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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 127-iii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE BUSINESS, ENTERPRISE & REGULATORY REFORM COMMITTEE
Monday 10 December 2007 MR GRAHAM WREN and MR TREVOR HURSTHOUSE MR JOHN SLAUGHTER and MR JOHN STEWART Evidence heard in Public Questions 333 - 436
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Business, Enterprise & Regulatory Reform Committee on Monday 10 December 2007 Members present Peter Luff, in the Chair Mr Adrian Bailey Mr Lindsay Hoyle Mark Hunter Miss Julie Kirkbride Mr Mike Weir ________________ Memoranda submitted by National Specialist Contractors Council and Specialist Engineering Contractors Group
Examination of Witnesses Witnesses: Mr Graham Wren, National Specialist Contractors Council, and Mr Trevor Hursthouse, Specialist Engineering Contractors Group, gave evidence. Q333 Chairman: Gentlemen, thank you very much indeed and welcome to this evidence session of the Committee's inquiry into the UK Construction Industry. For reasons best known to someone else in the room, I have to be on my very best behaviour today, because I have a very fierce judge in the room, I see. Can I begin by asking you to introduce yourselves for the record, and perhaps, as I have asked previous witnesses, if you could explain exactly what your organisations do, because there are quite a lot of organisations in the construction sector, and the Committee is coming to terms with them slowly. Mr Hursthouse: Trevor Hursthouse, I am in fact chairman of a company Goodmarriott & Hursthouse, an SME operating in the mechanical and electrical services field in Nottingham where it has been since 1913; more recently, part of the European and UK Imtech Group. Our business currently does £30 million a year turnover and we employ 250 people. We operate in the Midlands and North East, and throughout the UK. As far as the industry sector is concerned, I am also chairman of the Specialist Engineering Contractors Group, that is a group of associations which is the electrical sector, heating and ventilating sector, structural steel sector, lifts and escalators, and also plumbing and heating. We also have an association with the electrical sector in Scotland. We represent 8,500 member firms, but probably believe more like 60,000 firms are involved in our activities, which I suppose I would describe as high level engineering associated with construction projects, so heating, lighting, building management systems, lifts, escalators and the like, and that part of the sector can be somewhere between 30 and 50% of the value of work carried out, so our sector probably executes in the region of £30 billion per annum. I hope that helps. Q334 Chairman: It certainly does, thank you. Mr Wren? Mr Wren: Yes, thank you, my name is Graham Wren, my day job is I am executive director of Balfour Beatty Ground Engineering. Whilst Balfour Beatty is a very large company, Ground Engineering actually operates in the sub-contract sector, so all of our work is done under sub-contract. Our turnover is at around £90 million, we employ approximately 600 people. I am also immediate past president of the National Specialist Contractors Council. That is an organisation which represents some 28 other trade associations, and these in turn represent SMEs, approximately 7,000 specialist contractors who are operating in the building industry mainly, so anything from piling right through to the roofing, these would be the trade associations that would be represented by NSCC. I hope that is helpful. Chairman: That is very helpful, thank you very much indeed. We will get straight into some detailed questioning built on your memoranda, if I may, for which we are very grateful. Adrian Bailey? Q335 Mr Bailey: Just on the supply chain integration that you have referred to in your memoranda, basically progress has been slow in obtaining an integrated approach. Why do you think this is so? Mr Wren: I think the central issue for the industry is that the various parties who go to make up a contract essentially have different business drivers, so we have a client, we then have a major contractor, we then have a professional team, and then below the main contractor we will have a number of specialist contractors who are on site doing the work. The principal business driver for a main contractor is essentially cash, it is making sure that cash is coming in. One of his central drivers should be getting cash down to the supply chain, but unfortunately that does not happen as it should happen. Failure in the supply of cash to the specialist contractors really does undermine the whole principle of integration. If the cash does not flow from the client right the way through the supply chain in a timely manner, then you do not have any principle on which to base good successful integration. The other area I would say is that in terms of the professional team, you have a consulting engineer who is paid on a fee basis for his design. Any value engineering that the specialist businesses can bring to that design process actually goes against often the fee structure of the consultant. Why should he redesign it on the basis of a specialist contractor coming in and offering an alternative? So that could be one of the other areas which legislate against good integration. Mr Hursthouse: Yes, I will perhaps add to that. It is interesting that Graham says that the principal concern maybe of the main contractor is cash and the flow of cash. It is worth remembering that the industry has changed, and effectively main contractors are managers, and the reality is that the work is done by the specialists. Our staff screw things on walls and make buildings work and actually build them. So we have, if you want, the outlay, we have the overall control of the operation. I think also sometimes there is a misunderstanding about what integration really is. It is interesting that you hear it said that because there has been progress made towards achieving the 50% by the end of 2000 target that was in the Egan Accelerating Change report, to achieve 50% of jobs using integrated project teams, and you can have a client and a consultant, a designer and a main contractor, saying, "We are integrated"; well, maybe they are. That is not really an integrated team, but it is from their perception. If you ask them, they may say 20% of projects are integrated. If you ask the specialists, they may say probably 5%. Q336 Mr Bailey: That is interesting, because what it amounts to is the main contractor has no financial incentive for getting, if you like, an integrated and more cost-effective team together. In the Treasury report on transforming Government procurement which was published earlier this year, it did say the comprehensive spending review should ensure procurement is built on the principles of value for money and sustainability. Do you see any evidence so far from the CSR settlement that the Treasury intends to make procurement funding conditional on the use of an integrated delivery process? Mr Hursthouse: No. Mr Bailey: Have you anything else to add? Q337 Chairman: The Chairman does encourage succinct answers. They are welcomed. Mr Hursthouse: The answer is no, but I think I find it particularly odd that when you look at the sector -- we do not have time to go into all the detail, but report after report, Latham, Egan, NAO reports saying that there is a better way, there is a more cost-effective way of procuring construction. If you take the NAO report, it actually says that £2.6 billion a year can be saved by using a proper procurement method, and the CSR does not refer to it. I suppose as a taxpayer, I object. So why does it not? I do not know the answer to that, perhaps you could enquire into it. Q338 Mr Bailey: Have you anything to add to that, Graham? Mr Wren: I fully agree. Q339 Mr Bailey: Just to add to that, given the fact that the OGC has laid down common minimum standards, this would seem to indicate that Government procurement does not even meet those standards; is that correct? Mr Hursthouse: Again, I am sure Graham will have a view on this, but it would indicate that they do not keep to those standards, and that is again something I do not understand. OGC have put a tremendous amount of work into producing standards, into enquiring into best practice, into giving guidance on how best practice should be executed. Forgive me, both of us are practitioners, so we perhaps sometimes are not as in tune with these things as maybe we should be, but I understood that the common minimum standards, which are a clearly defined document, anyone can understand them who knows the sector, were mandatory, but they are not, or if they are, what is the sanction for not complying with them? Because they are not complied with. Certainly if you take local authority work, where there is an enormous amount of Government-funded work done, there is no indication that those minimum standards are applying or will be. Q340 Mr Bailey: So there is no monitoring of them to see that they are? Mr Hursthouse: Others may tell you different. If there is, with respect to whoever does it, it is not working. Q341 Mr Hunter: Can I invite you to stay for a moment on these issues of supply chain integration? You made a number of recommendations in the evidence that you placed before the Select Committee specifically dealing with integrated project teams. One of the notions you advanced was the one about appointing a champion, as you refer to it, to promote the integrated project teams in public sector construction, and various other things. Could you just tell us a little bit more about this champion concept? What form would this champion of integrated delivery take in your view? Are we talking about a single official or perhaps a Ministerial role, or do you actually envisage a whole new Government body? What activities would you see this champion being responsible for carrying out? Mr Wren: I would like to think of a champion in the sense of -- the analogy being a client, and the best integration happens when that client or champion takes a very central role in the procurement of his project, his or her project, through the supply chain. So good practice in terms of payment, low retention, is driven from the top rather than driven down to what I would call tier one, which is the main contractors. Because if it is just driven down to that level, then all of the other business drivers that I talked about earlier, in terms of the contractor makes money out of cash, the supply chain makes money out of doing things, all that is lost, so all of the best integrated projects are on the basis of a very clear direction given by the client or champion about how that project is going to be delivered in terms of good practice. Q342 Mr Hunter: So that is the function and purpose, but who or what is the champion, as you see it? Mr Wren: Well, if you take public procurement, it would be very nice to think, at the very highest level, in terms of a construction minister. A construction minister could set down the