Podcast: Construction Efficiency, The Productivity Blueprint

Transcript

Voiceover:

This is a podcast from the Bartlett Review, sharing new ideas and disruptive thinking for the built environment, brought to you by the Bartlett Faculty of the Built Environment at University College London. 

Judy Stephenson:

The biggest question for my construction economics students is, why do we try to build cheaply when we know how much it costs us in the long run? 

Priti Parikh:

Investing in the sector, it's investing more broadly in society, investing in health, wellbeing, improving quality of life. 

Noble Francis:

Academia can be industry facing and it can help find out where are the good places, where good practise is being done, where's the learning occurring, and how to share that learning.

Priti Parikh: 

Hello, I'm Priti Parikh, Professor of Infrastructure Engineering and International Development and Director of the Bartlett School of Sustainable Construction. Even before the US and Israel began the military action against Iran, there were serious problems impacting productivity in the UK construction industry. The economic shock caused by the war in the Middle East and subsequent rising costs of raw materials and energy will almost inevitably place even more pressure on the sector. But economic cycles change and this is not the first time we have seen dramatic price rises. So what are the more deep-seated issues which impact our ability to build efficiently and sustainably? The UK has a long tradition of innovative construction, and government policy that seeks to enable business growth. 

So what is going wrong and what can we do to improve matters? I'm really pleased to say that I have two of my brilliant colleagues with me today to help answer those questions. Professor Judy Stevenson is an expert in the economic history of the built environment. She's also the honorary secretary of the Economic History Society. Welcome, Judy. It's good to have you with us. 

Judy Stephenson: 

Thank you, Priti. 

Priti Parikh: 

And we are joined by Noble Francis. Noble is an Honorary Professor here at the Bartlett, and he's also the Economics Director at the Construction Products Association, which provides detailed forecasts for the construction industry based on in- depth analysis. Welcome Noble, to the Bartlett Review Podcast. 

Noble Francis: 

Thanks, Priti. It's great to join you.

Priti Parikh: 

Thank you. So let's start with the fundamental question. Let's talk about the construction sector, and do we have a productivity crisis? What is the problem? And Judy, I'm going to come to you first. 

Judy Stephenson: 

Okay. So the construction sector over the last 20 years has consistently slightly lagged productivity gains in the rest of the economy. And this is now seen as being a persistent or deep-seated problem. So the UK also has a productivity problem compared to other developed like G8, G7 nations. Sometimes the two get conflated, so I'm just going to talk about the construction industry.  

The core problem in construction productivity is in other sectors, what you try to do is the same thing over and over again. Essentially an economy of scale or an economy of scope of what makes things more productive. And in construction, that is very difficult to pull off because most of the really big and important projects are idiosyncratic. They're one offs.

 On top of that fundamental problem, the materials costs are unpredictable. And that means pricing is very difficult and that slows down production. We have a serious skills shortage. I mean, we have a highly skilled workforce in services. We have a very highly skilled workforce in terms of graduates, and so project managers are very highly skilled in this country. We are seriously lacking people who can actually put the glass on The Shard or lay the brick bit by bit, or indeed in construction with traditional or other different types of sustainable materials that are specialist in some way, we are sorely lacking a skilled workforce in that area. 

So that means that it's difficult to put the capital in because of the pricing. It's difficult to put the labour in because of the skills and the planning of it is much higher in terms of transaction costs than in any other sector of the economy. So it's always going to be difficult and we've got those extra problems. 

Priti Parikh: 

And Noble, I'm hoping you have more unicorns to share as well on this point. 

Noble Francis:

I don't have any unicorns, I'm afraid, but from my perspective, we talk about a construction sector, but actually it's many sectors. And as Judy rightly mentioned, we're not making the same thing over and over again, which is what tends to happen within manufacturing, where you can justify the high investment upfront for a long term, consistent rate of return. In construction, we're talking about 30 plus sectors and sub-sectors, and even within a construction sector, whether it's house building or whether it's infrastructure, energy, you're not making the same thing every time.

Everything is bespoke, everything is one offs. There's volatile demand. And given that you're making one-offs constantly, you're looking at a situation where the business models focus on the ability to deal with that volatile demand, and the way you deal with that volatile demand is to sub-contract out all the cost, activity, and risk. 

