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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 127-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE BUSINESS, ENTERPRISE AND REGULATORY REFORM COMMITTEE
Tuesday 4 December 2007 MR DON WARD and MR PAUL MORRELL DR MARTIN WYATT, MR ANDREW EASTWELL and MR BILL HEALY MR RICHARD DIMENT and MR BRIAN BERRY Evidence heard in Public Questions 208 - 332
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Business, Enterprise and Regulatory Reform Committee on Tuesday 4 December 2007 Members present Mr Peter Luff, in the Chair Mr Brian Binley Mr Michael Clapham Mr Lindsay Hoyle Mark Hunter Miss Julie Kirkbride Anne Moffat Mr Mike Weir Mr Anthony Wright ________________ Memoranda submitted by Constructing Excellence and the Commission for Architecture and the Built Environment
Examination of Witnesses
Witnesses: Mr Don Ward, Chief Executive, Constructing Excellence; and Mr Paul Morrell, Deputy Chairman and CABE Commissioner, Commission for Architecture and the Built Environment, gave evidence. Q208 Chairman: Gentlemen, welcome to this session of the Committee's inquiry into the UK's construction industry. This marks the halfway point of our oral evidence today so you are the midpoint in our investigations. We are finding it absolutely fascinating. We are changing gear a bit today and looking at slightly different issues. What I would like to do, as always, is ask you to introduce yourselves but as you do so perhaps you could explain a bit about your respective organisations. I think many of us are finding the plethora of organisations in the construction industry a little difficult to wrestle with, so a clear explanation of how you complement each other and do not overlap each other, if you do not, would be greatly appreciated by the Committee. Mr Morrell: My name is Paul Morrell and I am here as Deputy Chair of CABE, which is the Commission for Architecture and the Built Environment. CABE's principal concern perhaps as distinct from Constructing Excellence is what is built rather than how it is built and it is the quality of what is built and its social, economic and environmental impact, so the extent to which good design in buildings can produce social, economic and environmental good is our principal objective. Q209 Mr Hoyle: No carbuncles? Mr Morrell: No, no carbuncles. The avoidance of carbuncles is a specific part of our brief. Q210 Chairman: We have not asked the Prince of Wales to give evidence to this Committee! Perhaps we should. And Mr Ward? Mr Ward: Good morning, I am Don Ward and I am Chief Executive of Constructing Excellence. We exist to improve industry performance. Actually we are increasingly taking an interest in the product of the sector not just the process of it. The key difference is that we are independently funded, we are a membership-led, membership-funded organisation now. We do receive some government commissions particularly with some of the client departments, and we do have a niche consultancy business. It is fair so say that we have evolved since we were a DTI-funded best practice organisation and we have inherited probably ten years' worth of DTI-funded research and best practice activity. Q211 Chairman: We will be looking at some of that research in our next evidence session after you. Mr Ward: I will be sure to stay then. Chairman: Thank you very much. Mick Clapham? Q212 Mr Clapham: I think this would be more directed towards Mr Morrell but in your respective memoranda you have both referred to the 'whole life cycle' of a building. Could you tell us what you actually mean by the whole life cycle of a building and elaborate on how you think that may be used for future design? Mr Morrell: Life cycle cost takes a view on the total expenditure on and in a building over the whole of its life so it is as distinct from the cost of bringing that asset into being in the first place. Its importance is that over quite a short life of a building, you will very quickly spend more running it, operating it, maintaining it, consuming energy in it, and so on than you will in its first creation. Its importance is because most of us are set short-term targets in our lives. We concentrate too much on initial capital cost and too frequently save money in creating a facility which then starts to consume more than it should once it is in use. If there was one single change we would like to see made in the way that everybody - public and private - looks at investment in construction, it is that they will take a view over the whole life cycle of the building, first of all looking at what the costs will be over the whole of that life. Broadly, if you owned a building for 25 years, you would spend between one and a half and two times as much running it as you spent building it, so it quickly comes back. If you then added into that the cost of people working in that building - and they are much the same if it is a serviced building whether it is a hospital or an office - something like 80% of the cost over that time is in the salaries. If you also look not just at the whole life cost but the whole life value and how you could get money invested in capital back, quite small saving in capital costs is written off almost instantly by a tiny saving in staff costs, so we need to change the way we look at the building, not at the cost of the inputs but at how much is consumed/spent in running the facility thereafter and, beyond that, how much value is created by the facility over the whole of its life. It would change quite fundamentally what we build and probably how we build it. Q213 Mr Clapham: Given that there is obviously a value added by looking at the life cycle, does the industry seem to be responding to your endeavours? Mr Morrell: I think the industry can, I think the tools are there and we have quite spectacular programmes for calculating life cycle cost, but it is genuinely difficult to get people, both in the public and the private sector, to look at it in that way because, as I say, most of us are judged on fairly short-term targets. You set a budget for something and it is then difficult to go back and say more money would produce more value long term, because the person that you are saying that to is probably being judged in his board or his committee or wherever he functions as to whether he hits a capex budget. It needs a change of thinking. Probably the industry needs to be better at saying just how spectacular the gains can be. I think we have the tools. I think it is also our job now to work with the client side so they increasingly look at that and demand more of the industry to deliver against that objective rather than a short-term one. Q214 Mr Clapham: Clearly government could be of great help here and many of the government buildings could be built within that concept of life cycle. Has there been any kind of communication with government and, if so, what has been the response? Mr Morrell: Yes, all government departments, all those who enjoy public money are meant to appraise buildings over the whole life cycle. I think too rarely however does that actually become the driver. There is too inadequate an understanding of where best value lies looking over the whole life cycle and too frequently, I guess, the issue of affordability cannot be ignored and becomes the overriding factor. "You may be right in saying if I spent £10 million I would be better off than if I spent £9 million but I only have £9 million," is too frequently the response so affordability overtakes the long-term value. Mr Ward: I do think it is worth saying that PFI in theory ought to be better at doing this. In theory, PFI is trying to buy the service not the initial building, but it has horribly disintegrated as a process and in practice ends up being much more about the cost of the money rather than about the facility that people are buying, so they still compromise on this up-front time and expenditure in order to get the design better in order to make a saving downstream. Q215 Mr Clapham: Which is sad given that PFI, particularly in relation to education, is really driving in my particular constituency a whole new plank of primary schools, and one would have thought that given the savings that can be made within this concept of the life cycle that the Government would be thinking along those lines and pushing for PFI to build schools based on that concept. Mr Ward: I would not necessarily wish to push PFI as the only way of doing it but certainly pushing the integrated capex/opex whole life expenditure, absolutely right, and anything that we can do to get the Government to take a lead in that respect is undoubtedly going to deliver a better built environment. Q216 Mark Hunter: I would like to say first of all that I am a big enthusiast for the work that CABE in particular does. I am not as familiar with your own organisation, Mr Ward, but certainly my personal feelings about CABE are more power to your elbow because I think you are attempting to do a much needed job of work. I just wonder about the evidence to show whether or not you are actually winning the battle of hearts and minds given that so many public buildings are still turned out that are, frankly, dull, boring, and I will not use the term that was referred to earlier? Do you think that you are starting to succeed or is this really going to be drip-drip over many, many years before you finally turn this around? Mr Morrell: I am quite sure that we are starting to see it, yes, and I think the first thing, and probably CABE's first objective when I got involved with it seven years ago or so ago, was to get the idea of good design as an instrument of social good onto the agenda. I think it is. You no longer need to argue as to whether good design is a good thing, which might sound too obvious to state, but I am astonished when I go overseas, as I do in my day job a lot, how envious people are of the existence of a constituency here for good design and it gets that as a topic of conversation. The important thing then is the extent to which that good design does lead genuinely to social value. Q217 Mark Hunter: I am struck that your remarks even in this very early part of this session have been about design and yet the key word in the name of your organisation is 'architecture' which to me as the unitiated is not quite the same thing. Design implies a functionality but is architecture not about something more than that? Mr Morrell: Yes, so is design. Q218 Mark Hunter: Tell us a bit more about that. Mr Morrell: Let me go one step back. What we are interested in is all three corners of what makes good design: that a building should be functional, that it should do its job, and I think most of us would start there; that a building should show build quality, it should be durable and sustainable, and we see all those as part of the same thing; and, thirdly, that it should have a beneficial impact, which when we are not feeling too shy we call beauty, the very opposite of the carbuncle. Something should actually lift the spirits somewhat. I only distinguish design from architecture because it takes more people than an architect to make it, but either word will do for me. Good architecture and good design should finish in the same place. It combines all of those things and the more that you get those three spheres of criteria to overlap the greater the value. You are looking for something which gets the best balance between impact, build quality and functionality. Q219 Mark Hunter: The evidence memorandum that you have submitted to us cites research conducted by yourself showing the poor design quality of many newly built schools and in particular much new private housing. Could you tell us a little more about those two areas in particular and what your views are and the ability of the private and public sector to take into account in a practical way what you mean by whole life cycle when procuring new build? Mr Morrell: Yes. I think they are dancing to slightly different tunes. Let me start with the schools. Reviewing schools is a fairly new thing for CABE. As you will know from the memorandum, we have a service level agreement to review every school now when it comes forward in this huge programme, for fear of making mistakes or, more particularly, knowing that we will make mistakes but the importance of making sure that we do not repeat too many of them. In the first batches of schools that have come through, it is true that more than half of them are rated as 'poor' or 'mediocre'. I think this is principally about skills and knowing the question to ask on the client side. I think there is an issue that we might come back to about the skill in the public sector as a client for specifying what they want. Q220 Chairman: We will come back to that. Mr Morrell: I think also that it is perhaps significant that the better schools that have been reviewed have been the more recently built. I think it is early days bearing in mind the gestation period of a construction project to say that we are off on an inevitable rising trend, but I think the signs are that we are, and CABE is happy to be judged on the extent to which that review process continues to increase the quality of schools. You mention the word 'sustainability' and we do not see sustainability as a separate thing. Design is not good if it lacks sustainability. We see it as part of a whole definition of what good design is and good architecture therefore. Housing is different, housing is about the market I think, and you may have seen some of the headlines from John Calcutt's review last week. You cannot expect house builders, any more than you can expect a PFI contractor, to answer a question if they are not asked and they are not forced to ask by the market. It is a fact that because we have an under-supply, driven I would suggest principally by constraints on planning, it is a sellers' market - at the moment anyway it is a sellers' market - and if their first duty is to their shareholders, and that is how they will see their life, and there is no value attached to increasing the quality of housing, then they will not increase quality. This raises a separate issue for the public sector with the concerns for quality of housing; if the market is not producing it, it needs to be regulated for. I do not think the same is true in schools where it is a case of knowing what good is and demanding it and having the skills to supply it. Housing is quite different and I would not expect to see