rules and good practice by which all public procurement is to take place. I think the problem we have at the moment is that there is a growing commitment to best practice, to good payment practices, to nil retention, but there is no enforcement. Q343 Mr Hunter: I think we accept that the case is there for this kind of thing. It seems to me you make a fairly logical case for it, but is it your contention that this job ought to be at ministerial level? Is that what you are actually advocating, or did you have in mind somebody else who is an expert in the sector being brought in specifically to do it? I am just trying to understand how it would work in practice if the Select Committee were able to say, "Your wish is granted, we are going to set up this champion", what exactly is it? Mr Hursthouse: The minister perhaps might be an obvious person to be the champion, to have a level of authority. Q344 Mr Hunter: It might be the obvious one, but is it the one that you would personally want to see? Mr Hursthouse: Ideally, but I think as an alternative, it would be a high profile individual who was briefed with the task -- perhaps with a small staff, I do not know -- of driving these benefits into public procurement. Q345 Mr Hunter: Okay, that is helpful. Just on the same thing, my final point is: could you perhaps give us your views on whether or not private sector clients are any better at stipulating the use of integrated teams when procuring projects? If they are, why that might be the case? Mr Wren: Generally, yes. It is not as widespread even in the private sector as we would all hope, sitting at the specialist sector level, but generally, where it does work in the private sector, it is very successful, and what I think distinguishes them is that they do take a very active role, as I have described earlier, in terms of determining the agenda for their project. We are often talking about a discrete and single project, it may be quite large, but nevertheless it is just one project, and they pay very close attention to the risks associated with their project, so who is in the supply chain, and the competence of the people within their project. Some of the best clients that actually I have worked for in my company are the ones that actually sit at the table with all of the team associated with their project and run through risk assessments; they actively allocate risk to those people who are best placed to deal with that risk, and they understand, most importantly, the differentiation between value and price. That is something which is still not appreciated in our industry, and there is still a tendency to fall back to lowest price. The good clients are the ones that understand the best value. Q346 Mr Hunter: Your case is that there is clear evidence that the problem is much more in public sector than private sector? Mr Wren: In my experience, yes. Mr Hursthouse: I would say I have shared that experience. Q347 Chairman: Just give me an example of good practice in the private sector -- not Terminal 5, we have heard enough about Terminal 5. Another good case history in practice. Mr Wren: I can give you a personal one, if that would help. Around about seven years ago, a private developer in London determined that he was going to not take the traditional approach of just appointing a contractor to let that contractor get on with it, he was not going to just appoint a designer to design the work, he chose upfront his supply chain, he did a lot of homework in terms of who that supply chain would be, and brought them in on a single action basis to work up the design with his professional team. Then as the chairman, almost, of the group around a table, he decided how he was going to allocate the risk associated with the project. The most important aspect of this is that the supply chain, because they were locked into the project, were willing to share all of the risks and opportunities associated with the project with the client. The client was then able to see not only the risk but the opportunity he might have to improve upon the project, and the philosophy was simple. By involving early, he understood in a lot greater detail all of the risks and opportunities associated with his project, and he had much greater certainty of time and money, to the point where he was able to negotiate with his whole supply chain credits if we all went quicker. We actually paid back to the client some money at the end of our project, almost unheard of. That was some time before integration really was taking off. Chairman: Thank you, that is a very helpful illustration of the point. Before I bring in Mike Weir, Adrian Bailey has one last question. Q348 Mr Bailey: Very interesting. On the surface, it would appear that you are almost calling for more regulation. Is it an issue of more regulation or better enforcement of existing regulation to achieve this? Mr Hursthouse: If we are talking about the public sector client, which I think we are particularly, then I think better enforcement of current knowledge. It just seems, well, almost bizarre, the fact that there is a wealth of information out there which everybody agrees -- there is nothing wrong with it. I do not see reports saying that Egan is nonsense, Latham is nonsense, 2012 commitments, nobody is saying that. Even the Government department OGC set out, as I said earlier, clear guidelines, directions, support as to how to carry these things out. Yet there is a break, there is a link missing, that when people come to execute it, they do not use it. I do not know whether you call that enforcement or not, I am not quite sure how that applies, but certainly if a respected Government department -- I am sure OGC recognises and advises on best practice, why would you not use it? Not you, I mean -- why do you say, "Well, I have heard all that, I have read all that, but I am just not going to do it"? Q349 Mr Bailey: Just ignore it. Mr Hursthouse: It seems odd. Chairman: We are going to dig a little deeper now with some questions from Mike Weir. Q350 Mr Weir: Mr Hursthouse, in your memorandum you stated that project bank accounts would help facilitate integrated working; you also suggest these could equate to a 2.5% saving on project costs. Could you tell us first of all how it would create savings for clients, and given what you say, why have main contractors and clients not sought to use project bank accounts to date? Mr Hursthouse: Well, how does it save money for clients: there are costs associated with acquiring credit in the industry generally, and if you do not receive prompt payment, those costs have to go somewhere. At the end of the day, the client pays all the costs, that is inevitable. We will perhaps talk about it in due course, but if you have an industry which has a problem with late payment, then it has to cope with that by paying for credit. One of the issues about which there is most dispute on any project, and I am afraid there is sometimes too much dispute in construction projects, is about payment. Perhaps we will discuss them in a little while, but project bank accounts can solve a lot of those issues. The money is directed into the supply chain simultaneously, rather than cascading down and being delayed for good or bad reason. I think there is money saved, because people have to spend a lot of money collecting cash when there are payment issues. One of the ones that is not necessarily recognised is insolvency. There is a case where because cash has not reached people on time and in the right amount, insolvency occurs in the supply chain, and that can be very, very disruptive, and very, very costly, and there are examples of that. There is another further hidden issue, which is that if people in the construction supply chain are not paid on time, and not able therefore to discharge their responsibilities and debts, the thing begins to stack up down the system. There can be difficulties with suppliers created because of that, and again, that is disruptive to the supply chain team and again that becomes disruptive to the project. So all of those are costs which can impact on the project and therefore ultimately on the client. As to why main contractors and clients do not use them, Graham spoke earlier about the main contractors' access to cash, and cashflow management, and the extent to which he has large sums of cash, very often, which are being disbursed to other parties in the project team. The current mechanism is that all the money arrives with the main contractor and then it is disbursed. You hear us referring to main contractors here; I would not want to give completely the wrong impression. Not every main contractor is doing every bad thing that every main contractor would ever do, there are some perfectly respectable main contractors in the industry who are champions of the industry and behave in a very different way. So why would those sort of people, who are using that cash to perhaps rob Peter to pay Paul, or whatever, keep their business going with the cash in hand, and being able to hold it back a little while, bear in mind these are relatively large sums of money. So if you have the wages to pay on Friday and somebody owes you half a million pounds on Wednesday, and it does not turn up by Thursday night, you can have a very sleepless night. Q351 Mr Weir: I understand all that, and I can see from your explanation why a main contractor may not want to go down this route, because he would not have the use of that money, but surely it is in the client's interest for the smooth running of a contract to go down that route, so where is the logjam for imposing it? Do clients have the power to say to main contractors, "I want to do this so my contract runs smoothly"? Mr Hursthouse: Yes, they do, and you would expect they would want to, although sometimes, because of the reasons we were talking about earlier, the client has a relationship with the main contractor and a small team at the head of the project, not with the specialists, and does not necessarily recognise the extent to which those specialists are carrying out the work, and rely on an appropriate flow of cash to allow them to be able to deliver the service that he is looking for. I think that is sometimes just not appreciated, and yes, they can say, "We will have a project bank account". Q352 Mr Weir: So basically the contractor that Mr Wren told us about, his approach would probably push him towards doing that perhaps, but your average client would just say to contractors, "Here is a job, get on with it", and not really be interested in the nuts and bolts. Mr Hursthouse: Just that, without looking at the bigger picture. Very often, if you were contracting a large construction job and you know that to complete that job, you need a group of people, specialists -- Q353 Mr Weir: Then the question is: how do you get clients to take more of an interest and to insist upon doing this? Mr Wren: It just goes back to the central issue of the client understanding what best value means. I have some sympathy with clients because why should the client have to get involved through the supply