)
— Estimates of fixed capital input
to the construction industry (1.9.1)
— Review of the quality and completeness
of statistical data (1.10.1)
We see these approaches as moving away from
providing national aggregate studies of the construction industry,
that often conceal more than they reveal, to a more disaggregated
sub-sectoral approach which we believe will offer an opportunity
to examine some key explanatory factors.
We are aware that there is some pressure to
go beyond explanation to analytically informed action, however
it is important that we refine our estimates of where UK construction
currently is, before we start attempting explanations or drawing
policy conclusions.
1.1 Introduction
1.1.1 Davis Langdon LLP welcome the opportunity
to provide evidence concerning the House of Commons Trade and
Industry Committee inquiry into the UK construction industry.
1.1.2 Davis Langdon is one of the largest
construction consultancies in the UK with around 1,200 staff in
20 offices; worldwide, the firm has 2,500 staff in 80 offices
in 25 countries. Our main business is construction cost consultancy
and project management but the firm also has specialist groups
including construction taxation specialists, legal support services
and management consulting.
1.2 Relevant experience
1.2.1 Davis Langdon have undertaken a range
of studies on aspects of national and international construction
industry analysis and improvement. In the UK, Davis Langdon have
undertaken market, economic and general studies for Government,
institutional and private clients. These include a strategic study
of the Building Materials Sector for the Department of Trade and
Industry (DTI) and the Construction Products Association (2000)
and a study of the timber products industries, again for DTI;
a survey of construction professional services for the Construction
Industry Council (originally in 1995, again in 2000 and a re-run
is currently being undertaken).
1.2.2 Davis Langdon have been working with
ConstructionSkills since early 2004 reviewing their existing labour
and training demand model and considering how that could be improved.
ConstructionSkills are now taking this work forward on two inter-related
fronts: an improved model and national and regional skills and
training observatories. The latter are representative groups that
both inform the employment forecasting model and are informed
by it. The ConstructionSkills forecasting model is currently being
used by the Office of Government Commerce (OGC) to inform their
capacity research.
1.2.3 In 2005 Davis Langdon developed, for
OGC, a database of future new public sector projects that was
designed to give early warning of excess demand—both regionally
and by type of work. The initial work on that is now complete
and OGC is establishing mechanisms for collecting and monitoring
the appropriate data on an ongoing basis. Furthermore, Davis Langdon
completed a national demand and supply analysis of the UK construction
industry for the OGC in 2006.
1.2.4 In 2004, Davis Langdon completed a
Sector Competitiveness Analysis of the UK construction industry
that included construction productivity and other comparisons
between the UK, France, Germany and the US, for the DTI.
1.2.5 Given our experience we believe that
we are well placed to comment on topics that would be of relevance
to the Trade and Industry Committee. More specifically, Davis
Langdon would like to provide evidence to the Inquiry regarding
the following issues within the UK construction industry:
— Long term capacity for the delivery
of large infrastructure projects, including delivery of the Government's
capital investment programme.
— UK dependence on imported labour
and expertise.
— The UK industry's performance against
other countries.
1.3 Capacity of the UK construction industry
1.3.1 The concept of capacity is important
for policy makers and firms. The construction industry's capacity
is cited as a possible constraint on delivering projects. In particular,
it is a key concern in delivering the Government's investment
pledges on time and to budget.
1.3.2 The capacity of any industry needs
to be related to demand. The ability of the construction industry
to satisfy the demand for new build, refurbishment, repair and
maintenance work, depends on its capacity to produce output in
any given period. This in turn depends on the total of both employed
and unemployed resources, of skilled and unskilled labour, plant
and equipment, materials and management.
1.3.3 There are a number of ways of assessing
whether the construction industry is operating at either high
or low levels of capacity utilisation. The former is usually associated
with rising tender price inflation, poor quality, and delays in
completion. The latter tends to prevail at times of high and rising
unemployment, and when there is slow or negative growth in workloads.
This approach assumes measurement of a number of variables including:
construction new orders data; price and cost indices, labour productivity,
levels of unemployment; construction wages; construction insolvencies;
and the participation of foreign firms.
1.3.4 There have been previous attempts
to map supply and demand in construction, many of these have used
construction new orders data in an attempt to estimate future
demand patterns, however these studies have exhibited little correlation
between new orders and actual output.
1.3.5 Despite increasing construction output/orders
trends in the last few years research conducted by Davis Langdon
suggests there is little evidence to indicate a capacity problem
within the aggregate construction industry, although an increasing
trend in prices is evident. However, at a disaggregated level,
our research highlights some significant increases in some sub-sectors
of the industry.
