Off-site manufacture for construction: Building for change Contents

Chapter 5: Sector barriers to uptake

84.As set out in Chapter 2, the evidence revealed a compelling case for the widespread use of off-site manufacture for construction. However, many witnesses told us that the current culture and structure of the construction sector is not conducive to extensive use of off-site manufacture, placing barriers in the way of wider uptake. In this chapter we consider these barriers and actions the sector could take to overcome them.

Sector fragmentation and lack of collaboration

85.Severfield plc explained that “the industry is fragmented and traditionally works in silos … the culture and mindset of the industry has limited expertise and experience in collaboration”.83 UK Research and Innovation made a similar point, telling us that surveys of the construction sector show “entrenched cultural practices” within the sector, including a “reluctance to break from their existing, established networks of contracting bodies”, hampering the spread of off-site manufacture.84

86.The fragmentation of the industry makes it difficult for all parties—client, designer and contractors—to be involved from the beginning of a project. Ian Heptinstall told us that “fragmentation and misalignment within each [construction] project … is the real issue”;85 not fragmentation within the sector as a whole. Tony Meggs told us:

“The industry is quite disaggregated both vertically and horizontally in all sectors, quite frankly. From a government perspective, our historical approach, not universally but a lot of the time, has been to move as much risk as possible down the chain and away from government.”86

87.We were told that there is a lack of trust, and therefore a lack of collaboration, between businesses within the sector. Arup told us:

“Widespread collaboration across the construction sector is essential to make a step change in wider adoption of off-site [but] … fundamentally the industry isn’t overly trusting of each other … collaboration will require a change of mind-set prompted by a big incentive.”87

NG Bailey told us that “encouraging greater collaboration and a more balanced sharing of risk” would increase the use of off-site manufacture.88

88.Andrew Morris, Partner at Rogers Stirk Harbour, said that disputes are often seen “as part and parcel” of working in the construction industry.89 Suzannah Nichol, Chief Executive of Build UK, pointed out that companies in the sector “do not have … deep relationships with their supply chain”.90

Solutions to fragmentation

89.We heard evidence about three different ways to address the fragmentation of the construction sector: increased collaboration, the use of systems integrators to integrate horizontally, and vertical integration.

Collaboration

90.The Construction Leadership Council (CLC), co-chaired by Andrew Wolstenholme OBE and Richard Harrington MP, brings together the sector and Government. One of its key roles is to “push on-site construction to off-site construction”.91 It aims to do this by encouraging collaboration within the sector. Andrew Wolstenholme told us:

“The start point from the CLC was to put forward the thesis that unless the sector came together around a compelling and simple agenda that could attract the attention of a very diverse sector and industry against one set of initiatives, we would, like many others previously, fail to get critical change across the different parts of the sector.”92

91.The Infrastructure Client Group (ICG) is a forum for major infrastructure clients to work collaboratively to understand best practice. The ICG has recently launched Project 13 (see Box 7),93 a “new model for construction”.94 Martin Chown, representing the ICG, explained: “Project 13 is a change to how we can go to market and procure on a more collaborative basis, right from the start of the need for construction. It seeks … to come up with better models to drive that collaboration within the supply chain”.95

Systems integrators

92.ICG’s Project 13 promotes an enterprise structure (see figure 1) which uses systems integrators to bring together clients, suppliers and advisors. Mark Enzer explained to the Committee that “at the heart of [greater integration] is the role of the integrator … whose job it is to pull it all together”.96 He also explained that Project 13 could transform the industry into something that is more integrated “not necessarily … by one organisation being … integrated but by many organisations coming together in an enterprise to be more integrated”.97

Vertical integration

93.The University of Brighton told us that “vertical and horizontal integration enabled through systemic thinking remain a key factor” in achieving the changes needed in the construction sector. This cannot be “accomplished successfully unless the UK Government takes a more proactive role in this regard”.98

94.There has been some movement towards greater vertical integration. Jamie Johnston told us that “we are seeing some clients starting to address vertical integration”99 and Rosie Toogood confirmed that Legal and General Modular Homes are adopting this method.100

Box 7: Infrastructure Client Group Project 13

Project 13 is an industry-led initiative to improve the way high-performing infrastructure is delivered and managed. Project 13 seeks to establish a new approach within the construction sector—based on an enterprise, not on traditional transactional arrangements (see Figure 1).

