The demise of ISG: where do we go from here? (part 1)

That debate has stimulated thoughts in my own mind, which I wanted to share across two articles. This first article will explore some of the themes which arose from the comments, and in the second article I will add some of my own reflections.

These articles are not intended to be a fully detailed implementation plan but, instead, should spark ideas and debate that lead us away from intensely trying to fix a model which does not work, and open the mind to new possibilities.

Ultimately, it is that kind of atypical thinking that will lead to long-lasting and sustainable change.

Construction Risk Analysis

Despite advancements in technology and other industries using technology to perform sophisticated risk modelling, the construction industry seems stuck on an approach which relies on previous tenders or the market position to price and programme risks (e.g. “it’s always 3% design development if we have a Stage 4 design” or “we always programme design as a linear process even though that is never how it is performed”).

You think about the way we do things in the context of any other industry. We have an outline design for a building that has never been built before in the precise location it is being built. The built asset needs to comply with a vast number of codes, regulations and technical standards, and you need to utilise labour and materials from all over the UK and Europe (sometimes the world) to complete the construction. And you get a period to pin your colours to the mast with a price and period you expect for delivering the built asset. Those things are included in a detailed and lengthy contract which allocates all the risk to you and you underwrite performance of the contract with a bond and a guarantee, just for good measure.

In other industries, with that level of unknown risk, there would be sophisticated models using the most up-to-date technology to predict outcomes, providing information about scenarios and options to overcome risks. There would be solid and reliable analysis, which would be used to inform why the price or programme period needs to be what it needs to be or would enable mature conversations about how the whole project team can work together to eliminate the risks.

The technology exists, but, for some reason, there doesn’t appear to be a great deal of appetite to innovate here. This is probably because the industry’s data, which generative AI technology could use to learn and make predictions, exists inside organisations so unless there is a willingness to share this information, it would be extremely difficult to change.

That is one reason, but no doubt there are many others.

To regulate, or not to regulate: that is the question

I am not a fan of too much government intervention in the markets and tend to prefer a free market solution. However, we are now regularly seeing contractors who use the supply chain as a credit facility (lending that is not regulated or asset-backed, as it would be if a bank were lending), entering administration owing tens or hundreds of millions of pounds to the supply chain. The supply chain is at the bottom of the list as creditors in the administration, so there is next to no chance they will see that money again.

The perverse part of this is the reality that main contractors are preferred because they offer a higher degree of financial security (this is one of reasons, it is acknowledged there are others) and that financial security is often a product of their balance sheet. A significant asset on that balance sheet is cash reserves, which is mostly cash owed to the supply chain. There is something about that which doesn’t quite sit right with me, and I can’t quite square in my mind.

When it comes to regulation, it would be challenging. We have a Construction Act which, quite rightly, legislated regular and prompt payment to the supply chain. However, it means payment measures are not as binary as invoice dates and payment dates used in most other industries.

It could be the case that you ask to be paid £1m, the valuation is £1k, and providing that £1k is paid, then it would not necessarily flag as an underpayment. In those circumstances, you cannot even suspend performance for non-payment. You must continue to perform and remedy the issue through adjudication.

How can we regulate payment practices effectively in these circumstances?

Barriers to Entry

I can understand the main contractor’s perspective here. You invest in your people, your capability, and your technology, and, despite this, an up-and-coming main contractor offers a lower price, agrees to the risk profile, and snares a project from right under your nose. You either remain competitive and cut your cloth to suit, or walk away from the project, which might, in turn, undermine an entire business stream you have worked hard to build.

In construction, the barriers to entry are low, and whilst there are some barriers to taking on larger value projects (personnel, portfolio, finances, etc.), there will always be a client willing to take a chance and hope they pay less in the end for their built asset.

There is a theory that licencing might bring some much-needed control, both to protect investment made by contractors and to raise standards in the industry. I can see the logic because it would allow centralised control of critical industry issues such as building safety, construction safety, financial control, productivity improvement, and addressing the current and future skills shortages.

That said, it would be incredibly difficult to implement, if not impossible. You would, in effect, have one huge framework approach across the construction industry and this would require alignment between various client bodies as to their requirements.

It would need one hell of a leader to corral a large and diverse stakeholder group and convince them to truly come together, put aside their differences, look beyond their own needs and work together to create a better future.

Maybe this is where the Construction Leadership Council should be, but since it was established in 2013, has anything really changed? Are their aims and ambitions enough? Is their action disruptive enough?

Final Reflections

As I said at the outset, a five-minute article is not going to solve the issues we face in the construction industry. However, there was some positive and healthy debate in response to my LinkedIn post so drawing some of the key issues out and exploring them felt worthwhile.

Hopefully it gives you some food for thought and sparks some ideas about how we can change things for the better. Please share these in the comments if you do; all views are welcome.

In next week’s article, I will build on these ideas and some reflections I have been having about change in the construction industry, which did not come up in response to my post.

Keep an eye out for that and, in the meantime, enjoy the rest of your week!

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