A PROJECT REPORT

OPERATION MANAGEMENT FOR CONSTRUCTION OF HOT STRIP

MILL

Under the guidance Of

SMRUTI REKHA SAHOO

Submitted by
ANIKET KUMAR PRAJAPATI
In partial fulfilment o f the requirement
For the award of the degree
Of
MBA
IN
OPERATION MANAGEMENT

STUDENT DECLARATION PAGE

I hereby declare that the project report entitled Operation management for construction of hot strip
mill submitted in partial fulfilment of the requirement for the degree of Masters of Business
Administration to Sikkim Manipal University, India, is my original work & not submitted for the award
of any other degree, diploma, fellowship or any other similar title of prizes.

Place

Name of candidate: Aniket Kumar Prajapati

Date

Registration number: 1308003620

EXAMINERS CERTIFICATION
The project report on operation management for construction of hot strip mill is approved & is
acceptable in quality & form.

Internal Examiner

External Examiners

(Name, Qualification &

(Name, Qualification)

Designation)

BONAFIDE CERTIFICATE

Certified that this project report titled operation management for construction of hot strip mill is the
Bonafide work of ANIKET KUMAR PRAJAPATI who carried out the project work under my
supervision.

SIGNATURE
HEAD OF THE DEPARTMENT

<Designation Dept.>

ACKNOWLEDGEMENT
A task or project cannot be completed alone. It requires the effort of many individuals. I take the
opportunity to thank all those who helped me complete this project.
I wish to acknowledge my indebtedness to my project guide Ms. Smruti Rekha Sahoo Designation) and
faculty guide (Name) without whose sincere guidance and support this project would not have been a
success. Thanking them is a small gesture for the generosity shown.
I am highly indebted to Mr. Rajib Mohanty for their guidance and constant supervision as well as for
providing necessary information regarding the project & also for their support in completing the project.
I would like to express my gratitude towards my parents & member of L&T Construction for their kind
co-operation and encouragement which help me in completion of this project.
This project is a satisfactory outcome of several days hard work. We are thankful to the respondents who
have given us sample feedback and co-operation during the preparation of this project.
I would like to express my special gratitude and thanks to industry persons for giving me such attention
and time.
My thanks and appreciations also go to my colleague in developing the project and people who have
willingly helped me out with their abilities."

ABSTRACT
This report aims to understand two very important disciplines namely, project management and
operations management. Both disciplines are fundamental to achieving long term business success and
growth in this highly dynamic business environment. These two areas of management are discussed
particularly with respect to the construction industry. It is important to note that project management has
its origins in the construction industry and has since then been an integral part of the construction as well
as several other industries. Operations management, on the other hand, has largely been neglected for
many years. However, over the past few years, management across various firms has realised the
importance of effectively managing the operations to achieve business profits and growth. The main
objective of this report is to present a discussion on the differences between project management and
operations management in construction companies. To present these differences, it is important to clearly
understand the basic definition and function of these two disciplines. As a result, this report is structured
as follows: It begins by providing an overview of the construction industry moving towards providing a
clear understanding of the concepts of project management and operations management. Later, the
discussion shifts towards presenting an insight into the importance of these two areas of management
particularly with reference to the construction industry. The next section provides a discussion on the
differences between project and operations management. This report concludes by presenting a discussion
on the necessary skills for a project manager and highlights that it is important for project managers to
possess a clear understanding of the operational activities of the firms in order to make sound business
decisions. Only those organisations that are able to effectively manage their projects as well as their
operations will be able to survive and prosper in the future.
Supply chain management (SCM) is a concept that has flourished in manufacturing, originating from
Just-In-Time (JIT) production and logistics. Today, SCM represents an autonomous managerial concept,
although still largely dominated by logistics. SCM endeavours to observe the entire scope of the supply
chain. All issues are viewed and resolved in a supply chain perspective, taking into account the
interdependency in the supply chain. SCM offers a methodology to relieve the myopic control in the
supply chain that has been reinforcing waste and problems. Construction supply chains are still full of
waste and problems caused by myopic control. Comparison of case studies with prior research justifies
that waste and problems in construction supply chains are extensively present and persistent, and due to
interdependency largely interrelated with causes in other stages of the supply chain. The characteristics of
the construction supply chain reinforce the problems in the construction supply chain, and may well
hinder the application of SCM to construction. Previous initiatives to advance the construction supply
chain have been somewhat partial. The generic methodology offered by SCM contributes to better
understanding and resolution of basic problems in construction supply chains, and gives directions for
construction supply chain development. The practical solutions offered by SCM, however have to be
developed in construction practice itself, taking into account the specific characteristics and local
conditions of construction supply chains.

UNIVERSITY STUDY CENTRE CERTIFICATE

This is to certify that the project report entitled operation management for construction of hot strip
mill submitted in partial fulfilment of the requirement for the degree of Masters of Business
Administration of Sikkim-Manipal University of Health, Medical and technological sciences.
Student Name Aniket kumar prajapati has worked under my supervision and guidance and that no part of
this report has been submitted for the award of any other degree , Diploma , Fellowship or other similar
titles or prizes and that the work has not been published in any journal or magazine.

Regd. No.

Certified
(Guides Name & Qualification)

COMPANY CERTIFICATE
This is to certify that Aniket Kumar Prajapati MBA student of Creative Institution of Management;
Sikkim Manipal University has successfully completed the project as partial fulfilment of the MBA
program from Dt._____ to Dt.____. The report entitled: operation management for construction of hot
strip mill is his/her original work and the same has not been submitted prior to this in any form.
During the above period we found his to be sincere and hardworking. She followed the rules and
regulations of the organization and was punctual in his/her attendance. His/her performance and conduct
was good. He possesses the ability to transform conceptual knowledge to practical situations.

(Signature)
Name & Designation of
Head of the Dept.

COMPANY PROFILE
8

L&T Construction, India's largest construction organization and ranked among the world's top 30
contractors, has been over the past seven decades transforming cityscapes and landscapes with structures
of immense size and grandeur. The company's capabilities span the entire gamut of construction - civil,
mechanical, and electrical and instrumentation engineering - and its services extend to all core sector
industries and infrastructure projects.
Several of the country's prized landmarks - edifices, structures, airports, industrial projects, flyovers,
viaducts, water and power infrastructure projects carry L&T's signature of excellence in construction.
Today, more and more structures beyond India's boundaries are standing tall, thanks to L&T Construction.

EXECUTIVE SUMMARY

This report has been prepared in support of the development of the Industrial Strategy, Construction
Strategy.
The objectives of the study are:
1) To identify areas where savings cost can be made in L&T construction supply chains and the
barriers to achieving those savings.
2) To identify elements of L&T construction the supply chain that tend to be imported and
understand why domestic firms are not competing.
3) To recommend actions that Government and Industry can take to improve competitiveness of
L&T construction companies by overcoming barriers to the achievement of cost savings in
construction supply chains.
The methodology developed to meet the objectives of the study includes a literature review, a detailed
study of supply chains, and a series of structured interviews with members of construction supply chains.
The Commonwealth Department of Industry, Science and Resources is identifying best practice case
study examples of supply chain management within the building industry to illustrate the concepts,
innovations and initiatives that are at work. The projects provide individual enterprises with examples of
how to improve their performance, and the competitiveness of the industry as a whole. Supply Chain
Management (SCM) and other similar terms, such as network sourcing, value chain management, and
value stream management have become subjects of increasing interest in recent years. For example,
Supply Chain Management has been labelled as the single most wide-ranging approach in considering
how organisations utilise their suppliers processes, technology, and capability to enhance
competitiveness. Interest in Supply Chain Management is growing because of:
ever-increasing market competition; acceptance of a wider focus for evaluating organisational change;
and declining incidence of vertical integration as a result of which efficiency and innovation can no
longer be solely an internal management function. Supply Chain Management deals with the management
of materials and information resources across a network of organisations that are involved in the design
and production process. It recognises the inter-connections between materials and information resources
within and across organisational boundaries and seeks systematic improvements in the way these
resources are structured and controlled.

TABLE OF CONTENTS
10

CHAPTER NO.

TITLE

PAGE
NO.

Chain management and integration

14-22

1.1 Introduction

14

1.2 Construction industry

14

1.3 Project management

15

1.3.1 Project management process

15

1.4 Operation management

15-16

1.4.1 Operation function

16-18

1.5 Importance of project management in construction

18

1.6 Project management activities

18

1.7 Importance of operation management in construction

19-20

1.8 Project management Vs operation management

20-22

1.8.1 Differing objectives

20-21

1.8.2 Role of managers

21-22

1.9 Conclusion

22

Supply chain management

22-24

2.1 Introduction

22

2.1.1 Need for SCM

22

2.1.2 Definition of SCM

22

2.1.3 Origin of SCM

22-23

2.1.4 Roles of SCM

24

2.1.5 Concept of SCM

24

11

Methodology of SCM

25-44

3 .1 Introduction

25

3.2 Case study

25

3.2.1 Description, objective

25-26

Method & result

3.2.2 Conclusion

26-27

3.3 Research & comparison

27

3.4 SC problems

27-28

3.5 Fulfilment of SCM methodology

28-29

3.6 Structure, analysis & key findings

29-31

3.7 Distribution of on cost

31-33

3.8 Drivers of high performance

33-34

3.9 Insight from structured interviews

34-37

3.10 Waste management

37

3.11 Recommendation to L&T

37-42

3.12 Conclusion of supply chain analysis

42-44

Supply chain analysis in construction industry

45-67

4.1 Analysis of contractor on costs

45

4.2 Structured interview analysis

45-67

4.2.1 Hypothesis 1

45-51

4.2.2 Hypothesis 2

51-54

4.2.3 Hypothesis 3

54-57

4.2.4 Hypothesis 4

57-61

4.2.5 Hypothesis 5

61-65

4.2.6 Hypothesis 6

65-67

12

Analysis of supply chain survey

68-79

5.1 Key themes

68-69

5.2 Management of change

69-71

5.3 Certainty of outcome and risk

71-73

5.4 Effect of demand on market condition

73-75

5.5 Waste

75-77

5.6 Summary and conclusion

77-79

Actions needed to improve L&TSCM

79-92

6.1 Identification of elements

79-80

6.2 Recommendation actions to improve productivity

80- 81

6.3 Review of the survey

81-83

6.4 Literature review

83-88

6.5 Education and training

88-92

Conclusion

93

References

94

CHAIN MANAGEMENT AND INTEGRATION

1.1 Introduction
13

In order to achieve business success, organisations need to perform a number of activities. These
activities could either be their operations or projects or a combination of both. It is not possible for
organisations to achieve long term sustainable business success without proper measures to effectively
manage its projects and operations. Hill (in Slack et al, 2010) clearly indicates the importance of
operations to an organisation by pointing out that operation is the 'function responsible for 60-70 per cent
of costs, assets and people'. Similarly, almost all the businesses across various industries undertake
projects of some sort. One of the key challenges faced by organisations in today's complex business
environment is their capability to strike a balance in maintaining current business operations known as
business as usual and also to maintain the rate of business change required to survive and compete in
future (OGC, 2009). In this context of business change, projects play a critical role as they are required to
introduce the changes required. Project management is gradually becoming an important discipline in the
area of business success as Projects often provide the base for sustainable development implementation. It
is important for projects to be well planned and well managed and have specific goals and targets.
Although, operations management and project management are different in a number of aspects that are
discussed over the next few section, there are a few characteristics that are similar for both projects and
operations. Operations and projects both need careful planning, execution and control and are both
performed by the human resources of the organisation. Also, they both often face the challenge of limited
resources.
1.2 Construction industry
Construction Industry is one of the important contributors to the economy of many countries. The rapidly
changing business environment has transformed the way activities and projects are undertaken in the
construction industry. Due to the sheer volume of resources required to undertake large construction
projects, the construction industry possesses the ability to generate employment and supports economic
growth in the region by contributing largely to the Gross National Product (GNP) and Gross Domestic
Product (GDP). However, it is important to understand that the construction industry operates in a
different environment and is susceptible to several factors such as physical environment, legislations,
resource availability as opposed to other industries. The Construction sector has a strong impact on the
day to day activities of several lives and hence it is crucial to ensure efficient use of resources on the
construction projects. Construction projects and operations require a different set of skills in order to
manage them effectively. For example: It is important to ensure the safety of team members involved in
construction operations and projects as they usually need to deal with many hazardous operations.
However, such safety concerns are not so significant in companies operating in the software industry.
These challenges and newer ways of performing business activities have placed greater responsibility on
the project as well as operations managers who are required to achieve business success within limited
budgets and time. This implies that success in construction industry can be achieved by implementation
of adequate project management and operations management teams. Before we delve deeper into the
discussion related to the differences that exist between project management and operations management
in construction companies, it is important to clarify the basic definitions of project management and
operations management and their importance in construction companies.
1.3 What is Project management?

14

Projects involve certain degrees of uncertainty as they are unique to the organisation undertaking it. In
order to achieve success and desired results, it is important for the project management team to effectively
manage the day to day activities involved in a project. Projects consist of a number of separate but
interdependent tasks that have the specific objective of creating and developing some new entity
(Woodward, 1997). In this aspect project management plays a crucial role. Project management has been
in existence for several years and has become an integral area of management over the last three decades.
Project Management Institute defines the discipline of project management as the art of planning and
controlling various human and non-human resources to be used during the entire project life cycle in
order to accomplish already set objectives of scope, cost, quality, and time by using modern management
techniques (Barrie and Paulson, 1984). In simple terms, project management can be defined as the
process of planning, executing, controlling and monitoring the various aspects of a project in order to
achieve the project objectives and deliverables within limited time, costs and resources. The project
objectives and deliverables within limited time, cost and resources.
1.3.1Project management Processes
1.
2.
3.
4.
5.
6.

project definition
team establishment
project planning
implementation
evaluation
project closure and handover

Halpin and Ronald (Hendrickson and Au, 1989) point out the three basic ingredients that represent a
project management framework. They are:
General Management: This is a broad subject that various aspects such as finance and accounting,
strategic planning, organisational structure, marketing, organisational behaviour among others.
Special Knowledge domains
Supporting disciplines
For successful management of projects, strong working knowledge of these areas is needed. All these
three areas play a key role in effective management as they are linked with the activities involved in
undertaking a project.
1.4 What is Operations management?
The main objective of any business or organisation is produce high quality goods or services that meet
their customers' requirements in order to survive and prosper in the future. In order to achieve long term
business growth, it is important for organisations to operationally enact the organisation's business
strategy. In this context, to achieve long term strategic direction, organisation's operations play a key role
as it is important to effectively manage a large number of daily operations that are aimed at
accomplishing the desired objectives to satisfy the customers. In order to achieve this business objective,
it is necessary for firms to transform their resources into desired outputs that can be delivered to the end
users. Operations consist of all these activities that are necessary to transform and deliver an
organisation's offering of goods or services to its customers. The main objective of the operations function
15

is to efficiently manage the available resources to produce the goods and services required by customers.
Several large and small organisations have today acknowledged the importance of operations and hence
have appointed people to take responsibility for managing all or part of the organisation's operations
processes. Success of operations within an organisation can be judged on the basis of its profits, growth
and competitiveness. Operations activities form an integral part of any business as they focus on the
management of a large number of assets, and expenditure to produce customer centric goods and services.
Review of literature reveals that operations management within the construction industry is not a well
recognized area of study as opposed to other major functional disciplines of marketing, human resource
management and finance and accounting. However, the discussion that follows clearly establishes that
operations management is every bit as important for Kentz, and other firms operating in construction
sector in order to be successful. For the purpose of this discussion, it is important to establish the
definition of operations management at this point. Operations management refers to the function that
focuses on designing, managing and improving the systems and procedures that create organisation's
goods or services. It focuses on delivering value to the customers (Shtub, 1999). Other functions such as
finance and human resources support operations functions and hence are indirectly involved in making
products or delivering services. Firms that are able to effectively manage their operations can achieve
sustainable competitive advantage. This is evident from the case of Toyota. Toyota's Production System
(TPS) plays a vital role in its business success. Toyota's Production System is based on four integral
principles namely, the elimination of waste (muda), continuous improvement (kaizen), automation with a
human face (jidoka) and the involvement of all employees. The management at Toyota has worked
towards implementing these key principles in day to day business operations and this is evident in their
practices such just-in-time, total quality management and team-working. TPS has enabled Toyota to
achieve high volumes and high flexibility but with low levels of inventory and minimal defects. The
application of these principles to its design operations also typically enables Toyota to get new products to
market faster than its rivals, and with fewer design glitches.
1.4.1 Operations management Functions
Material availability
Quality data
Delivery schedules
Designs
Orders for materials
Production and delivery
schedules
Quality requirements
Design/Performance specs
Sales forecasts

16

Customer orders
Customer feedback
Promotions
Product/service
availability
Lead-time estimates
Status of order
Delivery schedules
Production and
Inventory data
Capital budgeting requests
Capacity expansion and
Technology plans
Budgets
Cost analysis
Capital Investments
Stockholder
requirements
Finance / Accounting Operations management
Hiring/firing
Training
Legal requirements
Union contract
negotiations
Personnel needs
Skill sets
Performance evaluations
17

Job design
Work measurement
1.5 Importance of Project management in construction
The discipline of Project management initially originated in the construction industry but can be applied
across various industrial and commercial sectors. Project management in construction plays a critical role
in the construction industry as it is important for companies operating in the construction sector such as
Kentz to manage projects on time within limited budgets and to manage risk across a number of projects
that are large in terms of budget, time and resources. There is a need for construction companies such as
Kentz to maintain a tight control on these constrained resources and finances to ensure profitability.
Construction projects are usually characterised by long and complex life cycle and lower profit margins.
Consequently, it is imperative for construction companies to maintain strict control over project schedules
and costs to avoid any over-budgeting or wastage. Woodward (1997) notes that the project environment
related to a particular project greatly affects the project management function. In this context, it is
observed that the project environment related to construction project is affected by a number of internal as
well as external factors such as availability of resources, legislative environment, physical conditions such
as location, weather and the presence of competition. As a result, project management in construction is
even more crucial due to the need to achieve high quality standards within limited resources. In
construction industry, project management specifically consists of a range of objectives which may be
achieved by undertaking a number of operational activities that need to be accomplished within the
specified resource constraints. It is important for firms such as Kentz to resolve any conflict that may
arise due to the differences in the desired objectives of scope, cost, time and quality, to the limited
constraints of budget and human resources, by finding and developing alternate ways to accomplish the
goals of the project. Hendrickson and Au, (1989) point out the following functions of project management
for construction:
Project management in construction is important as it helps in clearly specifying the project objectives
and plans to outline the various aspects involved in the projects such as project scope, project budget,
project timelines, setting quality standards, and selecting project participants. Project management also
helps in procurement of labour and other resources as per the predetermined plan and schedule. Hence, it
is important for maximization of efficient resource utilization. Project management activities help in
smooth implementation of various operations as its main focus is to ensure proper coordination and
control of planning, estimating, and construction in the entire process. Since construction projects are
large and complex and often require use of large number of human resources, they may often face the
challenge of interpersonal conflicts that may arise due to improper communication. Project management
helps in development of effective communications and mechanisms for resolving conflicts among various
active participants.

1.6 Project management Activities

Scheduling
18

1. Project activities
2. Start & End
3. Times
4. Networks
Planning
1. Objectives
2. Resources
3. Work Break
down Structure
4. Organization
Controlling
1. Monitor
2. Compare & Revise
3. Action
4. Organization
It is necessary for project managers in the construction industry to ensure that the project is completed
within the specified timelines and budgets while also meeting the quality standards that were desired.
1.7 Importance of Operations management in construction
The Construction industry is characterised by complex and large projects that usually involve substantial
costs while leaving little room for profit margins. In this context, efficient operations management is
important because it helps in managing an organisation's costs. It is important for construction companies
such as Kentz to manage their available resources and budget in the best possible manner to generate
greater profit margins. If an organisation fails to manage and maximise the utilisation of its resources, it
will not be able to achieve sustainable project success. Operations management in the construction
industry helps the project team to achieve higher level of efficiency at low operating costs. Moreover, it is
necessary that once the projects are completed, they are able to meet the desired quality standards. This is
even more crucial in a construction project as any negligence can create dangerous situations in terms of
safety. Operations management helps the firms operating in the construction sector such as Kentz to
ensure that they are able to achieve lower operating costs while also delivering high quality products to
their customers. As discussed earlier, operations management has a long lasting impact on the quality,
timeliness and reliability of the goods produced by an organization. The activities of the operations
function are central to achieving these aims.

