December 13, 2016

‘Modernise or die’- The Farmer Review of The UK Construction Labour model

In October 2016, Mark Farmer published his report 'Modernise or Die: The Farmer Review of the UK Construction Labour Model' (Report).

The Report came about following the UK Government’s request for the Construction Leadership Council to "identify actions to reduce the industry's structural vulnerability to skills shortages". In his Report, Farmer pulls no punches in criticising the different industry stakeholders for the current skills crisis, arguing firmly that the industry faces deterioration without change.

Set out below is a summary of the Report's findings regarding the industry's critical failings and its recommendations about how to create a “vibrant, re-skilled, fully integrated, more predictable and productive industry”.

Symptoms

Farmer found that the industry suffers from 10 critical failings (or "symptoms"), with potentially dire consequences:

  • low productivity;
  • low predictability;
  • structural fragmentation;
  • leadership fragmentation;
  • low margins and adversarial pricing models;
  • dysfunctional training funding and delivery models;
  • workforce size and demographics;
  • lack of collaboration and improvement culture;
  • lack of R&D and investment in innovation; and
  • poor industry image.

The Report identifies three ‘root causes’ that sit behind the above symptoms.  In Farmer’s opinion, “these root causes explain not only why we see the above issues in the industry but also confirm why things may not change without strategic intervention”:

  1. the industry’s ‘survivalist’ shape, structure and set of commercial behaviours (resultant from an operating environment characterised by low capital reserves and high demand cyclicality);
  2. the non-aligned interests between the industry and its clients (reinforced by traditional procurement methods and a deep-seated resistance to change); and
  3. the fact that there is no strategic incentive or framework in place to overcome these issues and initiate change across the board.

Recommendations

Farmer’s recommendations and required ‘treatment plan’ reflect the chronic underinvestment in the construction industry (caused by a combination of economic, market and behavioural factors). Farmer puts forward a number of wholesale and co-ordinated ‘special measures’ designed to drive transformational change.

At the heart of Farmer’s recommendations is the need for strategic intervention at a tripartite level, with the industry, its clients and government (as initiator) working together.  Critical to Farmer’s plan for change is, in his opinion, the need to recognise that the industry will not change itself.  It needs to be led by its clients expressly changing their needs and behaviours, or government acting in a regulatory or strategic capacity to drive ‘positive disruption’; strong leadership is key.

Farmer’s headline recommendations are as follows:

Recommendation 1: The Construction Leadership Council (CLC) should be given strategic oversight of the implementation of these recommendations and evolve to drive the process of change.

Recommendation 2:  The Construction Industry Training Board (CITB) should be comprehensively reviewed and reformed.

Recommendation 3: Industry, clients and government should work together leveraging CLC's Business Models work stream activity to improve relationships and increase R&D within the industry by changing commissioning trends from traditional to pre-manufactured approaches.  

Recommendation 4: Industry, government and clients, supported by academic expertise and leveraging CLC’s current Innovation work stream activity should organise to deliver a comprehensive innovation programme. This will have to be aligned to market needs and help to shape CITB reform.

Recommendation 5: A reformed CITB should re-organise its grant funding model for skills and training so it provides what the industry and market needs. In turn, industry bodies should take a more active role in ensuring training courses are producing talent for a forward looking industry (digitisation) and making sure the right business models are evolved with appropriate contractual frameworks.

Recommendation 6: A reformed CITB or stand-alone body should deliver a new, fresh image to schools to attract young people into the industry.

Recommendation 7: The Government should recognise the value of the construction sector and be willing to intervene to help establish and maintain appropriate skills capacity (e.g. by way of education, planning and tax / employment policies).

Recommendation 8: The Government should stimulate innovation in the housing sector by promoting the use of pre-manufactured solutions through policy measures.

Recommendation 9: The Government should work with the industry to assemble and publish a comprehensive pipeline of demand in the new-build housing sector to create stability and incentivise R&D investment.

Recommendation 10: In the medium to long term, if the voluntary approach fails, the Government should consider introducing a charge on business clients in the industry to influence commissioning behaviour and supplement funding for skills and innovation. 

The Report makes several comments about the underlying role the insurance and legal industry need to play in the change process.  Farmer suggests that to drive R&D and innovation, the industry should be considering more the use of project bank accounts and new methods of project level insurance policy to re-aggregate the natural fragmentation that exists around transactional and legal liability interfaces – which often stand in the way of innovative procurement and product assembly models. While this makes sense in principle, this type of insurance has been costly in the past.  What we need is for the insurance industry to respond with some appropriate cost effective models and clients who insist this type of insurance is procured for the project.  

Farmer also suggests that lawyers should support multi-disciplinary collaboration and a move away from normal contracting methodologies. Contract forms that reflect a multi-party approach, embrace BIM and make provision for the integration of pre-manufactured solutions should be utilised.  While we agree that collaboration and off-site manufacturing methods have a very important role to play in the industry going forward, the contracting methods (and risk allocation) adopted on projects are driven by the client’s needs, behaviours and the project itself, rather than the lawyers. Lawyers can, however, assist by promoting contracts that help drive these behaviours.

The changing behaviours and strong leadership of clients is something Farmer has highlighted as key to driving change in the industry.  However, the type of project involved will also play a key role in the contracting method adopted.  Alliancing has proven very successful in the past, but then only for those projects that it is really designed for, e.g. projects where the scope is largely undefined, there is significant room for value-add through innovation, the risks are high and best managed together. There has been a move in recent times towards the use of more collaborative styles of contracting (e.g. NEC3 standard forms which are based on an overall concept of ‘mutual trust and co-operation), though this has largely been driven by Government support for the form and is largely utilised for infrastructure projects.  However, despite everyone’s best efforts to drive change (reflecting in particular on previous reports by Latham and Egan) there will still be certain projects and clients that require a traditional, fixed price / lump sum contract.

'Modernise or die' raises some important issues that are inherent in the industry and proposes useful methods to alleviate these. Whilst Farmer is clear in his view, along with many industry stakeholders, that change has to take place, his recommendations may appear somewhat unrealistic within the current marketplace. Although perhaps the timing is perfect - as we prepare to jump off of one political cliff into the unknown, the construction industry could also close its eyes, and take the leap of faith with Mark Farmer.  It may just be exactly what we need.