The most significant changes in an enterprise structure as opposed to a transactional structure are:

  • the owner is central and leads the enterprise, defining long-term value.
  • suppliers and advisors have direct relationships with the owner.
  • an Integrator actively engages and integrates all tiers of the market.
  • the key suppliers, owner, advisor and integrator work as one team to optimise value.

The main differences between an enterprise model and a traditional construction programme model are:

  • Reward in the enterprise is based on value added to the overall outcomes, not service provided.
  • There is greater understanding of cost drivers and risk across all organisations in the enterprise, with commercial incentives for collaboration to jointly mitigate risk, not transfer it.
  • Establishing a high-performing enterprise requires fundamentally different leadership, governance, behaviours and skills to succeed. This will be underpinned by organisations with increasingly diverse skills and backgrounds.

Source: Institution of Civil Engineers, P13 Blueprint (May 2018): http://www.p13.org.uk/wp-content/uploads/2018/06/P13-Blueprint-Web.pdf [accessed 10 July 2018]

Figure 1: Traditional structures in the construction sector (left) and those proposed by Project 13 (right)

Flow chart showing alternative Private Sector, Public Sector and proposed Project 13 structures in the construction industrySource: Institution of Civil Engineers, P13 Blueprint (May 2018) p 6: http://www.p13.org.uk/wp-content/uploads/2018/06/P13-Blueprint-Web.pdf [accessed 10 July 2018]

95.The construction sector needs to build trust and partnerships so that companies can work together to improve the uptake of off-site manufacture. We welcome initiatives such as the Construction Leadership Council and the Infrastructure Client Group’s Project 13 but more needs to be done by other industry groups to facilitate collaboration within the sector.

96.The Construction Leadership Council should provide overarching, active and focussed leadership for the sector. They should gather and disseminate data including case histories, sign-post to resources and spread best practice around the sector.

Business models in the construction sector

97.We heard that business and procurement models used in the construction sector, including the structure of contracts, assignment of risk and cash flow, are designed for traditional construction and are a barrier to the use of off-site manufacture. Professor Jennifer Whyte, Director of the Centre for Systems Engineering and Innovation at Imperial College London, told us, “you cannot change technologies of production without changing business and procurement models”.101 Suzannah Nichol said that “the current way we buy and deliver construction is not sustainable and the business models are not fit for purpose”.102

98.In the Construction Sector Deal the Government stated “the current business model of the construction sector is not sustainable. Construction customers and businesses across the supply chain are focused on the costs and risks of individual projects, and do not collaborate effectively”.103

99.Laing O’Rourke told us that current business models are often based on lowest cost rather than value for money and that the sector “does not have the processes or systems required to successfully manage the complex supply and production relationships involved in delivery of one-off projects; resulting in waste, low productivity, poor quality design and construction”.104

100.Several witnesses told us that off-site manufacture needs to be considered from the start of the design process. Mark Enzer said: “It is very important to design the end-to-end delivery process around off-site manufacture rather than just bolting it on as an afterthought”.105 He thought that this was the only way to ensure that the benefits of off-site were realised, including productivity gains. However, the British Standards Institute told us that it can be challenging for architects to get involved at an early stage106; this could be addressed by having a set of design standards that suit off-site manufacture.

101.Arup explained that in the construction sector processes happen “sequentially and in isolation, designers design, engineers engineer and as a result the industry delivers bespoke products and the process is inefficient”.107 This contrasts with a manufactured approach: “Manufactured products are designed holistically and include suppliers in the design process. The design is often heavily influenced by parts that are available”.108 The McAvoy Group described this as the “Design for manufacture ethos”; it “requires earlier decision making” and minimises “the risk of projects running late and over budget”.109 Mark Farmer said that the current sequential model of designing, then procuring through a competitive process, then tendering to an ad-hoc supply chain is “not the best way of advancing off-site”.110

102.The Ministry of Justice told us that “the traditional role of Tier 1 construction companies will need to be challenged and re-defined”. This may include “new forms of contract that make it easier for the companies to fully collaborate” and new processes that “will need to be embraced by construction professionals, such as planners and quantity surveyors”.111

103.The Construction Sector Deal sets out three areas where action will be taken to change business models in the construction sector:

104.Designers, contractors and suppliers must all have early involvement in a project for off-site manufacture to be successful. This requires a change in business models in the sector and amongst clients, both private and public sector, as well as far greater collaboration. There is a need for a client’s professional team or advisers to adopt a different approach, as outlined by the Infrastructure Client Group’s Project 13 (see Figure 1), to enable off-site manufacture. We welcome moves in the construction Sector Deal to address business models in the sector and make them more effective.

