Governments must wake up to the forces redefining global construction

Following is a transcript Western Sydney University Adjunct Professor David Chandler presented to the Australia-China Council on 17 April regarding what is needed to develop competitive advantages in the design and construction marketplace.

When you live in a glass house you should not throw stones.

Today’s global construction industry is transforming at very fast rate. This is driven by the forces of digitisation, industrialisation, globalisation and sustainability. Overlaid on these forces are demands for higher levels of resilience and compliance. Some jurisdictions get this better than others. Never the less, the responses are variable. The recent politicisation of non-compliant construction cladding materials in Australia is a good example.

My view on this is that construction undertaken in any jurisdiction that contravenes that jurisdiction’s laws or the requirements of the contracts under which it is performed should be the key consideration. We should be regulating and administering contracts better.

Australia’s recent Senate inquiry into the use of non-conforming building products has essentially ended in an exercise where the senators blamed the states of Australia for not administering existing codes and laws adequately, and in response the states countered by declaring the problems were a border control issue that should be addressed by the Commonwealth.

Unfortunately, the various levels of industry governance have yet to come to terms with the forces redefining the global construction industry and how they will manage within that context.

I contend that this “is not a time to be throwing stones”. It is a time to consider what will be different and what does this mean?

I will attempt to unpack a few of the big issues I believe are relevant to the Australia-China Council and in particular some thoughts about what’s needed to develop competitive advantages in the design and construction market place. I will adopt three themes to assist the conversation about what will be different and what does this mean? They are:

• The need to understand the shifting nature of the construction industry’s traditional hierarchies and silos, and what this means for design and construct
• The changing roles of the players in construction marketplace, and what this means for the way the future built-world will be made

The importance of joining up all of construction’s inputs to deliver more assured, resilient and smart buildings

Take note, the modern construction future will be so different to the traditional construction industry’s past, that within 10-years what we all thought was normal for over 100 years will seem unimaginable.

Often the construction industry’s woes are easily described, but any meaningful response seems to depend on expectations of unrealistic action by others first. We have to move past this lame excuse. Irrespective of those actions, Australia and China’s construction futures are closely linked. They are also with all who make up the new global construction eco-system as it transforms into “its future-self”.

Understanding the shifting nature of the construction industry’s traditional hierarchies

Developed construction economies have used architecture, engineering and construction (AEC) as a descriptor in the past. In the future I believe a modern descriptor will be computing, engineering and construction (CEC). The industry these days is technology driven. One only has to look at the massive investments being made in new construction technologies and enterprises. I follow the BuiltWorlds organisation to provide a window on the pace of global investment activity that now sees CEC as an attractive sunrise industry,displacing its AEC past. In a modern construction future, buildings will be smarter, the processes of making buildings will get smarter and they will need smart enterprises to make them. None of these transformations will respect traditional hierarchies.

The recent studies by a young PHD candidate Jianing Lou from China’s South East University provide a considered discussion on the changing role of architects in this conversation. Jianing has concluded:

“Modern construction will define the industrial transformation of construction. It will require new disciplines. The industrialisation of construction does not herald the end of bespoke design, as components will be able to be assembled into endless built forms. How these are organised will require new logic and rules that the most sought after designers will need to adopt.

“Traditionally, architects used to be recognised as the first specifiers in the whole construction supply chain. Other specifiers acted as ‘service departments’ for architects. The relationships can be simply summarised as: the architects were responsible to their clients for drawings; the builders were responsible for realising them; while various engineers were responsible for equipping necessary components to finalise the buildings.”

Dean Strombom’s The Commercial Real Estate Revolution describes how today’s construction firms are grappling with decreasing profit margins and looking at expanding their services to provide greater value to clients and achieve greater control over their fate.

To achieve this, he points to “construction firms adding architects, architects expanding into construction services, brokers adding project and facility management services, and still others creating one-stop-shop capabilities”.

Strombom concludes with the view that “when the lines blur like this, it is a sure sign of more fundamental shifts taking place”.

I think that these indicators point to a profound impact on design and construct as we know it today. I believe that this view is increasingly shared across the construction world.

The changing roles of the players in construction market place

Of concern to me – and I am sure many of you share this – is observing the industry’s vendors of its pieces and parts getting excited about one element of making a building without having much idea of what problem they are solving, and how their input will be measurably better. Better, beyond self-acclaimed belief. Better, credibly evidence-based.