So the focus of the business models from major house builders or major contractors is not on the most efficient way of dealing with things, it's on the most flexible way of dealing with things, and those two are very different. The most efficient way of dealing with things is to invest multimillion pounds upfront in factories in digitalization, in offsite manufacturing in various forms, in technology. The most flexible way of dealing with things is to sub-contract it out to smaller firms, and then if the demand is volatile, you can deal with falls in demand, very sharp falls in demand, by cutting the supply chain loose, which means your firm survives, but it means the pain is dealt with by the small specialist subcontractors. So to use the extreme example, the top 10 UK house builders on average only employ one person for every three homes they build. 

Priti Parikh: 

And you mentioned investment as a critical factor, but even with investments, is there not a time lag? If you think about the reasons around failure for productivity, is there not a time lag around the investments and getting value addition from those investments? 

Noble Francis: 

Yes. There's a time lag in between deciding to do the investment, getting the investment down on the ground and getting to full production from that investment. There's a time lag in terms of getting the return on the investment. So the demand has to be there for long enough that I can go to the global board of directors, get them to sign off the investment decision, get them to make that major investment, whether it's in a factory, whether it's in digitalization, and then once it's up and running, it needs to be up and running for five to 10 years to be able to make that return. Now, again, back to the volatility and demand, if you go to house building, once every 10 to 15 years, private housing starts will fall between 60 and 70% during a downturn. 

Judy Stephenson: 

As they are now, I believe. 

Noble Francis: 

Indeed. And as a result, it is very difficult to justify high investment upfront for a return over 10 years when you know that once every 10 years, once every 15 years, there will be a very sharp downturn. And it's worth remembering that in something like manufacturing, it's not financially viable at less than 90% capacity utilisation. 

Priti Parikh: 

Judy, would you like to add to this? 

Judy Stephenson: 

I think there's ... I want to mention something a bit left field, but that is important. So a good built environment supports growth in other areas. A bad built environment hampers other areas. So it's a bit of a multiplier, if you like. So hold ups in the built environment in terms of infrastructure and housing then hamper productivity growth in other areas.  

Noble Francis: 

It's a very good point you make that construction ... We're not doing construction just for the sake of it. Construction is an enabler of everything else in the rest of the economy, whether it's the homes we live in, whether it's the transport infrastructure to get to places, whether it's the internet technology, so that we can work quicker, whether it's the hospitals we're being treated in or the schools and universities that we're learning in. Construction is not Coca-Cola. It's not there to be consumed.  

Judy Stephenson: 

So one of the areas that's not usually looked at is what is productivity in repair and maintenance, R&M. And that has a profound effect in a closer timeframe on the economy as a whole, because if repair and maintenance cannot be carried out effectively, you end up with stuff that can't be used. And repair and maintenance, it has a pretty steady productivity level, and it's pretty low compared to manufacturing again, probably for the very good reasons that Noble was covering in terms of the financial risk that contractors or owners face in facing these costs, which are increasing in a highly serviced environment due to insurance and a general attitude towards all types of risk. But yeah, our responsiveness to productivity and also technological innovation in that space is slower than it should be. So you see repair and maintenance tends to uptake new technology slower than other areas. 

 Noble Francis: 

Especially when you look at the biggest area of repair and maintenance, which is on the housing stock, you're looking at a housing stock of 28 million across Great Britain, and it's the extreme of doing bespoke work because it is different in every home. You have some homes, what, 37% of the English housing stock is pre-war, which means retrofitting that is very different work to doing a home improvement project on a home that's 10 years old. So it's a very varied housing stock. It's very labour intensive, which- 

Judy Stephenson: 

It's highly regulated. 

Noble Francis: 

Highly regulated.

Judy Stephenson: 

Good things going for it, because you can't put in ... You usually can't put in stuff that's going to kill you, but yeah, hopefully since 2017, even less than you could before, but the regulation means that it moves slower than it should, and it's more complex for operators in that area. 

Priti Parikh: 

And the repair and maintenance point is important, not just for housing. If we think about transport, road, infrastructure, potholes. 

Judy Stephenson: 

Potholes. 

Priti Parikh: 

Potholes. Tell me about potholes. 

Judy Stephenson: 

So the most efficient thing to do would be lay new road, and that in the long run, that will be far cheaper than repairing potholes. But every year there's a limited cash flow, and so it just goes on patching up the potholes, which then of course create more potholes. Yeah. I mean, there are people who blog very wittily about this better than I do, but it's exactly that point. It's the failure to invest today that leads to a fundamental productivity problem over the long run. The biggest question for my construction economics students is, why do we try to build cheaply when we know how much it costs us in the long run? And that's fundamentally a question that anybody in construction has to face. It's making the case for the good investment. 