chain? You know, I have appointed a contractor, I have appointed my professional team, and if I am a one-off client in the construction industry, why do I have to go through the whole supply chain, and also make sure that I understand all of their issues and their payments as well? Well, the reality of the situation as it is currently structured is that unless the client does that, there is a very real risk his project will go wrong, it will go over budget, it will go over time, simply because of all the business drivers which we described earlier. The contractor makes money out of his cash, the supply chain need the cash to do the work, and as soon as those two fundamentals go out of kilter a lot, that is when you get the disputes coming through your project. Q354 Mr Weir: It does not sound to me like there is an awful lot of drivers for anybody to actually push this forward in any way, the contractors or the clients, from your explanations. Mr Wren: Sorry, the problem we have is we have lots and lots of good practice in our industry, you know, in my own business, I am sure in Trevor's business, we can point to lots and lots of good practice. We are not joining it up. Q355 Mr Weir: I think we had better move on. You also mentioned collaborative contracts; can you tell us what the key features are of a collaborative contract and whether there are any good examples from the public sector of such contracts in operation? Mr Wren: Yes, there are some key features, I think, of a good collaborative contract. Not in any particular order of importance, but I think early supply chain involvement, that is where you will realise best value in your project; an understanding that actually the supply chain also do quite a lot of design; contrary to what you might think, probably most of the design in a project is carried out by the supply chain and not actually by maybe a consulting engineer or a structural engineer, and payment for that, I think, should be recognised, and it is not currently; a clear identification, I think, of how risks are to be handled on a project; fair payment mechanisms; no retention; and a clear path that escalates disputes with the courts being last resort. I think for me, those would be the key features. Mr Hursthouse: Yes, sharing risk is the thing, collaboration, as it is defined; I think one of the troubles we have is people arrive and become a party to the contract, progressively, too late. We arrive as the electrical engineer for the job and somebody tells me, "This is the design and this is our target costs". Well, if you say they are both wrong, it is a bit late to be doing anything about that, and thereafter, everyone has a problem. But if you buy into it at the very beginning and say, "We agree this is the right design, we agree this is the right target cost", we are not in a very good position to start saying later on, "Well, the price has all gone terribly wrong", because the client understandably says, "Well, you bought into it, you had better put it right", so it is a shared risk. Q356 Mr Weir: And an example in the public sector? Have you got any good examples from the public sector? Mr Hursthouse: From the public sector? Mr Wren: I think the NEC contract? Mr Hursthouse: Well, the contracts themselves; the project I thought you were referring to. Yes, the new engineering contract is something which is being used by ODA, for example, on the Olympics, and I think it is the recommended contract -- well, interesting, from OGC, it should be the contract of choice. I do not think I have ever seen it used on a public contract. Q357 Mr Weir: You also say in your memorandum that different Government departments are using different types of contract. Do you think the Government are making sufficient progress into standardising contracts across departments, and indeed to what extent is it possible to achieve such standardisation? Mr Hursthouse: Again, forgive me, but the straight answer to your first question is no. It is not as simple as that. There are a plethora of contracts, I suppose, because they have been built up by, with respect, this sort of unjoined-up construction procurement that has gone on across Government, so they have really been almost in silos, creating the contractual arrangements. Now is the opportunity of OGC and others -- I am sorry to keep referring back to it, but you would expect me to -- to say, "Look, this is how you should procure construction and this is the contractual arrangement you should have". I suppose thereafter, you say, well, why do they not get on with it and do it? Q358 Mr Weir: That one does not seem terribly hopeful either, so I will try your third mention of project insurance. Can you tell us what progress, if any, has been made towards widescale adoption of integrated project insurance? Mr Hursthouse: Well, not necessarily widescale adoption, but it is a new concept for the industry, and one that has enormous potential value, and some pilot projects have been identified. I think the intention was that there would be ten public sector trial projects with a value of about £250 million, and that is actually coming to fruition now. There is a project, I believe, which has been identified for the purpose, Southport General Infirmary, and there this will be trialled, and on these other ten projects, to see whether the theory -- well, not the theory, because other people have done it successfully -- will turn into practice. But inevitably when you are doing it with construction, these things take time to be implemented, for the outcome to be seen. Q359 Mr Weir: Are insurers generally willing to offer such insurance, in your experience? Mr Hursthouse: There is a group of insurers who certainly are, and that is a project that SEC Group has been involved in, in bringing the whole idea together, and bringing the right people together to insure projects. It is one of those concepts that is, I suppose, almost, you would think, quite obvious. Everybody on a construction site has to pay professional indemnity, everybody has all risks insurance and so on, so the insurer looks at the project collectively rather than looking at the business and thinking of all the things that might happen to it in any given year which it cannot really control, and in doing that, it is looking at the competence of the construction team, who of course can take risks away from the insurer. But it does go a stage further, and the real opportunity out of it is it will in fact then insure the project itself, in terms of its outturn, both cost and time, but again, to do that, there is a bigger emphasis on the project team, because the insurer is saying, "Can these people deliver? Will I insure them?" In a way, it is a catalyst, I guess, for integrated project teams to be put in place. Q360 Mr Weir: Finally, the problem of retentions has always been one within the industry. Has it improved any since the Committee last looked at the issue five years ago, and if not, why not? Mr Wren: I am tempted to say no. I would say not really. There have certainly been some improvements but it is not the pace which we really need to see. I think it just goes back again, without wishing to sound like a cracked record, to the central issue of the key business drivers being the parties involved, the issue of cashflow. What you have to appreciate, I think, is as a specialist, my business has a high capital cost, it invests in a lot of equipment, direct employees, training, all of those sorts of issues, I am what I call a capital user. It is absolutely fundamental to my business that my return on that capital is adequate and that I am getting cash through my business as well. Now the major contractors -- and as Trevor has said, there are some great ones out there, really good for the industry, but a primary business driver is their cash that they hold in the business. That cash is cash which is generated on a project and should be going through the supply chain. The longer you hold on to that cash, the more you can make from it. Therefore, retentions is one element of that. If I make 3% profit and I have 3% held in retention for two, three, four years, then how do I invest? I cannot invest in equipment, I cannot invest in training; and that is where the problem lies. Q361 Mr Weir: Given that, is there any difference about the way it is dealt with in the private sector as opposed to the public sector? Mr Hursthouse: I think there is, yes. There are enlightened clients in the private sector who engage with people in a way where they do not feel it necessary to take retentions. There is an issue here which comes up time and again: trust. Graham is talking about probably a more enlightened approach to integrated project teams, to working closely with a full project team. If you engage somebody and say, "Well, I would not engage you unless you were reliable", why would you take the retention? It is rather like saying to somebody, "I am going to employ you but I actually think you are going to do a lousy job so I will just hold your money back". If it will help you in terms of the scale of the issue, perhaps examples are quite good, but our report I brought with me, my own company, which is a business which does £30 million a year turnover, the last report had retentions held of just over £1 million, £525,000 worth of those were overdue. The oldest overdue was November 2005, and over £110,000 of those were due in 2006. We are a business which is very professional when it comes to collecting our money, we employ a lot of resource in collecting our money. That is the position we find ourselves in. Q362 Mr Weir: And how about the public sector? Who are the worst in the public sector for holding onto retentions? Mr Wren: It is a bit patchy, but generally, I think, the local authorities are still holding onto quite a lot of retention. Interestingly enough, a lot of Government departments now have a policy of no retention, but it is not enforced with the contractors, so do you know what your contractors are doing actually with the supply chain, in terms of retention down the line? You will find that almost 100% of the contractors are holding retentions on the supply chain that are doing work on Government projects, and this is what goes between commitment and enforcement. Q363 Chairman: So the taxpayer is funding the profits of the contractors? Mr Wren: I would have to think about that one. Mr Hursthouse: Well, insofar as the taxpayer is a client, I suppose -- Q364 Chairman: The taxpayer is paying the contractors' fees and they are not passing them on down the supply chain, so the taxpayer is creating a huge cash balance for the contractors. Mr Hursthouse: Yes, but ultimately it gets passed on, so long as you can drive the payment of the debt. It is just that it is often withheld for periods of time, sometimes for good contractual reasons, which we will not go into. Q365 Mr Weir: Given your earlier answers and the suggestion that the taxpayer is in effect keeping the main contractor going, in the same way as a private client would be paying him the money he was holding onto to pay his