a fundamental change in the overall quality of housing until there is a change in that market condition. Mr Hoyle: Can I just come in on that because I think the problem when I look at some of the statistics on public and private sector is the sheer difference where is there is not the investment in public sector housing. I do not know whether you have got a view on that. The biggest cases I am picking up at the moment are around the fact there is no public housing available and yet what we are being driven by is four-bedroomed detached which is creating "commuter lands" and local people cannot get onto the housing market. I do not know whether you have any views on that? Q221 Chairman: I happen to agree with Mr Hoyle very strongly but we must not spend too long on this because it goes off our main subject. Mr Morrell: I think the problem at the moment is that most affordable housing is being provided through section 106 agreements, in other words they become part of a trade-off by a developer with a commercial purpose --- Mr Hoyle: Can I just ask you about that. I understand about 106 agreements and the trade-off could be 15% or 30% or 50%, I am never quite sure, it depends on the developer and how hard or how desperate he is to get to get his planning permission --- Chairman: I am going to rule Mr Hoyle's out of order. This is a matter for the Communities and Local Government Department; not ours. Q222 Mr Hoyle: Chairman, if I could just ask the final bit; what do you think would be a fair assessment, 30% or 50%, on the section 106 agreements? Mr Morrell: For affordable housing? It depends entirely on the market. Industry, which complains usually at any kind of regulation or demand, has taken in its stride a proportion of housing of up to 50% because of two things; market and density. Mr Hoyle: That is fine, that is what I wanted to use. Q223 Mark Hunter: Anyway, as I was saying, the final part of my question is directed at the two of you. Constructing Excellence has talked in their submission about 'post-occupancy evaluation' while CABE have described the need for a comprehensive 'living' database to inform the design the future buildings. Can you tell us a little more about the work that you are currently undertaking to make the construction industry more aware of the need to consider the whole life cycle? Mr Ward: Post-occupancy evaluation is a weird phrase. Basically it means looking at the use of the building and trying to relate that back to the design and construction and the criteria that you had when you originally invested in the building. One of the snags is that you sometimes see it done straightaway after you have got the building occupied but you do not see it done on an on-going basis over 20 years or 40 years, or whatever, and still relating back, so you rarely get the investment case verified for the design and construction teams next time to have learnt. We have looked at different techniques for doing this. One of the problems is that everyone does it differently so you do not have a standard approach. Whole life costing similarly has suffered a little bit from that as well. We are coming up with standard methodologies for doing it. People like the British Council for Offices have a good methodology for offices just released and we have gone back to our own demonstration projects. Over the last ten years we have had 500 demonstration projects seeking to prove that some of the new ideas coming out of Latham and Egan work. Would it not be a good idea now because they were good projects for us to go back and see how they perform in use? We are trying to set an example in doing that. It is early days but Defence Estates are working with us particularly on verifying how some of their investments have delivered good value for them. Q224 Mr Binley: I want to move Mr Ward's mind to the whole question of integrated and collaborative working. I was really quite shocked by two points that you made. The first is that Constructing Excellence argues that considerable cost savings can be made from contractors adopting ways of working, the six-point programme and so forth. 'Considerable' is a pretty heavy word and when I note that some processes the industry are using are 95% wasteful, that suggests, at very best, that the practice is poor, quite frankly. Is that a fair starting point? Mr Ward: Yes, it is somewhat misleading, is it not? I think the car manufacturer Toyota, which is reckoned to be world class as a manufacturer, would reckon they still had 90% waste in their process, so we should be careful about the use of the word. If I used 'contractors' in the submission I was wrong; I meant to say the whole construction team. This is not just about contractors, this is about the design team. We have got examples of 10% to 20%. I could list examples of working with local authorities where we have got programmes of work that have delivered audited savings of 10% to 20% on cost saving and delivered more build for that money - the London Borough of Hillingdon, Barnet, Ealing, Isle of Wight Schools, Suffolk Schools, Kent Highways, West Sussex Highways - so there are really good examples out there of getting rid of some of that waste. Q225 Mr Binley: I was a local council portfolio holder for finance up until May this year and one of the areas that most concerned me was the waste that I noticed between the council and its contractors, quite frankly, and I think it is massive and I think we have got a real public problem here. I am happy to see that you are trying to do something about it. I am immensely unhappy that the industry itself is not doing what it should about it, recognising that this is public money (and sometimes public money is the easiest money of all to spend). How would you react to that statement? Mr Ward: Bear in mind that my stakeholders come from the client side, the public provider side, and the supplier side, so I think I have a reasonable view of both sides of this. I would say that the construction industry of course does not want to waste your money, of course it wants to deliver better, but it wants to be allowed to deliver better. If you go down the same old road of lowest price tendering every job on a job-by-job basis and then picking a different team the next time and then a different team and then a different team, they cannot implement the whole life cost or the sort of cost and time savings that I am talking about. The industry has lobbied as hard as the client side to implement frameworks for example to start to bring together programmes of work that make it more efficient for them to deliver, that make it possible for them to learn from one job and move onto the next job as a team and deliver the sort of cost savings that you and I both want to see from the investment of taxpayers' money. Q226 Mr Binley: If I told you that monitoring and policing on behalf of the authority was so weak and so poor that it created a situation where the contractors did not bother very much, would that statement shock you? Mr Ward: It would. I recognise that from years ago. I know that I can genuinely point to tens of local authorities that have changed their standing orders not to buy on lowest price but to make sure they buy on best value. However, there is a long way to go in that respect. Q227 Mr Binley: Thank you. There are some 400 local authorities tens is not much. Mr Ward: Indeed but it is a start. Q228 Mr Binley: Can we move on. Can you give me some examples of the quantifiable benefits that we might get from improved supply chain integration? Mr Ward: We have got several hundred demonstration projects each of which is --- Q229 Mr Binley: Could you send us a note on some of those because I think it would be useful to us. Mr Ward: I would be delighted to send you the latest report on that subject. I quoted some of the local authorities earlier and as you have got a particular interest in local authorities would you like me to pick out some of those examples in that submission? I am very happy to do that. Q230 Mr Binley: And add to that and give us slightly more detail in truth. Can I finally - because I think I have been slightly harsh with you because I wanted to probe - ask you about what approaches clients and contractors are taking to shared project risk? Can I tell you that I believe 'risk management' is becoming the fashionable phrase of the industry and we can overstate risk management and it can be taken too far, but I just wonder what approaches contractors are taking to share project risk with their supply chain and with others. Mr Ward: The most important thing about risk is to have a discussion about it. The most important thing is to be open about what the risks are and then to try and get rid of them and try and design them out. If you cannot do that we must work together on it. If you cannot do that we must finally insure it. What too many people in this industry try and do is dump risk, "That's your problem, I do not care," but it is not your problem. If you look at some of the innovative approaches to risk now, if you look at what Terminal Five, for example, with the project insurance approach, BAA realised that it did not matter how much they dumped risk onto the supply chain, the risk was going to come back on them anyway. It is their problem, it is their terminal that is late or whatever so they put in place an overall project insurance which covered all the parties. What you have otherwise is lots of different insurances that can conflict and almost encourage, as it does in motor car insurance, the attitude that you cannot possibly admit blame let alone be seen to start to try and solve it. That is a good one. We have published with the Joint Contracts Tribunal a new collaborative form of contract. It has an upfront approach to risk, a risk register as it is known, in the contract, again forcing a dialogue about risk early in the procurement process. That is very novel. You have got integrated project insurance, a new class of insurance just beginning to be pushed, and we have a series of demonstration projects which DBERR is funding the monitoring of to look at that new class of insurance and to see whether that will help with managing risks collaboratively. Mr Morrell: Can I add one thing on the issue of waste which is a massive issue in the industry. I have worked for all of my life on the client side advising clients, and I feel entitled therefore to say that the great majority of waste that occurs on site starts with the client and his team. I am not holding the clients responsible for the performance of the industry, but inadequate preparation as to what you want; clarity as to what you want, settling that; choosing a highly competent team that can deliver that; not undoing work on site because it was not clearly thought about. My dad was a builder and he taught me that by the time you get to site this is all the guys have got to make their living, and if you let them build something and then kick it over and say, "I have changed my mind", it makes them get bloody-minded and so you will get waste out of that. Clarity about what you want to build; reality about the ability to do it; and accountability by the team that they will do their bit for it will eliminate waste. It is never going to be eliminated just by shouting at the industry to do better. Chairman: We are going to move on to government as a client which touches on those areas as well but before that Lindsay wants one quick point. Q231 Mr Hoyle: Two quick points. Do you know what the cost is in the supply chain through failure to deliver on time? What is the cost to the construction industry of late supply? Mr Ward: Failure to deliver on time? Q232 Mr Hoyle: Say you ordered the steel and then there is a failure on two jobs and the steel slips and the whole of the construction industry is held up because the steel did not arrive on time. Have you any costs as to what effect late supply has on the industry? The second question is: what effect do monopolies within the supply chain have on costs? In the past it has been stated that whether it is stone for the site, whether it is sand, aggregates or concrete the price is ring-fenced and you really do not get best value because monopolists seem to be operating. Do you feel that is still the case in the construction industry? Mr Morrell: On the waste issue, if a job goes into free fall, the worst thing on a nightmare project is you have a dislocation between information being produced and its need on site. It is not unusual for a job to go 25% or 30% over budget and that probably happens to a quarter or a third of the projects. Very unscientifically, around 10% goes in that issue alone on the industry, so three times the contractor's profit margin. As far as the impact of cartels is concerned, tacit or otherwise, that entirely depends on the ability to import and then whether the international market is a cartel as well. It would be impossible to know what the cost of that is because if you have not got a fair market you have no way of testing. The more likely consequence of a cartel is that it will wipe our own industries out because they cease to be competitive. That has happened in our windows industry for example. I feel perfectly comfortable about saying that was a cartel and as a consequence of that none of our window manufacturers are major players internationally now because they had no need to be efficient and they had no need to win jobs competitively. Q233 Mr Hoyle: It is hard to ship in concrete from abroad without it setting. Mr Ward: Yes. Q234 Mr Hoyle: That is the difference. Mr Ward: Astonishingly, huge amounts of our stone are imported and of course the impact of that is the sustainability one because we are shipping massive quantities of granite from China in stone miles, or whatever they are, and the impact must be enormous. Q235 Mr Wright: What would you say is the key determinant of a good client? Mr Morrell: Having a clear understanding of what value means to him, what he wants that facility to do, and therefore being able to lay down clearly the requirements on how a building generates value for him. He will do that with a good adviser who has been that way before. He must know fundamentally what the building wants to do and define that purpose. One of my favourite examples of that of prisons, which might surprise you. If you were to say that the purpose of prison is principally containment and security, you would get you a design very much like the ones you are