Priti Parikh: 

And if we think about infrastructure, construction projects, housing stock, they typically will have a life of 20, 30, 40, 50 years. So then why build cheaply? Why not do it properly? 

Judy Stephenson: 

50 years? It's a minnow. We want things hanging around longer, and there is a lot of stock, especially in London, that is hanging around a lot longer. There's plenty of stuff between here and the river built in the 1670s and refurbished over and over. It's actually pretty sustainable apart from the fact it burnt a lot of coal for 250 of those 300 years or even 300 of those 350 years. But in terms of actual built sustainability, very high performance 

Priti Parikh: 

And I think both of you make a really important point that investing in the construction sector is not just about investing in the sector, it's investing more broadly in society, investing in health, wellbeing, improving quality of life, therefore it's a necessary investment to happen. And at the Bartlett School of Sustainable Construction, we engage with our students on those topics. So I was wondering, if we think about our future generation skills, employment, how does productivity link to employment and skills? 

Judy Stephenson: 

Well, higher skilled people are more productive. So the more skilled you are, either organizationally skilled, which is the kind of skills that we're teaching in our department, or technologically, prescriptively, manually skilled, the better the stuff that you make and the faster you make it. So we need people who have both training and experience. That's what really creates skill. And those bring tacit and explicit knowledge about how things work so you can get things done more effectively. 

But all construction companies face the problem that there is no funding for skills training and education in the UK really at the moment. I mean, there is funding. There are schemes that have been around for a while. Noble do you want to come in here?  

Noble Francis: 

I’ll come in. 

Judy Stephenson: 

But we're cutting them, not ... 

 Noble Francis: 

And also, I mean, remember, get back to the original point I was making, which is that if the majority of activity within construction is subcontracted out to SMEs, then you're in a situation where most of the employment is within SMEs, 84% of construction employment is within SMEs, which means the majority of the burden of bringing new people into the industry and improving skills is going to be through SMEs who are less able to do it because they have less resource in terms of finance. They have less resource in terms of time to train people up. And historically, what we do as an industry, particularly at the trades level, is we train people to do one trade, and then we leave them to it for the rest of their career.  

Judy Stephenson: 

And self-employment, of course, which accounts for something like 30 something, I can't remember, 32% of people working in the industry describe themselves as self-employed for at least part of the year. 

Priti Parikh: 

That's one third of the industry. 

Judy Stephenson: 

At least. 

Priti Parikh: 

At least. 

Judy Stephenson: 

And I think for people at the top who are trying to manage the situation, who are taking leadership and management roles, they find themselves in a situation where there is a public perception that construction is a problem, and that perception is often conflated with problems of planning, of local administration, of borough spending and account and things like that. So they are managing stakeholder issues which are not necessarily theirs to solve, but which they have to be able to deal with in order to deal with the organisational problems. 

So we're asking leaders and managers in construction to do more than they should. If you're working in banking or accountancy, you're working on what you're working on. In the construction industry, you're taking responsibility for the whole of the housing problem of the UK, for all the infrastructure delays and for bat tunnels and the supply chain and the energy cost and the cost of materials. And that's ... so we make things very complicated for leaders in the industry as well. 

 Priti Parikh: 

Yeah, that's a tough ask from leaders in construction.  

Priti Parikh: 

So we've been looking at challenges around productivity in construction, but I would like to know more about the enabling factors. For example, AI, will AI help or hinder us? 

Judy Stephenson: 

Well, it's got enormous potential. You still need huge oversight because we know the thing hallucinates and all that kind of stuff. But the gains to be made in those processes are huge. You can take a little bit like in drafting legal documents, you can take 30 hours of work down to three if you've got the right oversight. I mean, that's amazing. The problem is AI is not going to move the materials around any faster.  It’s a question about how we will gain from being able to design and project manage three times faster if we can't actually get the stuff up. So that's an issue, but the gains to be made from the management and project management point of view are potentially phenomenal. 

Noble Francis: 

And you made a very good point earlier about construction leaders at the top level are taking an awful lot of responsibility for things that are not purely the construction element of it. And if you look at some of the potential that AI has, you're completely right. AI isn't going to help with literally the onsite job of doing carpentry and joinery or bricklaying, but a lot of what AI can do in terms of helping those things are already a process, but a long and drawn out and expensive process, it can help. 