wages, and to stop borrowing more money, so in effect it is an interest-free loan from central Government, if that is what is happening. Mr Wren: Effectively. Mr Hursthouse: If you hang on to somebody else's money, you are, I suppose, getting an interest free loan, yes. Mr Wren: An inspection of contractors' balance sheets will show you the difference between the profit and the cash. You will see that there is quite a big imbalance on most of the balance sheets. Q366 Chairman: The public policy issue is retention is doing harm, you say, to the construction sector, so the Government can say, "Tick the box, no retentions, we are meeting all our objectives." In fact, in practice, it does not make any damn difference at all, because the sub-contractors are not getting paid. Mr Hursthouse: I do not think we could say that was universally true, but that is something which happens, that is for sure, yes. Mr Wren: That is generally true. Mr Hursthouse: At Government level, with local authorities, they do hold retention and they openly tell you how they make money with it and use it for other purposes. I think in the report you had from either of us, that is defined, I mean, it is a piece of policy. Chairman: Thank you. Thank you very much, I am very grateful. Lindsay Hoyle? Q367 Mr Hoyle: Can I just follow on from that a little, because I am a little bit concerned. As contractors, why do you enter into a contract when there is a retention there? Surely it is down to yourselves. You are masters of your own destiny. Mr Wren: I sometimes ask that question myself. Mr Hursthouse: It is a very good question. Well, you do not! I mean, of course, all of this seems sometimes bizarre. It is a very good question, Mr Hoyle. Why does not the specialist contractor turn around to the main contractor, whoever it is, and say, "I am not having your contract, clear off"? I take your point, but it is not quite like that. The relationship in the industry is not quite like that. What actually happens, you have a specialist, who is the guy who is doing the work, he has a number of employees, whether it is 50 or 100, and he needs a workload to keep his business going. Now from time to time, and it is interesting how we were talking about the inconsistency of contract types, people come to you, there is a dialogue to secure work, and basically what you are left with very often is, "Well, here is the work, it is yours because you are the cheapest, but anyway, it is yours, and here is the contract". This is where the power game plays, if you want, of, "Well, if you do not have the retentions, you are not getting the job then". "Hang on a second, I have 50 blokes here, what am I going to do with them?" So there is an element of taking on contractual conditions which either have to be tolerated because it is custom and practice, or you assess the risk, that is not likely to happen anyway. So it is a rather unusual relationship, and whether I have described that sufficiently, I do not know, but the reality is the work flow in a business has to continue. Q368 Mr Hoyle: Presumably you build in for it as well. Mr Hursthouse: There is an extent to which you do. Q369 Mr Hoyle: So it is not quite too many -- Mr Hursthouse: No. But then the cost goes up and the client pays for it. Q370 Mr Hoyle: That is the reality, is it not? You are not really losing out, everybody is passing it on. Just out of interest, as a specialist contractor, you will also have more specialist contractors supplying you. Mr Hursthouse: Yes. Q371 Mr Hoyle: Do you hold back from them? Mr Hursthouse: That is an interesting question as well, is it not? Q372 Mr Hoyle: I just wondered -- Mr Hursthouse: I can answer it quite honestly. If there is no retention on us, we do not. Q373 Mr Hoyle: But if there is -- Mr Hursthouse: We do, except we actually in our business have some thresholds, where we say: if this piece of work that has been carried out is below a certain level, we do not take retention. Q374 Mr Hoyle: So the food chain, yes. Mr Wren: Could I just correct one thing? I think you will find in our SME sector, we are not talking about 50 employees, you might be talking about less than five employees. The continuation of work with their clients, ie contractors, is an extremely important issue for them, and therefore, they are willing to let retention flow through on the basis of getting continued work. Whether they should be doing it or not, the realities of the situation are that they need to trade in order to survive. Q375 Mr Hoyle: Okay, I think we have made our own points, thanks for that. Can I just move you on to the review of the Construction Act? Why does the Construction Act in its current form fail to meet the needs of many parts of the industry? Mr Hursthouse: I think on two particular points. The two most important points are probably the subject of payment and then of adjudication. In the case of payment, the objective or requirement, probably the objective, I think, was to provide an adequate mechanism to give people certainty in terms of the amount of payment, and when they would receive payment. In other words, there is an agreement to pay this on this date, and we were talking earlier about these cashflow issues, so there was a requirement to achieve that, and there are reasons why that has not been achieved, which we can perhaps go into. In the case of adjudication, there is a scheme which is part of the original legislation, and the intention was that it should be straightforward, simple, a quick, low cost way of immediately resolving a dispute, usually to keep the flow of cash going, and for all sorts of reasons that have been frustrated, manipulated, interfered with, whatever you want to call it, when, to be blunt, the lawyers got their hands on it, no disrespect to any lawyers in the room. Q376 Mr Hoyle: We always like to blame those. In the case of the SEC Group -- I suppose that is the best way to call it? Mr Hursthouse: Yes, that is fine. Q377 Mr Hoyle: -- they state in their memorandums that the current consultation on the amendments to the Construction Act bears little resemblance to the original review of the area conducted by Sir Michael Latham in 2004. You have touched on it, but could you outline your actual main concerns on BERR's or DTI's proposed amendments to the Construction Act? Mr Hursthouse: As far as we are concerned we must achieve that objective; that is, certainty in terms of times and quantum. The discussions with BERR are ongoing and they are very open. I personally believe that they can be productive and successful. I do not think at the moment there is certainty that we have achieved that objective, but I believe that we can; and, if I am honest with you I believe we will. I believe there is a will to achieve that requirement. The fact is that if you look at the thing originally there has been an understandable desire to achieve consensus of opinion as to how these things should be resolved. I do not understand the technicalities but there was a regulatory reform order or whatever, and that needed consensus to make it work. The reality is, as I hope we have been explaining, that the parties are in different places in this issue, and there will not be consensus. It is just unlikely that there can be because we have different objectives. Q378 Mr Hoyle: The Construction Act: four years ago it started: who do you blame for it taking so long to complete? Mr Wren: I am not sure we are into blame. Q379 Mr Hoyle: Who do you hold responsible, then? Is that better? We will dress it up! Mr Wren: I am not going to get drawn into blame. Q380 Mr Hoyle: Who do you hold responsible? Mr Wren: The central issue is that, as Trevor described, we need to get consensus in an industry where we have already, many, many times ‑‑‑‑‑ Q381 Mr Hoyle: Okay, it is consensus; so another ten years on, are you still going to say "consensus" or are you going to actually say, "Well, to be honest with you, we believe it is ..."? Mr Hursthouse: The answer to that - no, no, another couple of weeks we will have it cracked, and then on the statute book! Q382 Mr Hoyle: But if you do not? Mr Hursthouse: If we do not, we will ----- Q383 Mr Hoyle: Do you blame the lawyers? Mr Hursthouse: No, no. We often do blame the lawyers, and we will! Look, as far as this thing is concerned, as I say, it is absolutely crucial. There are people who do say: "Let us have something that is nearly right and move on." There is no value in that; it does have to be something that is going to work. I take the view that however many years it is we have been in this review, if you assume the review had a purpose - and I believe it did - then surely it has to be seen through to a proper conclusion? That conclusion has to be something that delivers what we are trying to achieve or what BERR is trying to achieve. I believe it can do; I believe there is a willingness there. In fact we have a meeting with BERR on Thursday for that very purpose. Mr Wren: Can I add to it? I probably will get drawn into blame now! The central issue is that clearly contractors have a strong lobby, and it relates to cash flow. Those that do not want the cash to flow or to muddy the waters in terms of when that cash will flow clearly have an interest in not making it flow. If we are honest with ourselves, then it is the specialist group, lobbying for fair payment against the contractors' group, that wants to keep the thing muddy - which is what it is now. Mr Hursthouse: Five Ministers in four years does not help either. Q384 Mr Hoyle: So the strong lobby group continues. You are still using those old peers, are you, to lobby for you? Mr Hursthouse: Yes, very good they are too! I am not so sure about the old! Mr Hoyle: He has just woken up - we are all right! Chairman: We are not allowed to ----- Mr Hoyle: Can I just move you on to ----- Chairman: I think "old" is a bit unfair Mr Hoyle: That is why I said it, Chairman! Q385 Chairman: Can I be clear? You are blaming the industry not the Government largely for the failure to make progress in this area. That is the important ----- Mr Wren: No. Q386 Chairman: Corporately. Mr Wren: Corporately, yes. The industry has got lots to answer for in terms of the way that we are structured and the way that cash does not flow. There is an opportunity for Government to clarify through this process. In trying to get consensus I think we are going to lose it. That is, in my view, the problem. Q387 Mr Hoyle: In the case of NSCC, they note that clients in the public and private sectors have committed to only using contractors that hold CSCS (Construction Skills Certification Scheme) carded workforces, but that is not actually happening. Why is it that many of the clients and contractors are still not delivering the commitment on both sides to use the CSCS carded workers? Mr Wren: I would probably disagree with you. Our experience is that most of the specialists operate at 100% carded workforce, and I think it is the same for SEC G. There has been a lot of time and investment in making sure that we do go there. I think the main contractors' group has a very strong