getting now. If you said the purpose of prison is to rehabilitate and to avoid re-offending, then you would look at those things that avoid re-offending and you would design for them, so you would design for education, keeping people near their communities; how you address offending behaviour. Policy influences design in that way. You need to say what it is that your objective is. Then organise yourselves to overcome the schizophrenias that exist within client bodies. Every user wants what he has now plus something and no exchequer can afford that. Often a lack of resolving that schizophrenia in a client organisation is a big cause of tension later on because those who are briefing are asking for more and more and more and then the shock comes, so organise yourself for that. Then organise yourself for a detailed briefing process with a well-chosen team. The team is huge. In the audit of schools quality, it was significant I think that there was very little variability in the quality of schools produced by the same design team. They were either good or bad with different contractors with different clients all over the place, so the choice of a skilled team. Choose your team as you would choose your job really. Q236 Mr Wright: You mentioned prisons and schools. Do you think that there is any difference between the performance of the private sector and the public sector when it comes to the procurement of construction projects? Mr Morrell: I think there are some inevitable differences. The private sector tends to work with the same people over and over again and the most successful clients in the private sector do that. In my own life I have worked with quite a small number of clients over and over again. Conversations about fees are usually late because they know they will get a good deal and they know what they should pay and so on and they exercise a huge amount of discretion. I think the public sector needs to be very wary of the same kind of discretion because discretion is the immediate neighbour of corruption. I think the biggest challenge for the public sector is how it finds a way of replicating success in the industry, which is a good team, whilst maintaining visible, transparent propriety in the way that it is procured, and demonstrating value for money, so I think an intelligent selection process that mixes price and quality is the answer for both sectors but more particularly for the public sector. Mr Ward: I think there is a clue in what Paul said there that is helpful. It is less the difference between public and private sector - although of course the public sector is a bit more systematic and some would say bureaucratic - it is about frequent clients versus infrequent clients. A frequent client, whether it is public or private sector, you would tend to set up arrangements where you can work with similar teams. Frameworks is an example that we mentioned earlier. The difficulty comes with a one-off client who has never worked with the industry before. It does not matter whether that is in the public or the private sector. The public sector could easily be a health trust for example where you have devolved expenditure so the Department of Health is not in control of that. Those people are just as exposed as is the one-off client in the private sector, and I think it is frequent versus infrequent clients which is perhaps a more valuable distinction to understand because you have got to tackle them in getting best practice information, in our case, which is a completely different sort of challenge, to thousands of one-off clients out there, but we probably could get all the big repeat clients into one room, perhaps even into this room, and sit and talk to them and share ideas with them. Q237 Mr Wright: You did mention briefly the question of framework contracts and public sector clients now have these long-term framework contracts to deliver a series of projects. Are you satisfied with the Government's use of these contracts and do you think it could do better? Mr Ward: I think Mr Binley rather put me in my place when he pointed out that I only had 40 or 50 examples of local authorities rather than 400, so in that sense there is always room for improvement, there is more that can be done. There are some cracking examples of the use of frameworks in the public sector. The trouble is that people go through the procurement process to set up the framework so they have realised they do not want to tender every job, they have bought the procurement upfront, done all the hard work, and then they manage it just like they used to manage other contracts, so they forget that the clever bit is actually in the performance management of that framework over four years. They are going to do lots of jobs, maybe 20 or 30 jobs together and want to properly manage that, and they do not do that so they are losing out on the big savings to be had and just making the little savings. Q238 Mr Wright: So what you are saying is that there could be huge improvements in these contracts? Mr Ward: Yes, there could be huge improvement in the way in which framework contracts are managed downstream. Q239 Mr Wright: Do you feed that through into the Department? Mr Ward: We do feed it in. We published a report on it under the banner of the Local Government Taskforce fairly recently. Speaking at the Strategic Forum last week there was a report on integration at which both the OGC and DBERR were present and we very much made that point in that discussion. Q240 Mr Wright: Do you feel as though you are gaining momentum in this particular area? Mr Ward: It could do with some help! Q241 Mr Wright: It might be useful for us to have a copy of the report that you actually gave on this. Mr Ward: Thank you. We are happy to supply that, Chairman. Chairman: I had wanted to ask you about the OGC's Gateway process but I am not going to because of the time constraints we are under. I might ask you, gentlemen, if we could have a written note about any figures on take-up of the Gateway process in your experience. Mike Weir? Q242 Mr Weir: In both of your memoranda you have referred to the 'triple bottom line' of environmental, social and economic sustainability. Can you tell us what your understanding is of the triple bottom line and is there any conflict between the three legs of the stool so to speak? Mr Morrell: Potentially, but the whole point is that all three of them have to be served. This brings us straight back to the idea of value as well. A bit like that three-cornered definition of design quality I described. You try to get the maximum overlap between all three things. Just to explain briefly, you are trying to find a building which produces its desired social or commercial outcome, so that is the economics and social bit, but also which is sustainable, that does no harm to the planet and addresses this massive agenda of climate change that we are facing. You are trying to do all three things. A building is not good if it is socially successful, economically successful but damaging to the climate. In each of those things you are setting benchmarks and normally you resolve conflict by saying that there is a lowest level of acceptable performance environmentally that you must achieve, which would almost certainly need to be set by a combination of regulation and incentives, mostly by regulation. Q243 Mr Weir: Do you think the contractors still see environmental sustainability as a costly added extra rather than an integral part of the building? Mr Morrell: Less and less I think. Q244 Mr Weir: Does it tend to lose out to economic considerations or is it becoming more important? Mr Morrell: The market is not delivering it. The market will not deliver it because the demand for it is inadequate; it has to be regulated. It is a bit like my point on housing quality. Markets do what markets do and they do it very well. They will not deliver things that are outside the commercial question you ask. Q245 Mr Weir: But is there pressure from the client for environmental sustainability built in? Is that the way forward? Does the Government need to do more by actually saying you must do this? Mr Morrell: Yes. I would link this back to your first question about life cycle costs. If government in its own appraisals priced carbon, you do not need the IMF, you do not need the United Nations, you do not need the World Bank, just in your own requirement for appraising projects price carbon, it would have a fundamental effect on the decisions we make about buildings and it would set a very fine example. Q246 Mr Weir: So you do not think the Government is doing enough in that area? Mr Morrell: I think it would be helpful if it did that thing as well. There are places where this conversation has been had but it has not come back to me as a supplier to say that is how you must appraise our buildings. Q247 Mr Weir: In light of that, do you think the contractors themselves have the skills the deliver the Government's environmental sustainability agenda? Mr Ward: One of the most important set of skills there is about stakeholders. It is about the ability to have the conversations with the right people, whether it is the socially sustainable side or the environmental side, and to be able to listen and take account of that, so I think consulting skills are probably a little bit lacking. The other factor is that what too often happens when you are talking about add-on cost is they have done a design for a building and then they think "perhaps we had better add in some sustainability". Of course that is going to add extra cost. If you start from the premise of "we are going to make this more sustainable", which they could given the right brief, then the add-on cost is going to be significantly less. Q248 Mr Weir: You think it has to be addressed at the design stage rather than when it gets to the stage of the contractor? Mr Ward: Absolutely right. Mr Morrell: Before that, at the briefing stage. The industry will answer the question it is asked and usually answer it quite well. If you want a smarter answer you have to ask a smarter question and that is absolutely true about the environment. Mr Ward: My point about stakeholders is about briefing. The industry needs to be better at getting the client to ask the right questions. Briefing is a two-way process, it is a dialogue. Q249 Mr Weir: When you discussed with Mr Binley earlier you mentioned best value as opposed to cheapest. Mr Ward: Absolutely right. Q250 Mr Weir: Do you think that many clients understand the difference between what is perhaps best value and what is necessarily the cheapest or are they looking at the bottom line? Mr Ward: Absolutely not. They are too focused on capital expenditure instead of capex/opex, which is whole life. As Paul said, if we left you with one message it is can we please have a joined-up whole life approach to looking at the cost and value. Q251 Chairman: This has been a slightly frustrating session because you have a lot to tell us and your written evidence is some months olds - our fault, not yours, because we have taken so long to get round to it - so if on reflection you think there are things that you would have liked to have told us but you did not have an opportunity to do today or things you want to refresh your evidence with, feel free. We have very much enjoyed this rush around some very important themes and by way of a concluding question from the chair I will give you an opportunity to cover some missed ground. I think that we are very bad at learning from international experiences in this country, not just in construction but generally across a whole range of issues, so from your vast experience could you tell us of one example of industry good practice somewhere else in the world which we would do well to copy in the UK? Mr Ward: His experience is vaster than mine so I will go first! We have just had 20 of our members come back from Japan, which is a good example. There is unbelievable use of site briefings on a day-by-day basis. 400 people will be on the site lining up for ten minutes to be told what it is that is going to happen that day, which is an incredible contribution to health and safety. That was very striking. If I may just add one other example, given that we have focused on this whole life thing, if you look at how Finland for example works using object-oriented modelling and computer-aided design they do all the work up-front on a single model, they do the whole life value, so they are able to think about it because it has all been done in the computer --- Q252 Chairman: When you say the Finnish, who do you mean by the Finnish? Mr Ward: The Finland construction industry generally. Q253 Chairman: Who does that work? Mr Ward: There is a very strong VTT research organisation there who are best known for communicating this information but it is particularly some of their PFI work where they have done some terrific stuff because that model forces integration on the team. Mr Morrell: I am going to give a slightly different answer: I would look to America and to the overpowering sense of personal and corporate accountability that exists there. I deliberately choose a behavioural thing rather than a bit of process, or innovation or novelty because I think both the experience here and internationally, and as Don says, I work a lot internationally, I think we know how to do Over and over again what goes wrong in projects is not the absence of some kind of imaginative innovation; it is simply not doing the basics right, making up our mind what we want, being clear about that, choosing a good team, allowing enough time at the right time to design it. CABE has done a pretty good guide on this. We put everything into it that we could. If people followed that, and something like the OGC Gateway process was operating to make sure that you had reached that stage before you moved on, we need to look nowhere overseas to find out how to do this work; we have it all here. However, the problem is that every generation insists on its right to repeat the mistakes of the last one. Q254 Chairman: On that philosophical note, can I express our gratitude to you for a very fascinating three-quarters of an hour. We really appreciate your time and trouble. I repeat things that you think we ought to have gone over and you feel you have not been allowed to, or if you want to in any way update your evidence to us, please feel free to give us additional written information. Thank you very much. Mr Ward: Thank you very much.
