Modernising Construction REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 87 Session 2000-2001: 11 January 2001 The National Audit Office scrutinises public spending on behalf of Parliament. The Comptroller and Auditor General, Sir John Bourn, is an Officer of the House of Commons. He is the head of the National Audit Office, which employs some 750 staff. He, and the National Audit Office, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. Our work saves the taxpayer millions of pounds every year. At least £8 for every £1 spent running the Office. Modernising Construction REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 87 Session 2000-2001: 11 January 2001 Ordered by the LONDON: The Stationery Office House of Commons £0.00 to be printed on 8 January 2001 Contents Foreword by Sir Michael Latham 1 Executive Summary 3 Annex Key Questions for line departments and 14 agencies to consider in quantifying improvements in construction performance Part 1 17 The Challenge - Improving construction performance (i) The Challenge 18 (ii) Initiatives to improve the way that the 23 construction industry and their clients operate This report has been prepared under Section 6 of the (iii) What has been achieved so far in improving 25 National Audit Act 1983 for presentation to the House construction performance and further of Commons in accordance with Section 9 of the Act. progress needed (iv) How we approached the study 28 John Bourn National Audit Office Comptroller and Auditor General 22 December 2000 The Comptroller and Auditor General is the head of the National Audit Office employing some 750 staff. He, and the National Audit Office, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. For further information about the National Audit Office please contact: National Audit Office Press Office 157-197 Buckingham Palace Road Victoria London SW1W 9SP Tel: 020 7798 7400 Email: [email protected] Website address: www.nao.gov.uk MODERNISING CONSTRUCTION Part 2 29 Appendices Improving Client and Supplier Performance 1. Study methodology 53 (i) Partnering 29 2. Department of Environment, Transport and the 54 (ii) Improving the performance of departments 33 Regions Initiatives to improve construction and agencies performance (iii) Improving the performance of the 37 3. Different countries’ approaches to improving the 56 construction industry performance of their construction industries 4. Partnering and the UK construction industry 58 Part 3 41 the first ten years - a review of the literature 5. The NHS Estates 67 Procuring and Managing Construction 6. Defence Estates 70 (i) Selecting contractors 41 7. The Highways Agency 73 (ii) Designing buildings 44 8. The Environment Agency 78 (iii) Planning 47 9. Anglian Water 83 (iv) Project management 48 10. Kingston Hospital 86 (v) Measuring construction performance 49 11. Notley Green Primary School 88 (vi) Remunerating suppliers 51 12. Dudley Southern Bypass 92 13. Building Down Barriers 94 14. People and organisations consulted 98 References 101 Glossary 102 MODERNISING CONSTRUCTION foreword Sir Michael Latham1 The central message of "Constructing the Team" in 1994 was that the client should be at the core of the construction process. The general route recommended to achieve client satisfaction was through team work and co-operation. One specific method was partnering. Clear guidance for clients and the industry about best practice has since been published by the Construction Industry Board, the Treasury, the Construction Best Practice Programme and others, with very helpful input from the National Audit Office itself. That message has been strongly reinforced by "Rethinking Construction" in 1998. Sir John Egan's task force showed that effective projects would require a clear process, of which partnering was a vital part. Creative design is important for a fine project, but a well run process, stripping out waste and inefficiency, is necessary to deliver the client's aspiration for an harmonious building or civil engineering project which also actually works. Partnering has made great strides in recent years. The fastest growth has come in the Housing Association movement and some other parts of the public sector. The response from private commercial clients has been mixed. Some firms have led the way in best practice. Others have preferred traditional procurement routes. Many clients still do not understand that fiercely competitive tenders and accepting the lowest bid do not produce value for money in construction. "Lowest price" tenders may well contain no margin of profit for the contractor, whose commercial response is then to try to claw back the margin which was not in the tender through variations, claims and 'dutch auctioning' of subcontractors and suppliers. Such adversarial approaches have disfigured the construction industry over many years. They have produced high levels of litigation and conflict, low investment, inadequate research and development, negligible margins and low level of esteem of the industry by the public in general and graduates or school leavers in particular. Partnering turns the process around. It assumes a win-win scenario for all parties. It looks for reasonable margins built up by the whole team on an open book basis. All are signed up to mutual objectives through a charter for the project. All agree on effective decision making procedures. Problems are to be resolved collaboratively by the entire team, not shoved off onto those least able to cope with them. Continuous improvement and benchmarking are crucial. Partnering can be for a specific project or on a longer term strategic basis. It can achieve real cost savings and client satisfaction. This report by the NAO will be very influential in persuading clients and the construction industry to adopt Egan best practice. There are still too many clients, consultants and constructors who see partnering as an alien or threatening process. They could usefully reflect on how poorly they have been served by traditional methods. If all had been well with the construction industry, there would have been no need for the long stream of reports on its performance since Simon in 1944, nor for the critical findings of the Committee of Public Accounts and the NAO on departmental procurement over many years. foreword 1. Sir Michael Latham was a member of the Committee of Public Accounts from 1983 to 1992. In 1994, he wrote “Constructing the Team”, an independent review of construction, commissioned jointly by the Government and the construction industry with support of client bodies. 1 MODERNISING CONSTRUCTION executive summary In this chapter 1 This report is about how the procurement and delivery of construction projects in the United Kingdom can be modernised, with benefits for all - the The challenge - Improving 4 Construction Industry as well as clients. The construction business is worth construction performance £65 billion a year, of which direct expenditure by government departments and Improving the 5 their agencies accounts for £7.5 billion. Government spending on construction perfomance of departments will increase substantially following the spending Review 2000 which has and contractors doubled net public investment on infrastructure over the next three years to Procuring and Managing 9 £19 billion to deliver improved transport, schools and hospitals. This higher Construction level of spending on capital projects increases the urgency of the need for Recommendations 12 improvements in public sector procurement and management of new construction, refurbishment and repair and maintenance. Key questions for line 14 departments 2 A succession of major studies (Figure 1) have highlighted the inefficiencies of traditional methods of procuring and managing major projects - in particular the fallacy of awarding contracts solely on the basis of the lowest price bid only to see the final price for the work increase significantly through contract variations with buildings often completed late (Figure 2 overleaf). Experience has shown that acceptance of the lowest price bid does not provide value for money in either the final cost of construction or the through life and operational costs. Relations between the construction industry and government departments have also often been typically characterised by conflict and distrust which have contributed to poor performance. 1 Key Reviews of UK Construction Constructing the Team - Sir Michael Latham (1994) Recommended more standardised construction contracts, better guidance on best practice and legislative changes to simplify dispute resolution. Many of the legislative changes were made through the Housing Grants, Construction and Regeneration Act 1996. The report considered that efficiency savings of 30 per cent in construction costs over five years were achievable. Levene Efficiency Scrutiny (1995) Recommended that departments should: n communicate better with contractors to reduce conflict and disputes; n increase the training which their staff received in procurement