Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. Does the industry itself want any changes?
  (Sir Richard Mottram) I think the answer to that is that the industry itself comprises companies and firms of a very different kind, as we all know. In dealing with big companies in our public lives, so to speak, and dealing with smaller companies in our private lives they are very variable in the quality of the output and their interest in improving. What we are trying to do is work with the people who are interested in improving, capture their enthusiasm and then help spread that practice around the industry. They should be interested in picking all this up because, as we were trying to discuss before, it is in their business interest. These are things which should improve the lot—the shareholder, the manager and the worker in the industry.

  41. Has the public sector been a very attractive and lucrative source of income to the building industry over many, many years?
  (Sir Richard Mottram) I do not think so, because profitability in industry is quite poor.

  42. They won contracts, as I see in the report, not on best value but on the lowest tender, which they have always been able to come back and say, "We cannot really manage on that, we need a little bit more, a little bit more and a little bit more. I fought for years to try and not give it to the lowest tender, but to try and give it to the one that would do the best job. I think the Audit Commission used to have strict rules about that. It seems to me, you are coming down to the way many of us were thinking 10, 15, 20 years ago.
  (Sir Richard Mottram) This report absolutely meets your first requirement, the lowest tender in terms of the immediate project is the worst possible way of doing this.

  43. They have had a very lucrative source of income. Dare I say it, I suspect many contracts were won because of cartels anyway—you will not comment on that, I am sure—we always suspected that that happened. There was a system in the building industry which passed around the contracts over the years to ensure that they got the best deals. Why should they want to change now?
  (Sir Richard Mottram) If you are talking about the level of the big firms, we have not dealt or delivered a particularly successful industry. It has delivered an industry which is struggling to compete in international terms, in not all of it do we have world class firms. It has delivered an industry which struggles to make lots of profit. I quite agree with your fundamental point. I have appeared before this Committee before talking about Ministry of Defence projects in which, quite clearly, we have entered into contracts where the contractor—I have to be careful how I put this—intended to get back what they lost in the process of contracting through the claims process. We have tried in that department, I tried, with the help of others, to get us out of that system. That was a long process. You can see in this report, I think, significant progress in that department in relation to what it is trying to do—I am not claiming any credit for because it all happened after I left.

  44. I am sure it was the seeds you sowed. Is it not a bit perverse, in the report it says that the department will save something like £600 million in construction costs if delivery is improved. Who would then not get that £600 million? Who would be the losers of that £600 million?
  (Sir Richard Mottram) Are you referring to the Ministry of Defence?

  45. I am talking about this report. The department will save £600 million. Who will not get that £600 million? Look at the industry itself.
  (Sir Richard Mottram) If we took as an example one of the cases which is in here, which is about two Ministry of Defence training establishments, I think, which have been procured on the revised way in which the Ministry of Defence now procures the construction of these establishments, they regard the result as being they have paid less and their contractors have earned more. The truth is that everybody won. You might say, how can that be? There is a very simple reason why it could be like that. The answer could be that the labour force has been used more productively. The planning system that was used ensured that you produce a building which was fit for purpose and the whole life costs were lower, so the ministry gained. Partnering allowed you to incentivise both sides and share the benefits. You can conceive of circumstances where both sides win as long as you frame the process so that is the result. It is obviously not simple but we can talk about how do you it. These can be win, win.

  46. I am very cynical. I cannot see.
  (Sir Richard Mottram) If you look at the Ministry of Defence, they have more projects than they can afford to do which have a positive cost—benefit ratio. This report is not saying, and the whole process that Peter Gershon is applying with the Treasury—if departments improve their performance in relation to construction from the broadest sense and are saving money, as long as they have high priority projects they can spend it on that—they do not surrender it to the Treasury, the people are incentivised to go down that route.
  (Mr Gershon) The report makes it clear in the Defence Estates the number that we are talking about is a reduction, both on the cost of construction and running costs, not just a reduction on the construction costs.
  (Sir Richard Mottram) Both sides can win.

  47. Reading the report I notice that the Construction Industry Board was set up in 1995, that represents all sides of the industry. It reviewed its role in June 2000, frankly it does not seem to have done anything for five years if you read the report. Why not? Now it intends to achieve its objective six years later. What has it been doing for six years?
  (Sir Richard Mottram) If one thinks about what has happened in those six years, out of the Latham Report, which was produced in 1994, there was a recognition that the industry had to improve its performance and needed more effectively to work together. I think you will find that the Construction Industry Board has been beavering away at achieving that agenda. It is now actively involved in achieving the agenda from the Egan Report. You can say, "Why do you keep on having to have these reports?" I will answer, "Because this is an industry that actually needs a lot of help to modernise itself".

