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鈥淲e keep on getting more reports and more wringing of hands,鈥� says Rudi Klein, chief executive of the Specialist Engineering Contractors Group. 鈥淣othing ever changes. Bad practice is embedded 50ft into the ground in this industry.鈥� 

Klein represents a group of seven trade bodies for engineering subcontractors, and he has spent more than two decades campaigning for better payment practices. For Klein, the problem is an urgent and severe one that is doing significant damage to small firms, as 鈥渕ain contractors retaining funds through late payment are putting their supply chains in financial peril鈥�. Many small firms are unable to get insurance to work with the UK鈥檚 biggest construction companies because of the ailing balance sheets of those main contractors. And yet in Klein鈥檚 20 years on this particular soapbox, not much has changed. The private member鈥檚 bill in the House of Commons to rein in damaging retention practices, proposed by Tory MP Peter Aldous, has been delayed five times, leading to doubts it will ever be heard.  

Yet it鈥檚 not as if the big companies are rolling in cash and the payment model isn鈥檛 really working for them either: at 黑洞社区 Live last year a senior director at one of the country鈥檚 biggest contractors warned that operating models had to change. 鈥淭he current business model and risk profile [of big contractors] is not sustainable in its current form,鈥� said Mark Castle, Mace鈥檚 deputy chief operating office for construction. 鈥淐ompanies need to be able to earn sensible levels of operating margin so as to reinvest.鈥� 

Also read: Balfour and Kier still taking 50 days or more to settle up

Also read: Are late payment practices in construction too much for suppliers to bear?

鈥淕overnment cannot manage its own public procurement, so what regulator is going to have the ability and teeth to do it?鈥�

Andy Steele, Osborne

So, what can be done? Reformers say hange is unlikely to come from the contractors themselves 鈥� after all, they haven鈥檛 done much so far to initiate reform. Many call for a top-down approach; most sectors of the economy have one, if not several, regulatory bodies. In November, the SEC Group, on behalf of 60,000 firms, called for construction to have one too. 

So, what would a permanent regulatory authority look like 鈥� and what would it do? Is it feasible, let alone desirable? And could it just be the answer to the industry鈥檚 many woes?

Potential

鈥淣othing can manage the industry,鈥� says Andy Steele, chief executive of Osborne, a 拢320m-turnover contractor based in Surrey.

鈥淚 think you would create a monster. If you are just adding another layer of administrative costs to the industry, we鈥檙e going to be even less productive.鈥�

Klein has an answer to this objection, saying the government would fund the body, with a levy on industry an additional possibility. But he is clear he thinks a regulatory authority would pay for itself over time, through productivity gains and improvement to the sector鈥檚 GDP. The actual cost of a body depends hugely on what it does. The Financial Conduct Authority for the financial services sector costs 拢600m a year, while the water sector鈥檚 Ofwat costs 拢23m and the supermarket ombudsman, 拢700,000. 

The question of the remit of such a body is more complex to address; Klein says a regulatory body could carry out three main functions. 

First, a construction body could provide accreditation for firms in order to raise standards in the industry. This, Klein says, would improve the quality of buildings across the board, and would also rein in firms which perform poorly, and which undercut legitimate businesses.

Second, the body could arbitrate on the most severe cases of financial disagreements between contractors and subcontractors. 

And thirdly, it could promote better methods of procurement in the public sector. Klein says a new body could draw up a code of practice for procurement, including competency and ethical provisions. 

鈥淧eople have tried to use the carrot approach to making contractors behave better. we need to start using the stick鈥�

Rudi Klein, SEC

Licensing

Ann Bentley is global chairman of Rider Levett Bucknall (RLB), as well as the Construction Leadership Council鈥檚 lead on supply chain and business models. Bentley says she is 鈥渟ympathetic鈥� to the idea of a body such as an official regulator licensing firms. 鈥淚n other industries 鈥� and in other countries [such as the US and Germany] 鈥� this is standard.鈥� 

A regulator could create a set of rules and standards which have to be followed for firms to be allowed to work in the construction industry. 鈥淣urses not only have to be licensed, they have to be relicensed after a certain period,鈥� says Bentley. 鈥淲hen I go to hospital, I鈥檓 grateful knowing that this professional has passed rigorous tests and knows what they are doing. When I stand in a multi-storey car park, it would be good to know that the person who poured the concrete was properly qualified to do so.鈥� 

Osborne鈥檚 Steele points out that accreditation schemes have been introduced in the past, but they 鈥渄idn鈥檛 gain traction because nobody insisted they were used鈥�. 

