Memorandum submitted by The Heating and
Ventilating Contractors' Association
1. The Association represents the interests
of 1,400 building service contracting companies and firms within
the heating, ventilating, air conditioning, and refrigeration
contracting industry in the United Kingdom. Our members are involved
in the provision of these services to the industrial, domestic,
commercial and public sectors; they often act as sub-contractors
to main contractors or as sub-sub contractors to principal sub-contractors.
2. We agree with the Trade and Industry
Committee that it is an appropriate time to assess the current
performance of the construction industry. Recent forecasts suggest
that over the next five years the industry will continue to experience
sustained growth.1 To a large part this is due to current levels
of public sector spending, and it is evident that there are significant
high profile projects now underway across the United Kingdom,
including the Olympic projects, the Thames Gateway development,
and the Building Schools for the Future initiative. This activity
coincides with continued growth in projects under the Private
Finance Initiative, and strong private sector activity. It is
therefore useful to consider whether the industry's infrastructure
is capable of delivering the projected workload and whether changes
to its practices are required.
3. It is clear that there have been significant
efforts to improve the industry over the last decade; nevertheless
the Association remains concerned that there are some fundamental
difficulties which prevent the UK construction industry from becoming
wholly efficient and competitive. Evidence from our members suggests
that a number of these initiatives are now having some effect,
and that there are examples of progress towards best value procurement,
collaborative working relationships, and proper payment. However,
it is also true to say that in large part construction procurement
continues to be a fragmented activity, and that traditional approaches
to contractor appointment remain the norm.
4. In this submission we identify several
areas where we feel that further progress would be of significant
benefit and we invite the Committee to consider our suggested
recommendations on the following matters:
— Payment practices: payment abuse
continues to plague the industry; proper reform of Part II of
the Housing Grants, Construction and Regeneration Act 1996 will
improve the industry's efficiency and will reduce the incidents
of industry insolvency. Further measures are also needed to encourage
the public sector to move away from the practice of deducting
retentions, and to adopt project bank accounts.
— Best practice on contract management:
the industry suffers from a lack of standardised pre-qualification
procedures, adding to inefficiency and creating large overhead
costs for all participants, particularly small and medium-sized
firms; greater efforts need to be made by the public sector to
standardise procedures and introduce core qualification requirements.
— Availability of and investment in
skills: the medium to longer term ability of the industry to fund
its skills and training infrastructure needs to be addressed through
a review into training funding.
— Encouraging Sustainability: all public
sector procurers should take the lead in creating the right procurement
environment for the construction industry to make its central
contribution to the challenges that surround the issues of sustainability.
5. We would be pleased to provide the Committee
with oral evidence related to any of the matters raised in this
submission and we would add that as a member of the Specialist
Engineering Contractors' Group (SEC Group), we also support the
recommendations contained within the SEC Group's submission to
the Committee.
PAYMENT PRACTICES
The legislative framework for construction contracts
Payment
6. While most people are familiar with the
big names in construction, in reality the industry relies upon
the work of a large number of specialist contractors—primarily
owner-managed firms employing less than eight people, for whom
cash flow is crucial to survival.
7. Despite the introduction of statutory
measures to control late and non-payment for construction industry
contracts, many construction firms—particularly small and
medium sized enterprises—continue to experience payment
problems. Part II of the Housing Grants, Construction and Regeneration
Act 1996 (the "Construction Act") was designed to provide
sub-contractors with fairer, quicker, and simpler mechanisms to
ensure certainty of payment. However, we believe it has failed
to address two of the key issues it was designed to tackle: how
much a construction contractor is paid; and when a
contactor is paid.
8. Most organisations can enforce their
right to be paid for the services they provide. However, the failure
of the Act to address this point with a sufficient degree of clarity
means that certainty of payment is not available to companies
in the construction industry—a circumstance which is unfair,
and which can contribute to very high levels of insolvency.
9. It was an acknowledgement of this unsatisfactory
state of affairs that prompted the passage of the 1996 Construction
Act. But because the Act has not delivered the levels of protection
envisaged, the Chancellor of the Exchequer announced a Review
in his 2004 Budget statement.2
10. The Construction Act Review has provided
the Department of Trade and Industry (DTI) with an opportunity
to put in place effective measures that (a) will deliver the improvements
sought by Government and the industry itself; and (b) will enhance
profitability and productivity in an important sector of the British
economy.