Financing and cash flow

105.The way contractors in the construction sector organise cash flow will have to change if off-site construction is to be more widely used. Contractors are usually paid by their clients each month based on a certificate of the work done. 113 In certain circumstances a contractor might be paid before materials are paid for. In the case of a housing site, the houses can be easily financed as they can be easily secured and sold. Off-site construction may require the financing of a factory and the work in progress of that factory and contractors will probably only be paid when the modules produced are erected on site. Suzannah Nichol made this point, explaining that off-site manufacture required high up-front investment.114 Dr Mark Bew explained:

“There is a very different cash flow profile to opening a factory, buying materials, buying labour and having stock sitting in a yard. [Contractors’] balance sheets are geared to not doing that … They need to change and there needs to be a different model.”115

106.The Construction Sector Deal states that “modernising the [construction] sector will require significant additional investment … To do this, the sector will work with the government and the financial services sector to identify what sources of funding are available, and how these can be used”.116

107.At present the upfront finance required to set up off-site manufacture appears greater than the finance required for conventional construction. We welcome the commitment in the Sector Deal to identify sources of funding available to the sector. Should this review highlight gaps in the availability of funding, we recommend that the Government work with the construction sector and the financial services sector to develop sources of funding to fill those gaps.

Risk

108.The way risk is handled in the construction sector could be a barrier to off-site manufacture. The evidence we received was that risk is often shifted from clients to tier 1 contractors who then move that risk on to their supply chain.117 Jamie Johnston, Director at Bryden Wood, told us that off-site manufacture is more successful when a client says, “I’ll absolve you [the tier 1 contractor] of some of that risk and I’ll take a much more active role in developing the brief and understanding the vision and the supply chain”.118

109.Andrew Morris explained that, when clients assume some of the risk by taking out project insurance so that individual consultants on the project do not have to, it “draws you together, because you are then focused on the task at hand”.119

110.The Ministry of Justice made a similar point. It told us that modern methods of construction (which include off-site manufacture) currently require high levels of innovation. This relies on “everyone being able to work in a fully collaborative environment where risk is shared amongst the most appropriate parties”. They explained that traditional routes of risk management create a cautious risk appetite amongst contractors and the easiest route to a collaborative environment is through “project insurance with the client holding a larger central risk pot and passing less risk onto the supply chain”.120

111.Osborne Group Holdings Ltd told us that “traditional standard forms of contract do not protect the main contractor where a large proportion of the contract sum is placed with a single service provider (as is the case for off-site)”.121 This can create a risk because, if that single provider cannot deliver (for example, if they go out of business), it may not be possible to procure an alternative.

112.Martin Chown told us that new procurement models developed through the ICG’s Project 13 (see Box 7) will take account of changes to cash flow and risk “because [the new model] has to be based on payment and profit for performance and outcomes”122 and that in Project 13 “we advocate risk sharing as opposed to risk transfer”.123

113.We will follow with interest the success or otherwise of the new models developed through the Infrastructure Client Group’s Project 13. If they are successful in tackling some of the issues we have raised around risk and cash flow, the Construction Leadership Council should promote these models across the sector.

Client knowledge and leadership

114.Accord Housing Association told us that “the lack of understanding of clients in terms of the products and the process” of off-site manufacture is a potential barrier to its use.124 Mark Enzer told us that “there needs to be leadership in client organisations to commit to what is quite a big change”;125 this also applies to designers and other consultants.

115.Changes to client behaviour through initiatives like Project 13 from the ICG are starting to happen but more could be done in this area, including by Government. We discuss this in paragraphs 151–152.