commitment of only using 100% carded workforce on their sites, and clearly in terms of card number uptake it is very good this year and increasing. I think the issue is not the commitment the industry has in getting the carded workforce; in my opinion it is enforcement. When you turn up on site with a card and have spent time and money in getting that card, you want to make sure that that card is checked for your work on that site. Sometimes I think that is not happening. Mr Hoyle: What worries me is that in some of the evidence that has been provided - and it goes on to say in specialist skills; it says that clients have committed to using contractors with CSCS carded workforces, but this is not yet happening in practice; and this is a concern for those companies that have invested in qualifying their workforces. So they are saying that SMEs have not been able to invest because they are not quite sure where the next job is and where the next contract is coming from, and it is a lot of money to make sure everybody is carded. Chairman: For a point of clarity, Mr Hoyle has just summarised your own evidence to us, quoting your words to you. Q388 Mr Hoyle: So if you do not like your words, you should not put them down. Mr Wren: Well, I understand that. I can only tell you from my own experience and that within the NSCC. The complaints that come back to NSCC are: "I have invested in getting my CSCS card, but I am working on a site where other trades have not got CSCS cards: why should I invest in this card?" Q389 Mr Hoyle: You just said to me that that is not the case; now you are saying that is the case, but it depends which part of the contracts and which side they are on. Mr Wren: Well, you have got to view this as to whether ----- Q390 Mr Hoyle: It either is or it is not the case. Mr Wren: Look, it is a big issue in trying to get the whole of this industry moving towards - and it will take time. All I can tell you at the moment is that in terms of uptake and in terms of commitment from major contractors and from clients, they are saying: "We want to see a fully carded, 100% CSCS workforce." Q391 Mr Hoyle: I understand that, and I am not trying to corner you a little bit. They are delivering on their commitment but they are not delivering on the number of people who are holding the card - is that fair to say? Mr Wren: From my own experience there is a delivery on the commitment, and from nowhere it has ----- Q392 Mr Hoyle: We wish to see it. That is the objective. Mr Wren: Absolutely, yes. Q393 Mr Hoyle: The problem is they cannot put the ball in the net because they have not got the ball! Mr Wren: Yes, and I think also there is a question of it being mandatory on sites, and it is a question of the client again. It is not all the client; the client is assuming that if he has employed a good contractor and a good set of contractors and specialists, they will all be CSCS. It is not perhaps the right analogy, but if you are not a Corgi registered engineer you cannot go working on gas - it is illegal. Q394 Mr Hoyle: It does not stop them. Mr Wren: I know, but can you ever? So they get prosecuted and ----- Chairman: We are running a bit short of time. I do not want to flog this to death but there is one point. Can you reflect on what your evidence said to us, and the particular thing at the NSCC here, but can you just clarify ----- Mr Hoyle: I would say, please, if you would clarify; but also, is there any help and support that is needed to make sure that everybody carries the card? Chairman: A supplementary note would be very helpful on those points. Q395 Miss Kirkbride: The SEC Group has suggested some core criteria for assessing the competency of construction firms. Can you outline what they would be? Mr Hursthouse: Certainly in terms of health and safety they have been incorporated into the CDM Regulations. I am not going to trawl through all of that or try to list them. The principle, where they are coming from, is that what currently happens is that there is a plethora of qualification schemes which qualify businesses to carry out work on various projects, whether they are Government schemes where you go through a pre-qualification process for a health sector project or a school sector project - just anywhere - just qualifying schemes all over the place. Some of them are sub-contracted to the private sector to gather this information together. Very often there are costs, often not insubstantial, in qualifying and getting accreditation - "unless you have this accreditation you cannot work on the project" - and if you go into another section you need that accreditation. The view is: "Just a minute, competence evidence on construction projects - there is an element of it which is just universal; if you cannot behave properly when it comes to health and safety, you should not be allowed on the site." That applies to everybody. The thinking is that there should be some arrangement where there are core competences and there are schemes where you can qualify and those schemes relate to each other. If I were to get into this scheme it has some sort of accreditation to it; then I would get into that scheme and that scheme and that scheme, and I would not have to qualify for half a dozen schemes. There are very good schemes being run by trade associations, which are undoubtedly very thorough and very effective, but again I can qualify for one here and one here and qualify for one there - so core competence for assessment would save an awful lot of trouble and be a level playing field in terms of what competence really means. Q396 Miss Kirkbride: Do you see at present any difference between the public sector and the private sector with regard to this plethora of competences? Mr Hursthouse: To be blunt, no. I have got one contractor telling me I have got to qualify for him; I have another one telling me I have to qualify for him. The answer is "no". As I said earlier, there are within the CDM Regulations some core competence criteria, which is a good place to start, and it is something that should be developed if there is work to be done. Q397 Miss Kirkbride: Because they are effective. So what is your view on the effectiveness of Constructline, BERR's own database for construction firms? Mr Hursthouse: It is a self-certifying paper exercise, and it has not delivered. Mr Wren: If it does not have third-party accreditation, it is not worth it. Q398 Miss Kirkbride: It is a waste of time? Mr Hursthouse: You might be able to recover it, but as far as what it delivers now - probably, yes. That is perhaps overstating it, but it is not what we are looking for in the industry. Q399 Miss Kirkbride: If there is a particular issue that you would like us to raise with regard to the Olympic Delivery Authority when we see them in the New Year, your chance is now! Mr Wren: I would say all the things that we said before. Choose your supply chain, choose it early and choose it wisely. It is the specialist sector that is going to build the Olympics, let us be clear. We have much to offer. Get in early and there is value engineering and innovation to be done. If the ODA adopts a hands-off approach and stops at its tier 1, which is the major contractors, and relies on them to do what they are going to do, nothing will change. Projects will be let on price rather than best value. Risks will be sub-contracted down the line. It does not matter where you sub-contract a risk - if it happens it will be to the detriment of the Olympics, and the best thing to do is understand the risk and manage it. Make sure cash flows through the supply chain. If you do not do that, you will end up with the experience of a fairly major national stadium not too many miles from here, rather than the experience of the Emirates Stadium, which we shared, which we both worked on. That was good practice in terms of supply chain integration. The 2012 construction commitments which were developed for the Olympics - it is important that they do not just stop at the contractor; but that the contractor operates those construction commitments through the supply chain. We need to see evidence that that is happening currently. Q400 Miss Kirkbride: You drew the analogy with the Dome: is the Olympics going to be ready on time? Mr Wren: It will. Mr Hursthouse: It certainly cannot be late. This is absolutely true: before we were here, as you might imagine, we consulted and we were aware this might come up, and so Graham just told you what he told you, and I can tell you categorically that I have very little to add to that - in fact nothing to add to that: I would agree with him entirely. As he said, we did both work on the Emirates, and the question is: do you want an Emirates or do you want a Wembley? I know which one I prefer! Chairman: The question answered itself. Q401 Miss Kirkbride: The Dome was ready but not finished, I would argue - but there we are. Mr Hursthouse: As a construction project it was completed on time and on budget. What they put inside it was another matter. Chairman: It is quite good to think of the function of a building before you build it - but never mind! Gentlemen, you have been a very good double act, if I may say so - admirably succinct. You have not replicated each other's answers either! We are very grateful to you. I know it is a slightly difficult and artificial way to conduct these affairs, bringing the two of you together, but we are short of time, and you have done your sectors proud. We are very grateful. We have suggested one additional written memorandum, Mr Wren, but if there is anything either of you have not had a chance to say today and on reflection you would like to qualify your written evidence to us, please feel free to drop a note and make that clear to us. Thank you very much indeed. Memorandum submitted by Home Builders Federation Examination of Witnesses Witnesses: Mr John Slaughter, Director of External Affairs, and Mr John Stewart, Director of Economic Affairs, Home Builders Federation, gave evidence. Q402 Chairman: Welcome. Thank you very much indeed for your written evidence and thank you for coming. Many years ago when I was in public relations I used to work for something called the House Builders Federation, and I think you may be related quite closely, so what do you do, and why the house not the home? Please introduce yourselves for the record as well. Mr Slaughter: I am John Slaughter, Director of External Affairs for the Home Builders Federation. Mr Stewart: John Stewart, Director of Economic Affairs at the Home Builders Federation. Mr Slaughter: We used to indeed be the House Builders Federation until about two years ago, when we changed our name. The idea of that was to ensure that we better represented what the industry is now doing. We do not simply build houses; we build flats and mixed developments; we are involved in urban regeneration. However, we liked our acronym, so we made the massive shift from House Builders to Home Builders. Q403 Chairman: Thank you very much. That is very clear. In a way we are changing gear with you today, because a lot of our work until now on this quite