Out-Law Analysis | 16 Feb 2022 | 3:15 pm | 4 min. read
Built asset owners and construction companies must completely rework how construction procurement functions if they are to enjoy the productivity, efficiency, reliability and decarbonisation benefits of industrialised construction processes.
If they can learn lessons from aerospace and vehicle manufacturing and replace the top-down risk allocation of traditional construction contracts with an inter-dependent web of balanced responsibilities then owners and contractors will benefit from the coming wave of profound change.
But if they can’t make those changes quickly enough then they risk being overtaken by new entrants to infrastructure construction such as large technology companies which have the capital, technical expertise and logistics capability to implement industrialised construction at speed.
Industrialised construction is the use of data, digital technology and centralised manufacture to increase the productivity, profitability and reliability of the construction process.
It means that components or entire elements of a construction project are made off site, and that the asset is constructed, monitored and managed through sensors and embedded technologies and digital ‘twins’ of the asset.
The reality is that manufacturers of equipment or components have a very different approach to risk, liability and procurement to traditional construction contractors. Industrialised construction simply cannot become a reality until procurement processes recognise that.
Traditionally the owner of the project simply passes responsibility and risk to a main contractor, who passes that risk to sub-contractors, who often themselves pass liability further down the supply chain.
As we have explored elsewhere, industrialised construction depends on a much more inter-dependent web of responsibilities, liabilities and functions.
This begins with the procurement of the project and the creation of the contracts and frameworks that define the work and how it will be done. Without fundamental reform here, the project’s ability to benefit from modern approaches will be fatally hampered.
Manufacturers of components simply will not accept the kind of liability that contractors traditionally have. While second tier subcontractors might accept onerous risk allocation, the manufacturer of, for example, a pre-made panel with plumbing and electrics already installed simply will not. If there are defects they will replace a panel that is returned to them, but they will not sign a contract that makes them responsible for site delays, re-construction of the asset or other knock-on effects of a component failure.
A procurement framework has to find a new place for these liabilities, and much of it will travel back upwards to the asset owner. That owner must find ways to be collaborative and share responsibility, liability and resulting profits. And companies must find ways to work together throughout the project and from one project to another.
This is a wholesale change of mindset, but it is possible. Think of an enormous plane like Airbus’s A380 – it is bigger and certainly more complex than many buildings. The manufacturer brings together an enormous list of manufactured components that are made to its exacting specifications but are not customised for each individual plane. It gets the benefit of reliability, consistency and low cost because of efficient manufacturing. But it doesn’t get to dictate the exact nature of each component and must treat suppliers well enough that they will continue to supply components for the next plane, and the next, and the next.
These ongoing relationships are a vital part of industrialised construction. Rather than create a new team for every project owners need to create relationships that will last for years and many projects. Only by doing this can they move away from the bespoke model where every project is begun from scratch and towards the benefits of repeated processes and reliable results that industrialised construction promises.
This will in itself change the shape of the industry. All participants will have to invest: in talent, in training, in facilities and in new processes. For this they will need capital, and that need for capital may result in consolidation.
Some companies will become in effect product companies rather than services companies. The rewards are there – product manufacturers tend to have higher profit margins than construction services companies. But it will take investment and flexibility for companies to change tack so radically.
This need for investment also opens the door to unexpected competitors. What industrialised construction requires is access to capital; an understanding of technology; a digital-first workforce; a knowledge of manufacturing, and experience in logistics. Some of the world’s biggest technology companies meet this description and asset owners and contractors must be alive to the fact that the opportunity will not wait forever and unless action is swift they may miss it.
It is asset owners who must take the first steps. They must completely reconfigure how they go about procuring goods and services. They should consult with each other through industry bodies to come up with new standards and processes, and ensure best practice is shared.
More time needs to be spent on projects at the outset – they can’t be adapted and tweaked as they go in an industrialised construction model. All the major decisions must be made up front, adding time and cost at the start of the project. But this saves time and cost later.
Owners are still likely to have a single contract with one main supplier, but they will have to support that supplier with sub-contract relationships and design the main contract to enable that wider web of risk and benefit sharing.
Contractors will welcome the wider distribution of risk but must invest in skills and talent to ensure they can manage a much more complex procurement set up.
And even manufacturers have a part to play in understanding that selling to construction companies is not the same as selling to car or plane manufacturers. There is a major new market opening up to them, but they must be ready to compromise to make it a reality.