Digital disruption is happening across all sectors. Construction may be the second least “digitised” business sector currently (after agriculture) but that simply points to the scale of impact that may be felt within our sector over the coming years.
In his latest book “The Economic Singularity: Artificial intelligence and the death of capitalism” Calum Chace dramatically illustrates the power of exponential change in the following two examples:
"Imagine that you stand up and take 30 paces forward. You would travel around 30 yards (or metres if you are outside Britain and its former colonies). Now imagine that you take 30 exponential paces, doubling the length each time. Your first place is one metre, your second two metres, your third is four metres, your fourth pace is eight metres, and so on. How far you do you think you would travel in 30 paces? The answer is, to the moon. In fact, to be precise, the 29th pace would take you to the moon; the 30th pace would bring you all the way back.
That example illustrates not just the power of exponential increase, but also the fact it is deceptive and back-loaded. Here is another illustration of that. Imagine that you are in a football stadium which has been sealed to make it waterproof. The referee places a single drop of water in the middle of the pitch. One minute later she places two drops there. Another minute later, four drops, and so on. How long do you think it would take to fill the stadium with water?
The answer is 49 minutes. But what is really surprising - and disturbing - is that after 45 minutes, the stadium is just 7% full. The people in the back seats are looking down and pointing out to each other that something significant is happening. Four minutes later they have all drowned.”
Where is the average construction company sitting in that football stadium? The fact that exponential growth is “back-loaded” also explains what is known as “Amara's Law” (after scientist Roy Amara) which observes that we have a tendency to over-estimate the effect of a technology change in the short run and underestimate its effect in the longer term.
In May this year, the Financial Times held its first ever conference on the “Future of Construction”. Charles Russell Speechlys were pleased to be involved as the FT’s Legal Partner. The conference brought together key stakeholders from across the UK, Europe and the USA to explore the future of the construction industry, and in particular how disruptive innovation and collaboration might improve the relatively low levels of efficiency and productivity growth found in the construction sector when compared to other business sectors over the last 20 years – roughly the period since Latham.
McKinsey&Company were the FT’s Knowledge Partner. They presented the findings of their Feb 2017 report entitled “Reinventing Construction: A Route to Higher Productivity” which found that:
- Construction-related spending accounts for 13% of the world’s GDP, employing 7% of the world’s working population.
- The construction sector’s annual labour-productivity has only increased by 1% over the past 20 years, contrasting with 2.8% such growth in the world economy and 3.6% in manufacturing. If construction labour productivity were to catch up with the progress made by other sectors over the last 20 years (and McKinsey&Company believe that it can), this would add USD $1.6trillion/year to the global value of the sector – a figure equivalent to the GDP of Canada, meeting half of global infrastructure needs, or increasing global GDP by 2% a year.
McKinsey considered that sector productivity gains of 50% - 60% could be achieved by focusing on the following seven areas:
- Reshaping regulation
- Rewiring contracts
- Rethinking design
- Improving procurement and supply chain
- Improving onsite execution
- Infusing the industry with technology and innovation
- Reskilling works.
They also considered that for some parts of the construction sector, productivity gains of 5x – 10x current levels could be achieved by moving to manufacturing style production systems.
Attendees heard how developments such as BIM, additive manufacturing (3D printing), robotics, AI, smart materials, off-site manufacturing and augmented reality all have the potential to increase productivity and profitability in the industry. However, they key challenge is not the availability of new and exciting technologies, so much as the ability of the industry to deliver process, structural and organisational change that allows such gains to be realised.
From a legal perspective, it was interesting to note that construction contracts were repeatedly cited at the summit as a potential barrier to innovation. In his key note speech, Jérôme Stubler (Chairman of VINCI Construction) referred to a lack of trust leading to complicated contractual relationships. Contracts should incentivise innovative design and construction rather than prioritising risk transfer to the contractor. Live polling during the summit revealed that 24% of attendees thought “rewiring” contractual relationships would have the greatest impact on closing the productivity gap.
Are construction contracts inhibiting innovation?
This provocative question was posed to the ‘futurecast’ panel on which one of the writers (David Savage) was a member. This is a classic “chicken and egg” question, and perhaps the better question might be “why is the industry not adopting at scale forms of contract that already exist that structure risks differently and better align interests than the traditional bi-lateral main contracting approach?”
Although it is somewhat trite to observe, construction lawyers act on their client’s instructions, and if their clients were asking them to draft and negotiate alliancing agreements that is what they would be doing.