1.3.6 Anecdotal evidence suggests there
may be a possible shortage of general contractors willing to bid
for some construction projects (particularly public sector projects).
However, a recent supply analysis conducted by us suggests that
generally the number of firms and total employment within the
industry is increasing in line with demand and rather than supply
shortages it's perhaps more a problem of procurement, more specifically
an over reliance on private finance initiatives. It may be that
the public sector could re-examine the way it procures construction
services for general building work. PFI/PPP and other private
finance initiatives by their nature limit the number of potential
suppliers because of the large sums of money involved in both
putting bids together and if successful undertaking service delivery.
1.3.7 PFI has become an increasingly important
delivery route for the government in terms of procuring built
assets and delivering its stated investment plans. Indeed, the
number and value of signed PFI projects have increased significantly
since 1990 (HM Treasury, 2004).
1.3.8 In addition, we observe that there
are a surprising number of relatively small PFI projects ie those
with a capital value less than £20 million, in particular
PFI contracts signed by the DCMS, ODPM, DfES, DTI, DCA and the
OGC. The average value of PFI contracts signed by these departments
is significantly below the average value of all signed PFI contracts.
1.3.9 There are relatively high barriers
to entry for PFI bidders hence it may be difficult to attract
providers—depending on what else is in the market. Therefore,
it would perhaps make sense to procure public general building
work through other delivery routes ie framework agreements to
minimise the cost of bidding and attract potential suppliers who
would otherwise be put off bidding for PFI/PPP type work due to
the high costs involved. Ultimately, an over reliance on private
finance to deliver public buildings is likely to have the effect
of reducing the number of potential suppliers and therefore reduce
client options in terms of attracting competitive bids/submissions,
which may potentially result in the cancellation or curtailment
of public projects or programmes.
1.3.10 We believe it would be useful to
commission research into the effects of alternative procurement
mechanisms on construction firms' willingness to bid for projects
and the resulting prices tendered. Without such research it is
difficult to generalise as to which procurement routes impact
the industry.
1.4 UK dependence on imported labour and expertise
1.4.1 There is much anecdotal evidence suggesting
that the issue of migrant workers in the UK construction industry
requires further understanding. According to a recent survey `one
in ten builders are migrants' (Construction Confederation, 2004).
The survey of some 300 construction sites across the UK found
that 10% of workers spoke English as a second language with many
workers coming from Central and Eastern Europe. The survey found
that few of these workers have work permits although many pay
tax because of an anomaly in the system (the issue of temporary
CIS 4 cards regardless of nationality).
1.4.2 Now what is the real extent of the
migrant labour issue? The difficulties we have when examining
the official statistics is the general paucity of data and the
significant time lag between data collection and publication.
Furthermore, it should be noted that the official statistics represent
legal migrant workers, the issue of illegal migrant workers is
an even more complex one, although it's probably fair to say that
much of the anecdotal evidence refers to both legal and illegal
migrants.
1.4.3 The Home Office suggests that there
are an estimated one million illegal immigrants in the UK, but
there are no official estimates of the numbers working in the
construction industry. The one million represents 1.5% of the
population and, say, 3% of the workforce. The main activities
of illegal migrants include agriculture, tourism and construction.
It seems plausible that the proportion of illegal migrants in
the construction workforce could be 5% or more.
1.4.4 However, given the recent accession
of new member countries to the EU the picture may well be changing,
therefore it seems to us that there is a need for a comprehensive
study of migrant labour in UK construction "as it presently
is". This should be both quantitative (numbers, geographic
origins, levels of pay and productivity) and qualitative (formation,
skill levels, terms of employment, employment relations, recruitment).
1.4.5 We are aware of ongoing research conducted
by ConstructionSkills in relation to workforce mobility in the
UK construction industry and we understand that the survey will
be asking some specific questions regarding migrant labour. This
research could inform a comprehensive future study of the migrant
labour issue in UK construction.
1.4.6 The construction industry has a long
tradition of employing migrant labour. Given the current rate
of growth in UK construction output with a demand scenario of
around 3% per annum growth rate, this implies either a massive
step-change is achieved in labour productivity by greater and
more efficient investment in human capital (a challenge for the
Sector Skills Council), or it implies labour force growth of around
3% per annum. Can the latter come from "domestic" sources?
