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PAGE5LEIAANNUALREVIEW2016 PROFESSOR RUDI KLEIN. BARRISTER CEO SEC GROUP construction industry which resulted in a culture of lowest prices and lowest standards. This has not fundamentally changed in the 70 years since publication of this Report. The City regards construction as a business that is unpredictable competitive only on price not quality with too few barriers to entry for poor performers para.6Chap.1Rethinking Construction1998Sir John Egan. Reputable SMEs in the industry regularly complain that they do not compete on a level playing field. They are disincentivised to invest to any great extent in the drivers of productivity such as upskilling of staff innovation and technological advances because they are often out-bid by firms which offer lower pricessince such firms have little or no interest in investing in training or technology. Furthermore the general lack of enforcement of existing regulations governing standards across the industry only serves to encourage entry by businesses that often do not intend to comply with the relevant standards. The majority of the States in the United States where productivity levels are higher than in the UK have corporate licensing schemes. To obtain work a contractor must be licensed. This means that it is able to demonstrate that it possesses the requisite technical standardsits health and safety performance is satisfactory and it is appropriately resourced. Dysfunctional business models in the construction industry Finallythe largest companies in the construction industry are poorly capitalised. This can be evidenced by the merger talks which took place in 2014 between two of constructions largest companiesCarillion and Balfour Beatty. If they had mergedtheir joint balance sheet debt would have been minus 1billion The previous governments supply chain finance initiative has had the unintended consequence of shoring up the finances of the large companies at the expense of their supply chains. By far the greatest barrier to improving productivity in construction is the widespread abuse of the payment process lengthy payment periodslate payment and Improving competitiveness MANAGEMENT T HE Government is urging all sectors of UK industry to improve their productivity rates. There has always been a gap between productivity levels in UK construction and those in most other sectors. According to the Office for National Statistics this gap is growing.The prime reasons are there are major structural weaknesses in the process by which the industrys outputs are procured and delivered there are no barriers to entry to the industry business models in the industry are primarily driven by cash flow manipulation and the need to offload risk. Unless these reasons are adequately addressed the productivity levels in construction will remain below those of other sectors. Given the industrys critical importance to UK Plc this shouldnt be an option. Butunfortunately the Government seems to have relegated to the sidelines the previous coalition governments industry strategy for constructionConstruction2025. At present the Government doesnt have a plan for this sector. Process by which the industrys outputs are procured and delivered Unlike many other sectorsconstruction firms including lift companies deliver their outputs in conjunction with other firms as part of the process of delivering projects. Most firms have little influence on how projects are procuredon the design solutions and on the risk management processes. As part of a very disaggregated and fragmented supply chain they have to work around project practices and processes that are often inefficient and positively harmful to their businesses. For example the cost of re-design and re- work due to design shortcomings and poor or late information tends to fall on SMEs in the supply chain. Construction collaboration platform GenieBelt.com has estimated that 2billion is spent annually on re-workthis comes at a time when the industry is complaining of skills shortages. But this wasteful activity detracts from investment in the technologies and skills necessary to raise productivity levels. As far as government procurement is concerned an attempt was made to address this state of affairs by the Cabinet Office in 2011 when it published its Construction Strategy. The Strategy recommended the piloting of three model procurement routes. One of these was Integrated Project Insurance IPI. Much of the developmental work for IPI was resourced by the Specialist Engineering Contractors SEC Group LEIA is a leading member of SEC Group. IPI facilitates a far more efficient approach to procurement and delivery by allowing for early appointment of supply chain firms to buy into the key decisions on design planningrisk and cost. The emphasis is on collaborative working with the team coming under one insurance umbrella. The insurance policy underwrites the cost plan subject to an excess shared by team members. Whilst this initiative remains the best hope for improving construction procurement andthusthe productivity of the firms involvedthere has been little enthusiasm on the part of government to put forward pilot projects. However the first IPI pilot is now underway and it is hoped that others will follow. Lack of barriers to entry into the construction industry In 1944 the Simon Report The Placing and Management of Building Contracts lamented the lack of barriers to entry to the Continued overleaf