19

1.8 Project management Vs Operations management

The above discussion clearly indicates the importance of effective project management and operations
management in construction industry. It is established that both these disciplines are important to achieve
long term sustainable growth and success. Although, they are an integral part of every business, and
practitioners are of the view that project management is considered to be one of the most important
functions of an operations manager, there are a few differences between project and operations
management.
1.8.1 Project versus Operations -Differing objectives:
One of the major differences between project management and operations management lies in their
differing objectives. The key aim of project management is to ensure smooth control and effective
planning in order to achieve the desired objectives of the project on completion. On the contrary,
operations management aims to manage and execute the daily operations that are necessary to sustain the
business. Project management activities are usually designed around the project environment which is
unique to a particular project. This implies that since a project is temporary and aimed at achieving some
unique objectives to create a new entity, scope of project management is limited to that particular project.
On the contrary, operations management is aimed at planning and executing the activities that are
necessary for maintaining the current business operations. In terms of construction industry, activities that
require procuring goods to undertake large and complex construction project and also that require selling
the firm's business to its potential clients are its operations. While, project management in construction
industry ideally, would deal with the necessary planning of resources, budgeting, estimating of timelines
and scheduling. Project management is temporary and is unique to a particular project that is undertaken
to create a new entity, while, operations are ongoing and repetitive and deal with maintaining the existing
business activities. Management of projects in a construction industry is a challenging task as the project
environment is highly complex and the objective of project management is not limited only to the
completion of project within specified time and budget. Client satisfaction and meeting the desired quality
standards are crucial for project success in construction.
Time Constraints another major difference between projects and operations is that projects are
characterised by a definite beginning and ending while A operations are repetitive and ongoing. Projects
usually end when the objectives of the projects are achieved. This implies that the project duration is
finite as opposed to the operations activities that are continuous. However, this does not necessarily mean
that they are short lived. For instance, a large construction company is contracted to complete
construction of a large commercial complex for setting up offices. In this scenario, in order to complete
the construction project of commercial complex, a business owner who hires the construction company to
construct the complex, will usually specify a definite date of start and completion of the building. From
the point of view of the construction company, this unique construction opportunity is as project that has
certain time constraints. However, procuring of the building materials and other necessary equipments
that are not unique to this particular construction project are known as the operations. These activities are
repetitive and do not have a fixed time constraint.
Budget Constraints Project management deals with completion of certain projects within the specified
budget constraints, while operations management concerns those activities that are necessary to maintain
a specific profit margin. For instance, taking the case of the construction company that has been awarded
20

the contract to complete construction of a large commercial complex by a business owner. In this
scenario, the business owner who hires the construction firm will allot a specific cost for the project as
detailed in its
Request for Proposals. On the other hand, it is the responsibility of the operations management at the
construction company to, ensure that a predetermined profit margin is achieved on the project and work
while outlining its cost structure.
Project management is future oriented while Operations management is present oriented
Project management activities focus on achieving the future state of business. This implies that they are
future oriented. On the contrary, operations management activities focus on maintaining the current state
of business and bring the desired business changes, suggesting that the discipline of operations
management is highly present oriented. In the construction industry, the aim of project management is to
accomplish the completion of the project undertaken while delivering all the necessary expectations. All
these activities of planning and coordination are aimed towards achieving a future state. While the daily
operations are required to sustain smooth functioning of the current business activities.
1.8.2 Project managers should possess operations management skills
The above discussion clearly highlights the differences between project management and operations
management in a construction industry. However, management across various organisations is of the view
that operations management and project management are necessary skills for project managers across all
industries. It is important that project managers in a construction environment are able to adequately
consider the quality and safety concerns. In a construction environment, any minor defect can manifest
itself into a major issue as re-construction may be required leading to larger associated costs and delays in
meeting the project timelines. Further, such defects can also often become the cause of several personal
injuries or fatalities. Therefore, it is important to appoint skilled and efficient project managers who have
the necessary experience to ensure that the job is done right the first time avoiding any major or minor
accidents that may occur during the completion of the project objectives. General consensus with respect
to success of project management and operations management in construction industry is that it is
important that managers are able to motivate the team to collectively work towards business success and
accomplishment of business objectives as well as project objectives. It is necessary for management to
ensure that individuals part of the projects and operations coordinate and cooperate to form efficient and
effective teams that are specialised in a specific knowledge area. It is important for project managers to
have sound project and operations knowledge, skills and experience in handling several different teams. It
is necessary that the organisations in the construction industry such as Kentz not only possess the
necessary experience in the specialized knowledge area but also in the operations of their own as well
their customers business. For instance, the management team at a construction may be well-versed
constructing and customising the construction units as per the client requirements and yet it may lack the
experience in the procuring the resources that are necessary to undertake customer transactions. This
indicates the need for project managers to possess the required operations management skills. In order to
achieve business success, it is important to ensure that the projects not only meet customer expectation
but are also well aligned with the company's ideal profit margins. This can only be achieved if project
managers have sufficient knowledge of the operations while creating project budgets. Also, in order to
21

efficiently schedule and plan the budget and resources, it is important for project managers to be wellversed in the supply chain and efficient management of logistics.
1.9 Conclusion
It is established that project management and operations management, are two different fields of
management. Project management in construction plays a critical role in the construction industry as it is
important for Kentz as well as other companies operating in the construction sector to manage projects on
time within limited budgets and to manage risk across a number of projects that are large in terms of
budget, time and resources. It is important for Kentz, and other firms operating in the construction sector
to manage their available resources and budget in the best possible manner to generate greater profit
margins. If Kentz or other organization operating in the construction fails to manage and maximise the
utilisation of its resources, it will not be able to achieve sustainable project success. Project management
and Operations management are differing in nature in terms of their scope, time and budget constraint.
Also, Project management activities focus on achieve the future state of business implying that they are
future oriented. On the contrary, Operations management activities focus on maintaining the current state
of business and bring the desired business changes. However, management across various organisations is
of the view that operations management and project management are necessary skills for project
managers across all industries. It is safe to conclude that in this dynamic business environment, only those
organisations will survive and prosper that not only possess the necessary experience in the specialized
knowledge area to accomplish project objectives but also in the operations of their own as well their
customers business. There is a need in Kentz as well as other companies operating in the construction
sector to appoint project managers that have sound project and operations knowledge, skills and
experience in handling several different teams.

SUPPLY CHAIN MANAGEMENT

22

2.1 Introduction
Supply Chain Management (SCM) has been a well-researched area. Supply chain is a network of entities
(stages) that are involved in activities ranging from supply of raw material to production, distribution, and
delivery of final product to end consumer. In order to execute all the activities efficiently, an optimum
network design is required. Network design is a strategic level decision with a long term investment.
After network design is set and product design is finalized, some important issues may have to be
addressed. For example, which supplier, manufacturing, and transportation mode, out of available
options, are to be selected in order to minimize the total cost of supply chain? In other words, it is
selection of best option, out of all available options, at each stage of supply chain in order to minimize the
total supply chain cost. These decisions are tactical in nature and require a different kind of supply chain
design. Graves and Willems (2003), refer to them as Supply Chain Configuration (SCC) problems.
2.1.1 Why Supply Chain Management?
Supply chain management is extremely current due to its success in other industries and therefore
considered to be the future of construction by some academics. According to Constructing Excellence
(2004), products and services provided by external businesses typically account for 80% of the total cost
of projects, this means that main contractors have an ever-expanding supply chain as more packages are
left to subcontractors rather than being done in-house. The Latham and Egan reports highlighted the
requirement of outsourcing causing more emphasis on developing relationships within supply chains; as a
result an explosion of research has gone in to SCM. However, as Briscoe and Dainty (2005, p.319)
discussed, the construction industry remains characterised by adversarial practices and disjointed supply
relationships so where are we going wrong? This essay discusses whether SCM is the future of the
construction industry or whether its traditional roots will restrict its ability to improve.
2.1.2

Supply Chain Management What is it?

Supply chain management is considered an umbrella term encapsulating topics such as partnering and
lean manufacturing (Kelly et al., 2002, p.202) this could be considered a contributing factor to why this
subject is still shrouded in confusion. To make this intangible subject more understandable a sound
definition of supply chain management is required:
Supply Chain Management is the integration of key business processes from end user through to original
suppliers that provide products, services, and information that add value for customers and other
stakeholders.
2.1.3 Origin of supply chain managementSCM is a concept that has originated and flourished in the manufacturing industry. The first signs of SCM
were perceptible in the JIT delivery system as part of the Toyota Production System (Shingo 1988). This
system aimed to regulate supplies to the Toyota motor factory just in the right - small - amount, just on
the right time. The main goal was to decrease inventory drastically, and to regulate the suppliers
interaction with the production line more effectively. After its emergence in the Japanese automotive
industry as part of a production system, the conceptual evolution of SCM has resulted in an autonomous
status of the concept in industrial management theory, and a distinct subject of scientific research, as
discussed in literature on SCM (e.g., Bechtel and Yayaram 1997, Cooper et al. 1997). Along with original
23

SCM approaches, other management concepts (e.g., value chain, extended enterprise) have been
influencing the conceptual evolution towards the present understanding of SCM.
2.1.4 Roles of Supply Chain Management in Construction
In a way, the concept of SCM represents a logical continuation of previous management developments
(Van der Veen and Robben 1997). Although largely dominated by logistics, the contemporary concept of
SCM encompasses more than just logistics (Cooper et al. 1997). Actually, SCM is combining particular
features from concepts including Total Quality Management (TQM), Business Process Redesign (BPR)
and JIT (Van der Veen and Robben1997).The generic concepts, methods and lessons learnt, which have
been developed in the framework of SCM, can be used in different ways for the improvement of
construction supply chains. In the following, we illustrate how the methodology of SCM can contribute to
the understanding of construction supply chain problems, and in giving direction to improvement efforts.
The bottom-line is the effective resolution of interdependency-caused issues in the construction supply
chain, including basic problems and myopic control.
2.1.5 Concept of supply chain management
The supply chain has been defined as the network of organizations that are involved, through upstream
and downstream linkages, in the different processes and activities that produce value in the form of
products and services in the hands of the ultimate customer (Christopher 1992).

METHODOLOGY OF SUPPLY CHAIN MANAGEMENT

3.1 Introduction

24

In the literature on SCM, many supply chain methods have been proposed. Most methods address
logistical issues of the supply chain, e.g., quality rates, inventory, lead-time and production cost. The
methods of pipeline mapping (Scott and Westbrook 1991), supply chain modelling (Davis 1993) and
logistics performance measurement (Lehtonen 1995) analyze stock levels across the supply chain. The
LOGI method (Luhtala et al. 1994, Jahnukainen et al. 1995) studies time buffers and controllability
problems of the delivery process. Supply chain costing (La Londe and Pohlen 1996) focuses on cost
buildup along the supply chain. Integral methods like value stream mapping (Hines and Rich 1997, Jones
et al. 1997) and process performance measurement (De Toni and Tonchia 1996) offer a toolbox to
analyze various issues including lead time and quality defects.
3.2 Case study 1 & Case study 2
3.2.1 Description
1) This case study refers to time measurement to detect and analyze time buffers in a part of a supply
chain process of concrete wall elements including the excavation and delivery of sand, the
fabrication and delivery of elements, and the site installation of elements.
2) Involves problem analysis to identify and locate controllability problems in a part of a chain
process of composite faade elements. The observed part included the job preparation, price
bargaining, engineering, assembly,
Objective
1) Analysis of the time use along the process in order to get insight in the time buildup, and the
magnitude and location of time buffers.
2) Analysis of the controllability problems along the process in order to get insight in the occurrence
and causality among the problems and their and causality among the problems and their causes.
Method
Decomposition of the process in subprocesses and activities Time measurement of the activities
1) Categorizing time use per activity: wasted, non-value-adding, value-adding Locating and
quantifying time buffers Composing the process time buildup
2) Decomposing the process in subprocesses
3) Uncovering the controllability
4) problems per sub-process
5) Identifying and locating the causes
6) Finding connections between the problems and causes
Results
1) It appeared that at the beginning and the end of the sub-processes remarkable time buffers
occurred. The time buffers were particularly due to inventory and delays. The share of the time
buffers compared to the total lead-time was quite large (70- 80%). Underlying problems of the
time buffers included separate planning. The problems referred to various root causes including
inter-organizational barriers.

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2) The controllability problems were numerous. Root causes included no collaborative working
relations between parties, and adversarial bargaining. Most problems that were encountered on an
operational and managerial level were caused by strategic and cultural issues. These included
lacking common targets, reluctance and opportunism. The time buffers were having a large impact
on time buildup in the total process Controllability problems, as observed in the second case
study, mostly stemmed from earlier activities in the chain, performed by prior actors The
controllability problems caused much waste, including time buffers.
3.2.2 Conclusion :
From the case studies three main conclusions can be drawn.
1) First, even in normal situations much waste and problems exist in the construction supply chain.
However, this is not seen or often ignored. In the chain, most actors (separate companies and
divisions of the same company) appear to be managing just their own parts, securing their own
businesses.
2) Second, most of the waste and problems are caused in another (i.e. earlier) stage of the
construction supply chain other than where they are found. The root causes of the waste and
problems were rarely found in the activity where they were encountered, but rather in a previous
activity executed by a prior actor, often operating on a higher organizational level.
3) Third, waste and problems are largely caused by myopic control of the construction supply chain.
Many actors in the chain seem to be not able or interested to see the impact of their behaviour on
other (i.e. later) activities in the chain. In most cases, actors are not prompted to consider the
effects of their activities. Instead, they are encouraged to optimize their own part of the chain, not
taking into account other activities and actors in the supply chain.
The conclusions are based on three case studies. In order to underpin the conclusions, the
case study results are being compared to findings in existing research.
3.3 COMPARISON OF CASE STUDY RESULTS WITH FINDINGS IN EXISTING RESEARCH
Jarnbring (1994) found in his study on material flows in Swedish construction that the value added time
of those flows is only 0,3% to 0,6% of the total flow time. Various studies show a cost reduction potential
varying from 10% to 17% of the material costs (i.e. purchasing price) by means of improved logistics
(e.g., Asplund and Danielson 1991, Jarnbring 1994, Wegelius-Lehtonen 1995). Most researchers argue
that chances for these cost savings would increase if contractors and suppliers would co-operate to
identify joint opportunities to improve logistics. However, in a study into construction logistics, Wegelius
et al. (1996) found that the purchasing price is still the dominating criterion for supplier selection, which
is confirmed by Jarnbring (1994). Srkilahti (1993) found that, in general, subcontractors are also selected
on the basis of price. The tenor of these findings support the conclusion from the case studies as for the
existence of considerable waste in construction supply chains (i.e. the part of the chain involving
contractors and suppliers). Also, the argument that joint improvement of logistics would be more efficient
(i.e. less costly) when actors in the supply chain would cooperate demonstrates the fact that adversarial
bargaining is wasteful. When taking the whole supply chain into consideration, and all possibilities for
improvement, the amount of avoidable waste and problems must be considerably higher. Laitinen (1993)
found that each actor of the supply chain adds a time buffer for himself in the schedule, and often
26

produces in a different sequence or speed than the next or previous actor, optimizing just his own
activities. It is also customary to use material inventories as buffers against variations and uncertainties in
the supply chain (OBrien 1995). In a study on deliveries of concrete faade components, Laitinen (1993)
found several problems causing variation and uncertainty in the delivery process. For instance, design
information was often deficient, and difficult design issues were often not detailed. In addition, design
changes were caused by non-available, late, wrong or incomplete information, and they were often not
being communicated to the factory. The case studies showed that most of the waste and problems found
were caused by another actor in another stage in the supply chain. The case studies as well as the findings
in existing research indicate the causal relationship between problems in one stage of the supply chain
causing waste in another (i.e., the next) stage. Jarnbring (1994) found that deficient planning and deficient
information on the needed amount of material are characteristic for materials purchasing in construction.
In a study on the implementation of lean production in construction component manufacturing, Koskela
and Leikas (1997) found that there is a tendency to place construction component orders with missing
information due to incomplete design. According to Jarnbring (1994), decision making on logistical
solutions is often constrained to those solutions one has experience of or insight in.
Thus, the causes of waste and problems in construction supply chains, as mentioned earlier, include
decisions that are made with a lack of information or understanding. This appears to be valid for
operating the supply chain itself, but also for finding solutions (e.g., for logistics). Comparison of the
results of the case studies with prior research justifies that waste and problems in construction supply
chains appear to be extensively present and persistent. Due to interdependency in the supply chain, the
occurrence of waste and problems is interrelated with causes in other stages and levels of the supply
chain. Myopic control of the construction supply chain reinforces waste and problems, and complicates
their resolution.

3.4 SUPPLY CHAIN MANAGEMENTS CONTRIBUTION TO RESOLVE BASIC PROBLEMS

IN CONSTRUCTION: UNDERSTANDING CONSTRUCTION SUPPLY CHAIN PROBLEMS
The case studies and existing research show that problems in construction supply chains are largely
characterized by interdependency. Myopic control of the construction supply chain, combined with
traditional trading and non-cooperative relationships, reinforces the problems, and complicates their
resolution. Above, SCM has been introduced including an appropriate methodology to resolve the basic
problems in the construction supply chain. The first step of the methodology suggests a chain assessment
to uncover the nature and causality of the problems, which has been demonstrated earlier in the case
studies. Understanding existing problems is an absolute necessity to be able to resolve them effectively.
The goal is to become totally aware of the real basics of the problems (i.e. seeing the big picture), and
approaching the issue properly (i.e. holistically) in order to unlock possibilities for effective improvement
of the supply chain. In fact, its a matter of making waste and problems visible and tangible, and
identifying and detecting the root causes to make it possible to resolve them all.
3.5 ARGUMENT FOR SUPPLY CHAIN MANAGEMENT IN CONSTRUCTION: FULFILLING
THE SUPPLY CHAIN METHODOLOGY
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Based on the insight gained by means of supply chain assessment, the SCM methodology needs to be
fully applied to resolve the problems that were found in the construction supply chain. Because most
problems spread across (a considerable part of) the supply chain, solutions are needed that equally cover
multiple stages of the supply chain, including the actors involved. The range of the solutions and the part
of the supply chain involved depend
on the scale of the problems. After having assessed the supply chain, the SCM methodology suggests
redesign (reconfiguring the supply chains structure), control (coordinating the supply chain according to
the new configuration) and continuous improvement. For instance, towards suppliers, the methodology
could include reengineering the procurement process, installing joint coordination of logistics and
recurring product development programs. Typically, such activities include joint activities between
separate actors in the supply chain. Supply chain arrangements counteracting adversarial relations with
other actors (e.g., partnership) are needed to enlarge the magnitude of the SCM methodology, and clear
the way for resolution of interdependency-based problems and myopic control. In fact, actors are
dependent on each other for implementing the supply chain methodology successfully.
Supply chain development should take place in co-operation with a growing number of actors tackling a
growing number of issues. The actors involved should have a common development goal, share the same
view on the development, and adopt the same approach to issues such as grasping concrete and objective
performance information, and searching for improvement opportunities cooperatively (WegeliusLehtonen and Pahkala 1998). It is interesting to compare the development issues of SCM, as defined by
Lin and Shaw (1998), to the actual practice of construction . combined with traditional trading and noncooperative relationships, reinforces the problems, and complicates their resolution.
Above, SCM has been introduced including an appropriate methodology to resolve the basic problems in
the construction supply chain. The first step of the methodology suggests a chain assessment to uncover
the nature and causality of the problems, which has been demonstrated earlier in the case studies.
Understanding existing problems is an absolute necessity to be able to resolve them effectively. The goal
is to become totally aware of the real basics of the problems (i.e. seeing the big picture), and
approaching the issue properly (i.e. holistically) in order to unlock possibilities for effective improvement
of the supply chain. In fact, its a matter of making waste and problems visible and tangible, and
identifying and detecting the root causes to make it possible to resolve them all.

Why the study is valuable at this point in business cycle:

This study is concerned with the structure of the UK construction industry and the implications of this
structure with regards to productivity, competitiveness and the future attraction of the sector to new
entrants.

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Research for the supply chain analysis review was undertaken in 2013 five years after the
commencement of an extended downturn in construction activity. In real terms, construction output in
2012 was 88.5% of levels recorded in 2008, and industry forecaster, the Construction Products
Association, does not expect total output to start growing until 2014 (2.2% in real terms)1.
The ability of the industry to respond effectively to a recovery in demand without suffering from capacity
constraint or price inflation is of strategic concern to many sectors of the UK economy. With current low
levels of investment affecting the UKs future productive capacity, the ability of the construction industry
to respond to increased demand whilst remaining competitive and productive is a key issue. The study
finds that construction supply chains are highly fragmented, and furthermore, that the level of
fragmentation increases in supply chains that are directly involved in the delivery of construction work on
site. The implications of a fragmented supply chain include relatively high transaction costs, increased
requirements for management input and coordination of activities on site, and fewer opportunities to drive
out waste or reduce cost.
The study has also found evidence, through structured interviews, that challenging trading conditions,
very competitive bidding for work and use of tougher commercial terms related to payment and risk
transfer is contributing to a reduction of levels of cohesion in the industry. A number of respondents have
indicated that many of the behavioural gains secured following the implementation of the Latham and
Egan Reports risk being diluted or lost altogether.
Finally, the study has found evidence that supports the point of view that current pricing levels are
unsustainable, in that price reductions have been achieved through price cutting rather than cost
reduction. Examples include the practice of rebidding work within the sub-contract supply chain,
acceptance of low margins and inadequate pricing of risk. The consequences of unsustainable pricing can
be seen in weakened balance sheets, which reduce in turn the capacity of the supply chain to respond to
an increase in demand.
Having insight into the capability and capacity of the UK construction industry together with an
understanding of its structure and the factors which have the greatest impact on performance will be
invaluable as the industry moves into recovery. This report provides evidence-based insight to address
this need.

