The high levels of “process waste” built into the industry’s inefficiently long supply chains will make it impossible to deliver the objectives of the Industrial Strategy for Construction, according to a new government-commissioned report.
The report suggests that 18-20% of a typical project’s contract value is made up of multiple levels of supply chain margins, risk pricing and overheads, making it unlikely that current structures can deliver the 33% project costs reduction by 2025 demanded by the Strategy.
But the report also says that while the supply chain is a source of considerable inertia, it could also respond to performance improvement measures, for instance by reducing transaction costs associated with winning, delivering and being paid for work.
This might include more online transactions, it says. “The UK construction industry should adapt to its structure, in the same way that the Amazon and Ebay business model has made a virtue of its highly distributed ‘tail’ of specialist small-scale suppliers.”
Supply Chain Analysis into the Construction Industry, published by BIS on 23 October, was top of the agenda at the first meeting of the new Construction Leadership Council, chaired by business secretary Vince Cable on 14 October.
The report was produced by EC Harris to inform the Industrial Strategy for Construction, and was based on structured interviews with supply chain members in five typical projects. It found that projects with 50 supply chain companies were common (see table below).
High level Tier 1 supply chain comparison
It studied four main contracts (Tier 1) with a value range of £20m-£30m, representative of the work of national contractors and a smaller main contract (Tier 1) with a value range of £1m-£2m, representative of medium scale public sector work sourced via frameworks.
The findings suggest that the 18-20% overall figure is made up of 5-6% profit, risk and overheads for Tier 1 contractors, 6-7% for Tier 2 companies, and 12-13% on the lower value contract packages undertaken by Tier 3s.
The report also predicts that the upturn will lead to an increase in risk and overhead costs without any improvement in outcomes. “In the short term, and as the industry recovers from recession, these costs may increase as the supply chain takes steps to improve margins to levels which are sustainable,” it says.
“Action will need to be taken to eliminate costs elsewhere so that the supply chain can be sustained whilst Industrial Strategy cost reduction targets are met.”
But the interviewers noted “growing cynicism amongst subcontractors with regards to supply chain integration activities. For example, there was little spontaneous mention of Building Information Modelling (BIM).”
The authors recommend that the industry’s “agenda for change” needs to be promoted at all levels of the supply chain, with more investment in supply chain capability development.
The authors also suggest that the industry is too focused on eliminating physical waste from construction at the expense of “process” waste, and that there should be more focus on this aspect of the industry.
As well as the implications of the EC Harris report, a BIS press officer told CM that the first meeting of the Construction Leadership Council also discussed innovation, procurement, skills in the housebuilding sector, and construction’s involvement in See Inside Manufacturing, a BIS initiative to engage school students with the world of manufacturing.
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