intensive inquiry has been on the larger projects; now we are talking about a very different sector of the market. Can you explain to us in practice how the home building sector differs from the rest of the constructionists we have been talking to? Mr Slaughter: In a number of ways. The starting point is that essentially it is quite a high-risk industry, with the critical raw material of land supply through the planning system being its lifeblood. That in itself introduces quite a lot of uncertainty. In terms of the scale of operations, which you have touched on, Chairman, it is fair to say that although there are some major home-building projects, they are the minority of what the industry is doing. Statistically, the average development is something like 27 homes; so essentially we have relatively small-scale local output of housing across the country. In fact, the industry is characterised by a very large number of active sites at any one time. Some of the large companies may have as many as 350 or 400 sites in production at any one time across the country. That is one way of characterising the difference. It takes a long time to bring sites through the planning system from the point of view of originally identifying strategic sites that may be developable, then securing planning permission and then being able to start work on site. That introduces uncertainty in the sense that our main customer is you and I, or anyone else in the country who might be looking to buy one of our homes. The market we represent is obviously a volatile market. In the gap between the start of the production process and the end, when you are selling to a final customer, things can change quite a lot. There is a lot of uncertainty and commercial risk in developing house building sites and bringing them to fruition. If we had to characterise ourselves as an industry, we would see ourselves as developers, certainly not contractors, with a lot of risk in the way that I have mentioned, making it essentially a speculative industry, with all the issues that that potentially entails. Q404 Chairman: What about fragmentation? What is the size of the largest player in your sector and how does that compare with the rest of the sector? Mr Stewart: The largest company now is around 20,000 homes a year, and there are three in the "15,000-20,000 units a year" size band. It is difficult comparing it with the contracting industry because they do not build homes in the same way. Q405 Chairman: In terms of the available market do you regard yourself as more or less fragmented than your sister companies elsewhere? Mr Stewart: In construction? Q406 Chairman: Yes. Mr Stewart: I think it would be very difficult to make that comparison, but there is a long tail of smaller companies in house building, just as there is in construction - but whether they are comparable is difficult to say. Q407 Miss Kirkbride: In your memorandum you say that the planning system is the principal barrier to building homes and growth in your sector. Are you seeing any signs that Government's Planning Policy Statement PPPS3 is beginning to have an impact on the amount of land available? Mr Slaughter: It is very early days on that because that new planning policy statement only came into force in April this year, and the whole process of adopting local plans and bringing sites through the system is quite slow. However, we are hopeful that it will make a difference because the new guidance from Government says that once local authorities have identified what their housing needs are, they must identify a rolling five-year supply of land that is truly developable in order to achieve that, and further strategic land supply beyond that for their housing needs. That is a significant difference compared to the requirements of the previous planning guidance that it replaced in April. We are hopeful that that will make a difference. To my understanding there have been a few appeals that have been considered and decided since the new guidance came into force, which have essentially backed up its requirements in the sense that where there was not a clearly identified five-year land supply and a site was being considered under appeal, the inspectors have said that it is reasonable to grant planning permission because the local authority had not fulfilled its requirements to provide the requisite land supply. That is also early days. If you believe in the power of good exemplars, then the action that the planning inspectorate has begun to take may well be significant, and we would like to see that continue. Q408 Chairman: We do not want to trample too much on the affairs of our sister committee, the Department for Communities and Local Government Committee because obviously planning matters are primarily for them; but our purpose in this inquiry is to look at public policy issues affecting the construction sector. Is there anything else you would like to say briefly in relation to how the planning system impacts upon you that will be relevant? I am not providing you with an open cheque for an essay; just for a couple of sentences! Mr Slaughter: It is such a massive subject. Very, very briefly then - the speed of the planning system decision-taking is a problem, and this is something that we say to Government Ministers and officials in CLG. It takes an average of fifteen and a half months for a residential planning application to be resolved. Also, not overdoing the complexity of the policy requirements is the other big issue. We will probably come back to this later on in terms of questions about sustainability and zero carbon. Q409 Chairman: The point I am trying to draw out is that planning is the most important issue for your industry, is it not? Mr Slaughter: Yes, because it governs the raw material that the industry depends on to produce output. Mr Stewart: Chairman, the distinction I always make is that the planning system is largely outside the control of the home-builders; it is an administrative system run by local authorities. Without planning permission on a piece of land you are not legally able to build, so it can be an absolute constraint if there is not enough land and you cannot produce enough homes. All the other issues, such as skills, materials and production methods, are to a large degree within the control of the industry, so it is qualitatively very different to all the other potential barriers. Q410 Mark Hunter: As you say, questions about planning are relevant to a different Select Committee than this, but would it be completely unfair to say that the reason why planning is flagged up by organisations such as yours as being such an issue is because your members tend to favour developments in greenfield sites rather more than brownfield sites? Mr Slaughter: No, absolutely not. The industry is now building about three-quarters of its output on brownfield sites, and so it has gone with the grain of Government policy on this. In practice, it is not easier necessarily to get permission for brownfield developments any more than greenfield developments. The biggest overall problem is the amount of land coming through the planning system, which Government figures show has declined by 7% between 1997 and 2003. Q411 Mark Hunter: I would love to explore that further. My experience as a former councillor was somewhat different, but we will park that to one side for a moment. Can I bring you on to skills capacity issues, which was covered in your submission to a certain extent. Can you tell us more about your estimate of the growth in the home building workforce that will be required if we are to meet the target increase in housing supply of 240,000 homes a year? Mr Slaughter: Based on the research that we jointly commissioned with CITB Construction Skills a couple of years ago, as a broad estimate, taking into account potential productivity gains, it is probably in the order of 40,000 extra members of the workforce compared to roughly 280,000 that perhaps we have now. Q412 Mark Hunter: To pick up on a point in your evidence, what proportion of that do you think is likely to come from migrant labour? Mr Slaughter: I am afraid I do not think we can give any firm estimate. We have no real means of telling. Professor Ball, who carried out the study, said that it might be less than 20,000 of the 40,000, so somewhere less than half - but to be precise about that is very difficult. Q413 Mark Hunter: What about skill shortages in particular areas? Do you foresee any specific areas being more problematic than others, and, if so, what work are you undertaking yourselves to plug that particular gap? Mr Slaughter: You mean types of skills and particular areas of activity? Q414 Chairman: Both would be interesting, both geographically and skills. Mr Slaughter: In terms of the types of skill and types of job, I think there are challenges for management, the professions and the traditional trades within the industry. Professor Ball's analysis pointed that out. Certainly key issues in terms of output and productivity and quality are roles such as site managers and site supervision. There is a general shortage not just for home building but across the piece for planners and some of the other professionals. We are definitely going to need more bricklayers, carpenters and people like that. In terms of what we are doing about that, we are trying to work as closely as possible with CITB-Construction Skills to address those shortages. Our major members have taken a number of skills initiatives in recent years. One is to increase the number of apprentices, which is something the industry is keen to do. The major members have signed up to the CSCS objective, the qualified workforce objective. We have also been working to improve the qualifications for some of the key areas, particularly site management, where we have worked through CITB Construction Skills to introduce new qualifications for residential site management and supervision. They are options of existing qualifications that are more fit for purpose for our sector. The big push probably has to come to address the question of numbers overall. A lot of the work has to be through promotion of career opportunities in industry and the industry engaging with that as well. CITB-Construction Skills regard that as one of their key requirements, and we fully support them on that. We are trying to work with them on that through upgrading our own website, amongst other things. We and our members are supporting initiatives like the Inspire Scholarships, which are an important way of trying to attract new young professionals and management recruits into the industry. There is a range of things we are trying to do. Geographically - I might ask my colleague to comment on this in a moment, but the market seems to be working to balance requirements reasonably well, but that may in part be related to the inflow of migrant labour from the new accession countries in eastern Europe. Anecdotally there is perhaps more of that labour in the south and east of the country than other parts of the country. Statistics on this are very difficult