Memoranda submitted by the Building Research Establishment, the Building Services Research and Information Association and the Construction Industry Research and Information Association
Examination of Witnesses
Witnesses: Dr Martin Wyatt, Chief Executive, Building Research Establishment; Mr Andrew Eastwell, Chief Executive, Building Services Research and Information Association; and Mr Bill Healy, Construction Industry Research and Information Association, gave evidence. Q255 Chairman: Thank you, gentlemen, for coming today and thank you for the written evidence that jointly and severally you have provided the Committee with. As you heard me say to our last witnesses, I think many of us are finding the bewildering array of acronyms and organisations in the construction sector particularly challenging. BSRIA, you are particularly interesting - you sound like a punishment posting in the Foreign Office to an obscure Middle Eastern country and then CIRIA of course is not obscure at all! I think the Building Research Establishment is not BRE, is that right, the character off Desperate Housewives? Dr Wyatt: Wrong coloured hair! Q256 Chairman: I used to watch Desperate Housewives; I have given it up. I should not have mentioned that, I apologise! Again the same plea to you all, as you introduce yourselves for the record I would ask you to explain your distinct roles within the sector that you serve. Dr Wyatt: First of all, there are over 1,200 representative organisations in the industry and that probably tells you something about us. I am Dr Martin Wyatt, I am Chief Executive of the BRE Trust and the BRE. The Trust owns the BRE. Until 19 March 1997, the day before the Election was called, we were an agency of the then Department of Environment and we were privatised on that Sunday. Our history goes back to the 1860s but we were basically formed after the Great War. We are one of the three largest multi-disciplinary leading centres of excellence for construction in the world. Our focus is primarily on buildings and that is what makes us distinctly different from my colleagues. Mr Eastwell: Good morning. I am Andrew Eastwell, Chief Executive of BSRIA, I apologise for the name but the difficulty of the acronym makes it memorable, I hope. We were formed after the Second World War when government was attempting to get industry to work collaboratively both as an industry and also between industry and government. We have always been a private organisation and remain so. Our specialism is in mechanical and electrical systems, the engineering services within the built environment structures. Mr Healy: Good morning. I am Bill Healy, Chief Executive of CIRIA, which is the Construction Industry Research and Information Association. We were formed about the same period as BSRIA with the same spirit in the industry. We are focused on performance, improvement and innovation in construction generally. What differentiate us is our focus on infrastructure. Although we do get involved with our colleagues in some pan-industry things, it is infrastructure-focused. Q257 Chairman: Could you explain about infrastructure which covers a multitude of not sins but areas? Mr Healy: It is everything that connects to and the buildings sit upon, so it is everything from coastal defences through to transport systems, power and water facilities, and heavy civil engineering, bridges, tunnels, and the like. Chairman: Thank you very much. Brian Binley? Q258 Mr Binley: Three very quick facts: up until 2003 government invested £23 million in R&I for your industry; that ceased in 2004; and the industry has not picked up that shortfall. That is the plain and simple truth of the matter and as a capitalist I think you ought to, so can you tell me why you are investing such a small amount? Dr Wyatt: I will try. This was first looked at in 1919 in a report by the Department of Industrial and Scientific Research, believe it or not, and the interesting thing is that the economic analysis they did of market failure in the industry is pretty unchanged now Q259 Chairman: That was 1919? Dr Wyatt: 1919. If you want a copy I can provide one. The things which make us fundamentally different - and you find this not just in the UK, this is not something specific to do with the way in which construction works in the UK - are several-fold and together they add up to a very fundamental difference to, say, manufacturing industry. If you are a manufacturer, you carry out R&D where you can get benefit in the market-place - higher prices, larger market share, better margins, et cetera - and that is very difficult in our industry. The reasons really are several-fold, as I said. The first is that clients buy projects, they do not buy products. It is not like going to a car showroom and test-driving and saying, "I will have one of those. It is the most technologically advanced; it has got the best warranty; I will go with that." The second thing is that most clients are unable to differentiate or even specify an advanced model versus a standard model. That is not unreasonable. Many clients only buy one building in their lifetime so why should they know what state-of-the-art in a building is and what they should buy? The third reason is that it is almost impossible to protect the intellectual property that you generate in that industry. Patents are almost unknown. Basically anything you invent 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, and thus you cannot make that investment and protect it. Clients are very conservative in our industry. Very often the first conversation a client has with his design team is "How much insurance have you got?" The last thing a client wants to do is be experimented on so they want a good quality building but they do not want to be the test bed for new thinking. Finally, the risk of getting it wrong in our industry hugely exceeds the commercial benefit of innovating. If I introduce an innovation into the foundations of your building and that innovation goes wrong, I am out of business because the cost of putting it right will be in the millions and the benefit I might have had in terms of my design theme might be a few thousand pounds. If you take all these things together and look virtually anywhere in the world you will see the same low level of industry investment in R&D. Q260 Mr Binley: But Britain is a particularly low level at 0.5%. What you have just told me is a total cop-out surely? Dr Wyatt: No, I do not believe it is. Q261 Chairman: Mr Binley has obviously had something for breakfast this morning that has upset him! Dr Wyatt: I gave you a nice table on the back of the map of the world. Q262 Mr Binley: I saw that. Dr Wyatt: Those percentages are total R&D expenditure, they are not of the industry, they are everything, so they are the universities, government, research associations, agencies and the industry. The second thing to bear in mind is that what we have not seen and we do not have the data for, and I do not believe the Government has the data for, is a breakout of what proportion of that is private sector. My view is that the private sector contribution across these countries is probably not hugely different, except in Japan. If you multiply these figures up by the actual GDP, you get a slightly different picture. I can very quickly give you that - the UK is 43 million; the US is 215; the Netherlands is 28; France, which is probably the nearest comparator, is 206; Denmark is 23; Japan is 750 million; and tiny Finland is 58 million, but the majority of that in each of those cases where it is higher than here is government expenditure; it is not private sector expenditure, except in Japan. Q263 Mr Binley: Thank you, I am grateful for that. You have talked about variations between countries and I am happy with that. Can I move on to hidden innovation. Could you tell us more about so-called hidden innovation and could you tell me what you are doing to capture it and to build upon it, to use a pun? Mr Eastwell: The recent NESTA report on Hidden Innovation is a very useful reference point, and I am sure you have access to that. It really put a lie to the fact that the construction industry is not innovative. It has been accused of not being innovative largely because its R&D spend is so low and innovation has traditionally been attached to R&D spend. What NESTA identified is that there is a great deal of problem-solving innovation done per project on site. There are no industry widespread methods of capturing that innovation - and why would there be - but there are some very, very strong individual examples of it. I would take industrial clients such as Tesco's, land securities, and BAA has already been mentioned once today, as being examples of repeat clients who have embedded in their businesses processes which capture lessons learned. They also capture how the building operates subsequently so that they can identify good innovations or not so good innovations and they will reuse that information with their partners. All of those use framework partnerships and that information is exchanged very freely up and down the partnership but not necessarily outside of it. There is no incentive for them to spread that information outside their partnership because it is part of their business process and part of creating value in their business. It is less obvious in the public sector but there are some sporadic examples of where it is done. This is another report that I would recommend to you - Building Schools for the Future - and I will pass these references on to the Clerk after the meeting so that you have them, which looked at 12 schools in detail as part of a post-occupancy evaluation to see whether or not the structures met the aspirations. I am delighted to say that they are good places to be at school but very poor energetically, which covers something that was said earlier on today. The problem with hidden innovation is that where it is done, it is part of the company's crown jewels, it is part of their business USP, and they will retain it within their business. Q264 Mr Binley: Everything has got its price. How can we create incentive to spread innovation? Mr Eastwell: My own view is that government needs to beef up its own knowledge of its own estate so they themselves can become this client rich in knowledge of what it is that they are buying, owning and operating. Being 40% of the value of the construction industry both in repair and maintenance and in capital, it is hard to imagine that that rich data source would not be a very valuable resource for the rest of industry. Indeed, it used to exist many years ago when there were other agencies around like the PSA and NHS Estates and so forth. They were very good at that kind of effort and that is how you capture hidden innovation. Q265 Chairman: We have been told that the Highways Agency is a very good client in the public sector in the infrastructure area. Is the hidden innovation that is developing there being captured and shared, do you think? Mr Healy: Certainly they are getting better at that. There is an exercise on-going at the moment within their framework to try and share that information between departments, but I think that is still early days in moving onto the type of process that we envisage here, but, yes, it is good start. Q266 Chairman: Before I bring in Mr Clapham, we were told on a visit to a London hospital site, not in formal evidence, by Skanska that they thought one of the reasons that R&D and R&I were so much lower in the British building system was the lack of vertical integration and the smaller sized companies and contractors whereas in Scandinavia they have large shares in the market and it is actually worth their while investing to innovate in that market place. Dr Wyatt: I think there is an element of truth in that and the classic example of that is Japan. If you take the largest British company, I think it has 3.5% of the UK market, and that is Balfour Beatty, but it would not register in the world top 20. If you look at the largest companies they are mostly Japanese and that is no mistake. They have a very different structure to us in the sense that these companies are vertically integrated so they will quarry the materials, they will own the factories which produce the products, they will construct them into buildings and they will then operate the buildings. It is sort of 'super PFI'. When you get mega businesses which control their entire supply chain from beginning to end and you get a culture like you do in Japan where big companies strut their stuff in terms of R&D expenditure, then you will get major engagement of private companies in research expenditure. Chairman: I thought you might have the answer to that and I am also not surprised that Mr Hoyle has a supplementary as a result. Q267 Mr Hoyle: It is interesting though, is it not, because we have built up companies like that. If you look in the past at our quarries they were used in the construction industry. Then they get broken up and what we see is pension funds come in - Amec has been a good example where we had the cross-section of the Twin Towers, who was behind it, Amec, a vintage company, but it has all been sold off. Is that part of our problem that what we see is pension funds and other people buying, splitting up and breaking up all the companies? Is that the reason why we no have construction companies? Dr Wyatt: I cannot answer that question because I cannot speak for the pension funds. Q268 Mr Hoyle: Whoever, people who want to make a quick buck so they buy a construction company out and then start selling it off piecemeal. Dr Wyatt: I think the difference is fundamentally that our contractors tend to stick to contracting because they can borrow other people's capital to operate and they do not have to raise capital of their own. If you look at the capitalisation of the entire construction industry in this country as quoted on the Stock Exchange, it is less than Sainsbury's. They are eminently purchasable and they have a very low capital value because most of them are basically just super project managers. They do not have vast quantities of capital or estate or factories that they own and there are very, very low barriers to entry. Anybody can set up as a contractor and anybody can become a big contractor by buying more projects than the next contractor and so on. One of the characteristics of the UK scene is that there are rapid changes as to who the big contractors are, the big ones wax and wane and the situation changes. Q269 Mr Hoyle: Can I say I do not quite agree with that because we have seen companies in the construction industry like John Lang disappear, who were on the Stock Market purely as construction companies. The idea was to get out of being listed as the construction industry and be put into the service industry to ensure that shares fly through the roof. Hence Amec went from £2 odd to £10, I think it was. It is the complete opposite of what you have said. Dr Wyatt: It is true that a lot of contractors have tried to have themselves reclassified as service industries and they have tried to give up doing contracting. They want to be facilities managers, they want long-term contracts with government to maintain things. They do not want the danger and the risk of building individual buildings. That comes back to this business about risk. Lang's went under fundamentally because they made a series of technical mistakes which made them worthless and then a white knight came in and bought the business because it was worth very little, so a huge business changed hands for a pound or something very similar. Q270 Mr Clapham: Given what you have just said about the industry, and the difficulties that the industry has, we still need to realise that it is an enormous industry, employing more than two million people and that in terms of GDP about 10% of UK GDP comes from construction, so it still is a very important industry. Given that fact, is it possible to say how much support research and innovation gets from government? Could you put a figure on it? Mr Eastwell: I will try and answer that. The last authoritative figures were provided at a similar event to this in the House