3.6 The structure of construction supply chain management:

A key element of this study is an analysis of Tier 1 and Tier 2 supply chains taken from a sample of five
projects. In the analysis, Main Contractors with a direct commercial relationship with a client are termed
Tier 1. Sub-contractors and suppliers with a direct contract with the Tier 1 main contractor are termed Tier
2. Sub-contractors and suppliers working for sub-contractors are termed Tier 3. Tier 3 sub-contractors
also employ suppliers and sub-contractors, so in many cases there will be a fourth or even fifth tier
involved in construction delivery. The study was not able to obtain details of spend beyond Tier 3.
Four projects are representative of the work of national contractors and range in value from 55 crores to
500 crores. Supply Chain Structure, is based on projects from the private and public sectors, featuring
mixed use commercial developments, academies and a hospital refurbishment. Projects have been
29

sourced from Odisha and the regions. So far as is possible with a small sample, we have set out to
identify projects that are representative of wider trends affecting the non-residential construction sector.
The objective of the analysis is to build a better understanding of how supply chains are structured, and
whether project organisation and ways of working have an impact on project performance. The analysis
has three main components:
An analysis of the structure and distribution of spend within the main contractors Tier 2 supply chain,
together with a small sample of sub-contractors Tier 3 supply chains. This analysis provides an insight
into the complexity of supply chain management and the degree of spend aggregation.
An analysis of on-costs within the construction supply chain identifying the costs of mark-ups for profit,
overhead and risk, and considering whether any of these costs are duplicated.
The results of a series of structured interviews with project participants, providing deep insight into how
supply chains operate, and what factors could drive performance improvement.

The detail of the analysis, together with a graphical analysis of the distribution of work in the supply
chain is presented for each project enabling contrasting approaches to supply chain management and
bundling of the work to be compared.
Most construction work is delivered at the Tier 3 level or below meaning that there are two tiers of
management activity, procurement etc. above most construction activities.
The implications of a complex supply chain for construction include issues of efficiency associated with
the management of activities on-site rather than in a factory, and the opportunity costs associated with
forming a new team for the delivery of each project a common occurrence with conventional
procurement of single projects based on a competitive tender.
The key findings of the analysis of supply chain structure can be summarised as follows:
All projects in the sample feature a large number of Tier 2 suppliers (that is, specialist contractors such as
cladding, building services or finishes contractors). To have 50 to 70 Tier 2 suppliers and sub-contractors
is not uncommon;
All projects involved a large number of low value transactions within each supply chain.
On all projects, between 50% and 75% of the total value of the work is accounted for by a small number
of major Tier 2 sub-contractors and the main contractors Tier 1 site management team. Typically 4 or 5
sub-contractors are focused at Tier 2 on major packages associated with sub-structures, structures and
envelope, and building services. Although much of the value of construction work is aggregated in this
way, our study showed that actual delivery of these packages is undertaken by a disaggregated Tier 3
supply chain. As a result, coordination of activity on site has a crucial role in influencing performance;

30

For the delivery of complex sub-contracts, we found at least three tiers within the supply chain, providing
input into procurement, logistics and coordination, ranging from the main contractor (Tier 1) to the subsub contractor doing the work at Tier 3. Complex sub-contracts might involve elements of design,
complex components and integration with other sub-contracts, such as the structure or building services.
Given the degree to which final delivery of the work is highly fragmented, the study found that there is a
limited opportunity to consolidate the supply chain by removing costs of Tier 2 intermediaries, due to
their role in coordinating the work of installers at Tier 3 and below;
Both Tier 1 and 2 contractors are involved in a large number of small transactions with contractors,
service suppliers and material suppliers doing work on their behalf. Evidence from both Tier 1 and 2
contractors suggests that the supply chain becomes more fragmented for contractors involved in the actual
delivery of work as opposed to its coordination. Analysis of the supply chain of a regional Tier 1
contractor and a Tier 2 structures sub-contractor both, who are involved in the direct delivery of
construction work, shows that these businesses have the most complex supply chains
Results of the analysis point to the important role that material producers, plant hire businesses and
intermediaries such as builders merchants have in facilitating the ready availability of construction
products and services for small and low value transactions. These organisations operate at all tiers in the
supply chain, from Tier 2 and Tier 4 and below.

The findings of the study suggest that the construction industry is not currently optimised for
rationalisation of the supply chain. According to the review undertaken by the research team, the existing
industry structure has affected previous initiatives to improve performance. Furthermore, the design of
these initiatives had been influenced by a lack of appreciation of the structure and complexity of the
supply chain. The conclusion is that whilst downward competitive pressure through the supply chain
facilitates cost reduction, the current structure of the supply chain may not secure best value delivery
through the coordination of activities on site.

3.7 Distribution of on cost within supply chain:

The study includes an assessment of main contractor and sub-contractor on-costs. On-costs cover profit
margins, a project contribution to central overheads and allowances for risk.
Due to the complexity of a multi-layered supply chain, the research team have hypothesised that the
duplication of multiple layers of profit, overhead and risk could represent a source of non-value added
cost and waste.
The team has been able to compile an assessment of the total share of on-costs based on results from the
structured interviews.
Our findings are that the level of on-costs is determined in part by competitive conditions many
contractors, for example, have put in place cost cutting programmes to reduce overheads in the past 1-2
31

years, and profit margins are routinely adjusted as part of the bidding process. Reductions in additions for
on-costs recovered by participants at all levels in the supply chain have been a contributor to reduced
prices paid by clients over the past 4 to 5 years as a result of the recession. Many respondents commented
that current levels of return from construction were unsustainable particularly as allowances for project
risk have also been cut. Falling profits reported by main contractors and sub-contractors point to the
consequences of high levels of competition and the buying of turnover through the submission of low
bids.
The evidence from the analysis suggests that typical on-cost additions in the supply chain are as follows:
Main contractor (Tier 1) 5 to 6%
Integrator (Tier 2) 6 to 7%
Specialist contractor (Tier 2) 12 to 13%

The evidence of high overheads in some specialist sub-contracts may justify some de-layering of the
supply chain structure.
A number of respondents, mostly specialist contractors, reported that they secured work on a zero per cent
profit margin. Higher on-cost ranges tend to be associated with smaller packages of work, together with a
greater work content associated with product design and manufacture. For example, a specialist fabricator
of architectural metalwork will need to recover higher on-costs than a decorating sub-contractor.
Based on the results of the study, our assessment of the total proportion of a contract price that is
attributable to supply chain profit margin and overhead margin is likely to be in the range of 18 to 20%.
This assessment is not an average but takes into account the balance of work content on a typical project.
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. Given the volume of coordination of
activity on site, we see limited opportunity to reduce costs through the dis-intermediation of the supply
chain.
The research team also set out to collect information on the level of pricing of risk within tenders.
However, much less information was obtained and it is not possible to prepare an estimate for this oncost. Results of the structured interviews indicate that risk is not being fully priced in tender submissions.
The pricing of risk represents a risk to both sides of the pricing equation. Current market conditions
permit the transfer of high levels of risk to the supply chain at a low cost. As workload increases, this
balance is likely to shift, with suppliers pricing risk on a more commercial basis as well as seeking a
change in the balance of allocation. Clients and main contractors will need to manage this transition
effectively to minimise the effect of risk premium pricing on overall project costs.

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3.8 Drivers of high performance in supply chain:

Through structured interviews with 40 representatives of contractors, sub-contractors and suppliers, we
have isolated a series of enablers of high performance in the supply chain. These are highlighted in the
figure below, which summarises the findings of the interviews, identifying the performance drivers which
were mentioned most regularly by supply chain participants.
The study tested six hypotheses which describe the determinants of effective supply chain performance.
The hypotheses are listed in the below.

Hypothesis 1: Financial arrangements

Financial arrangements such as extended payment periods introduce additional cost and limit
industry capacity by tying up cash flow, placing margins at risk and by limiting a businesss
ability to grow through increased workload
Hypothesis 2: Selection of the Supply Chain
Supply chain selection involves balancing competition and cooperation as means of
developing best value solutions on behalf of clients.
Hypothesis 3: Design management
Design management has a crucial role in enabling improved project performance, by ensuring
that design is complete and buildable, by unlocking supplier contributions to design
development and through effective change management.
Hypothesis 4: Construction site management
Effectiveness of site management has a high impact on project performance as most of the
integration and coordination of the supply chain is undertaken by the site team.
Hypothesis 5: Price determination
Work has to be priced realistically to drive effective project performance. The challenge for
suppliers is whether the realistic price meets the affordability constraints of the client.
Hypothesis 6: Supply chain integration
Greater integration of the supply chain is an effective means of reducing cost and eliminating
waste.
Theses hypotheses were tested trough structured interviews with Tier 1 and Tier 2 supply chains. An
explanation of the methodology and a full description of the hypotheses are set out in section 5 of the
report, Structured Interview Analysis.

33

3.9 Insight obtained from structured interviews:

The analysis published in the report describes in some detail the key findings from the structured
interviews, providing a wider commentary in connection with the specific issues raised by respondents.
The following summary of the results of the structured interviews identifies aspects of supply chain
management that were thought to have the greatest impact on project performance:
a) Financial arrangements certainty of payment; prompt payment
Prompt payment is described as building trust and encouraging flexibility in the supply chain. Conversely,
poor payment performance disincentivises discretionary effort by the supply chain; Sub-contractors state
that payment performance is worsening and payments periods are being extended as a result of current
market conditions; Payment delays reduce contractors liquidity and in turn industry capacity and output.
b) Supply chain selection: - repeat workload, early contractor engagement
Early contractor engagement is favoured because it enables greater supply chain involvement in solution
development. Single stage tendering to design and build projects limits supply chain involvement in
solution development and may not deliver best value; Regular engagement of contractors in the context of
settled relationships is seen by the supply chain as a positive because it facilitates effective site
management and collaboration; Very high levels of competition in supplier selection are seen to be having
a negative effect on established supply chain relationships, which are at risk of breaking down.
c) Design management early contractor engagement; sub-contractor involvement in design
solutions; incentive to contribute
Incomplete design, design change and late variations are seen as a cause of significant waste; causing
disruption to progress of the work, reducing efficiency and increasing site management workload.
Barriers to the implementation of change are not high enough to discourage high levels of change orders;
Reduced levels of professional fees have reduced available design resource, which may in turn have
affected the quality and reliability of initial designs; Subcontractor engagement in detailed design
supports improved project performance.
d) Management good communication; well managed programme; good team relationships
Good on-site communication is seen as the most critical driver of performance, emphasising the
importance of a managers ability to combine knowledge, experience and soft skills; Supply chain
members consider that there is a high dependence on the ability of the project manager to drive high
performance. Effective application of soft skills is viewed as being critical in driving high levels of
project performance; Good programming is seen as being critical to coordinate the activities of multiple
suppliers and to accommodate the results of change; Extended lead-in times on projects are valued as
they provide more time to build good project team relationships.
e) Price determination realistic pricing

34

Realistic price levels are seen by project participants to be a positive contributor to project performance;
Under pricing is described as having a negative effect on project performance; Eagerness to work with a
client and overall levels of demand were described as the strongest determinants of the overall level of
pricing relative to input costs.
f) Supply chain integration more effective coordination and use of project resources
There was evidence from the sample of some vertical integration, with main contractors taking on the
building services integrator role; The team noted growing cynicism amongst sub-contractors with regards
to supply chain integration activities. For example, there was little spontaneous mention of Building
Information Modelling (BIM) and no mention of adoption on case study projects. None of these
performance drivers identified through the structured interview process are particularly innovative or new.
However, the message from participants was that the industry did not manage the basics as well as it
could, and that the supply chain did not perform as well as it could as a result.
Key things emerging from supply chain survey:
The analysis has also identified five cross-cutting themes which illustrate how the performance of the
supply chain is affected by the interaction of the issues raised in the structured interviews. The themes
and key issues described in an analysis of the supply chain survey are as follows:
g) Effect of behaviours and soft skills Project Managers (PM) have a key role in connection
with project performance
Behavioural issues within project teams were identified as a very important positive improvement driver.
Interviewees identified the contractors project manager as having a key role in positively influencing
these behaviours;
Due to the complexity of the supply chain, a high level of informal collaboration, the need to
accommodate change and low margins the research demonstrates that effective site management has a
key role in delivering successful outcomes for clients and constructors;
Feedback from the supply chain suggests that investment in the improvement of site management skills
will help to drive better performance.
Management of change the low cost of change comes at a price for the industry Construction has
developed processes to accommodate change in design and construction. However, by comparison with
other industries such as IT, it can be argued that construction accommodates change too readily and at too
low a cost at the point of change;
Evidence from the study suggests that the volume of change is high, comes from too many sources, and
can be highly detrimental to project performance;
The ability to introduce change is the industry norm, but is seen by the supply chain as a source of waste,
a cause of uncertainty and a catalyst for greater friction between trades. Many firms stated that the cost of
implementing change outweighed any income premium they might receive as a result of the change;

35

Change is a major source of waste. The ability to introduce changes during design and construction is
desirable, but the industrys presumption should be in support of managed change control in support of
better decision-making.
h) Certainty of outcome and risk transfer costs of risk transfer will be built into future
project costs Construction involves high levels of risk due to a combination of one-off design
and construction, site-based working, fixed-price contracting and supply chain fragmentation;
Risks transferred typically include compliance with planning, regulatory compliance, building
performance, sustainability standards, team performance, programme, and cost and so on;
Risk transfer mechanisms generally work well for the clients. However, the allocation and management of
actual risk is often erratic and inefficient, increasing uncertainty, and resulting in inefficient working,
waste and unnecessary cost;
Tough market conditions have increased the level of risk held by the supply chain. However, the
progressive transfer of risk from client through contractor to the supply chain may not result in optimal
outcomes;
The effectiveness of the management of this transfer of risk into the supply chain affects overall cost
levels in the industry, as well as productivity and profitability. Over time, the costs associated with risk
transfer will be built into the cost of work, through the proper pricing of risks in tenders, potentially
increasing project cost;
i) Effect of demand and market conditions a low entry price may result in higher overall
costs
Evidence from supply chain interviews clearly shows that low levels of demand and continued tough
trading conditions have a negative effect on firms, relationships and project performance;
Firms appear to be hoping that the market will return to conditions seen prior to 2008. There was little
evidence either of innovative or adaptive responses to current market conditions, or of a belief that current
conditions and price levels represented a new baseline;
This optimism, which is not supported by workload forecasts, weakens the industrys current focus on
cost and waste reduction initiatives that are essential to sustain long-term competitiveness;

Interviews provide evidence of a shift in bargaining power within the supply chain, which has been used
push down prices, rather than to reduce costs by changing ways of working;
The evidence suggests that supply chain members will seek to repair margins when the supply and
demand balance changes. 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.
3.10 Waste the industry is focused too much on physical waste

36

Interviews show that the industrys focus is on the reduction of physical waste. Most respondents did not
recognise other aspects of duplication or loss of value as waste;
In our view, waste is embedded into industrys structure, risk management practice and working culture.
Addressing the narrow view of waste as a physical by-product of construction will create opportunities
for performance improvement;
We found little awareness of opportunity, insufficient ability to act and only limited incentive to improve
performance with respect to removing all sources of waste from projects.
The commentary in the report defines each issue, summarises the insight obtained from the structured
interview, and sets out implications for industry strategy, feeding into recommendations for performance
improvement.
Opportunities to reduce cost through the supply chain
The results of the supply chain analysis and industry engagement highlight the longstanding
fragmentation of the construction industry supply. Insights also show that many of the practices
associated with the current downturn in activity are reducing the ability and incentive of a project supply
chain to work collaboratively to reduce waste and cost.
The report notes that there are risks that aspects of the supply chain are not fully aligned to set and
maintain a trajectory towards high performance and lower cost, delivery. In order to address these
potential shortcomings, the report has highlighted the main areas to reduce costs and improve
performance across the supply chain, including:
Early contractor and sub-contractor involvement in solution development, facilitated by appropriate
procurement arrangements which incentivise and reward supply chain contribution;
Greater coordination of design and assembly across the supply chain, possibly based on BIM, recognising
the dis-aggregated structure of the supply chain;
Improved management of change, focused on reducing the opportunity costs to the industry of
unmanaged change ;
Efficient and well-coordinated on-site operations, facilitated by an integrated and settled site teams,
capable site management and proportional management of change;
Wider adoption of the integration role of supply chain management, either at Tier 1 or 2, focused on the
management and coordination of related trades in a dis-aggregated supply chain.

Recommendations from the research actions to improve the competitiveness of the L&T
Construction Industry

37

The research has identified a series of actions that should be taken jointly by the Government and the
industry to harness the potential of the supply chain to improve performance and productivity of the L&T
construction industry. These actions include recommendations to initiate maintain progress. Many of
these recommended actions point towards small-scale, project level improvements, based on an agenda
for change aimed at all levels in the supply chain. This change agenda is important, as in the view of the
research team, current ways of working will not deliver Industrial Strategy outcomes. Actions identified
by the research include:
The promotion of an agenda for change at all levels of the supply chain, countering the view that current
ways of working will deliver Industrial Strategy vision;
Investment in the development of the quality and capability of site management staff in order to drive
performance improvement through supply chain interaction on site;
Better alignment of construction industry improvement agendas with the interests and priorities of the
supply chain, including procurement and risk transfer practice;
Encouragement through procurement practice of effective early sub-contractor engagement;
Investment in capability development throughout the supply chain to increase the adoption of
performance improvement initiatives;
The review of financial arrangements including bidding and payment, with a particular emphasis on the
role of supply chains in cost-led procurement, and maintenance of cash flow at all levels of the supply
chain, including Tier 1;
Promotion of effective change management practice, recognising that the opportunity costs of change are
passed into the supply chain through waste and lost productivity;
Promotion of the awareness of all sources of waste in the construction industry, not just physical waste;
Encouragement of the development of commercial exchange models that increase the visibility of
capability and reduce the transaction costs associated with delivering construction work through the
construction industrys tail of small businesses recognising that small businesses are a fundamental part
of the L&T construction industry.