鈥淭he only way it could be done is if it鈥檚 legally imposed, and even stuff that is legally imposed the industry doesn鈥檛 always deal with,鈥� he adds.  

Then there is the question of sheer scale. RLB鈥檚 Bentley says a lot of problems that occur in buildings come as a result of a lack of professional standards further down the supply chain, while big firms have a reputation to consider. 鈥淩aising professional standards is desirable, but it needs to happen from the bottom 鈥� which probably just isn鈥檛 realistic,鈥� she says. But with over 350,000 businesses operating in construction, licensing would take an enormous bureaucratic capability 鈥� an expensive and time-consuming task even if the government weren鈥檛 already trying to plan for Brexit. 

Arbitration

For the arbitration prong of a proposed regulator鈥檚 work, Klein suggests looking to the Groceries Code Adjudicator: an ombudsman created in 2013 to monitor the actions of the 10 supermarkets with a turnover of above 拢1bn. 

A grocers鈥� code of practice, setting out guidelines for how supermarkets should treat their supply chain, had already been drawn up four years earlier. It includes provisions for prompt payment and outlaws several practices supermarkets had previously used to transfer risk and cost to suppliers. 

The ombudsman was given the power to launch investigations where there is suspicion a grocer has broken the code; arbitrate in disputes between retailers and suppliers; and ultimately fine firms up to 1% of their turnover. 

 鈥淲hen you penalise a few firms, others sit up and notice,鈥� Klein says. 鈥淥ver the years, people have tried to use the carrot approach to making contractors behave better, but they just ignore that. We need to start using the stick.鈥� 

Klein suggests money raised from fining firms could be reinvested in the office regulator itself, although he also suggests an alternative sanction available to a regulator could be banning contractors from winning further public work.  

RLB鈥檚 Bentley expresses concern about unintended consequences to this: 鈥淵ou would have to make sure that if you were going to fine someone or stop giving them government work, their supply chain doesn鈥檛 suffer unduly. Although that must be equally true in supermarkets 鈥� that if Tesco got fined, the people they buy tomatoes off might be threatened,鈥� she acknowledges. 

But with several high-profile contractors having chalked up losses and gone, cap in hand, to ask lenders or investors for more money in the past year, the idea of slapping poor performers with further fines or removing a hunk of their revenue could prove unpalatable. 

And the supermarket industry is different from construction in more ways than this. The top 10 grocers have around a 95% share of the market and if Asda and Sainsbury鈥檚 merge, as planned, the top three would have a 70% stake. The top three construction companies by revenue, according to 黑洞社区鈥檚 2018 leaderboard, are Balfour Beatty, Barratt Homes and Kier. These firms have nowhere near a 70% share of the market 鈥� it鈥檚 probably nearer to 10%. And it鈥檚 worth noting they are, despite some overlap, very different businesses working in different parts of the market. 

This does not render the comparison redundant. Klein acknowledges a construction arbitrator along these lines would have an 鈥渋mmense workload,鈥� and suggests it would have to start by arbitrating on the most severe disagreements and investigating the most egregious malpractice. The outcome, he argues, would be that other companies 鈥渟it up and notice,鈥� with the industry collectively improved over time. 

But for Osborne鈥檚 Steele, regulators need a narrow focus, and are better at maintaining, rather than driving, a minimum standard.