  48. It does not want to change.
  (Sir Richard Mottram) I think bits of it want to change.
  (Mr Gershon) Both Latham and Egan made it very clear that if change was going to come it has to be client-led, customer-led, it will not be led by the supply side.
  (Sir Richard Mottram) Which is, in a way, your point.

  49. Yes, I think so, yes.
  (Sir Richard Mottram) Why change it unless somebody makes you.

  50. If any industry wants to improve they invest in research and development, the construction industry has not, has it? If you look at page nine of the report it tells us that industry turned over in the year 1999-2000 something like £65 billion, yet their investment was £147 million in research and development. I worked that out, they added 0.3 per cent—
  (Mr Gershon) Can I point out, not that long ago I joined from the private sector, if you are making less than one per cent profit it is very difficult to find more money for research and development. Unless the industry makes more profit it will not have headroom to invest in research and development and the training of people.[2]

  51. You are saying that the industry is making less than one per cent profit.
  (Sir Richard Mottram) It is making a return of about 5 per cent.

  52. I find that hard to believe. The construction industry is making less than one per cent profit.


  53. What are we talking about here?
  (Mr Gershon) Margin.

  Chairman: Is that an average? The best players make a lot more than that.

Mr Steinberg

  54. I cannot think of Mr Laing or Mr Wimpey or Mr Barrett earning one per cent.
  (Mr Gershon) The best players do not. The other way of looking at it is, look how poorly rated this industry is in the stock market compared to some other sectors?

  55. I would not know anything about the stock market. I have a few shares in the Halifax that I look at each day. It says in the report that Japan itself invests in research and development, something like one per cent of their turnover.
  (Sir Richard Mottram) Yes, they do.

  56. It seems to me there is not much commitment by the industry itself to improve, all of way through the report. I have this feeling that government and your department have been trying do something for years and years and years, and it is the industry itself which does not want to improve.
  (Sir Richard Mottram) At the risk of repeating myself, I would say that it is the following things. In relation to the research and development there is issue over profitability, which we have touched on. There are issues over whether we are capturing all of the research and development that is done. Some of the research and development is innovation in the way in which individual buildings are built. I am not making a big point about that. The industry itself consists of many, many small firms, who are not naturally into this, as well as some bigger firms, as you say, obviously. I do not think it is the case that we are trying to impose all of these various changes on a completely unwilling industry. What we are trying to do is work with those who are absolutely committed to these changes. These are not government-led processes. My department sponsors a lot of this work and we depend on the industry and members of the industry giving their time to make a success of it. We are not imposing it on the unwilling.

  57. One area that always disturbed me when I was a member of local government is the frustration, how long it takes for a project, once it has been agreed in principle, to actually coming into fruition. There always seems to be a huge gap between when a decision is made to when digging the first sod, if you like. I was just talking to a colleague of mine about the Gateshead Music Centre. It was agreed over two years ago. Nothing has been done. No decision has been made, and the cost has gone up by £7 million. I was also very surprised to see that often when a decision is taken to build something that they have not even got planning permission, they do not even have a site, they have not done the design. Unless I misread the report. That seems a crazy way to look at projects. Is that the way it has gone on for years?
  (Sir Richard Mottram) I think it would be quite unusual for people to be in a position where they would spend a lot of money where they did not know where they might put the building. In order to have planning permission you have to have a concept of what you want to plan.

  58. Unless I read the report wrong.
  (Sir Richard Mottram) That is clearly what it says.

  59. It seems to me a very cumbersome way to do business. If that is the way that construction industry works in partnership, with both local government and central government, no wonder it is in such a state?
  (Sir Richard Mottram) I agree. One of the areas that we are looking at in my department is how long it takes to construct a road—this is not a prelude to building up to roads—how long it takes to construct a road from the point at which you take the decision to do it, you know what the site is, and so on and so forth, these are very elongated processes. Those are examples of a failure to apply a proper procurement process, it is all very sequential. There is scope, actually, for accelerating those sorts of things by the application of some of the best practice in this report. I agree with you, that much construction, including the public sector, takes far too long. If people applied these techniques, including investing more effort in the beginning and thinking about what they are doing, sequencing it properly, the end product would be produced as a better quality and it would be produced more quickly.

2   Note: See evidence, Appendix 3, page 19 (PAC 2000-01/166). Back

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