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From Construction to Production: New Delivery Models for Infrastructure

12/18/2016

The United Kingdom is in a new era of infrastructure development. Our infrastructure is mature and in need of renewal. Most investment is in existing networks and facilities, where it competes for space with the delivery of services to customers. And infrastructure is becoming more integrated and more reliant on digital technologies to provide new capacity and ensure its smooth operation.

Modern infrastructure is critical to the future of developed economies. It enables businesses to improve their productivity, supports economic growth and allows citizens to lead fulfilling lives. Unfortunately, we have to pay for it through our taxes and charges levied on customers, and it is becoming unaffordable for many people living on modest incomes. In the current economic climate, it is essential that we invest in the right infrastructure, build it efficiently and deliver the outputs and outcomes that we have promised.

The approach commonly used to deliver infrastructure in the UK has evolved over the last forty years. It is a transactional delivery model in which the parties use the contracts between them as the principal means of achieving their objectives. Owners typically appoint consultants to design new projects and invite tenders from construction companies to build them – usually appointing the lowest bidder as the contractor. The contractor then breaks the project down into packages and invites tenders from suppliers for the work it cannot deliver itself. It is common for 80% of the value of an infrastructure project to be sub-contracted in this way.

This approach appears to offer owners a simple way of obtaining their infrastructure at lowest cost whilst satisfying regulatory requirements for open competition. The approach often works for modest projects based on established technologies that are separated from existing networks. But when projects become large, complex or technically challenging, the delivery model breaks down. It becomes inefficient, unreliable and often fails to deliver the optimum infrastructure solution.

The root causes of this problem lie in the disintegration of organizations, processes and knowledge that result from the pursuit of the lowest price and the transfer of risks into the supply chain. By accepting the consultant’s initial design and then breaking projects down into hundreds of sub-contracts, we impede the flow of knowledge from the supply chain to the front of the project where value is created, and we add cost and uncertainty at every step along the way. And in our efforts to disperse risk into the supply chain we have replaced the management of production with the management of sub-contracts. Blaming people when things go wrong has become more important than working together to make things go right.

The consequences of this approach have emerged over the last twenty years. A study by BSRIA in 1997 of the installation of MEP services on building projects in Europe and the U.S. [1] showed that more than 50% of the labor used on projects in the UK could be saved by eliminating avoidable delays and achieving best practice task productivity. At the same time, published [2] and unpublished studies of construction projects have shown that only about 50% of the tasks planned for the week ahead actually get done. The conclusion we can draw from this is that in the absence of a common system for managing production, uncertainty around the execution of tasks leads to significant losses in productivity.

The waste on construction sites extends beyond manpower. In 2007 a study by UK waste management experts WRAP [3] calculated that up to 15% of the materials delivered to construction sites end up being recycled or sent to landfill. And a recent study by the Get It Right initiative (www.getitright.uk.com) showed that defects and errors in delivering projects could add 20% to costs. Research conducted by Shady Georgue [4] and Paul Teicholz [5] has shown that construction is the only major industry that has failed to improve its productivity over the last hundred years.

Some infrastructure companies in the UK have bucked the trend and developed new approaches to delivering their infrastructure programs. Building on the seminal reports by Sir Michael Latham [6] and Sir John Egan [7], they are collaborating with their contractors and suppliers to design more innovative technical solutions and deliver them efficiently and predictably. Key features of these new delivery models include direct relationships with critical suppliers and common production systems. An emerging trend is for the traditional role of the general contractor to be replaced by an integrator.

In 2005, Anglian Water Services (AWS) set up its @one Alliance (www.onealliance.co.uk) to deliver part of its investment program. Since then, it has grown into a fully integrated collaboration between AWS and six contractors and consultants. The alliance now delivers the whole of AWS’s £2.5bn capital program and over the last decade has reduced its unit costs by more than 30%. London Underground has developed its Innovative Contractor Engagement (ICE) process to encourage companies bidding for projects to form integrated teams with their suppliers and contribute to the design of the projects. In 2014, ICE was used to procure the upgrade of Bank Station in the City of London and the winning consortium increased the benefit to cost ratio for the investment by 45% while reducing the estimated final cost by more than £60m [8].

This evidence raises the question of why the traditional approach has not already been replaced by new, more effective collaborative delivery models for infrastructure. Part of the reason is that it takes time to restructure the infrastructure companies’ relationships with their suppliers and retrain people to operate the new model. And many consultants and contractors will have to rethink their service offerings and business models to participate in the new model. But there are some more immediate challenges particularly around governance and our approach to managing these new collaborative organizations.

One of the attractions of the traditional approach to delivering infrastructure is that it provides companies with a simple system of governance for their investment programs. It has become accepted that tendering projects in the market and then delivering them on time and within budget will ensure value for money and compliance with public procurement regulations. The fact that this approach often excludes more innovative companies with better technical solutions and rarely delivers to its own standards becomes lost in the fog of recriminations that so often obscures infrastructure projects as they are completed and move into operation.

If we want new and more effective delivery models for infrastructure we have to begin by designing better systems of governance for investments in infrastructure. And we have to support them with systems for measuring performance in delivering infrastructure that get right down into the details of the efficiency and predictability of the delivery process. As long as nobody is measuring productivity and waste on construction sites or whether new infrastructure actually performs as planned, governance systems will not demand it and poor performance will continue to be accepted.

Decades of using the traditional approach to delivering infrastructure has seduced us into believing that success lies in choosing the right form of contract and enforcing it. We need contracts to define the relationships between the parties and the commitments they have made but it is even more important that we create effective organizations that enable all parties to interact and contribute to the best of their abilities. And that means that one party – usually the owner – has to take responsibility for setting up the organization, confirming people in the key leadership positions, defining the processes the team will use and providing effective management systems to support their work. Integrated organizations need integrated management and production systems.

It will take time for these new delivery models to become standard practice across the UK infrastructure sector. Government and the infrastructure companies are becoming more demanding in maximizing the value they obtain from their investments. But it will require new ways of measuring success and investment in training, management systems and new technologies to support and embed the new approach. The prize is affordable, modern infrastructure to support the UK’s development. The alternative is stagnation.


References

  1. Hawkins, G. 1997. Improving M&E Site Productivity. BSRIA Technical Note TN 14/97.
  2. Ballard, G. and Howell, G.A. 2003. Competing Construction Management Paradigms. Proceedings of the 2003 ASCE Construction Research Congress, Honolulu, Hawaii.
  3. Material Logistics Plan Good Practice Guidance. WRAP, December 2007.
  4. Georgue, Shady. 2015. PPI Technical Report: Manufacturing vs. Construction Labor Productivity. http://projectproducton.org/resources/papers
  5. Teicholz, Paul. 2015. “Trends in Labor Productivity in the Construction Industry.” PPI Annual Symposium Presentation.  https://projectproduction.org/resources/presentations/
  6. Latham, Sir Michael 1994. Constructing the Team. HMSO.
  7. Egan, Sir John 1998. Rethinking Construction. Department of the Environment Transport and the Regions.
  8. Innovative Contractor Engagement. “Project report on the implementation of ICE for the appointment of a design and build contractor for the Bank Station capacity upgrade scheme.” London Underground, September 2014.