Industry Insight No.23: Construction Industry Predictions for 2018

This article was first published on Lexis?PSL Construction on 23 January 2018.

Construction analysis: Sarah Schütte of Schutte Consulting Limited predicts the top 10 trends for the construction and engineering industry in 2018.

Here are my top 10 trends for 2018, in no particular order:

1. Professional services/consultancy

The demand for excellence has never been higher. This brings with it tougher client requirements, including a requirement to meet specified output criteria (for example ‘fitness for purpose’ obligations). Historically, professionals have generally successfully resisted this, largely due to pressure from their professional indemnity insurers (who often limit their cover to ‘reasonable skill, care and diligence of a similar professional carrying out similar projects’).

However, this situation is beginning to change, and arguably it has to for the future of the industry. On big projects in particular, client stakeholders (funders of varying sorts, government, the public purse etc) are increasingly demanding performance requirements, which can be measured (eg a HVAC system that achieves 18-22°C at all times, a building which achieves BREEAM rating of X, windows with a rating of Y etc).

All of these outputs must be designed, and must anticipate the associated risks. Also, measurable outputs can be linked to payment cycles and sums ‘due’. Currently, a design and build main contractor is often left with this contractual risk, as it cannot flow it down to the appropriate member of the professional team. The important case of MT H?jgaard A/S v E.On Climate & Renewables UK Robin Rigg East Ltd and another [2017] UKSC 59, [2017] All ER (D) 19 (Aug) is relevant in this regard.

2. Big data v data protection

This is a really interesting paradox for the industry to wrestle with.

The General Data Protection Regulation (GDPR) Regulation (EU) 2016/679 comes into force in May, and many businesses are still woefully underprepared. Read my 2 August 2017 articles on my website here. A renewed public campaign for privacy is underway by the Information Commissioner. I think this will prompt individuals to take action, resulting in more requests to be forgotten and more demands to unsubscribe. Organisations must, at the very least, swiftly gear up to deal with this increased volume, and implement measures to control use of data. I have worked with a few small clients to update privacy and cookie policies, while they took care of databases. Larger organisations have a much bigger job.

At the other end of the scale, ‘big data’ is very valuable for industry. It is the 21st century equivalent of oil in the 1930s. But, crucially, data never runs out. All businesses are run on data, to a greater or lesser extent. The megalith organisations, such as Uber, Google and Amazon, make their livings out of data. There is valuable commodity in the data they collect, process and deal in.

The construction industry can profit from big data too, for example by building smart buildings, transport hubs, drone highways, smart water and wastewater systems etc. The key is that everything has to serve an identifiable and measurable purpose. The purpose comes from collecting, using and analysing data in the right way. In the construction and engineering industry (especially in infrastructure, sustainability, development and redevelopment zones), big data will link into stakeholder demands and return on investment principles. I am excited about this, and confident that these demands will result in projects returning a higher rate of success than currently, and that there will be less wastage of resources, time and cost.

3. Flexible contracts

I have observed juxtaposition in industry between big and small contracts—an increase in frameworks, plus an increase in small, project-based contracts. Long-term frameworks and the reality of their effectiveness, including the ability to exit, are in the spotlight following the troubles at Carillion and Interserve. See my Industry Insight No. 22 Facilities Management Contracting. The ‘value for money’ question is not going to go away—long-term contracts have always been difficult to price accurately, and projects have a history of being underpriced leading to claims being logged as completion draws nearer. See the difficulties explored in my "Industry Insight No. 18 Is PFI a costly proposition or the way forward?" But long-term frameworks do not work in the same way as projects, and so the contracting strategy should be approached differently. Value for money is a crude mechanism for winning a contract, but is not the source problem—the criteria for award are problematic, and procurement expertise within an organisation needs more dedicated focus and training.

I have also noticed a shift towards two-stage tendering, and early contractor involvement-style contracting. These approaches allow the parties to ‘dip their toes in’ a project, but step away without too much pain on either side, should the circumstances show that the project is not right for one or both. It results in a fair price at the outset, with the opportunity to derive value later on. I predict that the uncertainties about funding and Brexit will also drive an increase in adoption of these concepts.

Letters of intent are perennially popular and we may see a rise in their use. They can be a useful, limiting time or expenditure or both, but they need careful drafting.

4. The rise of the trades?

I have noticed growing pressure on human and physical resource, planning around Brexit and having supply chain trades on standby. See my Industry Insight No. 15 on " Project Brexit". I sense a power shift coming as projects struggle to service the necessary small trades. For example, a tier 2 client had to swiftly engage new plasterers recently as they decided to return to Eastern Europe. This sort of risk comes at a cost, which cannot usually be passed up the contractual chain, and indeed was at my client’s risk pursuant to the subcontract. However, the reality is logistical pain and the project suffers, and therefore everyone should be sensible and assist in the recovery effort to mitigate potential delay and extra cost.

5. Retentions/withholdings

Retention and contractual withholdings have been thorny topics for some time. They are currently the subject of a new Bill introduced to the Houses of Parliament on 9 January 2018 (see Construction (Retention Deposit Schemes) Bill). It is a shame that there is such misuse and abuse of what is, in my experience, a sensible contractual device.