of Lords showing that in 2001 it was £18 million; and in 2005 it was £5.5 million. There is no analysis, as I understand it, for the present time. The best estimates that I have are that it is between £5 and £10 million, but it should be understood that that funding is principally from the Technology Programme that was with DTI and is now with DIUS and does not really address the gaps that we are concerned with here. They address the high technology end, not the processes - stem cell research and things like that. The construction industry does benefit from that but it is not the gap that we think is at issue. For co-funding, the sort of thing that we were talking about earlier, it is hard to identify any funding at the moment other than a very small amount covering things like the Knowledge Transfer Network, for which we are extremely grateful I should say. Q271 Mr Clapham: Why do you think that dramatic reduction has come about in the funding? Dr Wyatt: I do not think there has been a major policy change. I think it was broadly a mistaken circumstance. Immediately after the 2004 Election responsibility for the industry was transferred from the DETR to the then DTI and with it that funding. The DTI had been going through a period of criticism and change and had decided that it was not going to support any sectorally based research funding mechanisms, so this money and this industry was transferred into the DTI just as they were coming to that decision and thus it was wholly unwelcome that we were discussing and saying this needed to continue, so basically the money, to quote the Minister at the time, was 'snaffled' into the central coffers of the DTI and probably reappeared in the Technology Programme. That still remains the case today that DTI policy is not to have sector-specific programmes at all. Having talked to senior civil servants and others, the difficulty is that even though they may intellectually accept that the mistake has been made and it has been dropped down the cracks, they believe that to essentially do anything within DBERR to support the construction industry specifically would re-open the discussions with aerospace and everybody else about whether they should have specialist support. It has been put to me that it is very much more difficult to put this back together than to let it fall apart because it would require two ministers who were interested, two senior civil servants who wanted to do it, and somebody who was willing to put their hand into their ministry's pocket to fund it, and that is almost impossible. It is very difficult and it will need a very powerful interest from somewhere to boot-strap that process again, even though it is accepted intellectually that we lost something we should not have done. Q272 Mr Clapham: Given what you have just said, is the building of the Olympics stadium likely to have the impact that it may well bring a focus from government with regards to innovation? Do you think that could be the driver? Dr Wyatt: I think government has a lot of short-term interests and even in terms of the construction industry 2012 is relatively short term. It is undoubtedly true that a lot of good work is being done by the Olympic Delivery Authority in terms of sustainability and other matters. The problem is that most departments now seem to have become used to picking up the phone and calling us up and us saying, "We do not know because you ceased funding us five years ago," and then increasingly using focus groups and steering groups and heaven knows what else - people who will give an opinion which is no real substitute for empirical evidence, if you like, and so there is a culture of dealing with all of these issues as if they can be solved in five minutes by a quick question rather than needing proper research over a period of time to come up with a proper answer. Mr Healy: I think the overriding focus of the Olympics is one of delivery on time, from all of the discussions that I have had, rather than one of innovation or even necessarily the best way of doing things. I have to say the driver is on-time delivery. There is the issue of ownership as well now and because the interest in construction is spread amongst so many government departments there is no clear home for a focus in how to address this issue. It is now spread broadly across. I think most people are aware that there is an issue on-going but there is not the wherewithal to respond to that issue in any meaningful and co-ordinated way. Mr Eastwell: We have been accused of being a very fractured industry and indeed it is true. We are dealing with a very fractured sponsorship/intellectual input from government and that is also true. Chairman: We will return to that issue later. Q273 Mr Clapham: All three of you have contact with DBERR and the civil servants in DBERR. Have you been able to get the message over to them that the UK is one of the few advanced countries that does not have a dedicated research and innovation programme for building? Mr Healy: I think again DBERR would recognise that and they are very sympathetic to the position. Again, as the major funding has now moved across to DIUS and the Technology Strategy Board for R&D as opposed to applied research, which is the area that we are particularly focused on, they no longer have the wherewithal to address that. Their funding certainly in their construction sector unit has been cut dramatically, nearly all of their staffing staff. There is no clear home for construction there although I know that the 'Minister for Construction' is represented through that Department. As I say, the big spends, particularly where we are looking to government as a client, are in new schools, prisons, infrastructure, investments, which are spread around many different departments. Again, I think people are aware of what is actually happening but no-one is in the right position with the right centre of gravity to say, "We can address this issue." Mr Clapham: Given that, what do you consider ought to be one of the main messages that comes from the Committee's report on construction? Q274 Chairman: I think that is called leading the witness but I am very happy for the witness to be led. Mr Healy: It is putting that focus back in now and there is a number of elements in how this could be achieved. I do think construction has now been spread across so many people's remits that there is no-one who can address these issues of really seriously moving the industry forward. The Government is ideally placed to do it. As referred to earlier, it has 40% of the construction spend of £120 billion, which I think it is currently running at, which the government is client for. That is a very powerful position to be in and they really need to have the wherewithal to behave as an intelligent client as best they can and be a leader in that which I believe they can achieve if we get the right focal point. That needs to exist somewhere within the government mechanism. We have views as to where potentially it might be best placed. It has been tried amongst a number of departments. The problem is that now it has evaporated to a large extent. Q275 Mark Hunter: Can I ask a couple of questions about current research and innovation performance. I was very interested to read in the evidence you have put before us about the drop-off in public sector support for construction. You say that this is reflected in the number of new publications of technical guidance and standards produced by the sector and in fact report that between 2000 and 2005, the number of new titles averaged 173 per annum whereas in 2006 that figure had fallen to just 63. Do you think that the decline in these titles can be directly attributed to the drop-off in public sector co-funding for construction R&I and even if it is why has it not been picked up by the private sector? Mr Healy: I was reminded of this again last night ad I will come back on that. Yes, I think it certainly can be directly related to the drop-off of public sector funding. Each of the new publications, of which CIRIA has produced the larger number over recent years, typically cost something of the order of £100,000 to produce. They are fairly considered pieces of work, drawing on the best expertise in the industry and the experience of what has happened, and in fact many of them go on to be reference documents that are used by the broader industry going forward, so they are very valuable. At that kind of cost, the resale value is not much more than the printing costs of the book to distribute them, so we do not have the wherewithal to fund the large number of reports that we would like to produce. The reason I was reminded of it last night (I do not know if any of you saw it) is there was a Dispatches programme on Channel 4 called Submerging Britain about the flooding issues that had gone on in the summer. I was reminded that CIRIA had been trying to fundraise for a report last year, would you believe, which was about the flood resilience of infrastructure, which chimed a lot last night as we were seeing the issue of trying to protect a sub-station that was coming under threat and in fact a water treatment plant was submerged and people were left without water. At the time we were talking with our colleagues in the infrastructure industry about this there was interest but it was very hard to get sufficient of them lined up with their cheque books to actually make this report become a reality. Of course, post the flooding there is increased interest but I have to say that as of today I do not have agreed funding in place to actually move that report forward. With government funding in the past, the seed corn, the pump-priming - they would not have paid for the complete report - a 40% or 50% contribution to the cost to get that report moving would have enabled it to have been available in time for those events, so that was a very timely reminder to me of how things have slowed down. Q276 Mark Hunter: I was going to ask you for some examples of the way in which the drop-off in new titles is affecting the sector and you have just given us one. Mr Healy: I am sure my colleagues can help. Q277 Mark Hunter: Could you offer us a couple more as to how this has impacted? Dr Wyatt: Perhaps I can give you a very topical one and that is around the deployment of small-scale wind turbines in homes, a very hot topic. Lots of people are saying you need to use renewable forms of energy and this is one of the solutions. In fact, you have got things like the Morton (?) rules, et cetera, encouraging and DBERR themselves encouraging the adoption of these new technologies, but we actually know very little about these technologies and how effective they are. If we take the Code of Sustainable Homes as an example, in there there is encouragement to deploy micro wind turbines on your house and you get a higher sustainability score if you do. However, I was very concerned and a lot of people are very concerned that these windmills absorb more carbon in their manufacture and maintenance than they ever produce --- Q278 Mark Hunter: You had better tell Dave to take his down! Dr Wyatt: I am trying to avoid political comment! Quite of lot of us are concerned that they emit more CO2 than they save in a lifetime and thus the deployment of them actually brings global warming forward, it actually accelerates global warming. We discussed this and this is a classic example of why it is all going wrong. We raised this with DCLG whilst we were working on the Code for Sustainable Homes and they put together a tripartite meeting between Defra, DCLG and the then DTI to discuss this. The DTI took the view they were the sponsor of this small industry and that their job was to help manufacturers in new areas of commerce to get going and be world-class, so it was not really their job to carry out some research which might show it does not work. Defra said, "We are in charge of sustainability but actually it is about buildings so it is DCLG," and DCLG said, "We have not got any money," so at that point we all gave up. I managed to scratch together enough money from the Trust who owns us to do a small piece of work which has demonstrated that basically in a large number of cases you should not employ this technology. Q279 Chairman: Should not? Dr Wyatt: Should not. What I am unable to do through my own funding (and why should the manufacturers do it?) is produce a comprehensive design guide for specifiers and individuals in order that they can choose intelligently whether or not and what sort of windmill to use. This is classically the area where the industry in a broad sense worked with the Government in a co-operative way to produce that sort of guidance, and that mechanism no longer exists so I do not know what is going to happen there. Q280 Chairman: Notting Hill must wait with bated breath. Mr Eastwell: There is an interesting codicil to that that it also transpires that the planners prefer the windmills to be below the roof line and this is not the best place for windmills! Chairman: You have made your point extremely well. Q281 Mark Hunter: Obviously because it is in your evidence you must be concerned about the long-term implication of the investment in research and innovation activity. What do you think is the long-term implication if this current trend continues? What is the bottom line here for you? Mr Eastwell: I would refer you to Lord Sainsbury's report The Race to the Top which was published since we gave our evidence and in it he says: "Increasing R&D spend by research councils matched by decreasing departmental funding, the MoD in particular" - and I quote - "this is a cause for concern for our public policy-making." We would agree entirely with that. The problem is that the focus has been on the high-tech industries - stem cell research, grid computing and nanotechnologies - from which the construction industry will ultimately benefit. There is no question and we would not say that this is the wrong thing to do. Unfortunately, the baby has been thrown out with the bathwater and what we have lost is the practical implementation of how this can work for our sector. I think the long-term implications are quite serious. We were talking earlier about the value of the construction industry. It is nice to be able to say that we are number two in the world, number two only to the USA, in the export of intellectual design. This is why we have the Reichstag building and some wonderful buildings around the world generated by UK expertise. If we do not invest in the sort of work that allows companies to develop that - and some of them were quite small when they started, the SMEs - if we do not provide an infrastructure that allows that to continue, then I would submit that that £3 billion is at risk in the long term. It will not be tomorrow, it will not be next year, it will not be the year after. We describe this as a 'slow crisis'. None of the documents that we have cited as examples and we have here are broken; they are just wearing out. That is the way I would try to describe it as being a long-term problem. It is a problem of evidence-based design. As we lose that evidence base whilst our competitors invest in it - and I am thinking of France in particular here and Finland as a wonderful example of investment in object-oriented technology, of which you are going to hear a great deal more in the future I am sure - if we do not invest at the same rate then our dinner frankly is at risk to those countries that do. Q282 Miss Kirkbride: That leads on to the obvious next question which is where is the money going to come from? If we do need to spend more money, and presumably some of that is going to be public money, what suggestions do you have? In your memorandum you talk about the Landfill Tax Levy, the Carbon Levy or the Aggregates Levy. Dr Wyatt: Shall I expand a little on that. Obviously we did not want to come to you and say raise taxes as we thought that might not be very popular, so what we did was we looked at and identified research and programme-related streams of expenditure within government which are related to this industry in terms of either they derive from this industry or they have a major