to gain. Mr Stewart: The lack of statistics is a real problem. Q415 Chairman: We have heard quite a lot of compelling evidence from other witnesses that that pattern of shortage of skills being addressed by migrant labour in London and the south-east is fairly consistent. Mr Slaughter: We have a survey, which John is involved with, which has tracked the degree to which employers in our sector regard labour supply as a constraint on production. Certainly the position has improved in the last few years and that has been regarded as less of a problem than it was three, four or five years ago. Q416 Mr Weir: You mentioned the Construction Skills Certification Scheme. I understand that your Home Builders Group has a target for all site workers to have the CSCS card or equivalent card by the end of 2007. Are you on course to achieve that target? Mr Slaughter: We do not know how far we are going to get. We are not going to get to 100%, but I do not think that that is in practice easy to achieve in any state of affairs because of the churn in the labour force. That is the view of many people I have spoken to. We are currently at around 70% from the last audit of sites that was taken out, and our members are pushing very hard to get as far as they can by the end of the year. I cannot predict exactly what the final figure will be because we will have to audit that early in the New Year; but we certainly hope it will be above 70%, and from a starting point of something like 40% 20 months or so ago. We think that is a pretty good improvement. Q417 Mr Weir: When was that last audit taken? Mr Slaughter: October 4, 2006. There is a very strong push on at the moment, as you appreciate, for the end-of-year deadline, to get as many people signed up as possible. We recognise that probably not everybody will be signed up at the end of the year, and so the companies are thinking ahead about how they can complete the push beyond 1 January with a transitional mechanism to bring people on board. Q418 Mark Hunter: How does the performance of the home building sector compare with the rest of the construction industry in this regard? Mr Slaughter: My understanding is that the level of card holding - the newest equivalent would probably be the major contractors' group - as an analogy - which is in the high eighties per cent. When they got the equivalent of 1 January 2008 a year ago in their case I think they were 85/86%. We will not probably have got as far as that by 1 January; but on the other hand the time over which we have been working on this has been considerably shorter. Q419 Mr Weir: How many of your members make use of the grants available from the Construction Industry Skills Levy? Are they happy with the way the levy functions? Mr Slaughter: Not entirely, is probably the answer. If you do not mind, I will refer to a few figures that I have. It is a problem area for us. We would like to see better performance in terms of grant take-up. I have to be a little bit careful, because I do not think these figures are always necessarily publicly disclosed by Construction Skills, who collate them. The home building industry is not generally as successful as some other parts of construction in obtaining a good return on the levy it pays in terms of grant. That is an area that we are particularly looking to improve. There are some interesting perspectives on this. The percentages in terms of payment of levy by HBF members, or companies that are registered by CITB Construction Skills of HBF members is pretty high compared to the industry average. However, the percentage claiming grant is also pretty good - but the overall return is below average for the sector as a whole. There are some issues there which are quite hard to grasp in terms of why the performance is not better. We know circumstantially - and I cannot mention names - that some companies are much better in terms of their performance in this respect than others. This is an issue that we are actually raising and discussing with CITB Construction Skills with a view to seeing how we can improve it. Q420 Mr Weir: You say some companies are better than others: does it depend on the size of the company? Are larger or smaller companies any better than others? Mr Slaughter: No, it does not. There are some quite large companies that, as far as we understand it, do not have a good return in terms of grant. There are a number of issues: it may be how companies are set up internally and how far they resource the process of trying to secure support. There are concerns on the part of some companies that the procedures are simply too bureaucratic and too difficult, and therefore there is a disincentive to work to get as much support as they might. Q421 Mr Weir: We have heard evidence of regional variation in the way companies take on apprenticeships for example. Does the same sort of thing apply here - that you get large regional variations? Is there more of a tendency perhaps in the south not to go in for this scheme than in the north? Does that happen? Mr Slaughter: I think there is a difference between the north and south, because a higher percentage of the workforce is probably directly employed in the north of the country; and therefore placing apprentices in your own company is easier. We had a discussion about this with some of our major members fairly recently, and they did substantiate this north/south difference. In the south, where there is a larger degree of indirect employment on site, then it is not always so easy to secure the placements from the point of view of our members, the home builders. They sometimes have to work quite hard with their contractors to take people on as apprentices. One of the issues in terms of the take-up of grant and support is probably related to that phenomenon. Q422 Mr Weir: Going back to the question about the CSCS cards, is there also a north/south divide in the way these are taken up? It has struck me that the 86% in the construction industry, excluding home building, is quite high, given the evidence we have heard about migrant labour particularly in the south. I wondered if there were any regional variations in that figure as far as you are aware. Mr Slaughter: Not that I am aware of, no. That certainly has not come through the audits that we have carried out. We do have companies that have strengths in different parts of the country. Although we have effectively ten major companies in the sector, they all tend to have a strength in particular parts of the country, and there is no discernible pattern of one group being stronger than another in terms of performance. Q423 Mr Bailey: Zero-carbon homes: marrying this to the skills agenda, do you think you have sufficient skills to deliver the Government's targets by 2016? Mr Slaughter: What an enormous question! I suppose we do not entirely know at this stage because we do not know for sure how we are going to achieve the target at this point. There are lots of issues about how to achieve it. Q424 Mr Bailey: There are different technologies to achieve it. Mr Slaughter: Yes, and we certainly do not know what the right technical solutions and commercial solutions to energy supply, for example, will be at this stage, so it makes it difficult to give a hard and fast answer to the skills question. The way that a number of people look at this in the sector is to see that the suppliers and manufacturers of the new products and services that will be involved in achieving the zero-carbon homes standard will probably have a major part to play in this, because they will have to communicate the benefits of their product and instruct the installers, the operators and the site managers who are going to use the products in order to build the homes and have them working on the right basis. We suspect that quite a lot of the skills requirements and training requirements will effectively be pushed by the manufacturers and suppliers in the chain, wanting to make sure that their products are successful by communicating the right information and the right instruction to other people who need to have it. Q425 Mr Bailey: Do you think the Government is allowing the industry enough flexibility in the way in which it achieves these targets - or towards achieving them? Mr Slaughter: That is a debate in progress, I would say. If I could give you a brief explanation of why I say that, as far as we can see probably the critical issue to resolve will be how you achieve residual energy supply for zero-carbon homes. Zero-carbon homes is the performance standard post construction, so it is about having no net carbon emissions from the use of a home once it is occupied and built. But there is going to be a need for residual energy supply because for various reasons we are not going to be able to do everything through better insulation. The question is then how you achieve that residual energy supply. That is where a lot of the uncertainties I mentioned earlier rest because we do not know enough about the capabilities of the technologies. The average size of a site, which I referred to earlier, of 27 units, means that you are not going to necessarily get everything on site. You need to have the flexibility of other solutions. At the moment the working definition of zero carbon is relatively tightly drawn. Our wish would be to see a somewhat more flexible definition of zero carbon that would enable us to have a reasonably wide range of technical solutions and commercial solutions available to enable us to achieve this standard in an effective and cost-efficient way. Q426 Mr Bailey: I very much welcome those last comments because one of my hobby horses is that there did not seem to be enough attention focused on the potential of geothermal energy, both in the public and private sectors - houses and offices. What is your assessment of the potential of geothermal? Mr Slaughter: My understanding is that it is quite significant, but not everywhere in the country will be suited to that type of application. That is one of the issues we face. There is not any one single knock-out answer to how you achieve this in terms of the technology, which is why we would like to have that menu of options available. As far as we are concerned, this is simply a means of achieving the standard in a cost-effective consumer-friendly, practical way. Hopefully it means that more commercial partners from the energy supply industry will be interested in working out sensible arrangements about how we do it. Q427 Mr Bailey: Do you think the fact that the public sector is not a significant client for new housing makes it more difficult to promote the environmental sustainability agenda? Mr Slaughter: Yes it does, essentially. I am quite familiar with the view of the wider construction sector that public procurement, which is about 40% of the market is a significant means to achieve these objectives. We have nothing like a 40% public sector drive in house building. It is an issue. We have English Partnerships and other public agencies that are able to do quite a bit through demonstration projects, but they do not have the critical