Few understand how the end customer will benefit from their piece or part. Some have a misguided belief that the end customer is the next business up their supply chain ladder. Few have stopped to analyse who will be left in the traditional supply chain in just 5-7 years and what impact that will have on them. Imagine spending the next 5-7 years climbing up the wrong ladder. More concerning are attitudes that it is okay to push solutions deploying new technologies, materials or assembly methods, and if these do not work out the industry’s customers just become the guinea-pigsin the laboratory of transformation.

The Centre for Smart Modern Construction – c4SMC– at Western Sydney University is undertaking new modern construction focused research. Industry investors have prioritised four new knowledge areas they want explored over the next 3-5 years. They want evidence-based insights into:

• Practical digital applications that make doing global construction business smarter
• Establishing new globally applicable methods to measure construction effectiveness
• Understanding the new construction enterprise typologies that CEC will spawn

Providing insights into correlations that smart projects and smart enterprises share

Industry understands that new construction program content must be research-based.

This research must focus on real data showing the experiences of enterprises and project performances. This research should unpack how these enterprises have defined their enterprise value propositions, how they researched their markets and how they have executed their businesses and projects. Real evidence.

This is the important knowledge that future construction leaders must be armed with early in their careers. It is important that they do not get sucked into the traditional construction vortex and risk having the first 10 years of their careers wasted. They must be challenged to think about joining up the whole of the construction value chain to deliver tomorrow’s customers a level of assurance, like the customer experience in other modern industries.

The future for smart modern constructors is bright. But the future built-world will be made very differently to the way it has in traditional construction’s past.

The importance of joining up all of construction’s inputs

Perhaps the most vexing challenge for construction’s future is built-world compliance and resilience. Construction assurance is looming as the sleeping industry game-changer. And just like we have observed in very fast new products coming onto the market in other industries, such as Uber and Airbnb, the same will happen in the construction assurance space. Except that in this instance the change will be driven by the insurance and finance sectors who have the most at stake in insuring and securitising tomorrow’s buildings. While there is the same underlying consumer dissatisfaction with the construction experience as in other industries, the biggest risk driver here is with the money end of town.

The UK’s off-site construction manufacturing (OSCM) industry was the first to run into these headwinds. Simply, the financial markets were unprepared to increase the level of OSCM progress payments as more construction moved off-site and increasingly off-shore. And, at about that time, the global construction industry witnessed a massive exposure to building failures. Some of these failures were related to the resilience of the new materials and methods that were used in their making, but the elephant in the room was climate change. Buildings that were poorly made and often non-compliant with local regulations or the contracts under which they were performed were failing earlier and more catastrophically.

The consequential cost of these failures soared to new levels where even the insurers with the deepest pockets said “enough”. When industry cash flows are threatened it gets creative.

In the UK, Buildoffsite is the organisation representing the OSCM sector. What unfolded is the beginning of the game-changing construction assurance movement. Lloyds saw no value in underwriting the pieces and parts without these being part of an overall whole of building risk-wrap. Why would an insurer with deep pockets like Lloyds expose themselves to the inherent risk of those pieces and parts not joining-up, not performing as contracted or becoming part of a non-compliant or failed system? We can see today the wisdom of that position, as respondents to the recent building cladding failures play out in the courts.

The result has been a Lloyds underwritten product called the Build Off-site Payments Assurance System – BOPAS. BOPAS is a complete risk-wrap for buildings. The assurance can be for 60 years and includes the design, the assembly and all of the OSCM inputs. Lloyds risk rates the whole of a project’s supply chain and prices the premiums on a project basis. BOPAS is now becoming a preferred condition of the UK’s housing mortgage market for all new builds. The impact of BOPAS grows as companies in the UK and off-shore submit to the assurance process, including China. Premium costing is apportioned to every member of the supply chain on the basis of their assessed performance risk. This is game changing stuff.

Clients and constructors already started on this journey are reporting positive outcomes.

Bill Hughes, head of real assets at Legal and General Investment Management, said: “We consider the offsite and modern methods of construction (MMC) sector to be an important part of the future in terms of addressing the supply shortage issues currently facing the construction industry. Key benefits include being able to deliver consistency in terms of quality and reliability in timing, in a sustainable fashion – features that appeal to long-term institutional property investors.

