More Data on Australian Contractors

 Grattan Institute Transport Infrastructure Report

 

 

The Grattan Institute, a Melbourne based think tank for public policy, released an important report into procurement of Australian transport infrastructure projects. Their Megabucks for Megaprojects report has four chapters and makes 12 recommendations. The chapters contain a lot of carefully compiled and useful information, while the recommendations are all worthy and, despite their careful phrasing, make a strong case for greater client involvement in the design, documentation and management of large public sector projects. 

 

Chapter 3 of the report is ‘Competition is fundamental’, addressing the issue of the dominance of tier one contractors. The chapter collects data on projects and contractors that is not readily available, with the sources and methodology detailed in the appendices. Their key point is the increase in size of projects since 2014, as shown in Figure 3.3 below.

For the last few years the quarterly value of work done on these large transport projects has been over $5 billion. In 2020 Australian governments spent a record $120 billion on road and rail transport projects. 

The argument is that it is increasingly difficult for mid-tier contractors to win work on these very large projects, of the 11 projects above $3 billion 8 were ‘contracts involving multiple tier one firms’. These firms are ‘few and well-known’ in Australia and their Figure 3.10 shows how few, and how they consolidated their position through M&A over the last couple of decades. 

The two sources of potential competition for the three tier one contractors are domestic rivals that might scale up sufficiently or new international entrants to the Australian market. In chapter 4 the report argues strongly for breaking up large contracts to allow greater participation from domestic firms, Recommendation 10 is: State governments should develop and use a systematic approach to determining an optimal bundling of work packages for large projects, including when to disaggregate bundles that include both complex and straightforward activities. While not a new idea it is still important because public clients do not generally do this, and often do not have the resources required to manage multiple contracts. 

 

That leaves international entrants, which the report argues have been playing an important role since 2005: ‘International entrants add to local competition, and it’s very helpful to governments if there are a variety of market players willing and able to take on work. In particular, when tier one firms form a joint venture to bid on a large contract, the only source of genuine competition may be from international firms’. Their Figure 3.5 shows the distribution of contracts between new international entrants and firms that were already here in 2006. Of those firms, Bouygues won 4 contracts, Lang O’Rourke and Acciona 5 each. 

There are barriers to entry when bidding for these contracts, on top of the high bid costs. These are the lack of transparency in the weighting given to selection criteria and the emphasis on local experience. The report’s Recommendation 8: In selecting a successful bidder, governments should not weight local experience any more heavily than is justified to provide infrastructure at the lowest long-term cost. Governments should publish weightings of the criteria used to select the winning bid for a contract. The Grattan Institute is strongly opposed to ‘market-led proposals’ from contractors, and strongly in favour of open tendering. The state with the highest transparency rating is NSW, also the state with the most contracts with new international entrants. 

The report collects data on 51 projects over $1 billion in Australia since 2006. Their dataset of transport infrastructure projects includes 177 contracts worth more than $180 billion (in December 2020 dollars). That data makes this an important contribution to the debate about construction industry policy in Australia, to the limited extent that there is such a debate. A couple of decades ago this data would have been published by the Commonwealth, by the Department of Industry or similar organization, and incorporated into the procurement guides being developed by the Australian Procurement and Construction Council and related State agencies. The report concludes “these guidelines leave a great deal of room for subjectivity in the choice of contract type. Although some of the state guidelines and decision-support documents are quite detailed, none go so far as to prescribe a rigorous and systematic methodology for procurement strategy selection.”

 

This raises the awkward question of who the report is addressing. The fundamental problem is the politicization of the project selection process not the cost of delivery, Australian construction is not expensive by international standards. The recommendations address the problem obliquely by highlighting improvements in procedures and processes, all of which have merit, but not considering alternatives such as the role an independent authority could play or national coordination of procurement and other regulatory systems. In this it was something of a missed opportunity

 

 State and Federal budgets have billions in unallocated funds for projects at all levels (community sports grants, local and regional infrastructure) and for major projects the Commonwealth has Snowy Hydro, the NAIF, the Murray-Darling Basin Plan etc etc. These projects, large and small, shovel money out the door with little or no accountability and there is no evidence that politicians are interested in change at this time.  