Supply chain structure

This section of the report focuses on the structure of supply chains working under both Tier 1 and 2
contractors and sub-contractors. The analysis considers the number of sub-contractors and suppliers and
the value of the contracts in each discrete supply chain. The analysis addresses the objectives of the study
which is focused on the achievement of further cost savings in the supply chain and understanding of
choices with respect to the use of locally sourced or imported products and services. By analysing the
number and size of subcontracts involved in the delivery of a project, this study highlights the
disaggregation of the industry, the small scale of many enterprises involved and the limited extent of

38

repeat work. The implications of a large number of suppliers and/or a large number of small value
contracts include:
Relatively high transaction costs related to procurement, bidding and contract/commercial administration;
Increased levels of management and coordination of activities on site, related to a large number of
separately contracted trades;
Extensive learning curves associated with project processes, effective team working and other aspects of
collaboration;
Reduced opportunities to drive out waste and reduce cost through supply chain aggregation, volume
purchases and so on.
With respect to the volume of imported materials and services, the implication of a large number of
transactions is that the transactions become commoditised and the purchasing decision is made on simple
commercial criteria such as price and availability. This is particularly the case for construction materials
a finding which is supported by the results of the structured interview survey. The implication of this
finding is that there are few, if any opportunities to build a position of competitive advantage through
product of service differentiation for domestically produced materials, where these are subject to overseas
competition.
The supply chain sample
The analysis of construction supply chains relies on a high level of cooperation from the contractor
supply chain. The work is potentially highly time-consuming for participating contractors. The research
team developed an approach to analysis based on contractors internal cost reporting processes. Whilst
this reduced the effort required to produce the analysis, we also found that many sub-contractors were
quite sensitive to issues of commercial confidentiality. This reduced the willingness to participate, and
size of the sample, compared for example to the size of the questionnaire survey sample.
The analysis presented in this section is based on the following range of projects:
Four main contracts (Tier 1) with a value range of 500 crores. These projects are representative of the
work of national contractors with managed supply chains. Two of the projects are located in London, one
in the South East and one in the Midlands. A proportion of the construction work on some of these
projects is self-delivered by resources from within the main contractors organisation. The value of this
work, which is managed as a sub-contract typically ranges from 20 to 30%. This pattern of disintermediation of contracts is discussed elsewhere in the report.
One main contract (Tier 1) falling within a value range of 200 crores. This project has been sourced from
a regional contractor and is representative of medium scale public sector work sourced via frameworks.
The main contractor uses some direct labour for self-delivery.
Six sub-contracts (Tier 2) with values ranging from 100 crore. The focus of the analysis is on large,
complex sub-contracts which have an equally extensive and complex supply chain. These sub-contracts
are associated with the projects undertaken by national contractors. We did not examine the supply chain

39

structures associated with simple or low value sub-contracts, or sub-contracts for the supply of services. A
detailed analysis of four of the sub-contracts is included in the analysis.
The selected contracts have been chosen to reflect practice in both the private and public sectors, and
involved the delivery of high quality commercial office buildings and the construction of new-build
Academies. The project delivered by a regional contractor involved the refurbishment of a health sector
building. Where possible, the team identified pairs of buildings that were delivered using contrasting
approaches to procurement, so that the widest possible range of insight could be drawn from the analysis
and the structured interviews.
The size of the sample set out in this report meets targets agreed with BIS, which reflect the teams
recognition of the challenges associated with obtaining detailed financial data from the construction
supply chain. Supply chains which are excluded from the analysis include:
Consultant supply chains
Labour-only sub-contract supply chains
Manufacturing supply chains
Definitions of the supply chain terminology used in the analysis are as follows:
Tier 1
Designers and Constructor that have a direct contract with the ultimate client;
Tier 2
Designers, constructors and suppliers with a sub-contract with the Tier one contractor
Novated design consultants
Sub-contractors
Manufacturers and material distributors
Suppliers of major plant and equipment such as tower cranes
Tier 3
Designers, constructors and suppliers with a sub-contract with a Tier two sub-contractor
Designers providing working details;
Specialist sub-contractors
Manufacturers and material distributors
Plant and equipment supply and hire firms

40

Tier 1 contractors are typically termed main contractors, and many Tier 2 contractors are described as
specialist contractors. Labour-only sub-contractors typically operate at the third Tier. The supply chain
interviews described in section 5 are focused mainly on Tier 1 and 2 contractors.
In a small number of instances, we found examples of Tier 2 work being delivered (or the delivery being
managed) by a division of the main contractor for example, the delivery of the building services subcontract. This aspect of the analysis demonstrates that the final costs associated with physical construction
work can occur at all levels of the supply chain.
The analysis of expenditure categories
The analysis of the supply chain is based on records of expenditure obtained directly from Tier 1 and 2
contractors. So far as is possible, we were able to analyse the contractors direct and indirect expenditure
on a project. Information derived from records of contractors transactions on a project has enabled the
team to identify the number of sub-contractors and suppliers on a project. The team did not analyse the
number or size of individual transactions with suppliers. the analysis of each supply chain is broken down
into a series of cost categories which distinguish, for example, between sub-contracts for construction and
other sub-contracts for the provision of services and materials. This level of analysis is helpful as it
provides important insight into the complex range of activities undertaken in connection with each
construction project.
The analysis also distinguishes between three cost categories that do not involve sub-contracting. Direct
works describe costs that are related specifically to construction work. We have encountered a number of
examples of contractors at Tiers 1 and 2 who undertake construction themselves, and this category
highlights this allocation of work. Internal costs are costs related to management, supervision and
logistics on a project the activities normally associated with main contractors and some specialist
contractors. External cost is a category that has been used to isolate incidental expenditure, where this
was recorded by the contractor.
Supply chain cost categories
Sub-contractor: Sub-contracted construction, including design, components and materials, labour and
supervision
Sub-structure, partitioning, fire-alarms and so on.
Supplier (Services): Sub-contracted services including design consultancy and site services Directly
employed design consultants, multi-service gang, site services including cranes and hoists, temporary
power and so on, utilities connections, insurances
Supplier (Materials): Components or products purchased directly for incorporation into the works by
direct labour or by others
Concrete and reinforcement, air-conditioning plant, consumables
Direct Works
Construction work undertaken by the contractor at the head of a particular supply chain
41

Actual construction work sub-structure, building services and so on

External Costs
Incidental business expenses
Utilities costs for site accommodation and so on
Internal Costs: Internal costs of the contractor at the head of a supply chain associated with management,
plant, overhead and margin
Contractors project management costs, internal charges for plant and equipment, internal recharges for
business-wide activities, contribution and allowances for profit and risk
Note: It is not possible to define sub-contractors or suppliers as being either Tier 2 or 3. The analysis
presented in this report shows that Tier 2 sub-contractors typically have a complex network of subcontractors and suppliers. In many cases members of Tier 3 will also source work from sub-contractors
and suppliers.

The key findings of the analysis can be summarised as follows:

All projects feature a large number of Tier 2 suppliers. Low median values for four out of five of the
contract supply chains indicate that there are a high number of low value transactions within the supply
chain;
On all projects, between 50% and 75% of the total value of the work is accounted for by a small number
of major sub-contractors and the main contractors site management team. The allocation of workload
into packages has the effect of aggregating much of the value of construction work, albeit that delivery is
undertaken by a disaggregated Tier 3 supply chain;
Despite the level of aggregation of spend around high-value packages, all of the supply chains examined
had an extended tail of smaller value, specialist providers. The evidence for this is:
The high number of suppliers with contract values of under 100,000. For three of the national
contractors, over 60% of sub-contracts by number have a value under 100,000. For the regional
contractor, only 1 sub-contract exceeds the 100,000 threshold.
The number of suppliers with contract values under 10,000. This ranges from 15 to 20 on contracts
delivered by national contractors, to over 50 for the project delivered by a regional contractor.
The low average value of transactions relative to the maximum sub-contract value. Two main contractors
appear to follow a procurement strategy based on larger packages, and in this case, the average value is 30
to 40% of the maximum. For the other two national contractors, the average value was 10-20% of the
maximum, indicating a more dispersed supply chain. For the regional contractor, the average value is 5%

42

of the maximum indicating a critical dependency on the performance of one specialist contractor, and a
high volume of small transactions.
Supply chain analysis overall conclusions
The analysis of the supply chain has confirmed the extent of the disaggregation of the construction supply
chain. The headline findings of the analysis are:
Main contractors (Tier 1) may access a project supply chain of over 40 sub-contractors and suppliers to
deliver a typical 10 million plus contract;
50 to 75% of the value of the construction work in our sample was accounted for by 4 or 5 large, complex
Tier 2 sub-contracts;
The remaining project value is accounted for by smaller, simpler construction contracts at Tier 2, often
related to finishes, and construction services;
Complex Tier 2 sub-contracts are also highly disaggregated, typically featuring over 30 suppliers at Tier
3.
The current structure facilitates cost reduction through downward competitive pressure, which may not
secure best value delivery through the coordination of activities on site.
A key insight from the analysis relates to the supply chains directly involved in the delivery of
construction work, as opposed to the coordination of sub-contracts. The study featured two supply chains
involved in actual construction. They were the most complex and also involved the largest number of low
value contracts with a substantial number having a value under 1000 crores In both cases, the bulk of
the value of construction work was focused on large sub-contracts, so clearly where the aggregation of
work is appropriate, then the opportunity is taken. However, the presence of a large tail of small value
suppliers, points to potential issues associated with opportunity costs to the industry associated with the
coordination of a multitude of independently managed site operations and services.
The analysis demonstrates that there are a large number of individual participants on construction
projects, all of which will be pursuing their own growth and profit strategies. Some of these subcontractors are highly dependent on a small number of clients for most of their workload. Other suppliers,
particularly in bulk materials markets such as in-situ concrete, will be larger than their clients, and could
have more market power with respect to the setting of prices.
Another group of Tier 2 and 3 suppliers deliver relatively low value parcels of niche work on projects.
There are a large number of these suppliers. However, they are insignificant with respect to the proportion
of the overall value of construction work delivered. These businesses are likely to rely on a very large
client base on which to support a specialist business. In these instances, individual contractors will have
less incentive to align with the needs of specific projects.
One challenge will be to align these different project participants to industry wide needs to cut costs and
reduce project durations. The evidence from this project is that a considerable effort will be required to
influence the actions of a wide number of participants.

43

Given the current depressed state of the market and high levels of competition currently observed in the
supply chain, the immediate response to a recovery in workload is likely to be to strengthen margins and
balance sheets to provide for expansion and investment. These findings set the foundations for the
structured interviews, which focus in more detail on factors which improve performance in the supply
chain.
Distribution of on-cost within the Supply Chain
This section of the report considers research findings related to the identification of layers of on-costs
through the supply chain. Section 3 of this study has shown that for many aspects of construction work,
there are likely to be at least three tiers of contractors involved in the management and delivery of the
work. One of the teams research hypotheses is that as a result of these layers of sub-contract tiers, there is
the potential for the duplication of profit, overhead and risk allowances across a highly fragmented
project supply chain. If this proves to be the case, then the result will be high levels of management oncost in addition to the basic costs of component manufacture and assembly.
For the purposes of the analysis the definition of on-cost is as follows:
Addition for target profit actual profit may vary as a result of the accuracy of estimates and the
effectiveness of project delivery;
Addition for overhead contribution the proportion of business operating costs that are recovered
indirectly from projects as a central charge rather than directly as a project cost;
Addition for risk allowance an up-front assessment of a contractors potential risk exposure, taking into
the risk transfer built into the contract and the characteristics of the project.
The setting of on-cost additions is subject to market conditions. On-costs tend to be priced more
generously in rising markets. The context to the analysis presented in this report is that all of the projects
included in the sample have been procured during the downturn. Most profit, overhead and risk
allowances will have been subject to downward adjustment since 2008.
It is widely recognised that the construction industry is not currently generating sufficient return to cover
costs and deliver a return. Measures of prices published by EC Harris27 and others point to construction
price reductions in excess of 20% since 2008. Furthermore, historic records show that construction prices
rise after a downturn and in long run increase at a premium to RPI. Research findings support this
assessment of the current position of the industry. Taking into account that some projects were procured
in 2008/9 and then put on hold, and other projects were procured more recently, we found projects where
suppliers margins were described as being under considerable pressure and others where returns were
judged to be
The implication for the Industrial Strategy is that there is likely to be an upward pressure on prices linked
to on-costs when activity levels start to rise.
Supply Chain Analysis into the Construction Industry A Report for the Construction Industrial
Strategy
4.1 Analysis of contractor on-costs
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As part of the structured interview process, we collected data on on-costs from 31 participants. All
respondents provided information on margin and overhead. However, only 8 responded with details on
risk allowances, which when priced as an addition to net costs typically range from 3 to 5%. This
assessment is based on a blend of work whereby the main contractor recovers on-costs on 100% of net
cost, integrators recover on-cost on 35% of net costs, and sub-contractors and suppliers recover on-cost
on 90% of net cost. Suppliers costs would be included in the main contractors preliminaries addition, as
well as the works of sub-contractors.
a) Assessment of the impact of supply chain on-costs
Based on average levels of profit and overhead, the data presented in Figure 4.2 suggests the following
composite on-cost ranges for profit and overhead are average according to current market conditions:
Main contractor (Tier 1) 5 to 6%
Integrator (Tier 2) 6 to 7%
Specialist contractor (Tier 2) 12 to 13%
It should be noted that out of a sample of 31 respondents, four participants, most of whom are specialist
contractors recorded pricing profit margins at 0%.
Based on a blend of main contractor costs, work delivered by integrator sub-contractors and work
delivered by specialists, the total proportion of the costs of a construction project that is attributable to
margin and overhead is likely to range from 17 to 20% on average28. The share of on-cost attributable to
the integrator level, where it could be argued that there is some duplication of margin and overhead is
around 2%.
Our analysis shoes that most contractors who have been interviewed continue to secure some margin and
overhead, albeit at sub-optimal levels. On-costs secured outside of London and the South East are
significantly lower, albeit our evidence base has in part been derived from frameworks which have
protected reasonable margins.
The adoption of integrator roles by main contractors appears so far to have transferred on-costs to the
main contractor, rather than to have reduced them. A reduction in overall on-costs may follow through the
application of competitive pressure. In-house integrators are still winning work in competition with
independent specialists albeit the number of specialists is diminishing.
The evidence of high overheads in some specialist sub-contracts may justify further de-layering of
industry structure albeit there is also evidence that levels of management resource are being reduced to
keep bids competitive whilst maintain profit and contribution. The analysis shows that high overhead
costs are related mainly to smaller specialist subcontractors.

4.2 Structured interview analysis

45

The summary of the quantitative analysis of the findings of the structured interviews is summarised in
Figure 5.1. This table reproduces the matrix of hypotheses that the interview team used to record the
performance drivers that were mentioned most often during structured interviews.
The key for understanding the analysis is as follows:

1. The analysis is organised in a grid which sets out six research hypotheses described in section 5.2.
The hypothesis for construction site management for example is that site management activities
will have a significant positive or negative impact on overall project outcomes. Quality of
communication is identified as a dimension of effective site management performance
articulated as the opposing outcomes: good and poor quality communication.
2. In the analysis, we have focused on hypotheses which have attracted a relatively high level of
recognition and agreement from respondents. The number of respondents that recognise a causal
relationship with a positive or negative outcome is recorded in the matrix.
3. Clusters of positive and negative results are highlighted using coloured circles. Red circles
indicate a widely held perception of positive performance, whilst blue circles indicate a
perception of negative performance.
Detailed results related to each set of hypotheses are described in the following sections, dealing with
each set of performance drivers in turn.
The analysis suggests that financial arrangements, the method of being selected for a project, design
management and site management combine to have the greatest impact on project outcomes. By contrast,
methods of selecting suppliers, approaches to price determination and the integration of the supply chain
were picked out less often as drivers of performance.
These high level findings lead us to conclude that there is a close relationship between the disaggregated
structure of the supply chain and the need for high quality management during the procurement and
construction phases of a project. This places a premium on discretionary behaviours and inter-personnel
skills.

Overview of the performance hypotheses

The following section of the report sets out more detailed findings from the structured interviews,
organised by each performance hypothesis.
4.2.1 Hypothesis 1. Financial arrangements
Financial arrangements such as payment periods, retention funds and bonds introduce additional
cost and limit industry capacity by tying up cash flow, placing margins at risk and by limiting a
business ability to grow through increased workload.
Key findings

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There is a widespread view amongst sub-contractors that payment performance is worsening and
payments periods are being extended as a result of current market conditions;
The payment performance of clients and main contractors affects the operating performance of subcontractors;
Payment delays reduce contractors liquidity and in turn industry capacity and output;
Uncertainty and delay in agreeing payments for changes increases risk to the supply chain;
The practice of retention is reluctantly accepted but seen as a burden on cash flow and performance;
Prompt payment performance builds trust and encourages flexibility in the supply chain;
Overview
The analysis provides clear insight that payment issues are very important to supply chain members, and
that positive behaviours drive better project outcomes. Almost all respondents mentioned payment related
issues. There was a broad consensus that the timing and certainty of payment was a growing problem
which affects performance. The results suggest that the perceived fairness of financial arrangements was
seen by respondents to have less influence on performance than certainty and promptness of payment
itself.
One insight gained from the interviews is the knock-on effect of payment performance on individual
projects on the ability of a business to finance bids or expansion. Payment is a good example of an aspect
of business behaviour that has a direct impact on the competitiveness of the industry, including the ability
of sub-contractors to compete, win and expand.
Comments from interviewees emphasised that practice on our sample projects was significantly better
than their experience of typical behaviours on projects. The data analysis shows that the sample projects
were highly rated for fair and reasonable payment terms, and certainty and promptness of payment. Our
understanding of certainty of payment is that it concerns valuation practice such as being paid for
variations as well as the risk of employer failure. Certainty of payment was identified as an area where
poor performance did trigger negative reactions from the supply chain.
In discussing payment practice, it is important to emphasise that we found a number of examples of
flexible practice by main contractors, recognising the specific circumstances and cash flow positions of
different sub-contractors. Examples included shorter payment periods for contractors with a direct labour
force, higher frequency payments for SMEs

employed as part of a local employment support initiative, and support to sub-contractors that were
known to be in short-term financial difficulty.
Detail of findings on financial arrangements
Retention and bonds

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The practice of retention is to hold back a percentage of the value of work completed in order to
incentivise completion and the making good of defects. The practice of holding retention is written into
most construction contracts and only a small number of clients have given up their rights to hold retention
funds. Retention funds range from 3 to 5% of the value of completed work, and cascade from main
contractor down the supply chain. Sums withheld by a contractor may differ from those withheld by the
client. Half of the value of retention is paid on completion of work, and half is payable 6 months after the
end of the contract rectification period. As well as a drain on cash-flow and a source of creditor risk,
payment retention causes an administrative burden.
Most interviewees were resigned to the continuing use of retention and noted their impact on cash flow,
particularly as most sub-contractors in the sample were self-financing and avoided bank borrowing. In the
current market, the typical value of a retention fund 3 to 5% - will exceed the target margin on a project,
tying the money up during the construction and defects periods. The effect of retention is to reduce the
cash available to fund sub-contractor businesses. As a result this practice constrains expansion.
No interviewee suggested that the cost of the retention was built as an extra into a bid price. However,
industry commentary has suggested that the cost of retention can be built-in to the bid price in buoyant
markets, when contractors and sub-contractors are motivated to move on to new work opportunities rather
than spend time recovering outstanding monies.
Comments recorded from interviews included:
Sub-contractor: Theyre the bane of my life. It hits cash flow and increases uncertainty.
Sub-contractor: Youre waiting a year to make your margin.
Sub-contractor: We can spend a lot of time chasing retention, which causes a headache.
No sub-contractors mentioned retention bonds as an alternative.
Very little comment was made with respect to performance bonds. They were mentioned by one main
contractor who suggested that current market conditions were increasing their use mainly due to the
greater risk of sub-contractor insolvency
Certainty of payment
Certainty of payment concerns the valuation of variations as well as the financial stability and credit risk
of the immediate client.
Many of the concerns raised in interviews focused on the valuation of variations by main contractors. A
common complaint was that the valuation of changes was left unresolved until the end of the project,
when a subcontractor might be in a weaker bargaining position. Delay in the resolution of claims is a
common practice across the industry involving clients, contractors and their consultant advisors. Contract
provisions exist to encourage the agreement of costs in advance of the instruction of changes, and the
findings of our survey underline the benefits gained from the certainty of agreed costs. Key issues
identified by main contractors and sub-contractors involving payment certainty included:

48

Scope of variations. Discussions concerning the scope of work and the extent of design responsibility
associated with design and build procurement is a source of risk. This is an aspect of the cost of change
that we discuss elsewhere in the study
The timing of the agreement of the valuation of change. The level of risk can increase as a project
approaches completion, particularly if there has been a cost-overrun.
Project profitability. Main contractor were described as being more sympathetic to the valuation of
variations when projects are profitable. As one roofing contractor observed: When a main contractor has
not made money on a project, it always becomes very apparent at Final Account stage they just wont
pay variations
Certainty of payment associated with contractor solvency was also mentioned in interviews, albeit mostly
in the context of the support provided to businesses struggling with cash-flow issues, through prompt
payment by their immediate clients. An important and possibly overlooked benefit is a sub-contractors
willingness to respond more quickly to instructions when there was certainty of payment mitigating
potential delay.
Specific comments and insight on payment certainty included the following:
Sub-contractor: If you know you are going to get paid, you will respond to a variation quicker and go
out of your way to help.
Sub-contractor. An example of a subcontractor who turned a blind eye rather than discussing potential
problems with a main contractor is a good example of the corrosive effect of bad payment practice.
Missed opportunities to solve problems may have cost money, caused delay and introduced waste into
other elements of the supply chain.

Prompt payment
Prompt payment was described in interviews as an enabler of goodwill and cooperation. Prompt payment
is a hygiene factor and as a result, delayed payment inhibits good performance more than prompt payment
incentivises improved performance.
Prompt payment is an important enabler of project performance but may not result in reduced waste or
cost. However, prompt payment was seen by many subcontractors as a main contractor differentiator
which influences the pricing of projects. Extended payment terms also reduce industry capacity. Many
subcontractors interviewed said that they were unwilling or unable to work under extended payment
terms because of the strains on cash flow and increased risk.
Little direct reference was made in interview to Project Bank Accounts (PBA), despite efforts to introduce
them into the public sector. One specialist contractor acknowledged their role in providing greater
certainty with respect to payment and cash-flow. Main contractors have observed that due to the effect on
business models that rely on proactive management of cash, their prices may increase as the result of the
widespread introduction of PBAs.