鈥淭he construction industry is already regulated [like all industries] by the Health and Safety Executive: does that drive a massive improvement? I don鈥檛 think it does 鈥� I think it鈥檚 a policeman, not an improver.鈥�  

Procurement

Steele says financial disagreements between contractors and subcontractors are merely symptomatic of a wider malaise in the sector, which should be the area 鈥� if any 鈥� that needs most fundamental reform. 鈥淲e need to be improving contractual relationships so we have the right risk profile between the customer and the contractor and therefore the supply chain. If the cash flow is managed properly, right the way through the supply chain, subcontractors鈥� concerns will be addressed. We need to tackle the cause, not the single issue.鈥�

Klein agrees that risk management in the industry is a problem 鈥� but thinks a regulatory authority could play a key role in looking at procurement practices. 鈥淏ritain is the outsourcing capital of the world, and it鈥檚 all about transferring risks to somebody else,鈥� he says. He suggests an 鈥淥ffice for Construction鈥� could set up a code of practice for public-sector procurement, promoting methods which appoint competent project teams that can work collaboratively with one another. His favourite route to this is integrated project insurance 鈥� notably used to construct a building for Dudley College in the West Midlands 鈥� which incentivises teamwork and insures contractors against cost overruns. 

Bentley has long spearheaded a campaign for better public procurement. Last year she wrote a paper for the government in which she suggested an overhaul of procurement practices could save the construction industry 拢15bn a year. She also thinks there is a need to reassess how contracts are structured in order to improve the quality of building: 鈥淲e need to change the attitude toward value from lowest tender price, to tender price plus performance.鈥� 

So does she think there is a case for a body to promote better procurement? 鈥淚n short, yes. But from working with government I know that the more you look into proposals like this, the more difficult they are in practice. I advocate government using its buying power to improve the construction industry. I absolutely think at the moment it still doesn鈥檛 do as well as it could, and if you had a body that was even just looking at that, it would improve things.鈥� 

Steele remains sceptical: 鈥淕overnment cannot manage its own public procurement, so what form of regulator is going to have the ability and teeth to be able to do that?鈥�

He also points out that there are other means by which to improve procurement without setting up a regulatory body. The government has recently asked firms to apply for a 拢30bn mega-framework in a bid to simplify its procurement processes, while Network Rail has added in conditions about prompt payment into its frameworks. 鈥淎s a procurement company,鈥� says Mark Robinson, chief executive of public sector procurement body Scape 鈥渨e are able to change how contractors deliver projects by enforcing strict minimum standards on payment terms.鈥�

Cost

Against a possible 拢15bn of savings, the price tag for a regulator looks decidedly cheap. And the case for doing something dramatic to improve the industry is compelling, no matter where you sit in the supply chain. 

Osborne鈥檚 Steele says if procurement can be improved, payment practices will get better for subcontractors. 鈥淥ver the long term that will no doubt be the outcome,鈥� agrees Klein. 鈥淏ut the lump-sum, lowest-price contracting is still very much with us across the board. In the mean time we cannot justify not paying people who add most of the added value.鈥�

But the scale of the task at hand is offputting. 鈥淧robably the biggest problem we have in the industry at the moment is how fragmented it is,鈥� says Steele. As well as not having a regulatory authority it is one of the unique things about the industry. Scape鈥檚 Robinson says he would 鈥渋n principle鈥� support the introduction of a regulatory authority for construction but adds: 鈥淲ith over 350,000 supply chain businesses spread across a 拢90bn workstream [鈥�] putting mechanisms in place to have sufficient tough points and oversight would be a significant, and costly undertaking.鈥� Licensing construction companies, whatever the positive benefit for outcomes and businesses and employees, would be an immensely complicated task. 

Perhaps a better case for a new body revolves around improving public procurement. 

But whatever its remit, and whatever the level of support for the idea, question marks remain over whether there is the political momentum to see the idea through. Bentley says the problem with establishing a regulatory authority is that it covers a longer timescale than politicians work to. 鈥淢Ps have a five-year tenure, so if you don鈥檛 deliver something by year three 鈥� so you can sit on your laurels and demonstrate it works for a year before the next election 鈥� you have got to think long and hard from a political point of view of whether it is worth supporting.鈥� 

Nevertheless, she thinks there is a chance a new body for construction could be established. 鈥淚t鈥檚 much more likely that a Labour government would do it than a Conservative government 鈥� it鈥檚 central control versus free market economics. But under a Labour government, I think it would happen.鈥� 

That Klein will finally get his wish and see any kind of regulator created that can impose on construction the reform it clearly needs, is certainly possible 鈥� but a lot of attitudes, industry opinion and perhaps even the national government may need to change first.