11. Although the outcome of the review is
still awaited there is widespread concern across the building
services sector that the Government will fail to propose effective
measures to improve the industry's payment performance. We therefore
invite the Trade and Industry Committee to consider whether the
DTI proposals to review the Construction Act will resolve the
payment concerns identified by the industry. We believe that the
following measures will greatly improve the payment procedures
within the Act.
RECOMMENDATIONS
The Construction Act should be amended to ensure
the following:
1. A statutory definition of a payment mechanism
that defines what is to be paid and when.
2. All conditional payment provisions to
be outlawed.
3. Cross contract set-off clauses to be made
ineffective.
4. The Act to specify that the statutory
right to receive interim payments comes into being at the commencement
of the contract.
5. There should be statutory protection available
to the payee in the event of a payer's insolvency.
Adjudication
12. The Act also introduced adjudication
procedures for construction industry disputes and these have proved
to be a considerable success in addressing the industry's need
for a streamlined dispute resolution process. However, over the
last few years there has been some alarming anecdotal evidence
from our members that the cost and complexity of the adjudication
process is growing. This evidence appears to be supported by academic
research into the use of adjudication in the construction industry.3
13. In large part this problem results from
(a) the number of bespoke adjudication procedures routinely adopted
within industry contracts; and (b) a tendency for responding parties—and
their legal advisers—to instigate immediate jurisdictional
challenges when an adjudicator is appointed, thereby increasing
the time and cost of the adjudication process.
14. The Association is therefore concerned
that the rising costs of the process means that adjudication many
now fall outside the means of many small and medium sized enterprises.
We believe that the following measures would greatly improve the
situation.
RECOMMENDATIONS
The Construction Act should be amended to ensure
the following:
1. A single adjudication procedure for all
adjudications.
2. The jurisdiction of the adjudicator should
be widened.
3. The Act should make clear that the adjudicator
should not have power to award "party and party" costs
under any circumstances.
Retentions
15. The Association has long been committed
to improving payment security in respect of public sector construction
contracts—and, in particular, to the phasing out of retention
clauses by the end of 2008. We submitted evidence to the Trade
and Industry Committee's previous inquiry into this matter.
16. The construction industry is dominated
by small businesses. Approximately 150,000 firms out of 160,000
firms in the industry employ less than eight people. But, the
profitability of small businesses in the construction industry
continues to be adversely affected by the archaic and adversarial
system of retentions. Retentions involve the deduction of monies
from sums acknowledged as owing to contracting firms in case of
defects at a subsequent stage.
17. In theory, retention monies are withheld
by clients and main contractors in order to ensure that any defects
in the completed work are made good. In practice, they are all-too-often
used as a convenient excuse to delay or withhold payments which
are due to sub-contractors and sub-sub-contractors. The practice
leads to significant monies—an estimated £3 billion
across the UK at any one time—being unnecessarily and unproductively
tied up in retentions. Members have reported that in some instances
as much as 20% of the turnover of their businesses can be tied
up in retentions.
18. In practical terms those hardest hit
by retentions are small businesses which have to wait many months
and sometimes years before they are able to recover their retentions.
The system invariably gives rise to disputes.
19. The cost of maintaining cash retentions
far outweighs the perceived benefits; retentions are often withheld
on the smallest of contract values eg, between £1k and £2k.
They are therefore a needless drain on scarce resources and detract
from a sustainable construction industry that is concerned with
the elimination of waste (including economic waste). Retentions
do not promote quality; this is achieved through rigorous qualification
and inspection procedures and engendering positive relationships
comprising incentives rather than disincentives.
20. Sir Michael Latham in his report (Constructing
the Team) in 1996 recommended the replacement of cash retentions
by bonds; an Early Day Motion in the House of Commons during the
2002 Parliamentary Session (attracting some 150 signatures) called
on the Chief Secretary to the Treasury and the Local Government
Minister to phase out retentions in contracts for public sector
work; and the Trade and Industry Committee's Report in 2002 condemned
the practice of retentions as "outdated", "inefficient"
and "frequently harmful".
21. However, despite these powerful messages
our members report that retentions are still present within most
public sector contracts, and it appears evident there had been
little change in industry practice.
22. The recent work undertaken of the Public
Sector Construction Clients' Forum, however, has been a helpful
development in highlighting the use of project banks accounts.
We believe that the adoption of project bank accounts would provide
some measure of protection to all parties in the supply chain
and would, in addition to our suggested changes to the Construction
Act, facilitate improvements to payment certainty, particularly
for SMEs.