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Certainty and promptness of payment is particularly important for regional contractors or sub-contractors
that support a large direct labour force. There is currently a high level of awareness of late payment and
the extension of payment terms perhaps as a result of high profile actions by some main contractors.
Specific comments and insight on speed of payment included the following:
Sub-contractor: the majority of money is going to pay wages weekly and so we must be paid on time.
We have horrendous experiences on some contracts. This increases risk and wastes a huge amount of time
chasing.
Sub-contractor: Unable to fund many jobs with long payment periods so had to decline opportunities.
Sub-contractor: Delayed payment or longer payment periods influenced performance, with one firm
stating that it limited the labour resources allocated to a project to control cash flow.
Sub-contractor: Extended payment terms may be funded through the contract price, increasing the cost to
the client. One sub contractor stated that it had increased prices by 3% to 4% in response to the extension
of payment terms at the beginning of the recession in 2008/9.
Building Services specialist contractor: Careful management of subcontractors is required to mitigate the
effects of wider cash-flow problems. The impacts on sub-contractor performance, including fluctuating
labour levels, which create productivity problems on site. Problems associated with late payment may
also cause delays in deliveries. The cause of the problem could be a completely different project

4.2.2 Hypothesis 2. Selection of the supply chain

The selection of the supply chain concerns not only how suppliers are selected, but also how they
select their own supply chain. Selection involves balancing competition and cooperation as means of
developing best value solutions on behalf of clients. A key issue is whether price competition is
needed to ensure best value, or whether a project team can deliver equivalent or better value by
other means.
Key findings

Early contractor engagement is seen as very positive for performance because it enables more supply
chain involvement in solution development;
Where subcontractors are selected in competition, they are wary of assisting main contractors with bids;
The current application of single stage tendering to design and build projects limits supply chain
involvement in solution development and may not deliver best value, even if it offers the lowest cost of
entry;
Regular engagement of contractors in the context of settled relationships is seen as positive because it
facilitates effective site management and collaboration;
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Personal relationships and familiarity within teams still plays a strong role in supplier selection;
In the current highly competitive market, price often trumps performance in winning bids;
The re-bidding of packages by main contractors to drive down prices is having the effect of reducing
lead-in times for sub-contractors once the work is awarded;
Very high levels of competition in supplier selection are having a negative effect on established supply
chain relationships, which are at risk of breaking down.

Overview
The analysis of survey responses shows that both established relationships and early involvement in
projects are enablers of high project performance. These practices also tend to be associated with reduced
levels of competition. We have no evidence comparing the contribution to value generation of
competitive and collaborative approaches to team selection, but there are clearly trade-offs between the
two, such as the disincentive for a sub-contractor to support a main contractor in preparing a bid
submission, when it is known that all work packages will be retendered once the project is secured.
Interestingly, interviewees who saw a benefit in being selected on the basis of performance also
recognised the role of performance in the selection of their own supply chain.

During discussions, most interviews made it plain that competition was fierce and that cost discipline in
non-competitive situations was also high. The consensus was that clients expect prices to be very
competitive, irrespective of the method of selection.
Evaluated purely on the basis of a quantitative analysis, early contractor involvement is perceived to be
the strongest driver for improved performance. Furthermore, late selection was reported to have hampered
the performance of two respondents.
Findings on regular selection within the supply chain indicate that this is a positive performance driver
also contributing to positive site management performance. Whilst the project sample may not be
representative, interviews revealed considerable effort by team members to maintain stable relationships.
The interviews provided much evidence that methods of contractor selection were strained by current
commercial pressures resulting from the downturn. Contractors at all levels of the supply chain described
the erosion of perceived progress made after Latham and Egan, caused primarily by the cost reduction
imperative that has dominated bidding behaviour since the beginning of the construction downturn in
2008. From sub-contractors, there was fairly widespread cynicism about how some main contractors are
operating their supply chains and framework agreements. Given the extent to which price reductions have
been pushed down the construction supply chain in the five years of the downturn, this finding is not
surprising.

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Detail of findings on methods of selection

Appointment as part of an established team
Both main contractors and subcontractors saw regular engagement with their immediate employer, as
highly desirable and as beneficial to overall project performance, particularly as part of a long-term, trustbased relationship.
Claimed benefits of regular selection are derived from established relationships and include better and
faster communication, more trust, shorter learning curve, quicker resolution of problems, more openness
and a greater understanding of strengths and weaknesses within the team.
We were told that main contractors project managers often sought to influence the choice of
subcontractors to maintain continuity in project teams, as well as to influence the selection of personnel
from winning subcontractors. The central role of project management and effective team relationships is
discussed further in this report.
Specific comment and insight on the contribution of established teams included the following:
Main contractor: emphasising the importance placed on individual relationships: You will get a different
performance from a different team, even within the same contractor not just management, but negativity
at any level has an impact.

Sub-contractor: On two projects most subcontractors felt that they were part of a select supply chain and
viewed the main contractors as preferred clients.
Main contractors and sub-contractors. Ten respondents said that their selection was down to their
performance rather than price, adding that this was beneficial to overall project performance.
Evidence of changing selection practice
Most interviews confirmed that price was the driving force behind selection in the current market. Many
interviewees saw a shift in the balance between price and performance as being disruptive - creating a
downward spiral in prices.
A common observation in interviews was that the benefits for main contractors of having a stable set of
suppliers were being abused. Examples of this included:
Rebidding of sub-contracts when suppliers had contributed their name and expertise to the original main
contract tender;
Bidding outside of established supply chains to obtain highly competitive quotations based on a relatively
low cost base, which challenge the prices received from preferred suppliers. These are sometimes termed
rogue bids.
There is clearly a tension here between the discipline of an open and contested market and the benefits of
established, effective teams. We found plenty of evidence of sub-economic bidding which is likely to be
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at the expense of the health of the industry, project outcomes and team continuity. Main contractors in the
survey were aware of the pitfalls but were also subject to commercial discipline.
We also found instances where public sector policies to promote local SME employment also disrupted
established supply chains. For example, a contract may require a minimum level of local job creation or a
commitment to use local contractors to deliver the work, requiring a contractor to employ resources from
outside of their settled supply chain. These arrangements could also carry some financial risk for the
supplier, particularly as the main contractor will typically have a powerful market position. This can be
dangerous as small companies will often buy the work, especially on the first scheme for a big new
client.
Specific comments and insight on increased levels of competition included the following:
Specialist contractor: "Businesses are not being able to make enough in the market to surviveEveryone
I talk to wonders how long it can go on and how long can we survive".
Sub-contractor: Contractors are picking up jobs at low margins; bidders are fighting against the budget
not competition.
Early contractor involvement
Early contractor involvement concerns the formal or informal engagement of main contractor or specialist
contractors in the development of design solutions. Designs developed with input from constructors, or
with access to knowledge of proprietary solutions are likely to be more cost effective. However,
programmes like Building Schools for the Future, have demonstrated that the combination of early
contractor involvement in design and competitive selection can be wasteful and resource intensive if the
selection process is not managed effectively. In the early waves of BSF, detailed proposals were
developed by competing integrated supply chains in response to the specific needs of individual schools.
These proposals were used as the basis for the award of contracts for a portfolio of work. The work of
unsuccessful teams, including their design and construction solutions, was discarded as part of the
procurement process. A simpler process has been adopted for the Priority Schools Programme.
The challenge is to find fair and effective means engaging supplier teams to develop and deliver cost
effective solutions. Evidence from this study suggests that cost-led procurement of main contractor-led
programmes is currently being facilitated by high levels of competition within the sub-contractor supply
chain. This ability to maintain price levels in line with a clients affordability challenge may become more
difficult to sustain as the industry recovers from downturn.
Survey results indicate that early contractor involvement is seen as an opportunity to enhance project
performance at all levels of the supply chain. The literature review shows that this view is widely
accepted, if not universally applied. The projects in the survey did feature high levels of early
involvement. The schemes are high performing and not considered to be typical. Where contractors
mentioned that they were engaged late two of the four said this had a negative impact on performance.
Benefits of early engagement that were mentioned in the survey included:
Main contractor: The opportunity to engage key suppliers with enough time to build relationships;
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Specialist contractor: The time to value engineer solutions and enhance the programme for build ability;
Design consultant: Provides more time to resolve conflicts in the design.
Many participants noted that lead times were being reduced in the current market reversing the early
contractor involvement trend. Explanations included the rebidding of sub-contract work, and the impact
of client-driven change.
Negotiation vs. competitive bidding
Four respondents had been directly selected. Two of these suggested that their direct selection had
improved project performance. No participants suggested that competitive bidding had made a positive
contribution. One of the benefits of the negotiation route was the opportunity to .open up dialogue
and allowing you to price different options.

Main contractors observed that widespread use of single-stage tenders, often for design-build projects
minimised the opportunity for negotiated deals with suppliers.
Hypothesis 3. Design management
Design management has a crucial role in unlocking improved project performance, by ensuring
that design is complete and buildable, by unlocking supplier contributions to design development
and through effective change management, avoiding the disruption of project delivery
Key findings
Under-design and variations were seen as major blockers to project performance, causing disruption to
the progress of the work, reducing efficiency, increasing site management workload and causing
uncertainty with respect to payment;
Incomplete design, design change and late variations lead to significant waste;
Lead-in times available to check designs are being eroded by re-bidding of packages;
Reduced levels of professional fees have reduced available design resource, which may in turn have
affected the quality and reliability of initial designs. Some aspects of design particularly building services
continue to suffer from content and coordination issues;
Subcontractor engagement in detailed design supports improved project performance. However,
opportunities are limited as a result of competition in supplier selection;
Wider use of highly competitive selection is reducing the incentive for sub contractors to assist main
contractors in solution development;
Effective client decision-making and change management, including management of novated design
consultants improves project performance;

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Evidence that the barriers to the implementation of change are not high enough to discourage high levels
of change orders
Main contractors observed that widespread use of single-stage tenders, often for design-build projects
minimised the opportunity for negotiated deals with suppliers.
4.2.3 Hypothesis 3. Design management
Design management has a crucial role in unlocking improved project performance, by ensuring
that design is complete and buildable, by unlocking supplier contributions to design development
and through effective change management, avoiding the disruption of project delivery
Key findings
Under-design and variations were seen as major blockers to project performance, causing disruption to
the progress of the work, reducing efficiency, increasing site management workload and causing
uncertainty with respect to payment;
Incomplete design, design change and late variations lead to significant waste;
Lead-in times available to check designs are being eroded by re-bidding of packages;
Reduced levels of professional fees have reduced available design resource, which may in turn have
affected the quality and reliability of initial designs. Some aspects of design particularly building services
continue to suffer from content and coordination issues;
Subcontractor engagement in detailed design supports improved project performance. However,
opportunities are limited as a result of competition in supplier selection;
Wider use of highly competitive selection is reducing the incentive for sub contractors to assist main
contractors in solution development;
Effective client decision-making and change management, including management of novated design
consultants improves project performance;
Evidence that the barriers to the implementation of change are not high enough to discourage high levels
of change orders
Detail of findings on design management
Quality and completeness of design
Many subcontractors reported that the flow and accuracy of the information they received was poor. Poor
quality information affects performance because operations cannot be efficiently planned, coordinated
and scheduled.
Many respondents suggested that design was not fully resourced. One consultant suggested that:
Commercial pressures mean that gaps are forming in the scope (of design services). Gaps between the
design produced by the consultants and the information needed by contractors caused coordination
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conflicts and wasted time. The same consultant stated, we could have done more value engineering but
there is not enough (time) in the budget. We could also design a more buildable solution.
Examples of waste reported in the interviews included:
Reduced installation quality;
avoidable design issues in one case making up 40% of variation claims on a curtain wall sub-contract;
sub-optimal sequencing of work, a concrete frame contractor suggested that on average at least 2% to 3%
could be saved through early receipt of better quality information;
late receipt of information and changes associated with building services. A masonry contractor
commented that M&E never went well, and information was always late. Changes had cost 7% of
package value and could have been 20% without mitigation.
We were given an example of a project where the cost of the structure could have been reduced by 25%
through better quality information. Furthermore, we were also told that without the active mitigation of
the effect of change by sub-contractors, costs would be even higher.
Earlier engagement of the supply chain
Earlier and more extensive engagement of subcontractors was seen as a very positive step towards
improving project performance. Improvement could come from the avoidance of duplicated effort,
adoption of value engineering ideas, improved coordination and build ability and the reduction of the
number of design changes.
A good example of the potential benefits of early engagement and collaboration between consultant and
contractor was a project where the structure of the lift core could have been designed to support a tower
crane during construction at relatively little extra expense improving access and reducing other
temporary works costs. The option was not adopted because it was suggested by a subcontractor at too
late a stage in the design process.
Few of the insights that came from discussions with the supply chains were new. If anything, our findings
show that design management continues to be a challenge, even on more integrated projects where a
contractor has overall responsibility for design and construction.
Key themes that emerged from the structured interviews are as follows:
Effectiveness of the procurement of design and build projects. Issues included the ability of main
contractors to fully consider potential value engineering options in a single-stage tender competition.
Interviewees also mentioned conflict of loyalty issues associated with the innovation of the design team,
which in turn translate into tensions within the design and build team. These can also be interpreted as the
tension between the guardianship of design intent and the delivery of cost effective construction.
Another issue associated with design and build was the compression of the overall design and
construction programme. Some contractors noted that delays in main contractor appointment resulted in
further reductions to overall project duration, which reduces the time available for design integration and
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value engineering End-user clients are late in getting the main contractor on board and don't change the
timescale for the start date. That knocks on throughout the project. We are seeing that more and more.
Split design responsibility. One M&E subcontractor stated that it is common to end up doing easily
double the design/engineering work than was originally anticipated because of the exchange of
information with consultants who dont have the time or resource to respond effectively. On building
services, detailed design work is typically completed by sub- contractors. In this instance the subcontractor would prefer to take total rather than partial design responsibility;
Effectiveness of early sub-contractor involvement. Specialist contractors described resistance from
novated designers to changes in design or specifications. One cladding contractor saved almost 10%
through design changes, demonstrating the potential for a value engineering approach. Similar examples
from building services emphasise the importance of timing: If you are brought on late you get coordination issues. You can't fit services in. They don't fit and you are reworking walls etcetera - that adds
cost.
Some specialists also believed that they could make a greater contribution to design development and
value engineering. A good example was logistics which are not often considered at the design stage:
There are many opportunities to reduce costs that are missed because main contractors are not taking
into account the logistics during construction.

The effect of commercial practice on early contractor engagement

Early contractor engagement and sub-contractor involvement in design development were both identified
by many respondents as drivers of enhanced performance. However, interviews identified the extent to
which commercial practices such as single stage tendering and post-tender rebidding reduce opportunities
for and the effectiveness of sub-contractor engagement.
Sub-contractors have often provided assistance on bids on the expectation that they will be awarded the
work if the main contractor is successful. A number of subcontractors complained that they had invested
in supporting tenders only to see the work rebid and won by other firms at lower prices. This practice is
not sustainable and many specialists and subcontractors are very cautious about engaging in ECI without
a firm commitment. The most likely outcome is a sub-optimal design solution.
The rebidding of work packages post-contract award to further reduce prices was a common explanation
for reduced lead-in times.
Effective management of client change
The survey also revealed the contribution of clients to the incidence of change. Many complaints were
made over the timing and management of the clients decision making and their lack of understanding
with respect to the impact of change.
Many subcontractors stated that they preferred to avoid variations even if full costs are recovered due to
disruptions to the programme and wider knock-on effects. One concrete frame contractor noted. Even if

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we make money out of change, it hits morale and affects the programme. The only way to make money is
to do work efficiently."
Another example of the indirect impact of change is the potential for the wider disruption to work
sequencing. One flooring contractor noted: Getting the floors in at the right time in the contract cycle is
critical.....We need a clear run, otherwise we are scheduling (the) workforce inefficiently. Labour is about
20% of contract value, (low utilisation) could increase our labour cost by 50%. This example shows how
changes to the programme caused by variations affecting one trade can have a substantial and unintended
impact on others.
Survey participants clearly recognised the impact on performance of late change, including waste and
disruption to progress on site. However, there was a striking level of complacency amongst participants
with respect to accepting change as part of the
process, even though many contractors claimed to make more money from straightforward projects
without extensive change or claims. These findings were all the more striking given that projects in the
sample were procured using design and build which has some advantages with respect to increasing the
main contractors control over design change.
4.2.4 Hypothesis 4. Construction site management
Effectiveness of site management has a very high impact on project performance as most of the
integration and coordination of the supply chain is undertaken by the site team. The soft skills of
site management teams are particularly important in creating an effective and cohesive team. The
relationship between project performance and the abilities of one or two key individuals points to
the importance of the ability to attract, train and retain management talent.
Key findings
Good communication on site is seen as the most critical driver of performance, emphasising the
importance of a managers ability to combine knowledge, experience and soft skills;
There is a high dependence on the ability of the project manager drive high performance;
Strong team relations also have a major positive impact on performance;
A good project manager and good team spirit engender higher levels of discretionary effort;
Personalities and personal behaviour have a high impact because they influence the commitment of
suppliers on current projects and their interest and pricing behaviour on future projects;
Good programming is critical to coordinate the activities of multiple suppliers and to accommodate the
results of change;
Effective application of soft skills is viewed as being critical in driving high levels of project
performance;
Extended lead-in times on projects provide more time to build good project team relationships.

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Overview
The most striking result from structured interviews was the level of unanimity with regards to the positive
impact of good on-site communication on project performance. Respondents emphasised that positive
behaviours on site were critical to good project performance. Interviewees placed a very high level of
importance on the quality of the project manager and site manager.
Interviewees told us that the key to improving project performance was good team relationships and
communication. This emphasises the widely held view that construction is a people business a point of
view that sometimes gets missed in industry strategies and improvement initiatives.
With respect to both good team relationships and quality of communication, our case study projects were
rated very highly.
With respect to hard site management process as opposed to soft skills such as effective communication,
programming was ranked highly, particularly as a poor scheduling can have a direct impact on progress
and resource utilisation.
Other aspects of best practice management, including effective site logistics and benchmarking were rated
fairly lowly as performance improvers. This suggests that management practice is at a low level of
maturity and that there is likely to be plenty of potential for further improvement. 15 years after the
publication of the Egan Report, these areas of best practice continue to have a relatively low profile in the
industry, suggesting a slow rate of adoption of innovation.
Detail of findings on construction site management
Significance of the quality of relationships on project outcomes
Throughout the interviews, respondents highlighted trust, firm-but-fair decision making, understanding,
listening and many other soft skills as very important attributes for the site team.
Significant emphasis was placed on team spirit, good communication and fair minded management on
site. Most interviewees saw the project or site manager as the orchestrator of good behaviour and good
relationships on site. Trust has the single largest effect on performance on site, said one main
contractor.
One of the clear benefits of good relationships on site we found from the survey was evidence that
subcontractors were more prepared, where trust was established, to resolve issues between themselves.
This led to swifter resolution and less pressure on the main contractors management team
When you look back in on a job that is a bad job and think what you could have done differently, you
more often than not find you could have got over some behavioural or relationship issues earlier, said
one main contractor.
Effect of site management on commercial outcomes
Interviews provided evidence that project managers have some discretion in picking teams. Arrangements
were described where key individuals or teams from subcontractors would be allocated to work with a
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particular project manager: Every PM has his favourite busbies, as one M&E commented. This
behaviour is very important in creating the continuity of established teams described in connection with
selection.
The quality of relationships with project and site managers was described as having an influence on the
pricing of work. Many subcontractors said they adjusted the price of projects where they did not trust the
project manager.
One groundworks contractor said that he would add a 20% premium to a sub-contract price on projects
where he didnt trust the project manager. Part of the motivation was to avoid winning the work. This
feedback is an indictment of an industry where healthy competition is important, and where clients and
contractors are both seeking early cost certainty.
More positively, project managers were associated with positive project outcomes - you know you will
make money with him.
Variability of site management skills
Interviews respondents portrayed an ideal project manager as someone with a high level of both soft and
hard management skills and a clear understanding of the building process derived from practical
experience.
The sub-contractors comment on the pricing of project management performance points a degree of
variability in the skills and the performance of project managers and site managers.
Recognising the contribution of an individuals personality, a main contractor stated that good attitudes
and performance can be fostered by contractors through effective recruitment and skills development. His
companys policy was to seek people with high aspiration and collaborative attitudes.
Importance of programming and site management processes
While soft skills were seen to be highly valued, hard skills were also deemed critical to project
performance. The analysis found that the effective management of the programme was perceived as one
of the most important factors driving performance. Many of the trades emphasised the need to have
programmes that allow them a clear run at their work.
Given the number of trades and suppliers involved, the potential impact of variations and the inevitable
problems that occur on site, the ability to programme to optimise the use of sub-contractor resource is an
important enabler of effective performance and elimination of waste. For sub-contractors, the most
important aspect of work sequencing was to be given clear, uninterrupted access to their area of work.
Programming which results in discontinuous working is clearly uneconomic. The project management
skills involved are not limited to programming, as they also rely on ensuring that contractors adhere to
their original programme allocation.
Other aspects of process that drive improved performance include rapid turnaround of Requests for
Information (RFIs), effective reporting and the effective use of meeting time.