“The BOPAS scheme will be an integral part of any credible organisation’s offer, when producing any offsite/MMC products. It is key in providing the surety and insurance backed guarantee a long-term property investor requires, when investing in a property that utilises modern technologies and products.”

The UK’s Stewart Milne Group has attested to “BOPAS accreditation having been invaluable, not just in terms of giving comfort to the major mortgage lenders and insurers, but also in providing advice on our systems and processes, enabling us to fine tune our operations, making us more effective and ensuring we stand out in the industry”.

SIG Building Systems reported:“BOPAS took us on a journey that made us analyse the business in a way we had never done before. It presented many questions, some of which we would have not thought to ask, it created the new fundamentals behind our business model, it’s now an integral part of our culture and defines the way we operate day-to-day.”

There are a growing number of testimonies like these. But the biggest impact will occur when insurers and financiers fully realise the potential of individually rated building compliances and prospective resilience. Then they will be able to price insurance premiums and mortgages to reflect the quality (compliance plus resilience and more) on a per asset basis. In effect it will mean every building that will be made or adapted in the future will have its own risk index. Just as the Internet of Things gets serious in the CEC landscape.

Some will attest to existing product certifications that manufacturers offer to support the compliance of their products ex-factory. But this is not about assuring what happens next on the way to complete building assembly and lifecycle. These certifications are simply risk-shifting devices creating a synthetic assurance that their products comply at the gate. Regulators have not much else to cling to in their last century-based governance processes. The industry knows that the regulators are struggling, and the public loses confidence daily. Politicians who are just passers-by in the construction industry continuum simply lunge from one short-term fix to another. Often more regulation to fix failed regulation.

In Australia, our challenge to find a meaningful role in the global construction assurance space is exacerbated by the powers of states, territories and professional bodies who act to preserve the status quo and frustrate any chance of moving out of their glass houses.

The good news is that in the end, money talks. The transformation of the global construction assurance space will be insurer and financier led. No new legislation will be required. This is not to say that a global legal framework will not be desirable to enable some of the new CEC digital technologies to work better, such as those reshaping sectors like food and pharmaceuticals. The risk here is loss of a seat at the leadership and influence table.

There are few legislators who imagine the transformations I have outlined here. But it is likely they will be realities within 5-7 years. The risk is that a plethora of half-baked technologies jump on the band-wagon and claim they are the solution. Most will place the profit-cart ahead of the public-interest-horse. But in the end globally viable solutions that the industry’s clients, insurers and customers can feel confident about will prevail. Imagine how this will impact the nature of construction contracts that still operate as if buildings will always be built as they were, in the twilight of the last century.

The momentum ball for these transformations is gathering speed. The New Zealand government is just mobilising a massive national home building program called Kiwi-Build. It has neither the appetite or the capacity to underwrite the regulatory assurance program that would be necessary to risk-manage industry compliance on this scale. Having had the salutary experience of the Leaky Building Syndrome that has cost tax payers over NZ$13.5 billion (AU$12.6b) there seems to be recognition that the assurance underwrite for a new housing expansion program that draws on a global construction supply chain might best be sourced elsewhere. Just last week PrefabNZ called for the government to consider BOPAS.

For all of you who are looking to develop competitive advantages in the design and construction marketplace it will be impossible to continue for much longer with business as usual. The cost of compliance and transaction duplication across multiple jurisdictions is unsustainable. And for what? The reality is, the trajectory for built-world assurance does not look that flash just now, as compromised construction is excused by falling skill levels and impotent regulators. This story does not have a sad ending. Some are already on the case.

Summary

It is time to consider what will be different and what this means on a much broader scale than discussed in industry conversations that dictate only minor change at the margins. Developing competitive advantages in the design and construction market place will require reimagining construction’s past and mapping a path to a smarter construction future.

And it seems to me that the future of construction is about making new friends. This is not a time to be throwing up pointless domestic barriers that do not go to the root cause of the challenges facing our industry. I think we have a lot to do in Australia to prepare our legal and regulatory framework. First, our regulators need to understand that they must create a future-fit regulatory capability that gives them the credentials to participate in a wider construction ecosystem where the making of the future built-world is a global phenomenon.

Until this has occurred, my firm belief is that “countries who live in a glass house should not throw stones”. My message is that preserving silo-based solutions is no longer sustainable.

Adjunct Professor David Chandler is construction practitioner and industry engagement lead at Western Sydney University’s Centre for Smart Modern Construction.