RECOMMENDATION
That further the measures are put in place to
phase out retentions in public sector contracts, and that all
public sector procurers are encouraged to adopt project bank accounts.
BEST PRACTICE
ON CONTRACT
MANAGEMENT
23. There are three key areas related to
contract management where we feel significant improvements could
be achieved:
Integration and collaborative working
24. Since the publication of the Latham
and Egan Reports there has been much work underway to improve
the procurement practices of the construction industry. Nevertheless,
many of our members continue to be procured under traditional
methods. Our members have identified that greater involvement
at the earliest stage of procurement, encouragement of integrated
supply chains and more collaborative working would greatly improve
the industry's efficiency.
25. There is growing body of evidence from
Association members that they are becoming more involved in collaborative
arrangements. Recent research into the current attitudes of our
members towards collaborative working within the sector concluded
that:
" . . . collaborative forms of working—where
properly applied—have real advantages over more conventional
forms. In particular, the early involvement of contractors and
the closer working relationships implied under a collaborative
approach enable design and buildability issues to be resolved
more swiftly and efficiently. Early involvement also promotes
a more realistic costing and bidding process. Furthermore, where
multi-project collaborative working occurs, contractors experience
benefits in terms of sustainability, which in turn encourages
higher levels of inward investment in organisational capacity."4
26. The Association is pleased that such
principles are intended to be applied on the procurement of 2012
Olympic projects.5 However, as identified in the SEC Group's detailed
submission on this point, more effort is needed to encourage the
use of collaborative working relationships—and we support
their recommended solutions.
RECOMMENDATION
The public sector should take the lead in insisting
upon the use of collaborative contacts for the whole supply team.
Pre-qualification—public sector
27. Pre-qualification procedures for public
sector work remain complicated and are a source of constant and
bitter criticism by the industry.
28. Constructionline was conceived by Government
as a single register of companies pre-qualified to tender for
construction contracts, for use by all public sector agencies
across the UK. There is much criticism amongst Association members
of the "patchy" use of Constructionline by the public
sector, especially amongst local authorities, many of which persist
in maintaining their own bespoke lists of "approved"
suppliers. Qualification for these lists involves a great deal
of unnecessary, time-consuming, and expensive paperwork and bureaucracy.
Increased use of Constructionline would much reduce this unnecessary
regulatory burden and encourage business growth, particularly
among very small firms.
29. Many public sector bodies have chosen
to conduct their pre-qualification procedures through organisations
other than Constructionline. However, despite significant lobbying
from the construction industry—and for reasons related to
European competition law—Ministers remain reluctant to insist
that public sector bodies adopt the exclusive use of Constructionline.
As a consequence members therefore bear the (sometimes significant)
additional administrative and financial burdens associated with
joining more than one organisation if they wished to pre-qualify
for public sector work.
30. In 2005 the Chancellor of the Exchequer
asked the Office of Government Commerce and the Small Business
Service to undertake an investigation into the public sector's
use of third party accreditation providers to pre-qualify suppliers.6
The initial report, published in December 2005, identified:
" . . . that the public sector's use of
third party accreditation is currently uncoordinated and does
present barriers to suppliers' participation".7
31. However, despite this acknowledgement
of the existence of the problem, many sectors of the construction
industry—across all parts of the United Kingdom—continue
to feel frustrated by the lack of demonstrable simplification
of pre-qualification procedures by central and Local Government.
32. It may be the case that the creation
of a single national pre-qualification process is unachievable,
for the reasons stated by Ministers, and that the industry will
have to live with an open marketplace where Constructionline and
other third party accreditation providers compete to provide services
to Contracting Authorities. However, we suggest that greater effort
is needed to create a system where mutual recognition between
service providers will reduce much of the burdensome paperwork,
form filling, and cost overhead currently shouldered by the industry.
Corporate Competence Schemes
33. Allied to concerns about pre-qualification,
are those related to the proliferation of schemes that seek to
qualify firms. The Association believes that the industry should
move towards greater reliance on schemes that recognise the quality
and competence of firms. This is not a barrier to entry but rather
a means of improving the quality and effectiveness of the industry
in matters such as technical skills, health and safety competence
and general business procedures. The Association introduced its
own member assessment scheme in 2003.8
34. There has, however, been an increase
in the creation of such schemes over the last few years—not
all of which are aligned to public sector pre-qualification requirements.