Priti Parikh: 

Absolutely. 

Noble Francis: 

So admin support, legal jobs and construction lawyers get paid an awful lot. Architecture, business and finance operations, HR, an awful lot of this can be sped up using AI to help with the process and deal with the admin and bureaucracy around it. Now, you're not going to eliminate all the jobs through this, because as you rightly pointed out, AI can often come out with some quirky results, to say the least. And from a legal perspective, if my multimillion-pound project is heavily dependent on what is produced, I would want substantial checking going on, but it can make major efficiencies in improving the non-construction site element of it. 

Judy Stephenson: 

I think there's an aspect to this of training as well. For years, we have struggled to bring young people just to talk about who those people are. They are predominantly male in the construction industry, but they don't have to be. There's a kind of solidly rising ... so the construction industry can do diversity very well, but we've struggled to bring young people in particularly because they don't understand the industry and they see it as old and a bit fuddy-duddy, but training them with AI tools is an important access that makes things a lot more exciting.

Priti Parikh: 

And if you work in the construction industry-built environment, you see the results right in front of you. 

Judy Stephenson: 

Absolutely. 

Priti Parikh: 

You see new housing stock, new infrastructure being built. And you can probably say, "This is one of my projects." 

Judy Stephenson: 

Yeah, it's a huge work satisfaction. So we have the potential to bring ... and AI helps us bring that potential forward in a really positive way. 

Priti Parikh: 

And besides AI, are there any other enablers to boost productivity and construction? 

Noble Francis: 

I mentioned earlier on that the business model is based around subcontracting out the cost activity and risk. But in areas where demand is more stable, so in government programmes, in regulated sectors of infrastructure, where there are five year spending plans, five-year investment plans, there's more stability, then there is an incentive there to work with the same supply chains, benefit from the learning involved in those. Then you get better security, better quality, more efficient ways of working, and that learning is not lost. 

Priti Parikh: 

And given the world leading department in construction, I wanted to just think about what can academia do to help? 

Judy Stephenson: 

Well, I think academia has an opportunity to quantify the problem because the industry gets attacked for being low productivity. Everybody says it's a problem. It looks at examples, poor examples like Carilion and says, "Look, that's the state of the industry”, and it fails to see the positives. And I think we can be doing more to talk about the positives. Some of our students are doing those things. I'm going to have a plug for Alex Kulakoff, who wrote a great dissertation showing that usually people think fragmentation in the industry is a problem, and he took 25 years of data and showed that yes, the industry had not had fragmented, I mean, in terms of there was more of it and more parts to it, but that this was not a driver of productivity. So being able to have actually empirically driven quantitative explorations of these problems is very important. I think we can do that.  

Priti Parikh: 

And you mentioned Alex and now he's a lecturer. 

Judi Stephenson: 

Now he's a lecturer.  

Noble Francis: 

And from my perspective, academia has an absolutely critical part to play because we're in a situation where the biggest client in construction by far is government. Government has its ambitions, whether it's the very unrealistic 1.5 million homes in England in five years, whether it's more and better quality social infrastructure, schools, hospitals, defence, prisons, whether it's traditional infrastructure, it has an infrastructure pipeline of over 700 billion pounds. Government wants to see a better quality and built environment, but it doesn't have the skills, the knowledge, the experience of how that can be delivered. Industry, on the other hand, is there to help delivery because they make profits from it. 

However, each contractor or consortia is competing with each other. The point of academia is that they can highlight to government how it can most efficiently, most effectively deliver on construction projects, but equally academia can be industry facing and it can help find out where are the good places, where good practise is being done, where's the learning occurring, and how to share that learning for the benefit of everyone, whether it's all construction firms, whether it's government in terms of procurement and delivery.  Academia is absolutely critical in this respect. 

Priti Parikh: 

So Judy, you've been talking about the value of sustainability, learning from history, lessons learned, and Noble you've been kind of reflecting on policies and kind of politicians and their steer on sustainability, but where does that really leave us? Is it possible to be sustainable and efficient? 

 Judy Stephenson: 

I think it is but it requires investment and understanding what the horizon is. And too often we are building for the next five years. If we understood that we were building for the next 150 years, we might think about it in a more sustainable way, but I think the political question about, is this sustainability thing holding us back? I think there is something that can hold us back and that is how we integrate new technology.  Construction asks you to be sustainable from the outset, as in experimentation is very costly in the built environment.  