Two Reports on the Future of Construction

Construction Scenarios: AI and Technological Opportunity

In one of those interesting accidents of timing, reports from the two leading management consultancies on the future of construction were released within days of each other. These are briefly summarised below. Also, some quotes from interviews with people on new technology and their projects, with some comments and observations to close.

From management consultants McKinsey comes the latest in their series of reports on technology and construction, this one titled Artificial Intelligence: Construction Technology’s Next Frontier, the first major publication specifically on the industry-wide implications of AI that I know of. This is one of a series of recent papers on AI, automation and infrastructure.

The World Economic Forum and the Boston Consulting Group released their Shaping the Future of Construction report in 2016, with some interesting examples of frontier firms. They have published a scenario analysis as the second, final step in their Future of Construction project, which has involved people from industry and researchers from a wide range of organizations. The three Future Scenarios they describe make technological context central to the future form of the industry.

As an adjunct to these two reports, the views and comments by the managers in their interviews in Infrastructure Intelligence’s Toward Digital Transformation provide a nice counterpoint to the somewhat stilted language found in management consultese. All three were published simulaneously and contain a lot of boilerplate about change management, agility, recruitment and talent management but, despite the importance of organizational structure and the development of skills if you want to compete for the future, this is not discussed here.

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McKinsey identifies five AI-powered applications, and use cases that have already arrived in other industries, that can be applied to construction. This is a practical approach that seems to target major contractors, and is a different approach to previous reports that could have been primarily intended for public sector clients. McKinsey has been seriously developing their infrastructure practice for some years now, positioning themselves for the global infrastructure boom they forecast over the next few decades. The five industry applications are:

Transportation route optimization algorithms for project planning optimization;

Pharmaceutical outcomes prediction for constructability issues;

Retail supply chain optimization for materials and inventory management;

Robotics for modular or prefabrication construction and 3-D printing;

Healthcare image recognition for risk and safety management.

Each of these has a short discussion with some nice examples of crossover potential. They are all plausible extensions of current technology, and in robotics, 3-D printing and drones leading construction firms are already well advanced. Using AI for optimization is obvious, but it is just as likely construction contractors will be using logistics firms to manage transport and inventory as they are to invest in the hardware and software development needed. The question is whether this makes a convincing case for using AI in construction, or whether these are the pathways into construction for AI, or the only ones.

McKinsey also looks at some machine learning algorithms that are more relevant to contractors, and briefly assesses their potential engineering and construction applications. Despite their extensive reporting on BIM elsewhere there is no discussion of the potential use of AI in design and engineering, or in restructuring processes. They do have a good, generic framework for types of machine learning, and they suggest algorithms will be useful for:

Refining quality control and claims management

Increasing talent retention and development

Boosting project monitoring and risk management

Constant design optimization

And then there’s this:

industry insiders need to look beyond sector borders to understand where incumbents are becoming more vulnerable and to identify white space for growth. Both owners and E&C firms can explore nontraditional partnerships with organizations outside the industry to pool advanced R&D efforts that have multiple applications across industries.

Not coincidentally, McKinsey might be able to arrange introductions and facilitate ‘exploration’ and, like many McKinsey papers, this one reads a bit like a catalogue. However, where the previous reports in this series have emphasised industry problems, using consolidated industry data from their client base, this one is full of solutions. While some of these may be solutions looking for problems there are, nonetheless, many acute observations in this paper on the range of possibilities AI will offer in the near future. They have put out a stream of reports on AI over the last few years.

This is a short paper and light on detail. If McKinsey has a more interesting story to tell on pathways for AI into construction it might look something like the scenarios depicted in the WEF/BCG paper. They use the term Infrastructure and Urban Development Industry (IU) to describe what I call the Built Environment Sector:

The scenarios depict three extreme yet plausible versions of the future. In Building in a virtual world, virtual reality touches all aspects of life, and intelligent systems and robots run the construction industry. In Factories run the world, a corporate-dominated society uses prefabrication and modularization to create cost-efficient structures. In A green reboot, a world addressing scarce natural resources and climate change rebuilds using eco-friendly construction methods and sustainable materials. It is important to keep in mind that the scenarios are not predictions of the future. Rather, they demonstrate a broad spectrum of possible futures. In the real future, the IU industry will most probably include elements of all three.