bearing on the efficiency of what we do. We identified the three which are quite easy to find. The first one is Landfill Tax Credits and within Landfill Tax Credits £75 million a year goes to fund research. This is through a mechanism called BRU within Defra and, basically it is sprinkled across a load of quangos at the moment, people like WRAP, and 30% of those Landfill Tax Credits are generated directly by the construction industry, about 30% of landfill comes directly from the construction industry, something again we would like to do a lot better on but are unable really to do the research on that. The second one is the Aggregates Levy. There is a levy on aggregate extraction which of course is 100% related to our industry and that is very substantial, and that Levy is supposed to be for research in support of the aggregates industry. Then there is the Climate Change Levy, about 10% of which goes to the Carbon Trust. The Carbon Trust is an interesting body. It spends about £80 million a year. Ostensibly if you ask people in government about this expenditure they will point to the Carbon Trust, but the Carbon Trust principally receives a levy from the manufacturing industries and sees its job primarily as supporting lower carbon in the manufacturing industries, so if you look at the board of the Carbon Trust there is not a single person from the construction industry but it is used as the reason why we do not fund work in the energy area of the built environment. If you add these three streams together there is £169 million currently, some of which does trickle down and find its way into the industry but not for the improvement of the industry and not in any co-ordinated way which allows us to move forward effectively, so we would say that this can be achieved by some changes in priorities and getting more joined-up across government without further taxation. Q283 Miss Kirkbride: If you were to use those three pots to do what you want to do what would we then lose from what they are doing already? Where is it going? Dr Wyatt: By definition you would lose some other things. Nothing comes for free; we accept that. What we would say is that if you take for instance the Landfill Tax Credits that go to WRAP, WRAP's brief is to increase the use of recycled materials, so whilst they receive the levy they cannot sponsor the industry reducing the amount which goes to landfill. We can go to them for research funding on recycling materials but we cannot go to them for research funding on actually reducing the amount that goes to landfill in the first place so, yes, you would have to spend a little less on the techniques and technologies around recycling materials, which they are spending about £80 million a year on, and spend a little more on producing less stuff to go in to be recycled in the first place. Why is it that we are spending £80 million on something as focused and as narrow as recyclable materials and less than £5 million on the whole of the construction industry which is 10% of GDP? I do not think these priorities are logically thought through in a coherent way. Q284 Miss Kirkbride: Do you think there is any appetite in the sector for something akin to a construction industry skills levy? You laugh? Mr Healy: Sorry, it just reminded me of let us not talk taxes here because I am sure that is the industry's view. I am not long from the pointed end of the industry and they would certainly view that as another unhelpful tax and not a good direction. I am thinking of the CITB Levy which I know from talking to people in the industry is not broadly very popular in itself. I would think, no, there is no appetite for that. I would say that if we are going to use a mechanism such as Martin has just suggested, and the Fairclough Report suggested what we had in place was working, and indeed how he said that should be ring-fenced and indeed built upon, clearly that has not happened, but the mechanism of allowing government to have funding to help give direction and pump-priming to the type of activities that the industry can then join in is a far more positive way of taking it forward, and has been demonstrated to work in the past. Certainly from my point of view we are trying to fix something that has only recently broken here. I think if we can move back to that position it would be much better supported by the industry as a whole. Q285 Miss Kirkbride: The Latham Review proposed a levy on industry insurance premiums for the same benefit and I suspect that you would give the same answer presumably? Dr Wyatt: That is an insurance premium. Latham's logic there was simply that the insurers have to pick up the cost when things go wrong and fewer things would go wrong if we researched things better and thus we did things with full knowledge of the consequences. There is certainly an attractive logic in what he is saying in that it would be to the benefit of the insurers and thus it would not be unreasonable to take a bit of their premium to fund this, but I think in all honesty at the end of the day if you look at a lot of the topics and subjects they are for the good of society, not necessarily for the good of the industry. This is why no one individual company would fund them. What the industry is very good at doing is even if you put to them, "This is not for the good of any one of you but if you all work together as an industry we could produce a better product," what they will do is give very freely of their time, their materials and intellectual weight, but they quite rightly say, "Why should I spend this on the part of my shareholders; it is not my job to fund this?" In the past, the idea that the Government provided the cash for research to be done but the industry put in a lot of time for free on things that were for the good of society had been a model which worked extremely well. I think in that sense the industry did rise to the occasion historically and I very much believe that they would do so again. Mr Eastwell: Different countries have different models. In Belgium they have a well-developed model there fore using project insurance as opposed to individual insurance particularly for part players. In that instance, the insurers use a third party to assess design quality and that is part of the R&D. It is one way of collecting that experience and avoiding mistakes. In France in my sector the HMV sector they maintain a thing called Centre Technique which is funded from a small VAT supplement on products which are sold. Last year it raised about €4.3 billion and that money is spent within the Centre Technique to produce test methods and test cells. That is one reason why the UK has a very low number of test cells for HMV equipment. Between us we are it and it is very small. We did in fact poll my company membership some months ago prior to knowing about this question that you have just given us, and there was no appetite for a levy. You should be aware that the HMV sector chose not to be part of the CITV levy process and they maintain that very strong opinion on levies in general. Q286 Miss Kirkbride: The whole of the thrust of the questioning has clearly been about a voice in government and co-ordination of your industry. Mr Healy said he had ideas about what we should do about the structure of government to give your industry a voice; what should it be? Dr Wyatt: There was great debate about this question and we carefully avoided the words 'Minister of Construction' because we did want this to become a discussion about whether or not we have a Minister of Construction and thus if we do not have one the whole debate falls to one side. We do not want to be lost in that debate. However, one has to say on a personal basis I think that all three of us would say that government is so fragmented at the moment on all issues to do with construction, and it is so huge. You have a Minister for Agriculture with 1% of GDP and you have got a completely fragmented mess when it comes to construction at approaching 10% of GDP and £40 billion per year being spent by government. It is astonishing and what we would say constructively is that if you cannot effect that, which you might not be able to effect of course, one organisation to build on might be the OGC. The OGC does not currently have this role and it sits there as part of Treasury which is not a bad place to be if you want to influence behaviour across government. I believe a place to think of to put the industry sponsorship, particularly given the potential conflicts within DBERR, would be to strengthen the OGC's role to become the champion within government of construction and the organiser of the necessary research across government to see that government money is expended more wisely than it is currently being expended now. Chairman: We are getting very short of time but we have one more important question to raise which Mike Weir wants to raise. Q287 Mr Weir: In BSRIA's memorandum you talked about the need for more construction clients to set aside a proportion of their contract values for what you call a 'soft landing' approach to handover. Can you tell us a bit more what you mean by a soft landing approach and how this idea is going down with the contractors? Mr Eastwell: In short, there is a disconnect between delivering a building and using it. In general, a building is built, handed over to the client and then the parties depart. The problem with that is that the client is usually poorly placed, particularly in a building which has got a high innovation content, to make those innovations actually work. There are number of examples of things like woodchip boilers which were installed in schools and the caretaker switches the gas boiler on because that is what he has always done. Once you have got into that mindset the building does not work properly pretty much for the rest of its life. Soft landings attempt to blur that process between completing the structure and putting it to work with the people in it that are going to have to live with it. Is it taken up? No, there is only one firm example of it and that is at Cambridge University, who implemented this process precisely. They put aside a proportion of the prime sum in order to have a handover team work with them for a period of 12 months. The point about it - and we have heard the words "post-occupancy evaluation" used a couple of times - soft landings really is post-occupancy evaluation but at a particular handover period rather than at some time later in the building's life. Q288 Mr Weir: Given that you have cited only one example at present which is Cambridge University, if the idea is to provide a better building for the client, why is it not being used more widely? For example, is there resistance from contractors to it because they are not getting all their money at once? Is there a specific reason or are clients not demanding this in the original contracts? Mr Eastwell: It is both. Clients generally - and we were talking about capital sums earlier - if they have to shave their budgets, which of course they do, are they going to shave what appears to them to be a low-value activity for something which is perhaps a little more tangible in terms of what they can see, marble floors or whatever? I think they would choose to shave something which is intangible so that is from the client's perspective. From the contractor's perspective or the designer's perspective, he is raising the possibility of identifying defects that would otherwise not be visible, so the motivation for him to do it is fairly low as well unless he can see that he is going to continue in a longer term relationship with that client. I think the multiple builder, the serial builder and the one-off builder argument comes quite strongly into play here. Again I would refer to companies like Tesco's. They do have that long-term relationship with their client and they do understand how their buildings work so in that instance it is not formally soft landings but it is very similar. Q289 Mr Weir: Do Tesco's have a policy then for retaining some of the money where this is done or is it purely because they are so big and the builder does not want to fall out with them? Mr Eastwell: I cannot answer for Tesco's but what I can answer for is Building Schools for the Future. We recently held a conference at which Tim Byles, who is charge of the Building Schools for the Future programme, stood up and said that, "We want to learn from our buildings and we will be carrying out post-occupancy evaluation of every BSF school." In a later question from the floor somebody said, "Who is going to pay for this?" and he said, "I am open to offers from the floor as to who would like to join me in paying for this." I think this illustrates the disconnect. He wants to do it, he recognises the value but the processes are not in place because of capexing to allow him to do it. It is a very good example that I think should and could be addressed. Mr Weir: It does not sound like he has much of a future. Chairman: There are many issues that you have raised which I fear we would like to explore at greater length but we are already over time so we are going to have to stop here. If there are other issues that you would like to have raised with us in more detail, please feel free to give us a note about that. I think we asked for some information from you as well which we will confirm with you. We must make sure that that reference to the 1919 report is right. Apparently Network Rail are blaming Brunel for under-designing (?) station at present, which is rather the same tradition I think, but thank you very much indeed; we really appreciate your time. Memorandum submitted by the Federation of Master Builders Examination of Witnesses
Witnesses: Mr Richard Diment, Director General, and Mr Brian Berry, Director of External Affairs, Federation of Master Builders, gave evidence. Q290 Chairman: Gentlemen, welcome to the final part of this halfway point in the Committee's inquiry into the construction industry in the UK. Can I ask, as I always do, for you to introduce yourselves and explain a little bit about the role of your organisation and why a trade association focused on small and medium-sized firms is needed. We are getting rather overwhelmed by the number of organisations. Yours is clearly one we have heard of before, unlike some of them, but it would be helpful to understand exactly why we need you and not the Construction Federation or the National Specialists Contractors Council, or whatever it is. Mr Diment: I am Richard Diment and I am the Director General of the Federation of Master Builders. My colleague is Brian Berry who is our Director of External Affairs. As you said in your introduction Chairman, the FMB represents SMEs in the building sector. We have about 13,000 of them as our members. We are an organisation that was set up back in 1941, which might seem an odd year to set up a new organisation but we developed very much here in London and some of the other big cities where the smaller builders felt that they were being squeezed out of the market for repairs and work that needed to be doing following the initial stages of the Blitz. Our members are still very much the smaller companies. We have, as I said, 13,000 of them. Typically they are companies with a turnover of round about £0.75 million to £1 million, maybe employing eight to ten people. They work mainly in the domestic sector on general building though they do a little bit of work for the commercial and the public sector. A small number of them do build houses but only relatively small numbers, so we think we have a fairly unique niche within the sector. We obviously work very closely with our colleagues in the Construction Confederation, which tends to represent larger organisations and we have already talked about some of them today. We also work closely with the Specialist Contractors but they are by their nature more specialist organisations, we are a more generalist one, and our membership does represent something like twice the number of those two organisations' memberships combined. Q291 Chairman: Presumably you would advise us always to use a member of your organisation. Mr Diment: I would certainly