mass that would exist from Government procurement in other fields. So we have to look at other approaches which will work and have equivalent results. I know that this is something that people find slightly surprising, but what I call an intelligent approach to regulation is one of the things we need at a national level. The substitute, in a way, for public procurement in our case, is setting the right standards in the right time frame in national building regulations, for example; then you can try and create a level playing-field for the industry in that way. Q428 Chairman: In Worcestershire we are a bit suspicious of the Government at present, because we have two eco-towns planned for my constituency and the Government is not telling us who the promoters are for these towns or what the criteria are to assess whether to go ahead or not. It is very important because large proportions of affordable housing in a brand new environment suggests that there must be equally eco-friendly large portions of affordable employment in the same area. The Government does not seem to be doing a great deal to build confidence in its wider objective as part of the eco-town proposals. Do you think the Government is doing enough to build a framework in which zero-carbon housing can be a reality? Mr Slaughter: I think we would like to see them do more certainly. The eco-towns proposal is an interesting one, but at this stage we do not know enough about how that is going to operate. The Government is in the process of drawing up the criteria you would like to see, and I agree that that is very important. Q429 Chairman: But the applications are in. Mr Slaughter: The expressions of interest are in, but I do not think they constitute applications as such because the criteria have not been settled for the scheme. If we had a concern about eco-towns it is more in the direction of how long they will take to come through. The point about the substitution for the public sector pool that you were just talking about is a quite difficult one. This is how the Government is trying to do it; but the mass is not going to be that big that early, despite the plans for eco-towns. Perhaps the biggest concern there is whether we can find other ways of putting together good learning experiences at an earlier stage than the eco-towns themselves might deliver. Q430 Mr Weir: In your memorandum you call for an "enlightened longer term strategy" for the evolution of the national building regulations to assist effective innovation in sustainable construction. What do you mean by this? Mr Slaughter: A number of things. We have a number of wishes about how building regulations in particular might evolve to make it easier for the industry to concentrate and deliver effective innovation. The building regulations have become quite complex over time: new parts have been added to them on a relatively piecemeal basis, and changes have taken place on a piecemeal basis. We would like to see a longer term strategic vision for the key changes that the Government would like to see in the building regulations over time. The zero-carbon initiative is a good example of that, where the Government has said, "Let us have three changes in building regulations over the next several years to 2016, and so we have a plan for a step of changes that industry can work with." We would like to see similar vision in other fields of the building regulations. We would also like to see the regulations become less proscriptive than they have some times been in the past, more based on better regulation principles of output, based on regulation, not seeking to say you achieve the output in this or that specific way, but establish robust output and leave more scope in the industry to achieve that in a range of different ways. We would also like to see ideas which we have had one successful experience of on part E of the building regulations on sound insulation of a pattern-book approach, which industry has led through development pattern-book examples which are then verified as sound for achieving the desired objective under the regulations being accepted, so that you have a more industry-owned and industry-led process of binding effective ways of achieving regulatory outcomes. That then becomes less burdensome for industry and opens up the door to innovation. There is a range of ideas of this type that we would like to see adopted more generally. Q431 Mr Weir: The argument against is always that if you simplify the building regulations you are reducing effectiveness, especially in an industry that we have heard is very much price-led. How do you counter that argument? Mr Slaughter: On one level there is a concern that the current regulations - some of them in recent years have been very difficult to enforce because of the way they are drawn up. They are quite complex and not particularly easy to understand for compliance officers as well as developers. A simpler, less proscriptive, less complex set of regulations would in one sense be much easier to enforce because it would be much clearer what you were doing. If you have industry ownership in the way I was suggesting, you also create an incentive for people to do things the right way. There may be other things you need to look at as well, and we are not suggesting that there should not be proper compliance; but in many ways a better, fitter for purpose future set of regulations might be easier to enforce and better for everyone to live with. Mr Weir: Other witnesses have complained that the building regulations seem to change very regularly. Is it really simplification, or more that you know what you are doing for a longer period and you do not want so many changes? Q432 Chairman: Just to add to that, also the changes are announced at the eleventh hour and compliance is required at very short notice. Mr Slaughter: All of those actually. We would like to see a better future approach on all of those issues. It is certainly simplification, but a clear route map for the future is important because it has been an industry frustration in recent times that there have been too many changes with not enough advance notice, and that does not encourage efficiency or effective application, and it does not encourage forward investment-planning by the supply chain, which is often very important in this field. The notice of implementation is also a key issue. All three of those points we would support. Q433 Chairman: I asked you at the beginning about the fragmentation of the industry. I have heard it suggested that the fragmentation of the UK home building industry in particular means that its R&I record is not what it might be if it had a greater critical mass. Is that a criticism you are familiar with, and do you think it is fair? Mr Slaughter: We have no statistics to be able to comment scientifically. In one sense we would not think it is fair because the industry has innovated quite a lot in terms of the product you get in your home today. They are much more energy-efficient where even a few years ago the design specifications have moved on a lot, and what is fitted as standard in the home is quite different. In another sense I think you are correct, and that is why we would want to see a sensible approach to national regulation through building regulations, rather than no regulation. Personally I would agree with what the Stern report had to say in its chapter on construction, where it pointed very strongly to the fact that there was a lot of fragmentation in the sector as a whole; therefore if there was going to be a drive to successful improvement in the environmental performance of the construction sector, the right approach through national regulation was going to be an essential part of how that was done. We would very much support that. The industry can do a lot of things, but in certain key areas, without the right national regulatory framework, it becomes a problem because you cannot necessarily achieve competitive advantage successfully for an investment that might be quite risky as well as capital intensive when your competitors are not necessarily having to do the same thing. Mr Stewart: Chairman, the feedback to smaller companies is important because clearly they cannot afford to spend as much on research and development as large companies; but as long as the timescales for these changes are adequate so that the industry somewhere - large companies and others and research organisations can do research and transmit that information to the smaller companies, then they can come along behind. As John has already said, it is a lot to do with the timescales and the plans, rather than doing things too quickly or requiring things without proper planning. Q434 Chairman: Last week we heard from the Building Research Establishment and the two research information associations, CIRIA and BSRIA and they were both expressing concerns about research innovation in construction generally, in quite worrying terms. The word "crisis" was used on a number of occasions. Is that a label you would attach to your part of the industry as well? Mr Slaughter: I do not think we would, no. If you take the example of zero-carbon, the fact that we have this eight, nine, ten-year timetable that was announced a year or so ago by the Government, which we have supported and which was supported by the Construction Products Association for example, means that we are all trying to work together about how we get there. We look at it the other way round: having got that framework agreed and in the public policy domain, the industry now has the confidence to know what it has to achieve. I do not think we would feel that was the case in our sector. Q435 Chairman: We asked all our witnesses this final question and I am not sure how relevant it is, but I am going to ask it anyhow, because we have got the Olympic Authority coming in in the early part of the New Year. It is only something like 4,000 homes that are planned as part of the legacy of the Olympics Village site, but is there anything you think the ODA should be doing, speaking as home builders, that they are not doing or could be doing better, or are you broadly content to leave it to them to get on with it? Mr Slaughter: It is very hard for us to say. We have not been involved with the ODA at all. Q436 Chairman: Compared to Thames Gateway it is quite modest, is it not? Mr Slaughter: Yes. It is relatively small-scale in terms of what we are talking about. The way in which they have looked at the housing element of the project has not been something where they need to come to us specifically because it has been part of the wider tendering process. Chairman: I do not think we have requested further detailed information during this session, but if, on reflection, you feel there are things you would like to amplify, please feel free to give us some further information. We appreciate the time and trouble you have taken to come before us. It would have been remiss of us not to look to home building as part of the evidence we are taking. We are very grateful for the time and trouble you have taken. |