Each scenario is used to extrapolate implications for the industry, identifying potential winners from technological transformation, and the range of examples and ideas shows the value of such a widespread collaboration between industry, government and academia. The WEF does not say how far into the future they are looking, although it seems a fair bet that it is a lot further than McKinsey.  

Building in a virtual world

Interconnected intelligent systems and robots run IU

Software players will gain power

New businesses will emerge around data and services

Factories run the world

The entire IU value chain adopts prefabrication, lean processes and mass customization

Suppliers benefit the most from the transition

New business opportunities through integrated system offerings and logistics requirements

A green reboot

Innovative technologies, new materials and sensor-based surveillance ensure low environmental impacts

Players with deep knowledge of materials and local brownfield portfolios thrive

New business opportunities around environmental-focused services and material recycling

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What to make of all this? Scenarios can be useful thought experiments, but by their nature are limited because the futures they depict are typically extensions of the present. Tomorrow will be like today, only more so. And saying AI will be important in the near future is not particularly insightful, although for some construction managers may be necessary. Some, however, are already working with digital-twin projects and restructuring around technological opportunity, as the quotes from Infrastructure Intelligence’s Digital Transformation interviews below indicate:

London’s Crossrail and Malaysia’s Mass Rapid Transit Corporation are two examples that show how “visionary transportation owners and supply chains are embracing digital technology”, ”moving beyond 3D modelling and 2D deliverables to enable handover of digital as-built information to operations.” Steve Cockerell – Bentley Systems

“BIM Wednesdays, where each Wednesday we got together in a location or had people Skype call in and view models on smartboards. This meant that when we got to the point of submission we had collectively resolved all the issues”. Mert Yesugey – Mott MacDonald

“Not knowing where to start is something we hear often. Just being so overwhelmed with all the technology that’s available and all the workflow processes. The lessons that we’ve learned are you must start small with tangible pilots and attack one part of the workflow at a time, implement technology, create a feedback loop and be able to measure what’s working and what’s not.” Sasha Reed – Blackbeam

David Waboso of Network Rail on procurement based on whole of asset life and outcome based contracts, focusing on in-service performance and outputs. An example is Resonate’s “Luminate” digital train management system, “a novel form of contracting that needs only a small upfront investment and is based a shared benefits agreement whereby the supplier will be rewarded if the new system delivers performance improvements and a corresponding reduction in delay compensation payments.”

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So where is the industry at in regard to technology take-up, now that there is widespread recognition of the reality of a digital future? Will construction industry development over the next decades absorb the impacts of new technology and be gradual, changing industry practice over time without significantly affecting industry structure or dynamics? Given the entanglement of economic, social, political, and legal factors in the construction technological system this might be the case, however there are good reasons to think this may be wrong. Machine learning, AI, automation and robotics are an interconnected set of technologies that are evolving quickly, enabled by expanding connectivity and the massively scaleable hardware available today.

If we think of the structure of the industry as a pyramid, there is a broad base of tradesmen and small firms at the bottom, followed by a deep layer of medium sized firms, and a small top section with a few large firms. Those large firms and some of their clients are clearly on the technological frontier, and their investment in capability and capacity should deliver significant increases in efficiency and productivity, and probably scale. Some medium-size firms are also making these investments, and also have access to technologies like algorithmic optimisation, platform-based project management, robotic, VR and AR applications and so on. The WEF/BCG Shaping the Future of Construction report, which is now nearly two years old, included many snapshots of what a range of firms at the frontier were doing, and some are in the table below. These sort of examples are missing from McKinsey’s high level analysis, and reflect the diversity of the industry beyond McKinsey’s potential client base.  