hope you do. Q292 Chairman: I thought you probably would. Can I thank your Richard Hislop for his email this morning on "The Federation of Master Builders takes up the green challenge" which arrived in my inbox this morning. I am sure this Committee's report will deal with those issues so thank you for that, I will pass it to the Clerk. Your very first point was about the appointment of a dedicated Construction Minister. You have just heard our last witnesses, you were in the room, about this extraordinary problem of co-ordination. Everyone wants a minister to do their thing. Your members pay their taxes, I know they hate the burden of regulation and taxation, and everyone wants a minister, which means more government because if we give it to you then manufacturing will want it, aerospace will want it, pharmaceuticals will want it, they will all want it, and other special interest groups within the Department of Health, the Department of Communities and Local Government will want their ministers doing their thing. We already know that there are too many ministers so we will about 400 ministers and no backbenchers in the Government- which I suppose some of my colleagues on the Labour side might like the prospect of - but is a Minister for Construction really the only way? I think we all understand there is a problem about overlap. Is that the only answer or if we come up with something more imaginative might we be able to sell that to you as an idea instead? Mr Diment: The problem at the moment is the diversification and the number of areas of government that deal with this, as we have already heard from your previous witnesses. The responsibilities for different parts of the industry probably spread over seven or eight different government departments. Even within the post of Minister for Construction - and I am sure he will be a very good Minister for Construction - I think if you read through, it is one of 27 responsibilities that are actually are listed in the official BERR handout of where the minister goes. It does cause confusion when we need to speak and others need to speak, particularly those who are less familiar with the structures of government, in never being quite certain where you need to go if you are talking about construction regulations or you are talking about health and safety in the construction industry or training in the construction industry. Indeed, training is now of course split depending whether it is still going on at school or whether it has moved into the further education sector. There is a whole plethora of your colleagues who are responsible for this and we think it would be better to have a smaller number, hopefully a single minister, but certainly much greater co-ordination. Chairman: This is a negotiating position rather than a bottom line? That is very helpful, thank you very much. Mick Clapham? Q293 Mr Clapham: Before I turn to health and safety in the industry, could I just ask on the back of your introduction you said that most of your members were concentrated in London at the time that the organisation was founded. Is that still the case or are they spread across the country? Mr Diment: They are literally spread across the four countries of the United Kingdom now and fairly evenly spread. Q294 Mr Clapham: Turning to health and safety, we have seen a deterioration in health and safety over the last two years in the industry generally. Have your members reported that they too are experiencing a fall in health and safety standards? Mr Berry: The first thing we want to say is that all deaths in the construction sector are deplorable and the FMB is committed to improving health and safety in the construction industry. We have not noticed any deterioration amongst our own members. Any accidents and deaths would be reported under RIDDOR - the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1995, but certainly the evidence we have got from our insurance company Aon is that our companies are less of a risk than others in the construction sector. Q295 Mr Clapham: The reason I ask is because you do make the point in your memorandum about the fall in the number of HSE inspectors. As you will know, there has been quite a dramatic fall, we are talking perhaps by 2008, by next year, of a 17% fall in the staff of the HSE. Do you think that it is the fall in the number of inspectors in the field that is contributing to that deterioration in health and safety standards in construction? Mr Berry: We do not have specific evidence to support that, but what it does give is the impression that the Government is introducing new legislation, such as the CDM regulations and then we have the Corporate Manslaughter Bill coming but it is not putting the resources in to enforce the legislation that it has passed. We are very concerned that, as you have said, since 2002 there has been a 17% cut in the number of staff at the HSE, and we understand in the review announced this year that between 250 and 350 staff will be lost to the HSE throughout the course of next year, which means that an employer would have a one in 13 chance of receiving a visit from an HSE inspector so we feel that it is a contributory factor. It is also the message it gives out to the construction sector that the Government takes it seriously and, if you are imposing more legislation, the very least the Government could do is make sure that it is properly enforced. Q296 Mr Clapham: Given that your members are spread across the country and of course migrant labour in the UK is also being used quite widely, are there any reports from your members on the use of migrant labour? Does migrant labour within your sector add to the greater vulnerability to the risk of accident? Mr Berry: The use of migrant labour has been voiced as a concern in terms of the language barrier and familiarity with health and safety legislation. It is interesting that yesterday a report came out from the ICE, the Migrant Workers Task Force, which has looked at this issue. I have not had a chance to look at it in detail but it does flag up the issue of different cultural backgrounds and the language problem but also the lack of communication between employers and employees. I think this is an interesting area to investigate. Also the HSE was asked by the Secretary of State for Work and Pensions to break down the figures for accidents and deaths on construction sites to find out what role migrant workers were having on the 28% escalation over the last year. Q297 Mr Clapham: Do you feel that there is the potential within your membership to perhaps try to bring the insurance industry together with the employer to work out, particularly where you have got sub-contractors being used, a policy for a given site, for example if one could reach an arrangement with the insurance industry that a good health and safety record would result in lower premiums? Do you think that kind of approach would help to tackle health and safety? Mr Berry: Lower premiums would be very attractive to good employers who actually instil health and safety because one of the key issues with health and safety is the cultural issue, how do we change culture on construction sites. Good employers - and we hope most of them are FMB members - who take these issues very seriously if they are going to be rewarded with lower premiums, that is something that we would like to investigate, yes. Q298 Mr Clapham: Can I just go back to the HSE, they charge your members for their Code of Practice. Can you say what the charges are? Do you feel that charging for the Code of Practice is a disincentive to buy it and so therefore members are not knowledgeable of the Code of Practice that is required? Mr Berry: The Approved Code of Practice costs £15, which is not a high cost in itself but at a time when the Government is taking health and safety very seriously, it is an extra cost which has to be paid and we feel it is wrong to restrict information which could help to save lives and certainly reduce the number of accidents. Q299 Mr Clapham: So you do feel that it constitutes a barrier to good health and safety standards? Mr Berry: Barrier is quite a strong word. It is another handicap and it is another cost to employers. What we would like is to be able to download the information free of charge rather than have to pay extra postage because if you want to receive a hard copy free of charge it takes ten days but if you are willing to pay £10 you can have it within one working day. That is two-thirds of the cost of the Approved Code of Practice. It would be far better if at the touch of a button you could receive it free of charge and have the information immediately, which I think would certainly be a helpful way to disseminate the information. Q300 Mr Clapham: Has that view been put to the HSE and, if so, what has been their response? Mr Berry: We certainly put it to the Secretary of State for Work and Pensions when we attended the Construction Safety Forum as one of our main concerns and we are talking to the HSE about making this information more widely available. I think there is also a role there for the construction sector particularly large contractors which have a lot more information than the small ones to actually share the information across the sector. I think it goes right across the construction sector in addition to the HSE. Q301 Mr Hoyle: It is interesting that the Government which is meant to be e-government is failing when you need information, so I think it is something we must take that on board. Part of the evidence suggests that the major construction sites are much safer places to work in, that they are not the problem any more, and it is the small construction sites and small builders where you are more likely to have an accident. Do you think that is fair? Mr Berry: I think one of the factors is the size of the repair, maintenance and improvement sector which has increased from £3 billion in 2002 to £15.8 billion in 2006, and part of the reason for the number of accidents is clients undertaking work themselves and not employing professionals such as those that belong to a trade body like the FMB. We think that accounts for some of the increase in the number of accidents. Q302 Mr Hoyle: The second part is how do you qualify to become a member of the FMB? Mr Diment: Anyone can apply. We then have a vetting procedure that we go through to admit them which involves them demonstrating to us that they have a successful trading record, we would look at their credit references, we would expect to see evidence of their professional indemnity insurance and, if they employ staff, their employer's liability insurance. We then ask them to provide a series of references which will be taken up so that we can talk to the client about quality and their satisfaction of the work. We have introduced, starting about six months ago now which we will eventually roll out over a much wider basis, inspections and actually sending out representatives of the British Board of Agrément, who we are employing as our inspectors, to go out and look on site at one of the jobs that a potential member has done within the last 12 months to see the quality of it and to talk it through with the clients. We do have a process which we use if we are not satisfied with how our members have behaved in talking to them and we have powers which we do sometimes use to expel members. Chairman: That is a good answer, thank you very much. Brian Binley? Mr Binley: Good morning, gentlemen, it is nice to see you. Chairman: He is in a better mood! Q303 Mr Binley: Can I say how nice it is to see the craftsmen's body present. There is a concern about the continuation of that craft within the building profession and particularly within your organisation. Last year we hear that 50,000 young people applied to be apprentices and only 7,000 were placed. I know there would be some wastage but that seems to be quite a lot of wastage to me. Is the record of your members as bad as the rest of the sector when it comes to taking apprentices or can you give us evidence that it might be better, and I am hopeful that you will be able to? Mr Diment: We certainly share your concern that there are not enough placements for the number of people who want to come into the industry. Having said that, we think that amongst our members there is a fairly good record. We have just done our annual membership survey and of our 13,000 members just over a fifth (22%) said they are currently employing apprentices. When you look at the broader figures produced by Construction Skills something like 70% of apprentices currently being trained in the construction industry are being trained through SMEs, so we think the smaller end of the sector is doing a lot, but there is no degree of complacency and we would like to see more being done if possible. Q304 Mr Binley: Can you elaborate on what more you might do as the Federation of Master Builders? Mr Diment: We have been working very closely for a long time now with Construction Skills to make sure that the support that is available to smaller businesses is made aware to those businesses. We have just launched a major initiative, in fact it was launched yesterday by our national President alongside David Lammy, the Minister for Skills, which is a cross-industry taskforce which is designed to encourage those who do not yet train apprentices to take them on and those who do to consider taking on more. We are certainly aware that we need to increase two to three-fold the number of apprentices that are going through the industry as an absolute minimum if we are going to have the sort of numbers of skilled craftsmen for the construction industry as we move on beyond the turn of this decade. Not just because the industry needs them but because I think socially the country needs them, with all the evidence we have about young people who are drifting rather aimlessly through life, and to ensure that they have got some skills which will enable them to support themselves and their families for the rest of their working lives. Q305 Mr Binley: There was a time when young, would-be professional footballers were told to get a trade first, but those days have gone! We heard last week from Construction Skills that there is a north-south divide in respect of provision of training by employers and this is one of the areas where the north excels, quite frankly. Is this the experience with your membership? Again, why is that the case? And if you find the reasons why, can you tell us how we might put it right? Mr Diment: It certainly is. I mentioned a few moments ago the survey which we have recently done which showed that just over 20% of our members currently have apprentices. Of our members in Scotland it is 60%; in the north of England, Wales and Northern Ireland it is about one in three; in Yorkshire, in the North West and the South West it is one in four; in London and the South East it is somewhere between one in eight and one in ten. Q306 Mr Binley: A real problem. Mr Diment: So there is certainly a problem as you move further south and further east. Why has that happened? I think we are still struggling to try to understand it. I think there are some issues around the impact of the recession on the construction industry 15 years ago in which the traditions of training were maintained far more strongly in the north of the country. There are clearly issues probably felt more strongly down here in the south of the country about the relative perceptions of vocational and academic education. All of these I think need to be overcome. Q307 Mr Binley: Richard, if you have got any more information on this could you send it to us because it is an important subject? Mr Diment: Certainly. Q308 Mr Binley: We are talking, oddly enough, about the area that is going to see some of the largest construction projects in the country. I know that is not your bag really as an organisation but you do support those people and so it is pretty important. Mr Diment: Very much so, yes. Q309 Mr Weir: You mention in your memorandum the Government's climate change agenda and particularly the fact that it seems to be concentrating on new build rather than retrofit. You have called