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Programming provides a good illustration of how hard and soft skills need to be blended to enable
effective project delivery. Programming is a technical skill which relies on effective reporting of progress
and experience to understand how trades coordinate with one another. This technical skill has to be
combined with the management capability necessary to ensure that separate contractors are motivated to
complete their work to schedule, that problems are anticipated and that the full impact of changes are
understood, and if necessary, mitigated.
4.2.5 Hypothesis 5. Price determination
A key aspect of industry performance is cost effectiveness. Structured interviews indicated that a
high level of price competition is being applied as a result of current market conditions. The price
determination hypothesis is that work has to be priced realistically to drive effective project
performance. The challenge for suppliers is whether the realistic price meets the affordability
constraints of the client. If high levels of competition are the only means of meeting the clients
affordability criteria, then under-pricing will continue to be a challenge. Other means of meeting
affordability criteria need to be strengthened so that there is less dependence on highly competitive
price determination.
Key findings
Realistic price levels are seen to be a positive contributor to project performance;
Under pricing is seen as having a negative effect on project performance;
Negotiated contracts are rare in the current market;
Eagerness to work with a client and overall levels of demand are the strongest determinants of the overall
level of pricing relative to input costs;
Overview
Findings on price determination need to be interpreted carefully relative to current market conditions. The
projects featured in the sample will have been procured in 2010-2011 or earlier, which may mean that
price levels were higher than in the current market, or that there were opportunities to secure savings
through sub sub-contractors and suppliers.
The majority of firms interviewed for the study believed they priced realistically and that this was an
important dimension of project performance. This finding is possibly surprising given the duration of the
recession but it should be noted that firms were commenting on price levels in recently completed
projects, rather than projects that have been secured at the absolute depth of the recession. Where firms
said they had not price realistically, then a higher proportion, eight out of 12, believed this was
detrimental to overall performance. Notwithstanding realistic pricing, overall pricing of projects
continues to be very competitive. Interviewees told us that in many cases work has being undertaken at a
loss. These are not isolated instances. Sub-economic bidding and has occurred over an extended period of
time, with a corresponding effect on the ability of some firms to trade.
In the survey, we examined in more detail the process and drivers behind pricing decisions. This
examination is closely linked to the study objective related to cost reduction within the supply chain. A
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number of interviewees said either directly or by implication that their pricing decisions were in large part
a judgement call, related in particular to levels of available work and the attraction of the client as a
source of future work. This has implications for future price levels as previous patterns of inflation could
occur as layers of suppliers and subcontractors take their cues from the market.
The questionnaire data shows that the level of workload is a major factor influencing pricing. Discussions
with interviewees indicated that market conditions were much tougher in the regions than in London.
Albeit on a small sample, this finding was supported by the questionnaire results which showed
contracting firms working in the regions weighted the level of workload as a more important determinant
of price.
The questionnaire data also reveals a high level of eagerness to work with certain clients. Interviewees
frequently mentioned that they had priced very keenly or accepted less favourable terms to win work and
build a relationship with a client, be they the ultimate client or a main contractor.
The questionnaire data shows that risk is considered to have a strong influence over contractors
determination of the final price. Perception of relative risk could result in projects being priced more or
less competitively. We found plenty of evidence through commentary in the interviews that some firms
are not pricing for risk in their bids given current, highly competitive market conditions.
Pre-interview questionnaires included a section on factors which influenced decisions with respect to the
level of pricing on projects. The objective of this line of questioning was to gain a greater understanding
of the dynamics of price determination with a view to how this could affect the delivery of sustained
reductions in construction costs in the UK. The factors discussed exclude input costs such as labour and
materials, as the focus is on the pricing of margin, overhead and risk allowances.
The results of the surveys, completed by 33 respondents identified three main drivers of variability in
pricing:
the power and attraction of the immediate client,
the perception of project risk; and
availability of work.
The influence of the client in decisions related to pricing levels is an important insight, as it aligns with
wider client thinking around supply chain management and buying power through category management.
The implication is that client focus on a relatively small number of supply chains will influence pricing
through a combination of dependency for work, expectations around repeat work and a greater
understanding of the clients business drivers. An interesting example of this effect came from a main
contractor discussing open book pricing with a knowledgeable client. The contractor explained that if the
client and the supply chain both understand how much a facility should cost, then
suppliers should be able to focus delivering solutions which both meet the performance target and deliver
a reasonable margin.
The availability of work is an obvious factor. With work in short supply, clients are clearly benefitting
from very competitive pricing. However, in most instances, affordability levels have also been
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recalibrated, meaning that low costs are an essential contributor to project viability. The importance of the
client relationship will be in helping to mitigate upward price pressure transfer once markets begin to
recover. Consolidation of workload will be important in this regard, as there must be sufficient continuous
workload to sustain an alignment of commercial interest between contractor and client.
Finally, the pricing of risk represents a risk to both sides of the pricing equation. Current market
conditions permit the transfer of high levels of risk at a low cost. As workload increases, this balance is
likely to shift, with suppliers pricing risk on a more commercial basis as well as seeking a change in the
balance of allocation. Clients and main contractors will need to manage this transition effectively to
minimise the effect of risk premium pricing on overall project costs
Detail of findings on price determination
Pricing behaviour in the current market
During many interview discussions pricing was presented as a combination of the calculation of expected
costs and the business decision around expected benefits and the anticipated level of competition. The
business decision is often based on instinct and experience. In the words of one main contractor, price
determination is a judgement call taken on a case-by-case basis.based on experience.
A roofing contractor described the process as: We adjudicate on final price and take a view in order to
win the work.
We also found evidence of the impact of information quality on pricing decisions and associated risk. For
example, price levels established in an original bid document may disadvantage the supplier with respect
to the recovery of the cost of variations at a later stage in the project.
An example given by a ground works contractor illustrates the problem, where the scope of work changed
as the result of design changes, but the existing rates were applied, resulting in a loss. We found
ourselves pricing the wrong document. There was a lack of information. Descriptions (of work) tend to be
loosetheres always ambiguity in description. That requires a pragmatic approach from both sides to
(the application of) rates. On this job we priced keenly and took a hit on rates further down the line.
In this example, poor quality information increased the uncertainty over pricing and resulted in a poor
commercial outcome. Better quality information would result in a better outcome and perhaps better
decision making relating to changes in scope.
Given a perceived need for a flexible and pragmatic approach to pricing, many subcontractors said they
factored in considerations with regards to the contractors site team when they priced for work. The range
of these discounts or additions varied widely, but was substantial. As discussed previously, premiums
were sometimes applied to reduce the likelihood of winning the work.
Current price levels and their impact on business strategy
Most of the firms interviewed rated both their margins and overheads for the case study projects as
average compared to their own business norms at the time of bidding, with a quarter rating margins as
lower than average. A small number also rated their overheads as being lower than average.

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To some degree, the analysis of data from the case study projects conflicts with the impression given in
structured interviews, which reflected wider market conditions. The most commonly used phrase used in
interview to describe pricing levels was keen. Firms were prepared to state that on projects they were
discounting their margin to win work to cover overhead costs. In other cases, there was evidence of work
being bought at a loss which potentially necessitates the rebidding of supply contracts and so on.
The implications of highly competitive pricing behaviour for the ability of the industry to deliver truly
cost effective construction are potentially significant and include the following:
Risk is not being fully priced in tender submissions. This means that current cost levels are not
commercially sustainable, and the supply chain are potentially exposed to significant financial risks, on
which no return is being secured;
Rebidding on sub-economic projects adds cost to the supply chain, reduces the early contractor
involvement window and erodes cooperation in future bids;
Contractors are not making sufficient returns to re-invest in the business. We found evidence of
weakening balance sheets, falling investment levels and depleted levels of cash in businesses.

Examples of the impact of current price levels on business performance and stability included the
following:
Specialist contractor with manufacturing capability: Capital investment is not being supported by price.
Looking back on it I wished I had shut the business down four years ago and gone on holiday that is how
much it has cost us to stay in business."
Main contractor support to sub-contractors with cash-flow issues: Smaller contractors with cash-flow
problems tend to reduce site resources. We were given examples where lower tier subcontractors were
being supported by main contractors with favourable payment terms to ensure they maintained their
workflow.
Weakening balance sheets. Most of the businesses interviewed were self-financing and fund losses from
reserves. Whilst company balance sheets had strengthened prior to 2008, they were now being weakened
as a result of a drawdown on resources.

4.2.6 Hypothesis 6. Supply chain integration

Greater integration of the supply chain is considered to be an effective means of reducing cost and
eliminating waste. Better coordination of activity would be expected to reduce duplication of
activity and could increase the sharing and effective use of resources. Integration should lead to
more effective coordination of activity. In addition to increased horizontal integration of suppliers,

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vertical integration could potentially see layers of management cost and overhead eliminated from
project costs.
Key findings
Stable teams are seen to enhance performance;
Little spontaneous mention of BIM and no adoption on the case study projects;
Evidence of some vertical integration, with main contractors taking on the building services integrator
role;
Growing cynicism amongst sub-contractors with regards to supply chain integration.
Overview
Three of the projects featured elements of direct delivery of construction work including ground works.
The results of the analysis show a very low level of awareness of formal integration such as standardised
project processes. Some respondents did refer to the benefits of working regularly with other teams, albeit
more reported the benefit of being regularly selected by their clients. Nine out of the 12 interviewees who
mentioned regular work with teams said that it was beneficial to project performance
Interview findings suggest that few participants see supply chain integration or fragmentation of the
supply chains as an influence on performance. Interestingly, given the current profile of BIM (Building
Information Modelling), there was little spontaneous mention of BIM on projects. In some cases
interviewees mentioned the absence of BIM rather than its presence, albeit within a context where BIM is
in use.
The whole industry should take note that cynicism surrounding the application of supply chain
management and integration in construction may be growing. On more than one occasion we were told
that the Egan and Latham principles no longer applied to the industry.
Detail of findings on supply chain integration
Extent of sub-contracting
The level of sub-contracting on the case study projects was considered normal and was not perceived to
be a cause of good or bad performance. The large number of contractual interfaces involved is also
considered normal. Paradoxically, on one project which featured an off-site manufactured structure and
envelope solution, integration issues became more complex, even though the number of trades was
reduced, because design issues such as the positioning of socket outlets and other services needed to be
fixed at an earlier stage on a project than normal. Clearly as the teams understanding of these disciplines
increased, further performance gains could be secured.
The most important aspect of supply chain integration in the eyes of the interviewees was the stability and
continuity of site teams. Many of the interviewees said that project performance was improved by teams
working together regularly. Main contractors described effective teamwork as the foundation of
successful project delivery.
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The value of stability and continuity in support of good teamwork is clearly recognised by site
management. We found evidence, mentioned under construction site management, that project managers
often seek to keep teams together either by influencing the selection process or by requesting key
personnel from subcontractors which have successfully bid for work.
This finding has important implications for the strategic procurement of repeat work on a serial basis
demonstrating that there are additional benefits to be gained from repeat work other than buying power.
The benefits of stable project teams supported by repeat workload are well rehearsed and were mentioned
often by the interviewees. These include common processes and jargon, lessons learned, shorter learning
curves; faster team building, greater levels of trust and cooperation, effective collective problem solving
and a reduction in the risk of conflict.
Evidence of vertical integration
The main instances of vertical integration found in connection with sample projects involved management
of building services, together with the use of direct labour on high risk areas like ground-works where
there are potential benefits to be gained from a higher level of control and risk management.
The motivation to integrate building services is complex. Firstly, there is the opportunity to reduce cost
and increase access to margin. Secondly, the ability to risk manage delivery of a highly complex area of
work is increased. Other benefits of the integration include earlier engagement in the design and
coordination process.
The effectiveness and permanence of this realignment of the supply chain will continue to be tested. In
particular, the risk reward balance will need to favour the main contractor for the vertically integrated
model to become widely established. Furthermore, some clients may still want to appoint specialists
contractors to this role.
One specialist building services contractor who was unsurprisingly sceptical focused on the business
challenges involved, questioning whether main contractors had overestimated potential gains from the
vertical integration, and whether a complete assessment had been made of the skills and resources
required, and risks associated with the delivery of a portfolio of projects of varying complexity.
The other aspect of vertical integration found in the survey related to direct employment of construction
operatives, which we saw on three projects. On the regional project studied, the main contractor maintains
a high level of direct employment and trains its own apprentices. It also has a vertically integrated
building services delivery capability. Despite the extensive in-house capability, the contractor maintains
and utilises a large database of suppliers.
This firms managing director was committed to the use of direct labour because it led to better quality of
work and better communications on site. This contractor secured a high volume of work via public sector
frameworks and their approach to employment aligned with the values of the public sector client. The
MD recognised the value proposition despite the higher cost of the direct employment strategy,
potentially limiting the firms flexibility when bidding in competitive situations.
Other aspects of supply chain integration
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Findings from the structured interviews reinforce our view that the construction industry focuses on day
to day issues of project management and coordination which are effectively transacted through personal
relationships and the effective operation of settled teams.
The low perceived value of other aspects of supply chain management and integration is an important
issue as it provides a clear indication of the erosion of initiatives designed to drive efficiency and life time
value for the client.
Key findings which came out of these discussions included:
A widespread perception that the supply chain has been abused in response to tough market conditions
examples of behaviour include rebidding work, extended payment and so on;
Extensive use of cheapest price procurement, particularly at Tier 3 and below including the use of subcontractors from outside of frameworks to challenge the price levels of preferred suppliers;
A perceived increase in me-first behaviour by sub-contractors which affects the level of collaboration on
projects;
A reduction in levels of motivation of sub-contractors to assist in solution development and bidding;
Both implicitly and explicitly many interviewees stated that the approaches to project delivery developed
in response to the Latham and Egan reports were in retreat. Some in effect said, to paraphrase, Egan is
dead. Cynicism over the notion of supply chain integration was very evident during interviews with subcontractors.
One finding, which surprised the team, was the near absence of any spontaneous mention of BIM by
either contractors or sub-contractors. Given that the projects in the study were unlikely to use BIM will
inevitably have lowered the profile of new ways of working in the minds of the interviewees. BIM was
only referenced twice when interviewees were asked directly about potential improvers of project
performance. No other form of information technology was mentioned during interviews. Our conclusion,
at least at this stage, must be that BIM is not at the front of mind of many supply chain participants.

Analysis of supply chain survey

5.1 key themes emerging from the supply chain survey
The quantitative analysis of survey data provides a comprehensive overview of discrete issues identified
by survey participants as having the greatest potential impact on project performance.
These factors include:
67

1)
2)
3)
4)
5)
6)
7)
8)
9)

Certainty and promptness of payment;

Early contractor engagement, including involvement in design development;
Regular selection by and repeat workload for the immediate client
Formal design management practice;
Good quality communication;
, positive team working relationships;
A well-managed project programme and construction sequence;
Realistic pricing of well-defined work;
Regular working within settled teams.

As well as having a direct effect on project outcomes, these factors interact in a complex way to either
inhibit or promote project performance, depending in part on circumstance and conditions. Given the
complexity of the supply chains that we have analysed as part of the project, the implication for Industrial
Strategy is that levers for project performance will be subject to a range of contradictory, cross-cutting
influences.
This section of the report seeks to identify and consider the impact of cross-cutting themes that have
emerged from the survey. We consider how various factors and circumstances interact to influence project
performance. The analysis has been prepared by drawing on the results of the structured interviews, by
reflecting on the range of opinion encountered and by applying the aggregation of results presented in the
survey grid.
In this analysis, we have focused on five broad themes
1)
2)
3)
4)
5)

Effect of behaviours and soft skills;

Management of change;
Certainty of outcome and risk transfer;
Effect of demand and market conditions;
Effect of behaviours and soft skills

Project managers are central to project delivery and there needs to be more focus on their skills
development as part of a wider performance improvement agenda.
Defining the issue
Interviewees rated behavioural issues within project teams as a very important positive improvement
driver. Interviewees identified the contractors project manager as having a key role in positively
influencing these behaviours. The Industrial Strategy should focus on attracting, developing and retaining
premium management skills to drive performance improvement.
Interviewees also said there was a high degree of inconsistency in management approaches from project
to project and company to company and a wide variance in the competence and capability of the
management team. The structured interviews suggest that below par management performance has a
direct impact on project outcomes.
Insight from the study
The interview process focused heavily on the contribution of site team and supply chain. The results focus
on production rather than design or the clients briefing process which clearly also have a significant
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effect on overall outcomes. Combining insights on the complexity of the supply chain, a high level of
informal collaboration, the need to accommodate change and low margins the research has
demonstrated that effective site management has a key role in delivering successful outcomes for clients
and constructors. The study also emphasises the importance of positive behaviours and central role of the
project manager in facilitating a high performing team.
We were struck by how many issues were left unresolved at the early stages of the project design,
commercial or production related which needed to be finalised on site. The effective resolution of these
issues is very dependent on the capability and workload of the site team, and it is easy to see that the
development of solutions on-site could result in the sub-optimal use of resources. A responsive approach
to problem solving, combined with a diverse and potentially fragmented supply chain and challenging
market conditions, demonstrates that the project managers workload is complex and unpredictable.
Interviews emphasised the degree of influence a project manager might have on team selection, and the
extent of the project managers role in coordinating and motivating the project supply chain sometimes
based on ad hoc, quid pro quo arrangements. This pattern of behaviour occurred on projects managed by
contractors with very mature and formalised management systems as well as less organised businesses.
Interviewees said the quality of individual project managers varied greatly. A range of capability within
the pool of managers is essential to provides scope to match managers to projects. However, interviewees
saw a gulf between good project managers and bad ones and their performance had an effect on
project performance. Perceived failings were mainly seen in soft skills including negotiation and manmanagement. Main contractors also acknowledged the need for performance improvement especially with
soft skills. As evidence of this need, some contractors are introducing new training initiatives for their
project managers.
Many of the factors that create behaviour problems on site have been accentuated by the current tough
market conditions. There was a view that many recent gains made in collaborative behaviour were being
eroded as a result of highly competitive bidding and tightly resourced projects placing a further
premium on management capability.
Feedback from the supply chain suggests that investment in the improvement of site management skills
will drive better performance. The opportunity for improvement may not be obvious to all construction
businesses and we recommend that further work is undertaken in understanding the potential for upskilling and the best means of delivery of these skills development programmes.
Our research provided greater clarity with respect to the coordinating role of the PM particularly on
projects with complex diverse supply chains. The PM role could be a single point of failure on a project,
and from a policy point of view, awareness raising, skills development, and the attraction of talent will
help mitigate this risk.
5.2 Management of Change
The low cost of change for the client comes at a high cost to the industry
Defining the issue

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Some change during design and construction process is inevitable and the industry has evolved to
accommodate this. By comparison with other industries such as IT, it can be argued that construction
accommodates change too readily and at too low a cost at the point of change. Furthermore, it can be
argued that most stakeholders: clients, designers and contractors all have a shared interest in the ability to
readily introduce change.
However, the evidence from our study suggests that the volume of change is too high, comes from too
many sources, and can be highly detrimental to project performance. Many sources of change are
avoidable, and it could be argued that the introduction of higher barriers to change would improve
industry and project performance.
Our structured interviews clearly indicate that the ability to introduce change is the industry norm, is
reluctantly accepted, but was seen by most interviewees as a source of waste, a cause of uncertainty and a
catalyst for greater friction between trades. Change disrupts progress, introduces cost and reduces
industry productivity.
Given that changes may have a knock-on effect beyond the contractor who is doing the work, the full cost
of change may be higher than the price paid by the initiator of the change. Any premium related to
reduced efficiency will be paid by all clients of construction.
Insight from the study
A commonly held view is that construction firms thrive on change. Designers hone their proposals,
mistakes get corrected, and constructors secure higher profits on variations. The study found little
evidence of this, and many firms said the cost of implementing change outweighed any potential benefits.
This does not mean the practice of profit recovery on variations does not go on, and in any case, not all
parts of the supply chain will benefit.
Whilst we found a reluctant acceptance that a high level of change was part and parcel of the construction
process, we also found a degree of ambiguity as to how change was initiated. With the increase in the
transfer of design risk down to main contractors and specialist contractors, some change could fall within
the scope of design responsibility, which may require main contractors and subcontractors to absorb these
costs and associated disruption to progress. Furthermore, disputes with clients might be avoided to
maintain client goodwill for the sake of repeat work.
Common sources of change identified by interview participants included:
1) Extent and quality of design delivered by consultant design teams a function of procurement
route, appointment and scope of service and quality of resourcing
2) Detailed design work completed by specialist sub-contractors a function of the extent of
contractor design, the timing of contractor appointment and design milestones
3) Client initiated change related to specification enhancement or end user requirement
4) Extent of contractor engagement in the design process related to procurement route and the
design stage at which contractor appointment takes place
5) Quality of client brief and capability of the client as a construction employer including the
effectiveness of stakeholder management of end users