Shaping the Future: Technology, materials and tools in 2016

Company	Example
Fluor (US)	has built up an internal team of experts on concrete to advise the client at an early planning stage, to develop a foundation of data based on experience and to create a convincing business case for greater use of innovations (such as 50%-faster-curing concrete) in the market.
BASF and Arup (Europe)	have jointly developed an app for architects, engineers and project owners to calculate the energy savings achievable from the latent-heat storage system Micronal.
Skanska (Swedish)	has developed a new construction concept known as “Flying Factories”, which are temporary factories set up close to construction sites; they apply “lean” manufacturing techniques and employ local semi-skilled labour. The advantages include a reduction in construction time of up to 65%, a halving of labour costs and a 44% improvement in productivity.
Broad Group (China) with ArcelorMittal (India)	is using a system of modular building components that enables very speedy construction: a 57-storey building was built in 19 days by moving 90% of the construction work to the factory.
Komatsu (Japan)	is developing automated bulldozers incorporating various digital systems. Drones, 3D scanners and stereo cameras gather terrain data, which is then transmitted to the bulldozers; these are equipped with intelligent machine-control systems that enable them to carry out their work autonomously and thereby speed up the pre-foundation work on construction sites, while human operators monitor the process. On mining sites, autonomous haul trucks are already in common use.
Win Sun (China)	has been building 10 houses a day by using 3D-printed building components, and has concluded a deal with the Egyptian government for 20,000 single-storey dwellings leveraging this technology.
Skanska	and its partners are pioneering the wireless monitoring of buildings, using sensors to record data (such as temperature and vibration), and wireless equipment to store and transmit this data. Data analytics are applied to determine the implications of any changes in the sensor readings. These smart-equipment technologies have the potential to reduce unexpected failure by 50%, improve building-management productivity by 20-30% thanks to less need for inspections, and improve the building’s energy performance by 10% over its lifetime.
Atkins	has implemented advanced parametric design techniques for detailed design “optioneering” in the water infrastructure industry. That has made it possible to provide 22 design options in one day, a 95% time improvement on traditional design methods for similar results.
Arup	combines various data-collection methods, including mobile surveys, security-camera footage and traffic-flow reports, for improved decision-making in the design of residential projects.
Skanska	is developing a Tag & Tack system, pioneering the use of radio frequency identification (RFID) tags and barcodes on products and components in construction projects for real-time monitoring of delivery, storage and installation, the new system is achieving reductions of up to 10% in construction costs.

Source; WEF

Based on these examples, the level of technology use in construction, compared to advanced manufacturing techniques in 2016, is well behind. Companies in the aerospace or automotive industries have developed their automated factories, integration capabilities and use of new materials like carbon fibre. Adidas makes 300 million shoes a year and in 2017 opened a fully automated factory in Germany. There are many examples. The lag is primarily due to the dynamic of a project-based industry, where it is hard for contractors and consultants to spread costs incurred with innovation across projects. Consequently, the manufacturers and suppliers of building and construction products, machinery and equipment do most of the research and innovation because they, like car companies, can spread the development costs over many clients. The role of contractors is to seek efficiencies in delivery, as the examples show. What these examples also show is that the gap between the industry’s larger, leading edge firms and SMEs is growing, and can be expected to increase because the great majority of smaller firms cannot innovate as fast or as effectively as larger firms.

A period of technology-driven restructuring of the building and construction industry may be about to start, similar to the second half of the 1800s when the new materials of glass, steel and reinforced concrete arrived, which led to new methods of production, organization and management. There are many implications of such a restructuring. Some firms are rethinking their processes in response to developments in AI, robotics and automation as capabilities improve quickly and the range of new products using these technologies expands. Many firms, however, are not. Meanwhile, frontier firms are exploring new tech and pushing the boundaries of what is possible, and are inventing new processes.

Other relevant posts:

Construction’s three pathways to the future here

WEF Shaping the future of construction here

BIM is essential but not transformational here

Technological diffusion takes time here

Disruptive change in construction here

Frontier firms in construction here

UK Launches New Industrial Strategy

Construction gets one of the first Sector Deals

Industry policy has been out of favour for the last couple of decades, especially in countries like the US, UK and Australia. Partly this is ideological, a view that it is about government intervention and picking winners, and partly because some issues traditionally addressed by industry policy (like tariffs and market access) have moved into negotiations around trade policy, at both the global level with the WTO rounds and in the increasing number of bilateral trade agreements. Mainly though it is because few industry policies have really been successful, and many have been expensive failures. Traditionally manufacturing was the focus for industry policy, but these days the approach is more about coordinating a wide range of policy to achieve objectives across the economy and society.