There are of course a number of existing standard form construction contracts which are specifically intended to facilitate innovation and collaboration. For example:
- NEC 4 suite of contracts generally as recently published, and the new NEC4 Alliancing Contract in particular (which has been published in consultation form only so far)
- JCT Constructing Excellence Contract 2016
- ACA PPC 2000 (amended 2013)
- CIOB Complex Construction Contract 2013.
- These contracts typically seek to foster innovation and collaboration by, for example: early contractor involvement
- encouraging value engineering
- early engagement around, and resolution of, “claims”
- integrating project teams on a multi-lateral contracting basis, rather than bilateral (PPC 2000 and the new NEC4 Alliancing contract in particular).
''Contracts should incentivise innovative design and construction rather than prioritising risk transfer to the contractor.''
However, it is certainly true that more traditional forms of contract continue to dominate in the private sector.
One recurrent challenge is reconciling collaboration with a genuine client need for cost and time certainty. If the developer or its funder has limited contingency in its budget, then it may have very little capacity to share cost risk with the contractor. In our experience, this is the primary reason why clients will often seek to amend design and build contracts in order to create a single point of contractual responsibility and seek to “guarantee” outturn price as much as possible. At the international level, and in the infrastructure sector, one sees this in the growth of robust EPC forms (such as FIDIC Silver book) and the limited take up of target cost pricing options in both the NEC suite and around the IChemE suite of contracts (where such pricing options have always been available to users of those forms). Inevitably this will inhibit innovation, but is understandable from a client’s commercial point of view.
Some clients will only build periodically or perhaps only once in a generation, and may therefore have little appetite for innovation unless the industry can present a compelling case for improved outcomes. Contractors are incentivised by lump sum contracts to innovate for their own benefit, in order to maximise profit, but there is no – or too limited – incentive to collaborate or innovate for the true benefit of the client, let along the long term occupier, facilities manager, or future owner of the built asset.
Nevertheless, and at the same time, it does appear that an increasing number of clients are beginning to favour a more collaborative approach to contracting. The 2015 NBS National Construction Contracts and Law Survey found that 44% of client respondents did employ collaborative techniques on some projects worked on in the last year, although only 28% were collaborating on all projects.
It was notable that collaboration was found to be much more likely on high value projects, and the most common form of collaboration was the relatively limited step of providing for an ethos of “mutual trust and cooperation” in the contract. It is questionable whether this is sufficient to facilitate a genuine change in behaviour. Formal partnering or alliancing contractual models were much less popular.
The adversarial nature of typical construction contractual relationships is further aggravated by the complexity and fragmentation of the industry. As has been commented, UK construction has circa two million workers, engaged by 200,00 employers. Different parties (with different shareholders and insurers) will inevitably seek to protect their own positions, as contractors seek to pass risk on via subcontract terms. McKinsey&Company specifically noted how fragmented specialised trades in construction dragged down the productivity of the sector as a whole: whilst responsible for 52% of construction value added, they performed at 79% of the baseline productivity measure for the sector generally (building performed at 104%, civils at 119%, and industrial at 124%).
As noted during the FT summit, clients need to be persuaded of the benefits of new technologies and to become comfortable with any associated risks. The industry needs to be able to validate innovation and demonstrate the business case for its adoption.
Consequently technology also has an important role to play in performance assessment and data collection.
The role of the public sector as the major client of the sector should not be overlooked in this debate. The Government’s 2011 Construction Strategy recognised that the UK does not get full value from public sector construction. The Government has sought to use its scale in the procurement of construction to lead the process of change by a series of measures including:
- providing visibility of the forward pipeline to enable the industry to invest in skills, products and services
- obtaining benchmark data to target and achieve cost reduction
- requiring fully collaborative 3D BIM (with all project and asset information, documentation and data being electronic) as a minimum by 2016
- requiring good practice in dealings between Government and its directly contracted suppliers to be cascaded down through the supply chain.
In 1994 the Latham report identified a lack of collaborative behaviour in construction as one of the main obstacles to meeting client expectations. Nearly 25 years later, many of the same fundamental problems remain and risk impeding the construction industry from maximising the potential of digital disruption, AI and other new technologies to increase productivity.
Nevertheless, we are optimistic about the opportunities digital change will help bring to the construction process and thus the sector. Advocating for new forms of contract and procurement strategies needs to be part of the leadership response in our sector to enable that change. New forms are already available to facilitate collaboration and innovation – witness the inclusion of an interesting new alliancing form of contract within the new NEC4 suite of contract published in June 2017.
As more data becomes available to validate the benefits, the business case for delivering projects differently – enabled in part by exciting new technologies deployed into all aspects of design and construction activity - should become compelling. If that happens, then more collaborative and alliancing based models of construction contract should start to gain market share.