1.4.7 It seems unlikely, even with substantial
increases in relative construction wages, salaries and conditions
but that needs to be explored. The alternative is to "import"
labour on a large scale. Aside from political sensitivities to
charges of "swamping", this raises difficult questions
about the impact on investment in human capital, skill levels,
wages and salaries and labour productivity. The danger is that
the short-term solution that government and firms will adopt will
be to imitate what has happened in the USA in the 1960s and 1970s—i.e.
replace increasingly scarce, productive but high-paid labour by
abundant, less skilled and less productive but much lower paid
migrant labour. In the US this was the start of a subsequent long
"vicious circle" in which construction industry labour
productivity and relative wage rates have chased one another downwards—with
lower wages reducing incentive to invest in either fixed or human
capital.
1.4.8 The construction industry accounts
for some two million (over 7%) of the UK's total labour force.
But, because its manual workers stay in construction on average
for only around 20-25 years of their working lives, maintenance
of a sufficient construction workforce requires that the industry
recruit an even higher percentage of new entrants to the labour
market than that. Thus, in an expanding economy, with expanding
construction demand, potential construction labour shortages will
sooner or later become an issue unless an upward trend in the
level of labour productivity can be achieved and sustained.
1.5 UK construction industry's performance
against other countries
1.5.1 The measurement of industrial productivity
generally is problematic and the measurement of productivity in
the construction industry is particularly difficult. Construction
output and employment data are unreliable and in most countries—though
not in the UK—reliable deflators are not available. It is
also difficult to adjust for quality differences over time.
1.5.2 Productivity directly relates to the
ability of firms to organise production. Thus quality of management,
workforce skills, capital investment and capital intensity are
all factors that determine labour productivity. Studies of labour
productivity highlight the weaknesses and strengths of firms and
industries in terms of their human capital and investment in plant
and equipment per worker. This is not to say that firms alone
are responsible for their levels of productivity. This is especially
not the case in construction, where the market conditions within
which firms operate affect productivity and the rate at which
firms innovate. In the construction industry productivity improvements
may also be closely related to opportunities to innovate given
by project design decisions that are outside of the control of
construction firms.
1.5.3 In 2004, Davis Langdon were involved
in research for the DTI that provided a sector competitiveness
analysis of the UK construction industry. The study investigated
the relative position (in terms of labour productivity levels
and rates of change) of the UK construction industry compared
to the construction industries of France, Germany and the USA.
A comparison was also made with vehicle production and repair
in the UK. The report provided a picture of productivity in the
construction industry from data available at the time.
1.5.4 In summary the headline findings of
the research suggested that, within the constraints/limits of
the available data, the labour productivity level of the UK construction
industry was relatively poor compared to the three other countries
studied, especially the USA and France. In addition, we found
similar (negligible) rates of labour productivity growth in all
four countries, for the period 1992-2001.
1.5.5 However, the analysis concluded that
definitive findings, even as to national rank orders in terms
of productivity levels, are simply not reliable at this stage,
with the present state of the data. The main weaknesses in the
data concern the definition of industrial classifications within
the construction industry in SIC and NACE, missing data and the
problems of international comparability, specifically comparative
price levels (PPPs), price indices, and measures of labour input
(DTI, 2004).
1.5.6 Our level of understanding of the
explanatory factors affecting construction productivity is far
from complete; and many of the explanations offered have not yet
been subjected to sufficiently rigorous scientific testing. However,
there is some pressure to go beyond explanation to analytically
informed action.
1.5.7 Some of the explanatory factors found
by research to be significant can be acted upon by industry and/or
government initiatives, so as to increase the level and rate of
change of UK construction productivity. Previous work highlighted
some of the possible contributory causes of differentials in relative
levels of construction productivity (DTI, 2004).
1.5.8 We suggest that some of these contributory
causes are investigated further, specifically: the effect of demand
composition on productivity levels; the effect of construction
industry size and structure on productivity levels; and estimates
of fixed capital input to the construction industry. We see this
work as a move away from providing national aggregated levels
of construction productivity, that often conceal more than they
reveal, to a more disaggregated sub-sectoral approach which we
believe will offer an opportunity to examine some key explanatory
factors.
1.5.9 The headline finding of our previous
work is that UK construction productivity is almost certainly
below that of the USA. It is important that we refine our estimates
of the gap before we start attempting explanations or drawing
policy conclusions.
1.6 Future directions
More specifically, we believe that further investigation
is required to examine both the capacity of the industry and to
establish the productivity of UK construction compared to other
countries.
