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Review of Scottish public sector procurement in construction

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10. What the industry needs to do

10.1 Overview

10.1.1 Throughout this report, we have signalled that we believe there are a number of areas where changes to the public sector's approach to procurement is only one element of what is needed to make a positive change.

10.1.2 We believe that some of the problems and issues which have been raised with us as we have spoken to stakeholders are, at least in part, of the industry's own making. Late payment down the supply chain, retentions abuse and suicide bidding are not problems which the public sector alone can resolve: industry must play a leading role.

10.1.3 The problem, however, is that the construction industry in Scotland is a vastly fragmented and complex landscape, which mirrors in many ways the myriad of different entities and professions which make it up.

10.1.4 And there are a great number of construction companies. Two-thirds of those employed in construction in Scotland work for small firms which employ fewer than 50 people, some 12 per cent work for medium-sized firms employing between 50-249 people, and 22 per cent for companies which have grown beyond the SME bracket[64].

10.1.5 We have deliberately resisted being prescriptive in our recommendations in this chapter - choosing instead to highlight a number of challenges which we believe the industry must address. We have heard time and again that if industry is to change, it must be industry which owns and drives those changes.

10.1.6 Well, let this be the impetus. We have set out here a series of challenges to the industry - it is for the industry to step up, to organise itself, and to address these challenges.

10.2 A cohesive voice

10.2.1 There are a great many separate bodies representing trade and professional groupings within the construction industry. These each have their own role and their own interests. We do not seek to downplay or undermine these bodies.

10.2.2 However, there is a clear need for these bodies to come together to agree a common agenda, such as the one we have suggested here. This is a long‑recognised problem, most recently in Construction Scotland's Industry Strategy:

"Representation of the industry is extremely fragmented. Over 100 separate membership organisations are involved in engagement with government, each representing specific parts of the industry. None of these bodies currently represent the industry as a whole. This fragmentation puts the construction industry at an immediate disadvantage as it competes with other sectors to get its key messages heard, recognised and acted upon by government".[65]

10.2.3 Accordingly, the first step will be to seek agreement on how the industry can best co-ordinate its efforts. We believe that the newly formed Industry Leadership Group, under the auspices of Construction Scotland may facilitate this. For it to do so effectively, however, its membership may need amended to ensure sufficient buy-in from across the industry.

10.2.4 We urge industry to commit earnestly to support this Industry Leadership Group - it is already up and running, has the backing of Scottish Enterprise, and if it can be made to work, is potentially a very powerful voice for industry, as well as driving force within it.

10.2.5 Recommendation:

The Chief Construction Adviser should hold talks with the Industry Leadership Group and with other trade and professional bodies and representative institutions to agree on how the industry should co‑ordinate its efforts.

10.3 Treating each other fairly

10.3.1 We have made suggestions in section 6.8 as to some of the steps which the public sector can take to improve payment down the supply chain.

10.3.2 But this, like so many other issues, is one which is primarily of industry's own making. The contractual and working relationships between two private firms may well be influenced by the relationship with the client, but ultimately are a reflection of the way in which those two firms choose to treat each other.

10.3.3 We both have experience of a number of different industries - some of which see no shortage of machismo. Never, however, have we come across an industry which is as confrontational as the construction industry, or indeed, one in which there appears to be so little professional respect between firms.

10.3.4 We understand that these are tough times, and, as we recognise in section 6.8, everyone is under a great deal of pressure. But some of the behaviours which occur in the construction industry - especially as they relate to payment (both payment terms and valuation) and retention abuse - are particularly corrosive.

10.3.5 We are not naïve enough to believe that things can change overnight. But neither do we see any reasonable justification for firms not replicating the fair treatment which they rightfully demand from their public sector clients in their dealings with other firms.

10.3.6 Recommendations:

The Fair Payment Charter should be promoted more widely as the norm within the construction industry. The industry should consider how it can collectively make late payment of suppliers an unacceptable practice.

When the public sector adopts good practice - such as might relate, for example, to the appropriate use of retentions, requirements for insurance or the use without alteration of appropriate standard forms of contract - industry should replicate this throughout the supply chain.

10.3.7 Another issue of fairness, which has been much in the news recently, is that of blacklisting of construction workers. Earlier this year, the Minister for Transport and Veterans told the Scottish Parliament that:

"The Scottish Government is totally opposed to blacklisting or the compiling of a blacklist. We expect companies that are awarded public contracts maintain high standards of business and professional conduct"[66].

10.3.8 We concur with this statement - there is no place for blacklisting in the construction industry, and we understand that the proposals contained in the Procurement Reform Bill will provide powers to tackle companies which do not comply with their legal obligations, including on blacklisting and employment law.

10.4 Bidding sustainably

10.4.1 Abnormally low tenders - or 'suicide bids' - can be a big problem for everyone. Firms submitting such tenders risk their financial health, maybe even their survival, and clients risk being faced with either a contractor which submits a multitude of claims to try to recoup funds, or a contractor which is unable to complete the work - or both.

10.4.2 And yet, as we discussed in chapter 7, this issue is notoriously difficult for public sector clients to deal with.

10.4.3 We accept that there are any number of reasons why a firm might take a commercial decision to submit a lower than usual tender for a given piece of work - it may have a short gap in its order book that it would rather fill with something, than have its workforce sit idle, for example; or it might be trying to break into a particular sector and recognise that without a strong history it has to compete harder on price. Ultimately, so long as such bidders are acting within the law, and can actually deliver those contracts at the agreed price, then that is their decision.

10.4.4 What we are keen to see brought to an end, however, are bids which are deliberately set at an uneconomic level to win the work on the basis that the difference will be achieved by negotiation on specification and quality, or through claims.

10.4.5 This will require some innovative thinking - you do not need to stray too far into this territory to run up against anti-cartel legislation. But industry must be involved in the solution to secure the necessary buy-in.

10.4.6 There may also be some relatively simple measures which can be taken, such as rolling out schemes like the Royal Incorporation of Architects in Scotland's "Bid / Don't Bid" assessments. These encourage firms to take a more pragmatic approach to deciding which contracts to tender for. By tendering for fewer contracts, firms waste less money tendering for work they are unlikely to win, and are able to invest more into the tenders they do submit.

10.4.7 Recommendation:

The industry should consider what is prompting 'suicide bids', and how to arrest them, so that both the customer and the contractor get a fair deal.

10.5 Industry helping industry

10.5.1 The private sector is self-evidently competitive. Nonetheless, there are clearly some areas in which a cross-industry approach can be mutually beneficial - such as in the development of apprenticeship schemes, or a standardised approach to new technologies.

10.5.2 Recommendations:

Industry should use existing sources of guidance and work with the public sector to develop best practice models for the delivery of community benefits, and a shared apprenticeship model.

The industry needs to be ready to embrace modern methods of construction, and new and emerging technologies such as Building Information Modelling.

The industry should consider what industry-led training programmes currently exist for those bidding for public sector work, and whether there is scope for these to be co‑ordinated and developed further.