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Other sources of change include value engineering proposals initiated by a contractor, detailed design
changes required to coordinate the works of specialist contractors, as well as changes in the sequencing of
work.
With most projects being procured using variants of design and build contracts, an increasing proportion
of the risk and cost of change is held by the main contractor and the project team. Discussions about
certainty of payment centred on issues associated with variations, which it was claimed have become
more difficult to agree as margins on projects have fallen. Other aspects of market conditions that appear
to have accentuated the causes of change include downward pressure on design fees and later engagement
of specialist contractors, which might delay the completion of design work.
Despite the fact that change increases uncertainty, reduces efficiency and might result in extra costs in the
supply chain, we observed that the cost of change which is generally accepted as high does not feed
back in the system to change behaviour or practice. The implication is that change management needs to
be more effective, and change needs to be dis-incentivised possibly by ensuring that the initiator of the
change bears a greater proportion of the full economic cost. .
The high incidence of change has been highlighted as an issue because it is endemic, and because of the
potential negative effect of change on the efficiency of a highly fragmented industry. In our view, change
is a significant source of waste. Furthermore, as not all costs of change are recovered through provisions
in contracts, the costs of change affect all aspects of construction. Reduced volumes of change will
increase efficiency, resource use and should take cost out of the design and construction process.
The ability to introduce changes during design and construction is desirable, but the industrys
presumption should be in support of managed change control. A full understanding of the implications of
change across the supply chain should lead to better decision-making.
Adoption of Off-Site manufacture and Building Information Modelling (BIM) may help to create further
discipline to support the selective use of change. Given current endemic levels of change, some external
discipline is likely to be necessary encourage appropriate behaviour and practice.
5.3 Certainty of outcome and the transfer of risk
Defining the issue
Construction involves high levels of risk due to a combination of one-off design and construction, sitebased working, fixed-price contracting and supply chain fragmentation. This is well documented and well
understood. Risk has increasingly been transferred down the supply chain from client, through the main
contractor to specialist contractors. The evidence suggests that whilst risk transfer mechanisms work well
for the clients the allocation and management of actual risk is often erratic and inefficient, increasing
uncertainty, and resulting in inefficient working, waste and unnecessary cost. Risk transfer affects the
performance of the whole industry not just individual projects.
The context of the research is the widespread adoption of design and build as a procurement route for
complex, high quality buildings. In each case, the constructor took responsibility for the completion of the
design, either through the innovation of the clients original design team, or though the transfer of the
design responsibility to an in-house team. The transfer of the risk includes compliance with planning,
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regulatory compliance, building performance, sustainability standards and so on. Detailed aspects of
compliance are transferred further down the chain to specialist contractors with design and coordination
responsibilities. Effective management and mitigation of risk will reduce waste and cost, and will
improve outcomes for the client and for the industry. By contrast, poor risk management practice has the
potential to increase costs within the supply chain affecting margins and reducing efficiency.
Insights from the study
Sections of this discussion dealing with waste and change underline the extent to which planned
construction activities can be subject to disruption.
We found evidence that main contractors are taking on more risk. Evidence includes in-house delivery of
the detailed design solution and the in-house management of detailed building services design,
coordination and installation an activity normally undertaken by one or more specialist Tier 2
contractors. Acceptance of these risks increases control, and the ability to pass risk further down into the
supply chain.
The effectiveness of the management of this transfer of risk into the supply chain affects overall cost
levels in the industry, as well as productivity and profitability.
When asked about risk, some subcontractors interviewed said that they did not price for it, particularly in
the current tough market. Others said that lack of information at the outset made pricing risk difficult, and
that an assessment was made on the basis of experience rather than a rigorous assessment.
Evidence gathered through the surveys suggested that the tough market conditions were increase the level
risk held by the supply chain as a result of:
Single-stage tendering based on incomplete design;
Poor flow of design information, including ambiguity over design responsibility;
Late engagement of sub-contractors reducing lead-in times;
Uncertainty with respect to responsibility for and valuation of changes;
Financial risks associated with low margins, extended payment periods and progress by other subcontractors;
The progressive transfer of risk from client, through contractor to supply chain may not necessarily result
in the optimal management of project outcomes particularly if the
negative outcomes are absorbed by the supply chain. The study has demonstrated that, in the current
market, not only are risks not been fully priced at tender, but also that project management reduces the
ability of the supply chain to mitigate their risk exposure.
In common with all enterprises, construction firms manage their projects as a portfolio, with better
performing jobs compensating for poor returns from under-performing projects. Our findings are that,
through transfer down into the supply chain, risk management is increasingly being undertaken at a
disaggregated level. Over time, the costs associated with this risk transfer will be built into the cost of
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work, through the proper pricing of risks in tenders, potentially increasing project cost. In the meantime,
our findings do suggest that market signals for failure are being blunted, with the costs of risk on one
project being offset by successful outcomes on others.
The study has demonstrated that risks are being passed further down into a very fragmented supply chain.
The study has also shown that current commercial practice is increasing the level of risk related to
incomplete information, reduced lead-in time and supply chain fragmentation driven by lowest cost
bidding.
Risk transfer based on integration of design and construction is a key element of the industry efficiency
agenda. The study suggests that the industry could manage the delivery of projects more effectively so
that risks are reduced or avoided, cutting the costs of risk, and safeguarding profitability across the project
portfolio.
The transfer of risk down into a fragmented supply chain potentially has the effect of insulating clients
and constructors from the immediate impact of risk but also reduces the efficiency of project delivery,
increases overall cost and reduces profitability. Transfer of risk to a level below which it can be mitigated
effectively has the potential to increase the overall cost levels of the industry.
In seeking to drive out cost and waste, the industry should ensure that risk management drives optimum
outcomes not simply least cost outcomes for the client and constructor on individual projects. Whilst
supply chain members will always be required to accept design, performance and commercial risks,
greater effort in the coordination of the activities of the project team, so that risk and waste is avoided,
will help to drive these superior outcomes.
5.4 Effect of demand and market conditions
Squeezing the price may result in higher costs
Defining the issue
Evidence from supply chain interviews clearly shows that low levels of demand and continued tough
trading conditions have a negative effect on firms, relationships and project performance.
These negative effects were described repeatedly during interviews. Our impression was that supply chain
participants were waiting for normal trading conditions to return. There was little evidence either of
innovative or adaptive responses to current market conditions, or of a belief that current conditions and
price levels represented a new baseline.
Firms are hoping that the market will return to conditions seen prior to 2008. This expectation weakens
the industrys current focus on cost and waste reduction initiatives that are essential to sustain long-term
competitiveness.
Insight from the study
The study provides some evidence of industry consolidation that poor performing firms and operatives
had left the market. We also found widespread evidence of a reversal of gains made in terms of team
collaboration and enhanced performance that stemmed from Latham, Egan and other improvement
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initiatives. The survey provided evidence of a shift in bargaining power within the supply chain. The
prevailing view was that the shift had been used push down prices, rather than to reduce costs by
changing ways of working.
The typical approach reported by supply chain members was to weather the storm until prices bounced
back. Many sub-contractors have eaten into cash reserves, have bid at sub-economic prices to cover
overheads, and have accepted risks that they might have rejected in more buoyant markets.
The evidence suggests that supply chain members will seek to repair margins when the supply and
demand balance changes. The implication is firstly that short-term effects of the recent downturn on the
supply chain will need to be addressed, and secondly, that 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.
The short term effects of the downturn on project performance include:
Extensive use of re-bidding, reducing the incentive for subcontractors to engage in early design, cutting
lead-in times and compressing programmes;
Less cooperation within project teams, leading to a reduction in discretionary effort, and greater
demands on site management skills;
Short term cash flow constraints leading to erratic levels of personnel and oversight on site;
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Supply Chain Analysis into the Construction Industry A Report for the Construction Industrial Strategy
Medium term cash flow constraints inhibiting bidding for work potentially reducing competitive
pressures during the recovery cycle;
Low prices reducing the ability to price travel costs into bids reducing the ability of businesses to be
able to trade outside of their immediate local markets;
Cuts in investment in plant and machinery potentially reducing productivity, and requiring investment
during the recovery cycle;
The Industrial Strategy is being set at a point in the economic cycle when low demand is straining
collaborative working and reducing the industrys capacity for investment in capability and growth.
The challenge for the industry, in meeting long term cost reduction targets, is to channel the high levels of
market pressure to induce genuine and sustainable improvements to performance, while reducing the
short-term negative impacts created by low demand. Areas where attention will be needed in strategy
implementation include the maintenance of positive, collaborative behaviours in the project supply chain,
as well as the mitigation of the effects of supply chain fragmentation on levels of innovation.
We found evidence that supply chain fragmentation acts as a barrier to the flow of good ideas.
Furthermore, that the effect is accentuated by the stress of low levels of demand. We also found that the

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market prioritises price over efficiency dis-incentivising the long-term improvement in industry
performance.
There is a risk that the bottom-up, industry view that a building costs what it costs will remain
prevalent. This is the opposite of a should cost perspective driven by affordability, and by the purpose
and value delivered by the asset. The implication of the bottom-up perspective is that when demand
returns, margins and prices will rise, and the costs of buildings to clients will also increase irrespective
of affordability.
The construction industrys adaptation to the demands and dynamics of the market conditions associated
with a new normal will take time. However, the lack of perception in the supply chain that change is
needed was striking. The short-term need to cut prices to win work has resulted in a loss of perspective
with regards to the long-term capability and performance of the industry. There is little evidence that the
core messages of the Wolstenholme report have been absorbed by clients, constructors or their supply
chain.
5.5 Waste
Defining the issue
When interviewees were asked about waste in the construction industry, most respondents instinctive
response was focused on physical waste which ends up in a skip. This narrow view of waste was not
universal, but it was the norm.
This insight suggests that most participants do not recognise other aspects of duplication and loss of value
as waste. The implication is that it is difficult for a highly fragmented industry to develop a common
cause focused on the adoption of lean principles.
However, the structured interviews showed that other sources of waste are pervasive. Examples included
ill-thought out design leading to sub-optimal and/or expensive solutions; unnecessary or late variations
leading to work being redone; poor scheduling leading to inefficient use of labour; poor logistics leading
to unnecessary and resource-hungry temporary works.
The amount of money, man-hours, materials, effort and time wasted is impossible to quantify from our
survey. However, other studies indicate that potential savings are substantial and could deliver a portion
of Industrial Strategy performance targets.
Insights from the study
We have observed that waste is embedded into industrys structure, risk management practice and
working culture. Addressing the narrow view of waste as a physical by-product of construction will create
opportunities for performance improvement. As an example of what can be done, the linking of waste
reduction to sustainability outcomes has been very effective. Most major contractors now report
publically on their waste reduction initiatives, demonstrating that the industry can focus collectively on
areas of performance improvement when it is directed to do so.
The narrow view of waste which we encountered and the sometimes blinkered approach to a wider range
of potential waste issues is clearly a behavioural issue. But behaviour is not to be the only barrier to its
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removal. Many interviewees said they could significantly cut cost, time, reworking and material waste.
But they did not.
There are many reasons, details of which are given in the summaries of the survey, they include:

Discretionary effort by project participants continues to be critical to efficient project

performance, but is undermined by risk transfer, tough market conditions, resource constraint and
limited gain sharing;
There is little evidence of a willingness to consider value engineering options;
Supply Chain Analysis into the Construction Industry A Report for the Construction Industrial
Strategy
Main contractors and subcontractors are unable to influence design sufficiently due to the timing
of their appointment;
There is often too little lead-in time for contractors and sub-contractors to plan and coordinate
works effectively;
The rebidding of work to reduce cost has the effect of reducing the window for contractor
engagement and lead-in. Re-bidding also potentially disincentivises early contractor involvement
which might deliver better value solutions;
The disruption and waste that can be caused by changes at all levels of the supply chain is not
fully recognised and is not sufficiently disincentivised through pricing models;
The full impact of decisions on the efficiency of contractors and subcontractors is very difficult to
determine due to high levels of interaction within the supply chain.

In summary, we found little awareness of opportunity, insufficient ability to act and only limited incentive
to improve performance with respect to removing all sources of waste from projects.
We have shown that aspects of behaviour and procurement hold back an industry-wide focus on the
reduction of all aspects of waste in process, definition and delivery. Innovation to reduce waste in
construction is inhibited by many interrelated factors.
Given that construction is not a process-driven industry and many of its products are one-offs the full
extent of waste is disguised and the true value of savings is not recognised. Many of the examples of
waste cited by interviewees were repeated from project to project, and have been known as issues for
many years.
High levels of in-built waste will be a major source of opportunity for cost reduction in pursuit of the
Industrial Strategy. However, the sources of waste are so deeply rooted in the way that the industry
operates that even on best practice projects there is insufficient opportunity and incentive within the
supply chain to cut waste.
Changes introduced in the Industrial Strategy may well address some aspects of waste in the system.
However, as the industry is a complex system, other changes may be counter-productive, and other
elements of the operation of the industry may create inertia. The complex interactions that result in waste
will require determined action to drive improvement. Elimination of waste will require high levels of
discipline and focus. The survey has shown that there is a desire within the supply chain to eliminate
waste that can potentially be channelled to deliver better outcomes.
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5.6 Conclusions and summary answers to the project objectives

This section of the study focuses on the key project objectives and considers how the findings of the
research provide additional insight into the improvement of industry performance. The key project
objectives are:
To identify areas where cost savings can be made in L&T construction supply chains and the barriers to
achieving those savings.
To identify elements of the L&T construction supply chain that tend to be imported and understand why
domestic firms are not competing.
To recommend actions that Government and Industry can take to improve competitiveness of L&T
construction companies by overcoming barriers to the achievement of cost savings in construction supply
chains.
Areas for cost savings and barriers to achievement of savings
The study has highlighted the fragmentation of the supply chain, which has long been recognised as a
structural issue that needs to be accounted for to improve performance. The findings of the study suggest
that the industry will be less able to manage the price impact of an improvement in workload than it was
prior to the downturn, due to a number of factors, including:

Cash flow constraints resulting from low profitability and limited availability of bank funding;
Consolidation within the supply chain, resulting either from business closure, or limited reinvestment in plant, equipment and people;
A reduction in levels of cooperation across the supply chain, reducing the extent to which the
supply chain offers integrated solutions; and
The disincentive for sub-contractors to work with main contractors in the development of bestvalue design and construction solutions stemming from an increased frequency of re-bidding
work, post tender-award.

The literature review sets out how the Latham Report focused considerable effort on the improvement of
the business environment for the construction supply chain. Evidence from the structured interviews
indicates that there is a growing perception amongst supply chain members that a number of positive
collaborative working practices that emerged
Practices introduced to reduce cost, including rebidding of sub-contractor packages, transfer of design and
commercial risk based on limited information and extended payment terms appear to be reducing the
ability and incentive for a project supply chain to work collaboratively to drive out waste.
Challenging market conditions are also reducing the ability of the supply chain to fund increased cash
flow associated with business expansion.
The performance agenda set by the Egan Review also identified the supply chain as an agent of change.
However, based on the limited evidence of this report, the supply chain which the review had in mind is
not as capable of driving the change agenda as it should be. This is partly as a result of the erosion of the
partnering/early contractor engagement culture, and partly as a result of the reality of a highly
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disaggregated supply chain. It is easy to see that, even if there were a high level of cooperation between
Tiers 1 and 2, then engagement with specialist contractors at tiers below level 2 could remain a challenge.
One of the Egan performance improvement solutions was to encourage greater adoption of off-site
manufacture. We have found outstanding examples in the study, but also continue to see high levels of onsite coordination of large numbers of sub-contractors. Performance has improved, but there clearly is
potential for further gains.
Evidence for this potential comes from the industrys low take-up of benchmarking and performance
assessment. Another key Egan improvement route was the use of performance measures to add discipline
to long term relationships. The awareness of benchmarking and other measures of performance within the
supply chain was shown to be quite low evidencing many of the findings of the Wolstenholme Review,
which concludes that industry commitment to reform had only been skin deep, and indeed that the
industry had taken its eye off the reform agenda.
As the construction industry emerges from an extended downturn, it is arguable that the supply chain is
ill-equipped behaviourally and financially to set and maintain a trajectory towards high performance and
lower cost, time and carbon.
This conclusion is however premature, as it ignores many of the changes being driven by clients,
contractors, technology and suppliers that will sustain momentum towards performance improvement.
Areas for Cost Savings - Conclusions
The supply chain will have a role in driving performance improvement, but as an enabler, the structure
and capability of the industry is only one part of the solution. In summary, the main opportunities to
reduce costs related to the contribution of the supply chain are likely to be:

Early contractor and sub-contractor involvement in solution development, facilitated by

procurement strategies which enable supply chain input to be directed to meeting clearly
communicated target costs, where the main contractor and supply chain collaborate to deliver a
facility to an agreed specification within a pre-set budget e.g. the approach adopted by the
Education Funding Agency (EFA) in delivering the Priority Schools Programme
Coordination of design and assembly across the supply chain, potentially based in sharable asset
information e.g. BIM
Effective management of change, including a shared understanding across the project team of the
opportunity costs of unmanaged change;
Effective on-site operations, supported by an integrated, established site team, capable site
management, and proportional management of change;
Wider adoption of the integrator role of supply chain management, either at Tiers 1 or r 2,
placing greater emphasis on the management and coordination of related trades optimising
performance and potentially securing client and supply chain benefits through repeat work and
volume savings.

The barriers to achieving these savings include:

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A predictable rebound in prices related to supply and demand conditions, exacerbated by industry
consolidation and reduced levels of investment;
Commercial behaviours throughout the supply chain that reduce incentives for collaborative and
cooperative behaviours, driven by current market conditions;
The highly fragmented supply chain particularly related to complex sub-contractors. This
potentially introduces waste and reduces opportunities for cost reduction via volume-based
procurement, category management etc.;
Methods of contractor selection and incentivisation, based on least cost rather than should cost
procurement strategy;
Inappropriate risk transfer down the supply chain, potentially introducing waste into solution
development and on-site construction.

ACTIONS NEEDED TO IMPROVE L&TS CONSTRUCTION SUPPLY CHAIN

6.1 Identification of elements of the L&T Construction Supply Chain that tend to be imported
The proportion of imported vs. home sourced materials and services proved very difficult to assess as part
of the structured interview process. Feedback from respondents was that product selection decisions are
based almost exclusively on price assuming that the specification is met.
Where there was a client-driven selection of imported products, the reason for the selection was usually
related to quality and performance in the context of internationally traded products and systems such as
switchgear or external envelope systems.

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These findings suggest that for many product segments, the product supply chains route to increased
market share is likely to be through cost leadership strategies rather than differentiation.
The implication for the domestic supply chain is that where there is potential for import penetration,
markets will be subject to continuing commoditisation pressures, which in turn will require a sustained
focus by domestic firms on the reduction of waste and inefficiency to remain competitive. Furthermore,
as a result of these pressures, margins are likely to remain tight. This is good news for the wider
construction industry, which is unlikely to see significant input cost inflation affecting material and
product inputs.
During the structured interviews, alternative selection criteria that might favour L&T suppliers, including
security of supply, length of supply chain and sustainability impacts were not mentioned widely. This
clearly creates a challenge if the industrial strategy is to play a role in strengthening the competitive
position of the L&T manufacturing sector.
6.2 Recommended actions to improve productivity of the L&T Construction Industry
The study has focused on the structure and operation of supply chains associated with the on-site
construction of non-residential buildings. The recommendations set out below are specific to this sector,
and are not necessarily applicable to other construction industry segments.
Our conclusion from this research is that the supply chain will focus on relatively small-scale, project
level improvement initiatives. The supply chain is likely to adapt to influences from the market rather
than as a result of specific policy. Accordingly, the teams recommendations are as follows:

Create and maintain momentum around an agenda for change that involves all levels of the supply
chain. The agenda for change should counter widely held perceptions that current working
methods will deliver the Industrial Strategy improvement targets;
The industry should invest in the development of the quality of site management. The investment
should include recognition and profile, skills development, career paths and technical and people
management capability necessary to optimise performance;
Performance improvement initiatives developed as part of the implementation of the Industrial
Strategy should be aligned with the interests of construction delivery teams. This will increase the
likelihood of adoption. Opportunities for alignment include:
A) Alignment of aspects of Government Construction Strategy with supply chain interests.
Examples from the strategy include performance measurement, should cost procurement and
the appointment of teams to extended programmes of work;
B) Adoption of procurement processes which are consistent with the objective of encouraging
enhanced value, low risk project submissions. Cost-led procurement is a good example of this
approach
C) Encouragement of the adoption of risk transfer practice that is consistent with allocating risk
to the appropriate supply chain member. Procurement strategies such as cost-led procurement
may result in further risk transfer into the supply chain;
Encouraging continuing involvement of the supply chain in design development and bidding
through early engagement of contractors in solution development. This agenda may benefit from
the wider adoption of the cost-led approach advocated by the Government Construction Strategy;
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Investment in capability development throughout the supply chain to increase the uptake of
performance improvement initiatives including BIM and managed collaborative working;
Financial arrangements including bidding and payment:
Organisation of cost-led procurement needs to be organised in such a way as to incentivise early
sub-contract engagement;
Initiatives to improve cash-flow within the supply chain need to balance the interests of all tiers in
the supply chain, recognising that cash flow is also central to the Tier 1 contractor business model;
Development of more effective change management practice, including recognition of the hidden
costs of change in terms of cost and lost productivity. The team believes that the opportunity cost
of change is under-valued;
Wider promotion of the awareness of the process waste that is built into so much construction
activity. Examples include procurement activity at all levels of the supply chain, rebuilding
delivery teams on a project-by-project basis and the wider impacts of change;
Encouragement of the development of commercial exchange models that address the needs of the
construction industrys highly dis-aggregated supply chain. This supply chain structure is integral
to contracting business models. It is a source of considerable inertia, but is also an area of
performance improvement. Increasing the visibility of capability and reducing transaction costs
associated with winning, delivering and being paid for work could delivery significant
performance improvement;
The UK Construction Industry should adapt to its structure, in the same way that the Amazon and
E Bay business model has made a virtue of its highly distributed tail of specialist small-scale
suppliers.