So we need to have a responsible conversation about what that means without making it appear that we are suppressing innovation, but that involves an industry and a government who are willing to have a very grown-up conversation. 

Noble Francis: 

And from my perspective, it is possible to be sustainable and efficient, but you do need to think about the built environment in a different way.  You need to procure for the long term and you need to make sure that that built environment is maintained over the course of the life, but what you can't do is build something as a big one off and not maintain it and it be sustainable and efficient because what you will find is 10, 15 years down the road, you have to do lots of major investment and it tends to be very sticking plaster investment, and that does not lend itself to being sustainable and efficient.  

Judy Stephenson: 

Yeah. I think this raises a question, I don't know whether this will get into the podcast or not, but it raises a question of ownership. I don't mean the individual home ownership. I mean about who looks after the infrastructure, who looks after, because we fudged that many times in terms, both in terms of the private finance initiative and in terms of running down borough wealth. 

Noble Francis: 

And remember, councils used to have their own contractors working directly for them. 

Judy Stephenson: 

Yeah, it's really important to say here that also, the direct labour model worked really well because it wasn't a least cost model. 

It's known over ... I mean, the empirics on it are really strong, but we just politically can't get our heads around it. But least cost building contractor is the most expensive way and the most unsustainable way to buy buildings. There literally isn't a worse way. But there's no such thing as least because lease cost, all the contractor is doing is cutting things to the absolute bone so that either you're going to face a huge lump sum to make things good or you're going to have a failed project. 

Priti Parikh: 

In light of what we've been saying about sustainability, whole life design, building things better for the future, how optimistic do you feel about the future? 

Judy Stephenson: 

Well, there's one big ground for optimism, and they come into the classroom every week Priti. They are our students, and when you get very despairing of planning, politics, investment, interest rates or cycle, then these fabulous kids turn up, sorry for calling them kids, most of them in their mid-20s. They've maybe got a bit of experience working in real estate or project management or construction. They want to know more, they want to know how to do it well, they're committed, they love their work, they love the industry, and they're genuinely engaged with the problems of ... and they want to know how to make it not just better, but kind of right. 

So there's lots of great examples of how bringing people into the building industry in a downturn has generally had positive benefits for the labour force as a whole from all over the world, but for people who aren't necessarily from an academic or a kind of degree route, I think it's got similar things you're giving people, life-changingly positive skills, building things well can be nothing but good. 

Priti Parikh: 

And I know that if you think about UK government agenda, skills is really high up on the agenda. 

Judy Stephenson: 

And we've got the infrastructure to do to train people there, the further education colleges, the guilds, they are there. It's not like we have to start over. 

Noble Francis: 

And from my perspective. In terms of whether I'm optimistic, I'm an economist, so I'm never optimistic or pessimistic. I just am. I'm not really a glass half full or half empty person, but from a practical point of view, there is an increased awareness, whether it's from industry, whether it's from government, whether it's from the public, that there is a great need for improvement in the built environment at the time at which we're not going to be able to do things in the same way as we did them before. 

We will have to deliver it more efficiently, more effectively, because the needs are so great across the whole built environment. And if government is able, as the largest client in construction, to make sure that demand is not as volatile, then you will see the whole supply chain investing in more efficient methods, whether that's tech, whether it's digitalization, whether it's offsite manufacturing, whether it's consistent investment in skills and directly employing people. 

Judy Stephenson: 

I'm the nerd, there's your policy man. The role of the government, it's a Keynesian point and it's absolutely bang on the money. The role of government is to smooth demand. He said it clearly. He knows what he's talking about. There you have it. 

Priti Parikh: 

And I'm an engineer, so I'm a half glass full person and I work on improving access to infrastructure on this planet. So when I see the transformational impact infrastructure has, I'm optimistic because if it can be better in making that business case to politicians, to investors, and generate more investment at the right moment in time, I think I'm optimistic that we can do something about this. 

Judy Stephenson: 

Yes. 

Priti Parikh: 

My thanks to Noble and Judy for their time and expertise. I've really enjoyed hearing your thoughts on the subject and I hope our listeners have too. If you want to find out more about the work being done here at the Bartlett, links to articles and previous episodes of the Bartlett Review podcast, and a lot more information about the Bartlett Faculty of the Built Environment is available via our own website, ucl.ac.uk/bartlett, or you can find us on LinkedIn at the Bartlett UCL. From me, Priti Parikh thank you for listening and goodbye.