Examples of these include TrustMark, the Construction Licensing
Executive, and the Office of Fair Trading's Consumer Codes Approvals
Scheme (which seek to qualify firms operating in the consumer
marketplace); the Competent Persons Schemes (qualifying firm to
self-certify installations under the Building Regulations) and
CORGI registration (created to regulate the safe installation
of gas heating appliances).
35. The Association, and its members, support
such initiatives, many of which are designed to combat the prevalence
of rogue traders who provide poor quality services to consumers.
The activities of such "cowboy" traders harm the operations
and reputation of legitimate contractors in the building and construction
sector. Nevertheless, we believe that there is now scope for a
more rationalised approach.
36. Many of the schemes apply different
criteria to verify technical and business competence; there are
also varying requirements related to the frequency with which
firms are inspected. Some schemes, for example, require firms
to be inspected annually, while others impose inspection on a
less frequent basis. The Association believes there is a danger
that the development of so many schemes, without some form of
mutual recognition arrangement, may in the longer term prove counter-productive
as firms chose not to participate because of the increasing cost
involved.
37. We feel the time has come for Government
to take the lead in establishing a more simplified process for
such schemes; it has done so in other areas of business regulation
following the recommendations in the Hampton Report.
38. The recent publication of core criteria
for construction health and safety9 provides an excellent model
for establishing a common approach to competence accreditation,
and we suggest that this model could be expanded to embrace other
matters related to the business and financial competence of firms.
RECOMMENDATION
To address concerns about pre-qualification
requirements, and the widely varying requirements of construction
industry competence schemes, a set of core criteria should be
developed by Government which will lead to mutual recognition
arrangements between scheme operators.
TRAINING AND
SKILLS
Funding
39. All sectors of the United Kingdom construction
industry have seen an increase in migrant labour. While this is
a potentially attractive option for employers to resolve short-term
labour shortages there are also longer-term difficulties. There
are concerns that many of those engaged may not be contributing
to the UK economy and such solutions are at the detriment of "home
grown" investment in training. At the same time, the UK population
is ageing—more than 70% of the 2020 working population is
already over the age of 16—and working lives are lengthening,
increasing the need for already acquired skills to be regularly
refreshed and updated.
40. In recent years, there has been a ready
supply of suitably qualified potential recruits to building services
engineering, at both craft and technician level. Yet the level
of new-entrant training currently being undertaken is less than
half of that required to ensure the existence of a skills pool
sufficient to meet the present and future needs of the sector.
41. The principal reason for the low level
of new-entrant training lies in the growing reluctance of employers
within the sector—the vast majority of which are small and
medium enterprises (SMEs) and micro-businesses operating to very
tight margins—to devote the necessary investment to vocational
education. The evidence that emerges is that the majority of employers
depend on the minority to train.
42. Meanwhile, Government is making it increasingly
clear that it is looking to industry to take responsibility for
its own skills development, and not to expect this process to
be financed from the public purse. In the wake of the Leitch Report10
on the nation's long-term skills needs, the majority of whatever
Government funding remains available is likely to be focused on
providing the non-employed with the basic skills required to attain
"employability" (ie, to achieve five GCSEs at grades
A to C or equivalent).
43. The Government will also be encouraging
employers to support all their employees who wish to do so in
achieving a National or Scottish Vocational Qualification at Level
2. This will almost certainly further divert potential funding
away from qualifications at Level 3 and above.
44. A widespread appreciation exists among
employers that, to develop the building engineering skills required
fully to meet the challenges of the future, there must be a radical
shake up in the funding of new entrant training.
45. The Association believes that the key
to a reversal of the current state of affairs within building
services engineering is the introduction of funding arrangements
that truly meet the needs of the sector—funding which embraces
not only school leavers, but also recruits from "non-traditional"
backgrounds.
46. The concept of a training fund has received
support within the Leitch Report which favours giving employers
greater control over the allocation of training funding. The Leitch
Report also suggests the implementation of "collective arrangements"
to encourage and motivate employers to develop their workforce.
47. Although much work is underway to examine
the impact of the Leitch Report on the construction sector, the
Trade and Industry Committee may wish to consider seeking further
evidence of the longer-term ability of the industry to fund its
skills and training infrastructure.
RECOMMENDATIONS
Skills provision in the building engineering
sector will be improved by:
1. A formal review into the industry's funding
arrangements.