There is also the problem that results take time to happen and thus take longer than the electoral cycle to develop, so there is little benefit to the government of the day even if a policy is working. While it is a fact that governments can have major impacts through regulation, tax, and R&D these policies are spread across departments, and although many inquiries have recommended leveraging purchases of materials, machinery and equipment and buildings and structures to policy outcomes there are significant institutional constraints on government buying power. What history generally does show is that it is hard to get industry strategy right, implementation is difficult and outcomes are uncertain in dynamically evolving economies.

Given this background it was a notable occasion when, on the 27^thof November 2017, The UK Government launched their new Industrial Strategy, “setting out a long-term vision for how Britain can build on its economic strengths, address its productivity performance, embrace technological change and boost the earning power of people across the UK.” In the prolix way of such documents there is much talk of innovation, partnerships between industry and academia, preparing for the future, high tech industry clusters and next generation technologies and so on, all of which are well-known elements of a modern economy. Nonetheless, combining them into an overall policy backed with funding and resources as this strategy has done may become something of a template for twenty-first century industry policy, in the same way Australia has followed the UK with PPPs and City Deals for infrastructure.

The industry strategy includes four Grand Challenges, five productivity foundations, and various sector deals. The Grand Challenges of the future are artificial intelligence (AI) and data, low carbon/clean energy growth, health and ageing, and transport and infrastructure. Productivity depends on people, places, ideas, infrastructure and the business environment. No surprises in those lists, and the paper includes a great deal of conventional thinking and hand waving on those topics. There will be more funding available for technology start-ups through the British Business Bank, which gets a £2.5bn fund from money that would have gone to EU investment programmes, and changes to pension fund rules will allow them to invest in small companies.

A proposed national industrial strategy council will have oversight of implementation of the proposals, and theoretically will hold this and subsequent governments accountable for progress. The strategy includes establishing several new councils and offices and renaming others, like the new UK Research and Innovation body, which brings together all the research councils, and Innovate UK, the operating name of the Technology Strategy Board, a non-departmental public body. This plethora of initiatives means the strategy lacks clarity and a meaningful target, with the potential for much energy and money to be spent on process rather than outcomes.

Construction is one of the four Sector Deals (along with AI, the car industry and life sciences) launched in the strategy, and there is a lot of discussion about housing in the context of affordability and energy efficiency: ‘The government and the construction sector, through the Construction Leadership Council, have agreed a Sector Deal to transform the productivity of the sector benefiting the wider economy. The deal will substantially boost the sector’s productivity, through greater investment in innovation and skills, creating new and well-paid jobs and maximising its export potential. This will also reduce the environmental impact, improve the efficiency and reduce whole life cost of new projects and buildings to help build the houses, schools, hospitals and major transport projects we need.’

The Construction Leadership Council is a heavyweight group of senior industry executives that promotes off-site manufacturing and increased digitisation in construction, and appears to have had significant input into the industry strategy. The key points in their 2013 publication Construction 2025 have been included, often using the same language, in the Industrial Strategy paper, and the Council given a leading role in the implementation of the sector deal. There is a recent video of a speech to the Council (16^th November, 60 minutes) by Ann Bentley, Chairman of Rider Levett Bucknall, which argues for change and puts her view of industry development (digitisation) and policy options (value based procurement). While the ideas are not particularly original they are cogently argued and very relevant, and probably representative of the viewpoint of management in the UK industry. She discusses industry potential around three ideas:

• Use outcome-based procurement to drive capital delivery and lifetime performance.
• Increase transparency on the performance of suppliers and assets.
• Improve procurement efficiency and get the basics right

 There are some big numbers attached to the industrial strategy, mainly through the Industrial Strategy Challenge Fund which will invest £725 million in a range of new programmes to ‘capture the value of innovation’. (These programmes are not the same as the four Grand Challenges but are obviously linked). This could amount to serious money if it materialises, although the funding included in the strategy is spread thinly and seems low given the scale of the challenges and the ambition of the strategy. The Challenge Fund ‘aims to bring together the UK’s world-leading research with business to meet the major industrial and societal challenges of our time.’ There is a lengthy list of challenges on their page:

From data to early diagnosis and precision medicine

Healthy ageing

Prospering from the energy revolution

Transforming construction

Transforming food production: from farm to fork

Next generation services

Audiences of the future

Quantum technology

Robotics and artificial intelligence in extreme environments

Accelerating innovative healthcare and medicines

Faraday Battery Challenge: clean and flexible energy

Driverless vehicles

Manufacturing and materials of the future

Satellites and space technology

Transforming construction is one of the Challenges, and there is potentially £170 million (around AUD$300m) allocated, with the aim to change the way buildings are created. This means manufacturing and will be targeted at off-site and modular construction, which in turn is linked to other Challenges in energy, robotics and manufacturing. It may take some time to see how this works in practice and there are no details on the how or where this investment will happen. In the Challenge Fund at the Transforming Construction link above it says:

The way we create our buildings has not changed substantially in 40 years and needs a drastic overhaul if it is to deliver the buildings that the UK needs. Construction is currently expensive, and too many buildings waste energy.

We need to transform construction so that we can create affordable places to live and work that are, safer, healthier and use less energy.

By taking a lead in the UK, we can also increase our ability to export: global demand for efficient buildings is rising rapidly, due to the pressures of urbanisation, affordability, and the need to cut emissions.

 Export potential is clearly the motivation behind many of the strategy’s ideas, because post-Brexit the UK will be looking to expand into new markets to replace as much as possible of the 43% of trade currently done with the EU. It is worth noting here that UK imports of building and construction products have doubled in the last decade, much of it materials from the EU and wood from Sweden. On the other hand, importing materials and exporting higher-value off-site construction products and methods may turn out to be a great strategy.

The strategy also promises more spending on education and training, infrastructure and urban development, extending a wide range of existing programmes and adding emphasis in areas like STEM teaching, including ‘a £64 million investment for digital and construction training’. There will be a new regulator, the office for students, to address employer and student needs, and a national retraining scheme targeting skills shortages in key sectors: ‘We will provide £34 million (AUD$60m) to expand innovative construction training programs across the country, including a program in the West Midlands, focused on supporting the country’s housing needs and building upon existing good practice’. However, there are no details on what this actually is or how it will be implemented, and this is a criticism that can be levelled at almost every initiative proposed in the strategy. Skills policy, business support and planning are policy areas in the strategy that are devolved, and thus the responsibility of administrations in Scotland, Wales and Northern Ireland. The recent Final Report of the Industrial Strategy Commission argued strongly for ‘further and faster’ devolution in the UK. (This was another major source of the ideas and initiatives in the strategy).

The document presents policy ideas like a prospectus, with breakout boxes of examples and endorsements to support the strategic initiatives, most which are not new and were flagged in the January 2017 Green Paper that led, after the rounds of submissions and discussion, to this November White paper. For example, the strategy links to a previously announced boost to R&D, with a target of 2.4% of GDP by 2027, and an existing teacher recruitment and retention scheme. Proposals like a new office for AI have no funding attached, and any discussion of Brexit is absent.

On the one hand, delivering an ambitious and comprehensive industrial strategy is a laudable achievement and there is no shortage of issues and challenges to be addressed in the UK and elsewhere. If nothing else, developing a comprehensive policy like this focuses minds and involves many participants. Government policy does not have to be original or innovative to be useful and effective, so the lack of new ideas or perspective is not the problem. It is probably better to have a strategy that brings together issues around productivity, innovation, skills and technology, than not have one at all.

However, on the other hand, a policy that lacks credibility or substance is not helpful. There is a lot of rhetoric in the strategy, embellishing the very many ideas and initiatives included. Many of the proposed initiatives are to be implemented through various regulatory and funding bodies, some existing and some new, with much of the thinly spread funding being channelled through current programmes, but details are lacking. There are no firm commitments to invest in any of the challenges, or to any specific investments in the sector deals. Local and regional governments, universities, regulators and industry bodies have all been given significant but generally unspecified roles, and their engagement will be an important determinant of any successes.  

How the UK Government moves into the next phase of their industrial strategy will tell whether this is a serious effort at industry development or a publicity policy, aimed at announcements and PR but lacking support and commitment. At some point next year the challenges and sector deals should lead to expressions of interest and applications for funding of new projects, which will be the litmus test of the substance of the strategy. Establishing the proposed national industrial strategy council and other offices should provide a stream of positive events and announcements in 2018, but achieving the strategy’s goals will require a great deal of coordination, determination and long-term commitment, qualities not always associated with government industry policy.