1.7 The effect of demand composition on productivity
levels
1.7.1 One potential source of inter-country
differences in measured labour productivity may be differences
in the composition of construction output. For instance, one country
may have a relatively large share of output and employment in
a sector of construction which is inherently less labour-intensive
than other sectors. Indeed, previous research suggests that relative
sizes of the various sectors could potentially cause substantial
differences in aggregate productivity levels (DTI, 2004). Further
work on sectors could therefore help to better understand the
sources of productivity differentials.
1.7.2 The output-structure of a country's
construction industry is most likely to influence average labour
productivity through variance in the share of Repair & Maintenance
in total output (it is uniformly acknowledged that labour productivity
is much lower in R&M than in other construction—perhaps
by as much as 40%).
1.7.3 Work on existing built stock is likely
to be more labour-intensive for a number of unavoidable technical
reasons compared to work on new build. It is also intrinsically
harder to achieve efficient use of resources, including labour,
in work on existing built stock. As a result labour productivity
in repair and maintenance will be lower than labour productivity
in new build. It follows that we would expect from the differences
in output mix, ceteris paribus, the construction industries of
France and the UK to have lower overall labour productivity than
Germany and the US, but this expectation needs testing.
1.8 The effect of construction industry size
and structure on productivity levels
1.8.1 If productivity is linked to size
of firm, because of economies of scale or of experience then we
would predict differences in industry structure to have an effect
on average relative productivity levels, such that: the more "concentrated"
the industry (the higher the output-share of larger firms), the
higher the predicted level of productivity. Specifically, is US
construction technology more "flexible" so as to operate
efficiently over a wider range of scales; apparently, the productivity
gap between small and large firms is much smaller in the US than
the UK.
1.9 Estimates of fixed capital input to the
construction industry
1.9.1 We believe that research is needed
on developing a feasible but reasonably accurate method for measuring
the value of capital inputs in each country's construction industry,
but especially in the UK. This approach would allow examination
of productivity differentials that may be attributable to different
levels of capital input.
1.9.2 The UK construction industry appears
from the best available long-term source—National Institute
of Economic and Social Research (NIESR) Sectoral Productivity
Data set—to have much lower levels of fixed capital per
worker than do the USA, France and Germany. However, when examined
in more detail, and when measuring only machinery and equipment
per worker, much of the difference with France disappears. The
gap in machinery and equipment per worker between UK and the USA
is now proportionately much smaller than it once was—in
1996 prices, approximately $12,000 capital stock of equipment
per worker in the US and $6,000 per worker in the UK.
1.9.3 However, the data for measuring capital
input in construction is particularly poor, because of problems
in allocating equipment hired and used, but not owned, by the
construction industry.
1.9.4 We believe we have developed an approach
to estimate capital input that could well have implications much
wider than the construction industry, and if successful, would
be something the DTI could push the Office for National Statistics
to look at for other industries.
1.10 Review of the quality and completeness
of statistical data
1.10.1 Finally, Davis Langdon believe that
there is a need and the scope for potentially valuable improvements
in the collection, analysis and publication of data on construction
labour input, capital input and output that would permit more
accurate and reliable:
— inter-industry comparisons of productivities
within the UK;
— inter-activity comparisons of productivities
within UK construction;
— inter-country comparisons of construction
productivities within the EU.
Recommendations for improvements in the statistical
data:
— Further work is required to improve
the construction element of the NIESR productivity dataset:
— On deflators (outside UK).
— On self-employment (outside UK).
— Research is required comparing each
country's Labour Force Survey results for employees (as well as
self-employed) in construction with that country's employer-based
survey results for employees.
— It would be highly desirable to add
questions eliciting value added to the DTI's Private Contractors
Census survey of construction firms.
— Research is needed on developing
a feasible but reasonably accurate method for measuring the value
of capital inputs in each country's construction industry, but
especially in the UK.
1.11 Summary/Conclusions
1.11.1 Given current concerns regarding
the capacity of the construction industry to cope with the forecast
demand through to 2012, and beyond, we believe that this Inquiry
is both timely and warranted. It's fair to say that there have
been several recent studies examining both capacity and productivity
issues in the industry, however these often appear to be one-off
research commissions with little follow-up and certainly limited
buy-in from industry participants. We believe that a coordinated
approach is required to consider these significant issues going
forward, our evidence suggests a number of possible approaches
that could be adopted to examine both the capacity of the industry
and to establish the productivity of UK construction compared
to other countries.
June 2007
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