Project methodology
This section of the report outlines the approach adopted by the team and critically reviews the
effectiveness of the adopted methodology.
Methodology
The key components of the project methodology are as follows:
1) Project identification the team has used a matched pairs approach where we selected sample
projects which adopted different approaches to the delivery of a similar building type. The
building types compared are commercial offices and schools, and the dimensions of difference
included:
National vs. regional contractor;
Direct vs. sub-contract labour resources;
Main contractor vs. sub-contractor management of specialist sub-contracts (e.g. Building
Services);
Utilisation of innovative construction methods e.g. panelised construction.
Whilst it has not been possible to directly relate specific aspects of delivery method to project
performance, the matched pair approach helped to ensure that the supply chain survey was representative
of a range of industry practice.

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2) Value tracking through the supply chain we have adopted a Commercial Cost Assurance
methodology to provide an analysis of the supply chains of main contractors and selected
specialist sub-contractors. The benefits of the approach include:
Details of supply chain on-costs obtained without reference to actual project costs;
Consistent and comprehensive overview of the principal contractor cost base;
Detailed but selective analysis of the supply chains of a limited number of specialist
contractors.
3) Structured interviews of contractors, sub-contractors and suppliers. Use of a structured interview
format has provided a rich source of semi-quantitative data. Data sourced via the interview
process includes:
Margin and overhead pricing for Tier 1 and 2 suppliers;
A quantitative analysis of the key drivers affecting pricing behaviour;
Identification of the most common and influential factors supporting or holding back high
performance on construction projects.
Structured interview methodology
40 interviews were undertaken with main contractors and members of the Tier 2 supply chain, including
consultants.
The structured interview process set out to identify aspects of project which contribute to improved
performance including reduced cost, and other factors which act as blockers to improvement. The main
output of the structured interview is a detailed insight into the key issues affecting contractors operating at
a range of scales on building projects.
Structured interviews focused on the following areas:

Details of the respondent, the respondents firm and the project;

Identification of key factors influencing performance on the project;
Systematic testing of our performance hypotheses;
Specific questions relating to waste, whole-life costing, imports, the economic climate and cost of
bidding.

The structured interviews were supported by a pre-interview questionnaire which enabled the team to
gather specific details on price levels, margins, extent of outsourcing, pricing of risk and other factors
influencing pricing.
Whilst the interviews give plenty of flexibility for the interviewee to focus on key issues of their
choosing, we used a survey matrix, based on a set of agreed hypotheses, to structure our analysis of the
interview results. This analysis of factors influencing performance was confirmed after the interview.
The performance hypotheses considered in the project are as follows:

Financial arrangements
Method of supplier selection
Method of being selected to supply
Design management
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Site management
Price determination

Supply chain integration

Each hypothesis is associated with a range of outcomes e.g. prompt or extended payment periods
influences project outcomes. When an interviewee mentioned the issue in the interview and identified
either a positive or negative outcome associated with the issue, then this was recorded in the survey grid,
together with extensive notes of the interview. For example, one or two respondents mentioned that
extended payment periods had the effect of reducing available cash flow, and increasing costs. This would
be recorded as a negative outcome.
Use of the survey grid in this way has enabled the team to produce quantitative data from an informal,
qualitative survey.
The methodology was developed in conjunction with the University of Reading. The research hypotheses
were informed by work undertaken by Professor Will Hughes in connection with project procurement
strategy.
6.3 Review of the effectiveness of the survey
A total of 40 questionnaires were completed for 5 projects as part of the survey. Constraints affecting the
sample size included the identification of suitable projects and the need to secure support from project
teams. Given the challenges faced by many contractors in the current market, we were pleased with the
size of the sample obtained. Financial data was more difficult to obtain. We designed the methodology to
keep separate discussions on commercial matters such as margins and the details of specific projects.
Nevertheless, a smaller number of survey participants were prepared to complete a pre-interview
questionnaire giving a sample size of over 30. We acknowledge that the sample size is small, which
affects the reliability of results. It should be noted that engagement with the contractor supply chain was
very resource intensive, and that barriers to obtaining commercial information are also high.
The pre-interview questionnaire proved very successful in freeing up effective time for the structured
interviews and providing a useful source of consistently defined data that have been used for quantitative
analysis.
Effectiveness of quantitative analysis
The application of a quantitative analysis to the results of the structured interview was developed in
conjunction with Professor Will Hughes of Reading University. There are a number of methodological
challenges to the approach not least the consistent recording of insights from the structured interview,
and the interpretation of the importance and impact of the performance factor under consideration. It
would be possible to fine tune the approach adopted by the team, by for example removing ambiguities in
the terminology used in the questionnaire or drilling deeper into certain aspects of supply chain
performance. However, the experience of the team is that it was rare that issues raised by interviewees
could not be analysed using the performance drivers described in the project hypotheses.

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The benefit of the quantified analysis, presented in tables, is that the hard data can be used to support our
interpretation of results from across the 40 interviews. For example, where very little mention was made
of a performance driver such as benchmarking, we believe that this can be taken as a strong indication of
the low level of performance measurement as a management tool in the construction supply chain.
Identification of causal relationships
In the development of the methodology, we explored whether it would be possible to identify causal links
between performance drivers. So, for instance, we might have recorded that the instances of low levels of
early contractor involvement led to high levels of variations and in turn led to delays to the programme. In
reality while causal links were clearly articulated by interviewees and evidently present, the complexity of
the interplay between different factors was too great to capture using quantitative data. The existence of
causality was recorded as qualitative data and is a key element of our analysis and findings. In particular,
the identification and recording of mitigating factors that compensate for poor performance elsewhere in
the system is a key part of the analysis.
A common example concerns the contribution of good project management and good relations on site to
project outcomes. These were cited by many interviewees as being the glue that holds project
performance together, compensating for performance failings elsewhere. Other methodological issues
associated with the survey that need to be acknowledged include:

Variation in the scoring by interviewers. This is unavoidable, although the team did consider the
normalising of scoring;
variation in responses from interviewees based on the norms and experiences of each individual
(e.g. what is good performance on a project);
ambiguity within the hypotheses, such as differences between explicit (contractual) and implicit
(self-interest) incentives to contribute to performance improvement
separation of project, enterprise and industry performance. Our objective was to capture project
specific performance drivers, but it proved difficult to keep respondents focused on a single
project particularly when more pressing issues might be better illustrated by experiences from
other projects in their portfolio.

Conclusions
In conclusion, the quantitative analysis provided an effective means of gathering structured information,
enabling the team to quantify what are in essence qualitative survey responses.
In summary, given the constraints of time and risk that response rates would be low the survey achieved:

A high degree and quality of participation providing insightful data;

The capture of qualitative and quantitative data;
Structured data providing the foundation for effective analysis;
Fresh insights enabling us to recognise and develop cross-cutting themes that are presented in
the report.

6.4 Literature Review main recommendations of Construction Industry Reports

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This annex features brief summaries of the recommendations of the three major reports featured in the
Literature Review, The Latham Report (1994), The Egan Report (1998) and the Wolstenholme Report
(2009)
1) Summary of Latham Report Recommendations
Constructing the Team Recommendations Summary
1. Focal Points clients
Government should commit itself to being a best practice client. A construction forum should be created
to represent private sector clients
2. Guide for clients on briefing
The Construction Industry Council (CIC) should prepare a guide to briefing. It should also be part of the
contractual process that the client should approve the design brief by signing it off.
3. Code of Practice
The DoE should coordinate a construction strategy code of practice (CSCP) to inform and advise clients.
4. Code of Practice (guidance in the CSCP)
The CSCP should be designed to assist clients to meet their objectives and to obtain value for money. The
guide should also be designed to harness clients purchasing power to improve the long-term performance
of the industry.
5. Consultation of the process plant sector
The European Construction Institute should be involved in the implementation of the CSCP.
6. Check-list designers
The formulations of a check list, or the adoption of existing ones such as those of the British Property
Foundation (BPF) or Building Services (BSRIA), should be an urgent task of the reconstituted JCT as
part of the drafting of new duties.
7. Co-ordinated project information (CPI)
The CPI technique should be made part of the conditions of engagement of the designers and be made a
contractual requirement.
8. Allocation of Mechanical and Electrical (M&E) design responsibilities
Whatever procurement system a client employs, the allocation of design responsibilities between design
consulting engineer and specialist engineering contractor should follow the check list of guidance with a
separate design agreement for the specialist engineering contractor.
9. The Joint Contracts Tribunal
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To amend the standard JCT and ICE forms to take account of the principles set in the report.
10. The Construction Contract Standards Joint Committee (CCSJC)
The structures of the CCSJC and the JCT need substantial change.
11. Joint Liaison Committee
A joint liaison committee should be formed to consider amendments to the NEC and to build up a
complete family of documents around it.
12. Client use of the NEC contract
Public and private sector should begin to use the NEC, and phase out bespoke documents.
13. Register for consultant and quality/price assessment
There should be a register of consultants for public sector work.
14. Project sponsors and managers
The roles and duties of the project sponsor need clearer definition. Government project sponsors should
have sufficient expertise to fulfil their roles effectively.
15. Main contractors and subcontractor list
A list of contractors and subcontractor should be kept for public sector work. It should develop into a
quality register of approved firms.
16. Tendering
Detailed advice should be included in the CSCP to all public sector clients on the specific requirements
for selective tendering in accordance with European Union Directives.

Clients should adhere to the recommended numbers of tenders for single stage tendering in the NJCC
Code of Procedure.
17. Value for Money and cost-in-use interim arrangements
The aim should be for the DoE to set up a central qualification list based on CMIS of contractors and
subcontractors seeking public sector work. Such a list should also be supported by a national scheme of
guidance for quality assessment of tenders.
18. Selection of subcontractors
Set up a central qualification list based on CMIS of contractors and subcontractors seeking public sector
work. Such a list should also be supported by a national scheme of guidance for quality assessment of
tenders. This should include a commitment to short tender lists, and selection on quality and price as well
as client engagement in the appointment of Tier 1 sub-contractors
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Sub-contractors should undertake to work in a win-win manner with other sub-contractors.

19. Partnering
Public sector clients should experiment with partnering arrangements with the intention to build-up longterm relationships.
20. Training
The industry should make specific provisions for training, from flexible modern apprenticeships to
developed NVQs.
21. Image of the industry and equal opportunities
The CIEC and CLG should set up a high-powered task force to report quickly on implementing the
Building Towards 2001 recommendations.
22. Professional education
A task force should be set up with the CIC and Government to agree an implementation of the agreed
desired objectives for professional education.
23. Research and development
Expenditure on research and development in the industry is generally thought to be inadequate and
dissemination of it faces real difficulties. Government should take steps to involve clients in its existing
research strategy programme.
24. Productivity target
A target of 30% real cost reduction over 5 years should be accepted by Ministers by the year 2000.
25. Unfair conditions
The NEC or adjusted standard form JCT and CCSJC should be adopted to address unfair contract
conditions, including timing and conditions of payment, the right of immediate adjudication and rights of
set-off or contra charge
26. Adjudication
A system of adjudication should be introduced within all the Standard Forms of Contract (except where
comparable arrangements already exist for mediation or conciliation) and that this should be underpinned
by legislation.
27. Trust funds
Mandatory trust funds for payment should be established for construction work governed by formal
conditions of contract.
28. Liability legislation
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The Construction Contracts Bill should include provisions to implement the majority report of the
working party on liability.
29. Latent defects insurance
The Construction Contracts Bill should contain a provision for compulsory latent defects insurance for 10
years from practical completion.
30. Creation of a delivery mechanism a standing strategic group of the construction industry to address
this report and industry level requirements
A Standing Strategic Group of the Construction Industry should meet twice a year.
Summary of Egan Review Themes
The Egan Review set performance improvement targets to be achieved by taking opportunities in the
following areas for improvement. The report is not structured by recommendation, so only the themes are
listed.

Improving the project process

Repeated processes
Integrated project processes
Focus on the end product
Product development
Project implementation
Partnering the supply chain
Production of components
Sustained improvement
Enabling improvement
Decent working conditions
More and better training
Design for construction and use
Standardisation
Technology as a tool
Better regulation
Long term relationships
Reduced reliance on tendering

Summary of Wolstentholme Review Recommendations

The Wolstenholme Review identified 8 future areas for action, described as Big Themes for Action and
Some Quick Wins (Wolstenholme, 2009 p. 25-26). The articulation of the major themes in the report is
as follows:
1) Understand the Built Environment
Both clients and suppliers need a better understanding of how the relatively small up-front costs of design
and construction leverage much higher costs downstream for end users in terms of facilities management,
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business costs and ultimate value. The latter may be measured in terms of business (financial), social
(education, healthcare, etc.) and environmental outcomes. Such a powerful argument has captured
audiences' imagination whenever Constructing Excellence has exposed it.
2) Focus much more on the Environment
The construction industry must become a sustainability leader and adopt carbon efficiency into all our
processes. Our failure so far to link ourselves in the public's mind with one of the major issues of the day,
namely climate change, is a huge missed opportunity for our industry. A 'green recovery' from the current
industry recession is now required. Put simply, our vision is of a future where young people who want a
better world will be able to fulfil their aims by joining our industry to deliver a low carbon economy,
rather than by devoting themselves to environmental protest.
3) Find a Cohesive Voice for Our Industry
Our industry bodies and professional associations must collaborate to represent our industry effectively to
Government and other key stakeholders. One option may be to give the Strategic Forum for Construction
greater authority and resources. Alternatively, the L&T Contractors Group or the Construction Industry
Council needs to expand their sector coverage. If we want the attention of Government, we should focus
on how improved performance in our industry can help to reduce Government costs.
Adopt New Business Models that Promote Change
Business models are fundamental to changing behaviour. We must move away from models that
encourage short term thinking and find ways to incentivise long term value creation. This could include
incentivising developers to hold and manage property, rather than developing to sell, encouraging
contractors to move away from subcontracting to business models based on vertical integration or
integrated teams, or for suppliers to take a financial interest in the on-going performance of their
completed projects, rather than walking away after installation.
We must develop a new generation of leaders who can communicate their vision and drive change in
culture and behaviours. We need leaders who can help the public understand our contribution to a
successful society and economy and help to attract more of the best recruits to our industry. G4C shows
that the younger generation has the right aptitudes and desire for change, so our challenge is to speed up
the natural pace of evolution. There needs to be a major co-ordinated push across the industry to improve
the quality of leadership development, both at a project team level but particularly at the top of the
industry.
6.5 Integrate Education and Training
Together with the education sector and professional bodies, we need to promote a wider strategic
understanding of the built environment and how all disciplines inter-relate to deliver solutions.
1) Procure for Value
All customers in the chain need to professionalise their procurement to achieve best value, rather than
focusing on lowest price. They also need to be more open to invite and assess innovative proposals by
suppliers. The inability to assess alternative bids or those based on outcome specifications, or to take
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account of both capital and revenue expenditure let alone value, severely constrains innovation at the
point at which team members are selected.
2) Suppliers to Take the Lead
In the current economic downturn, clients will struggle to lead the way we need suppliers to show how
they can create additional value. Industry firms and their clients have a strategic choice turn back to the
bad old ways of lowest-price tendering with negative margins and a subsequent claims battle, or embrace
beneficial, sustainable change. This starts with proper collaborative working including integrated, lean
processes. Evidence exists for this latter course of action, but Constructing Excellence needs to be more
effective in presenting this data to persuade senior decision-makers. The report also identified 22 quick
win themes to encourage leaders in the industry, government and clients to re-consider current practice,
focusing on how it might need to change to drive improvement. These themes remain highly relevant.
They are described in the Wolstenholme review as follows:
Industry Leaders
1. Take the lead for the industry's change agenda. Do not wait for clients to give you permission to
change. It may be another five or ten years before they will be in a position to help.
2. Exploit the recession to look for your own case for change lift the industry by searching for better
profits, funded through real value improvements, change and productivity.
3. Seek incentives for delivering innovative solutions. Your customers want them (and need them) but are
not sure how to ask!
4. Do not rely blindly upon other peoples recipes for success. Interpret and apply in your own way to
gain full advantage and ownership of the changes.
5. The younger generation is telling you to look at construction as a part of a wider, and much more
important, process that delivers the built environment. You are building stuff now that should still be fit
for purpose in 2070. Are you?
6. Up your game by attracting, training and retaining your future leaders. A lot of them are choosing to
bypass our industry altogether.
7. Graduates leave university with a technical qualification. Institutions will guide them to professional
status. You have to convert them into people who you would trust to lead and grow your business. Steal
some ideas from other sectors who understand what graduate and professional training really means.
8. People management should not be a transactional process employees are not 'spanners on
inventories'. Develop talent management as a core skill along with organisational design and change.
9. Continue to support efforts to improve the image of the industry by promoting the vital role of the built
environment from an early age in schools.
10. Understand the strategic value of infrastructure and develop a long-term vision for a sustainable UK
built environment.
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11. Develop policies to incentivise innovation and change in our industry to help speed up the
modernisation process and focus the industry on the next steps.
12. Regulatory models have pulled the industry in the right direction in some sectors, along with many
variants of the PFI model. Build on these to help the industry's change agenda succeed.
13. Plan for the nation's future infrastructure. It would help everybody if the plan was integrated and
funded. If you are about to make cuts in infrastructure spending then you need to be honest with us. We
will need to plan for the downturn or lose the momentum and skills that we are building.
14. Leadership makes a huge difference. Choose a Minister responsible for the built environment who has
a real purpose and ambition and who can stay in post long enough to make a real difference.
15. Support the Chief Construction Advisers mission to federate the departments who influence the
Industry's agenda and who themselves have to act as exemplars in their capacity as construction clients.
He or she has to emulate the excellent profile that Sir David King has developed as Chief Scientific
Adviser.
16. Supporting the education and professional development of the industry by working with universities
to create 'system thinkers' who challenge silo approaches to problem solving.
17. Think strategically the world is changing. Assume that legislation will get radically tougher in order
to meet the environmental agenda. Understand how you need to rethink your business models to achieve a
step change in sustainability performance. Achieving BREEAM 'Excellent' is a start but it will not solve
the big issues.
18. Improve your team's ability to develop and control the brief. You and your consultant teams are
injecting waste into the procurement process by specifying one-offs and by introducing late changes when
it is inefficient and expensive to implement them.
19. Challenge your consultants to develop more options for risk transfer. Passing the risk down the supply
chain effectively turns off the innovation tap. The more innovative the solution the closer you will need to
get to the supply chain and the greater the potential to generate long-term value. Work with the supply
chain to understand where they are really best placed to manage risks on your behalf, and to deliver best
value when they do so.
20. The supply chain wants your repeat business. An effective way to generate value is to incentivise real
improvements in output in return for a 'pipeline of opportunity'. If you align longer term objectives in this
way, you will create relationships based on trust with your consultant team and suppliers.
21. Few clients incentivise their teams to find radical savings in operating expenditure over the life of an
investment and yet the business case to do so is compelling.
22. Safety always act as if you are personally responsible for safety. Your behaviour and attitude as a
client will be reflected by the project team. If the moral case for investing in an environment where
everybody goes home safely is not compelling enough, consider the true cost of poor safety on your
programme and the reputational damage to your company.

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Literature Review - Bibliography

Cabinet Office (2011) Government Construction Strategy May 2011 [online]; available from
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