for a 5% VAT rate on all retrofits and refurbishment work to encourage home owners to make their homes more energy efficient. Do you think this can be implemented without the risk of such a system being abused by those simply wishing to avoid VAT? Mr Berry: Yes we do because we have looked at the evidence from the European Commission 2003 which looked at the experiment on the Isle of Man and that revealed where VAT was reduced, 96.4% of the cut in price was actually passed on to the client. At the same time there was a 96.4% (the same percentage) increase in business activity. That reflects that the market is very price sensitive and the construction sector is very keen to pass on price, particularly in the domestic sector, to clients. Q310 Mr Weir: Are you able to estimate the proportion of work currently undertaken by the sector that could be classified as retrofit or refurbishment? Mr Berry: We have looked at the DTI construction figures for 2006 and in terms of RMI, the market is worth £49 billion, which would have meant that the Government collected about £8.9 per billion in VAT. If you were to reduce it, as we are recommending, from 17.5% to 5%, that is a shortfall of about £6.9 billion. At the same time you have to factor in that a lot of businesses who operate in the black economy would probably be more inclined to register. That was certainly the example in Italy where they reduced the VAT and 35,000 extra firms suddenly reappeared and were registered, so the tax intake would increase in that way. Q311 Mr Weir: You said earlier that most of the work of your members is not building new houses but retrofitting and refurbishment. Of the overall market is that the largest share of the market? Irrespective of tax-take, do you see that as the largest share of the market within the UK given that there is also a large-scale programme of new build? How do you see the balance between the two? Mr Berry: I think it will continue to be the case that people will want improvements to their homes either because they want to expand them, they want a bit more living space, or they feel they have got to repair to continue to make the place habitable. Clearly there is a massive programme the Government have announced of new build but our view is that most of the homes that we have today are still going to be around in 50, 60 or maybe 100 years' time and there will be a continuing great requirement to ensure that those are kept to the highest possible standards. I have no scientific evidence for it, I think it is just intuitive, but I think with the costs of moving these days, people are more inclined to make the best of what they have got rather than go through the agonies and the cost of moving to a new property, although undoubtedly we do need extra properties because of the growth in the number of households. Q312 Mr Weir: Are your members finding that people who are doing retrofits or refurbishments are looking to make them more energy efficient or is this being driven by building standards? Is there a real appetite for it? Mr Berry: I think it is being driven by building standards to a great extent, as again your witnesses were saying earlier on. The customer base is not being very demanding on this at the moment and again from our survey that we have just done, our members were telling us this is not at the top of the list of priorities of the clients they are working for. Possibly more than in any other part of the industry, this is an area in which the customer is king; you deliver what the householder is asking you to do or you do not get the work. Q313 Mr Weir: So in effect price is still the guiding principle for your customer rather than energy efficiency. Do you think that the cut in VAT would have the necessary boost to encourage more energy efficiency and not only reduce the price - and I can understand your point that it will hit the euphemistically called 'informal sector' who presumably do not pay any VAT at all - by taking your prices nearer to them but will have the effect of people saying, "Okay, I want to retrofit, I want to make it more energy efficient"? I am not convinced of that fact. Mr Berry: One of the problems is actually the pay-back period, unless you insulate where you can get your money back fairly quickly. There is growing evidence, particularly among some of the more affluent clients, of them wanting to upgrade their homes so they can make them greener and more energy efficient. It tends to be the top end or in social housing stock where the Government is upgrading the social housing stock, so I think there is a growing willingness amongst householders to upgrade but the tax breaks are not sufficiently attractive. Linked to that, if the Government is very serious about reducing carbon emissions by 60% by 2050 it is going to have to tackle the existing building stock because existing homes contribute 27% of CO2 emissions. Q314 Mr Weir: I do not think there is any argument about that. What I am really getting at is what you are saying to us is that it has to be driven by regulation to force people to go down this route otherwise price will continue to be king. Unless the regulations say you must insulate more and you must do more energy efficient, it is not going to happen on a large enough scale. Is that a fair comment? Mr Diment: I think like most things they need bit of carrot and a bit of stick. Q315 Mr Weir: Your memorandum recommended a cross-departmental review of the regulations surrounding waste and arrangements for recycling. Why do you think that is necessary? Mr Diment: This is an area that our members regard very highly and it was very pleasing to see, again from our recent survey, that well over 90% of them said this was a priority, obviously because they think it is environmentally the right thing but they also see the impact it has on their bottom line. It is getting more and more complicated to understand exactly what the regulations are. There are local variations in interpretation. There are issues about shortage of sites around the country to which our members can take materials where they can be properly recycled. I do not know if there is anybody here from Wales but a particular issue we have from our members in Wales is that there are hardly any suitable sites for hazardous materials of any sort in Wales and you end up undertaking extremely long journeys, burning fuel and creating congestion, to meet the waste regulations, which when you are trying to look at it from a holistic approach does not make an awful lot of sense, so there is a range of things around that need to be more joined up as far as our members are concerned. I suppose another example would be, because of the problems of defining one man's waste and somebody else's material that might be able to be reused in the future, that we have had examples of members who have taken materials back to their yards in the hope that they can either sort them out for reuse or move them on to a proper waste disposal site and then been accused of trying to run a waste sorting station without the necessary permits and licences. Q316 Mr Weir: Do your members find a difficulty with the regulations to do with disposal of certain types of waste? I did have an experience of one builder saying he would not do a job of retrofitting because of the materials there and it was difficult for them to dispose of and they would have to bring in specialists to deal with it. Is that a problem? Mr Diment: That is the sort of issue that many are facing as the regulations become more complex. In themselves of course nobody can say these are not right but it is thinking through the consequences of them, the costs they are imposing, the difficulties they are imposing, particularly when for many of these hazardous materials local authorities around the country do not necessarily have to provide local resources where they can be dealt with. Mr Weir: Thank you very much. Q317 Mr Clapham: It is in the area of retrofits and refurbishments that you would come into contact with asbestos. Do you give any advice down the line to your members regarding the use of approved contractors for its removal? Are the asbestos at work regulations sufficient to be able to provide you with the necessary guidance for dealing with asbestos? Mr Diment: Certainly it is not an issue of concern that has been raised in the sense that you are talking about it, Mr Clapham, from our members. We are at the moment running a series of workshops around the country for our members to make sure that they are up-to-date on the various regulations around working with asbestos and of course, more importantly, disposing of it safely. I think they all recognise the dangers of these materials and are looking for as much help and guidance as they can get from an organisation like ours because, as I said, they are very small organisations in general with not a lot of people resource and they are expected to know everything in the same way as if they were a very large company. Q318 Mark Hunter: I want to move us on to the regulatory burdens issue. In your submission, you make the case of the industry being heavily regulated as it is now. My question to you is: do you think that the Government is making sufficient progress in simplifying the regulations that impact on the construction industry or do you think the system is in danger of becoming even more complex? Mr Diment: No, I do not think it is becoming much simpler. The evidence certainly from our members and I think the wider SME community is that whereas there has been some simplification it is being overtaken by additional requirements being added as new regulations come through. I think it is the sheer complexity, the quantity of them, the cost, the constant changes which are causing problems. People can rarely argue per se with a particular regulation but it is the sheer volume of them coming through. I suppose a classic example for our members would be the changes in the Building Regulations. There are 14 parts to the Building Regulations, ten of which have virtually been rewritten within the last five years. There is often not enough time to get used to it. For Part L of the Building Regs published last year the documents were published on 15 March and people were expected to operate them with effect from 6 April. If you have a big compliance unit in your company that may just about be possible. If you are a five, six, ten-man company that is very, very difficult. Q319 Mark Hunter: So you would agree with my latter comment then that it is becoming more burdensome? Mr Diment: It is becoming more burdensome without any doubt at all. Q320 Mark Hunter: I am going to move onto a question about standards setting. The Federation, as I understand it, is an approved scheme operator for the Government's TrustMark? Mr Diment: It is. Q321 Mark Hunter: Which is at least in theory designed to help protect people from rogue traders. Could you tell us in your opinion why consumer awareness of the TrustMark scheme is so low and also what your organisation is doing to tackle that problem, if anything? Mr Berry: The FMB was instrumental in helping to set up TrustMark because we think it is a very good thing to help advise clients. The problem that we are picking up from our members is that TrustMark is not widely known amongst the general public and particularly the clients of FMB builders and that is probably because of poor marketing of TrustMark. We are trying to do our bit by promoting TrustMark in the promotion of material, and certainly in terms of our trade magazines wherever we can we refer to TrustMark. Government funding for TrustMark was cut earlier this year and members are saying there is very little business advantage at the moment in the TrustMark, and so what is needed is a robust marketing and consumer plan for TrustMark so that everyone in the industry is familiar with TrustMark and would know what it means and who to go to if they want any work done in their house. Q322 Mark Hunter: How many members at the moment are accredited? Mr Berry: 2,800. Q323 Mark Hunter: Out of how many? Mr Berry: Out of 13,000, but that is the largest number within the TrustMark scheme by far. Q324 Mark Hunter: But there is still some way to go? Mr Berry: We need to encourage more members to do so and we are trying to do that. Q325 Mark Hunter: What do you do as an organisation to encourage more of your own members to sign up? Mr Berry: We are trying actively to promote it to our members but the problem is that all the feedback we are getting is they cannot see the business advantage. Clients are not asking for the TrustMark kite symbol and so until they can see the added business advantage it becomes very difficult. Q326 Mark Hunter: So you think Government needs to give a lead on this and do more to promote what the scheme is about? Mr Berry: It was a commitment in the Government's Manifesto and now it has taken away the money. If you are going to promote a scheme like TrustMark you do need to put the money behind the marketing to make sure that everyone knows about it. Q327 Chairman: How much money is involved in TrustMark? Mr Diment: There was an initial grant, if my memory serves me right, of about £2 million for the first 18 months of its operation but direct government support for TrustMark ceased at the end of March this year and it is now reliant only on the subscriptions that are paid by the individual companies that are prepared to get themselves licensed through TrustMark. Q328 Chairman: This comes under the consumer affairs part of DBERR, does it? Mr Diment: It does, yes. Q329 Chairman: That leads me to the last question I want to ask you before we let you go, because bogus self employment is an issue that we spent a lot of time discussing at the last evidence session and my domestic boiler featured in that earlier session because I realised I had a bogus self-employed plumber who was very difficult to call to account afterwards for the quality of his work. Is it a matter of concern and also does it have consumer implications? Do your members use self-employed labour or are they typically small teams of builders and craftsmen who go round and do the work on a fully employed basis? Mr Diment: Certainly a substantial proportion of our members operate entirely within their own employees most of the time but, equally, a large number of them do occasionally have to bring in specialist staff either to cope with short-term peaks or a particular craft that they do not have within their existing workforce. I think it is almost impossible for us to put an estimate on the number who might be employed. We like to think, and I am reasonably confident, that the vast majority are employed legitimately, but I do not think anybody can put their hand on their heart and say there is none at all. Q330 Chairman: The business model which actually says a company entirely uses self-employed labour would not meet the approval of your organisation. I am thinking of systematic, well-planned large businesses. Thames Water referred me to this plumbing company and it turned out that the plumbing company was using entirely self-employed people and had no employed staff at all and the responsibility therefore was shuffled between the two. Mr Diment: When we look at the turnover of a company we would like to see that equate somehow to the declared workforce of the company, and if there was a great inconsistency we would be asking greater questions. Q331 Chairman: Because there are consumer implications for extensive use of the self employed at your level? Mr Diment: Yes. Q332 Chairman: And they are different implications to the ones of big businesses who might have other reasons for using bogusly self-employed labour? Mr Diment: Yes. Chairman: Okay, I think that concludes our evidence session. Your written evidence came to us some months ago because of our delay in launching this inquiry because we thought we might be about to be abolished, so if there are things that you have not been able to say today that you would like to give us further written submissions, please feel free to do that; otherwise thank you very much indeed.
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