A pipeline of projects at scale

116.Mark Farmer observed that the construction sector suffers from being highly cyclical.126 The cyclical nature of investment in the industry matching economic cycles has proved damaging to the construction industry in the past. Dr Diana Montgomery, Chief Executive of the Construction Products Association (CPA), explained why this is a barrier to greater use of off-site manufacture:

“Any manufacturing requires capital investment to get your plant off the ground and it needs a sensible payback. If you are looking at a pipeline that looks less than six months out … without that longer-term vision, it is really problematic to write a business case and get investment.”127

117.To have the confidence to invest in the capital needed to set up a manufacturing facility, a company needs a consistent pipeline of projects that they will have a high chance of supplying. Laing O’Rourke pointed this out: “for offsite methods to become the norm and transform the way in which the built environment is delivered, industry needs confidence and visibility of pipeline, at a regional and national level”.128

118.Kier Construction Ltd told us that existing market vulnerabilities “are amplified by a sensitivity to fluctuations in pipeline, with a lack of long-term planning, confidence and predictable demand a business and sector challenge”.129

119.Laing O’Rourke recommend longer term relationships within the sector as a solution: “having contracts structured to enable multiple sequential delivery over a period of time enables visibility of continuity of resource and the ability to invest in and benefit from progressive learning and innovation”.130 Martin Chown explained how Project 13 hopes to address the lack of a reliable pipeline:

“The clients around the table of Project 13 come up with models in which suppliers can work on many projects, both large and smaller, and can go from one project to another building on that success. We feel that that enables innovation and productivity and a knowledge to be built in from one project to another.”131

120.Many of the barriers to the greater uptake of off-site manufacture for construction facing the construction sector, such as a lack of collaboration and attitudes to risk, are cultural and can only be dealt with by the sector. The sector must look at ways to reduce the barriers and this should be led by the Construction Leadership Council.


83 Supplementary written evidence from Severfield plc (OMC0084)

84 Written evidence from UKRI (OMC0074)

85 Written evidence from Ian Heptinstall (OMC0001)

86 Q 68 (Tony Meggs)

87 Written evidence from Arup (OMC0010). See also Q 9 (Jamie Ratcliff).

88 Supplementary written evidence from NG Bailey (OMC0086)

89 32 (Andrew Morris)

90 Q 51 (Suzannah Nichol)

91 Q 71 (Richard Harrington MP)

92 Q 58 (Andrew Wolstenholme)

93 Infrastructure Client Group, ‘What is Project 13’: http://www.p13.org.uk/ [accessed 10 July 2018]

94 Q 65 (Martin Chown)

95 Ibid.

96 Q 18 (Mark Enzer)

97 Ibid.

98 Written evidence from the University of Brighton (OMC0028)

99 Q 32 (Jamie Johnston)

100 Q 9 (Rosie Toogood)

101 Q 3 (Prof Jennifer Whyte)

102 Q 52 (Suzannah Nichol)

103 Department for Business, Energy and Industrial Strategy, Construction Sector Deal (5 July 2018): https://www.gov.uk/government/publications/construction-sector-deal/construction-sector-deal [accessed 5 July 2018]

104 Supplementary written evidence from Laing O’Rourke (OMC0085)

105 Q 18 (Mark Enzer). See also Q 2 (Phil Wilbraham).

106 Written evidence from the BSI (OMC0022)

107 Written evidence from Arup (OMC0010)

108 Ibid.

109 Written evidence from McAvoy Group (OMC0047)

110 Q 25 (Mark Farmer)

111 Written evidence from the Ministry of Justice (OMC0081)

112 Department for Business, Energy and Industrial Strategy, Construction Sector Deal (5 July 2018): https://www.gov.uk/government/publications/construction-sector-deal/construction-sector-deal [accessed 5 July 2018]

113 Q 35 (Andrew Morris)

114 Q 52 (Suzannah Nichol)

115 Q 19 (Dr Mark Bew)

116 Department for Business, Energy and Industrial Strategy, Construction Sector Deal (5 July 2018): https://www.gov.uk/government/publications/construction-sector-deal/construction-sector-deal [accessed 5 July 2018]

117 Q 33 (Jamie Johnston)

118 Ibid.

119 Q 34 (Andrew Morris)

120 Written evidence from the Ministry of Justice (OMC0081)

121 Written evidence from Osborne Group Holdings Ltd (OMC0023)

122 Q 65 (Martin Chown)

123 Q 68 (Martin Chown)

124 Written evidence from Accord Housing Association (OMC0079). See also written evidence from the Ministry of Justice (OMC0081).

125 18 (Mark Enzer)

126 Q 28 (Mark Farmer)

127 51 (Dr Diana Montgomery)

128 Written evidence from Laing O’Rourke (OMC0055). See also written evidence from Elliot Group Ltd (OMC0027) and BEIS (OMC0011).

129 Written evidence from Kier Construction Ltd (OMC0024)

130 Written evidence from Laing O’Rourke (OMC0055)




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