Another problem is main contractors who are not repaid retentions will then withhold repayment to their sub- contractors. That is only legally permissible if the same criterion for withholding flows down the contractual chain. With a contract like NEC, assuming the standard provisions have not been tinkered with, this should work smoothly, and there is transparency for the Project Manager who manages the process. However, I have seen cases where the contractor has simply not checked the contract to see if the same criteria apply—assumptions that they are the same are dangerous. To me it is a risk item, which needs frank discussion at tender and negotiation stage. It also requires a proper understanding and careful management by those charged with costs control (eg the Contract Administrator in JCT, or the Project Manager in NEC).

Industry has already realigned itself without government interference—10% retention has long gone, reduced to 5%.

6. Infrastructure—time for an overhaul?

This year will put the spotlight on the value of infrastructure and public-facing services being delivered by the private sector. The recent Carillion insolvency has accelerated this introspection. The commentaries I have seen, and contributed to, including several on LinkedIn, clearly show a need and desire to explore contracting strategy, value for money in facilities management and, perhaps more philosophically, the role of private funding in the public sector. The construction and engineering industry cuts right across transport, health, prisons and schools. They will all come under intense scrutiny. I sincerely hope that this does not stop investment in UK infrastructure (see Industry Insight No. 14 Stakeholders: Managing Challenges and Opportunities, whether for new or upgraded assets. In addition, in relation to funding, Brexit remains a significant challenge.

7. Data security

This remains a top priority for boards of all sizes within the construction and engineering industry. What does success look like? For my clients, it is all about showing the impact of investment in IT solutions by measuring effectiveness of the products (eg number of incidents) and flow down process and rigour to individuals (eg the percentage of people changing their password as required by company policy). See also Industry Insight No. 19: Cybersecurity and the construction industry.

8. NEC4 and FIDIC 2017

2017 marked the year of new editions of the NEC and FIDIC contracts, following JCT’s new release in 2016. It will be interesting to see the rate of uptake. Both have made their contracts longer, and changed risk allocation in some areas.

FIDIC is complicated but fairly specialised in its application. Most of my UK clients are curious about NEC4, and investing in training workshops during the first half of 2018. This is a sensible, and logical step to take. For now, however, in strategy terms, they are sticking to NEC3, which they know well and are set up internally to deliver. For example, recently a client was toying with moving to NEC4 for 2018, but realised its accounts system was not able to handle the new requirements on final assessment. That meant we had a new project risk item on the table. The work to upgrade the system is now underway, and commissioning and training are planned, but these steps will not be completed in time for this project, so we are using the NEC3 contract.

9. Technology

Technology is moving quickly. Clients are talking about all these tools, and concepts, but are nervous about adopting them wholesale, plus there is significant expense attached to them. Rather, there is incremental incorporation into contracting strategies and supply chains on a project-by-project basis. In the UK, the technology development sector is dominated by and driven forward by specialised small and medium-sized enterprises. It is very exciting that, notwithstanding a slowdown in investment due to Brexit concerns, UK innovation continues. But it needs more funding to scale up and deliver value and volume. At the moment, adoption of technology is driven by compliance (eg BIM Level 3 is coming) and speed (eg 3D printing of small, repetitive items).

The term ‘artificial intelligence’ (AI) covers a wide variety of concepts, including machine learning, neural networks and cybernetics. AI is not new though—it has been around for over 30 years in the process engineering sector and in the form of data analysis (optical character recognition, eg via multiple choice tests). More recent developments centre on AI applications for information-filtering, eg keyword searching in contracts, and e- disclosure. But these can be clunky—taking AI to the next level to support the contract review function, for example, takes a lot of investment (especially employee time to “teach” the software how to get better at searching for what you want to see). There is also training of teams and organisation process and policy to feed into this area eg how far can you automate a contract so that the legal team does not need to see it? At what point is a proposed term acceptable or not acceptable.

I foresee AI moving up the construction industry agenda but only once organisations start to see practical benefits in the investment.

10. Governance, compliance and ethics

Always a hot topic, the UK is at the forefront of much of the law and practice in these areas. No doubt the Carillion insolvency will dig around into these areas a lot, and perhaps expose practices, which were suboptimal (it would be wrong to cast opinion, when the situation is very raw right now). Such discoveries would be insightful, but the fact of them does not make anything better per se. The better focus should be on the ‘why’. That may take some time to unravel, and be painful along the way.

Here are two other practical challenges for the construction and engineering industry:

? PR and reputational risk and conflicts of interest, eg the executive who moved from CH2M to HS2 just before a ￡170m contract was awarded to CH2M (see Telegraph article for good summary)

? consolidation within industry prompting a review of governance and decision-making functions (See FT article for good summary on how HS2 faces fresh conflicts of interest over Jacobs and CH2M merger )

It is very unfortunate that both cases involve HS2, the organisation set up to deliver Europe’s largest infrastructure project, putting it under the spotlight (again). This is the UK flagship project and solid ethical governance must be at the heart of it, if it is to successfully deliver some very challenging objectives without the costs spiralling further. See my pair of articles: Industry Insights No. 8 and No. 9 on Ethical Governance

These are my predictions for 2018. I would welcome readers' views.