2. Introducing "collective arrangements"
as recommended by the Leitch Report to encourage and motivate
employers to develop their workforces.
3. The removal of inequitable funding provisions.
4. The removal of age limit barriers on entry
levels.
5. The further rationalisation of Vocational
Standards.
ENCOURAGING SUSTAINABILITY
48. The quest for sustainability in construction
presents both challenges and opportunities for the building services
engineering sector—the primary focus being on the design,
installation and maintenance of low and zero carbon (LZC) technologies.
The Association, and its members, have responded positively to
the challenge and much activity is underway to equip the industry
with the right skill level and the right incentives to ensure
that it can provide a central contribution to issues of sustainability
and combating climate change.
49. A report recently commissioned by the
Association from consultants Faber Maunsell has identified the
actions that must be taken to ensure that our members are well-placed
to deliver an expert service to their customers and clients. These
actions include the establishment of standards for low and zero
carbon systems and the creation of an appropriate training infrastructure.
50. However, we believe that there are also
significant parallel challenges for the industry's clients, particularly
across the public sector. We feel that they too have a major role
to play and must take the lead in creating demand for innovative
sustainable solutions from the building engineering services sector.
In many cases this will involve a cultural shift away from traditional
procurement approaches that are based on a "lowest price"
and fragmented supply chains; these will not deliver the solutions
that are needed.
51. The recent publication by the Treasury
of its report "Transforming Government Procurement"
is a welcome start to this process. The report identifies that:
"At the heart of any procurement are the
people involved in carrying it out. To get goods and services
that are consistently fit for purpose and value for money is challenging
and requires people with specialist skills whether in the public
or private sector. The Government needs to attract, develop, and
retain people in the Government Procurement Service who . . .
do not retreat to the lowest price because it appears at first
sight to be the most easily defensible. Government needs people
who properly understand, and can apply, the principles of value
for money on a whole-life costing basis"11
52. The measures identified in the report
set out a framework for delivering the Treasury's vision of improved
procurement processes across Government departments. However,
we believe that there is an equal, if not greater, challenge to
transform the approach of Local Government so that it can adapt
to a new era where all parties in the supply chain are properly
engaged in the delivery of sustainable buildings.
RECOMMENDATION
The Trade and Industry Committee is invited
to seek further evidence from the Office of Government Commerce,
the National Audit Office and the Department for Communities and
Local Government on the practical steps that are being taken across
the whole of the public sector to deliver improved processes for
sustainable procurement.
May 2007
REFERENCES
1. Recent forecasts produced by Construction
Skills, the Sector Skills Council for the building sector, suggest
that the UK construction industry will achieve 2.8% growth per
annum for the next five years.
2. Budget Red Book 2004—Chapter 3, paragraph
3.59—"Following concerns expressed by the construction
industry on unreasonable delays in payment, the Government will
review the operation of the adjudication and payment provisions
in the Housing Grants, Construction and Regeneration Act 1996
to identify what improvement can be made".
3. Glasgow Caledonia Adjudication Reporting Centre—Adjudication
Report Number 7 (August 2005).
4. "A Study of Opportunities and Obstacle
to Collaborative Working in the M&E Supply Chain"—Dr
Dan Bishop (University of Leicester) And Professor Alan Felstead
(Cardiff University).
5. "2012 Construction Commitments"
published by the Strategic Forum for Construction identifies several
key areas of best practice relating to procurement and integration,
including the early involvement of the construction team. The
Association is a signatory to the Commitments.
6. Budget Red Book 2005—Chapter 3, paragraph
3.65—"In response to particular concerns from SMEs
on the public sector's use of third party assessment providers
to pre-qualify suppliers, the OGC and SBS will research the effect
this has on potential suppliers and identify solutions to reduce
any barriers to SME participation".
7. "Third Party Supplier Accreditation
Study"—December 2005—Office of Government
Commerce.
8. All Association members, for example, are
subject to third-party inspection and assessment by a recognised
third party certification body. Potential members must undergo
independent inspection and assessment prior to admission. Inspection
and assessment is then repeated for all members every three years;
it comprises two elements: commercial capability and technical
competence.
9. For further details please see the Approved
Code of Practice under the Construction (Design and Management)
Regulations 2007.
10. Leitch Review of Skills—"Prosperity
for All in the Global Economy"—December 2006.
11. "Transforming Government Procurement"—HM
Treasury—January 2007, Chapter 2, paragraph 2.4.
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