Procurement case study: Westminster 1837

The Building of Westminster

At the beginning of the 19^th century in England, the building industry was undergoing major changes. For many years, even centuries before, building had been done by independent craftsmen belonging to guilds, or Companies, who usually worked directly for a client. The end of the 1700s, however, was the time of transition from these old, established ways to what eventually became known as the ‘modern system’ of contract labour and measuring to determine costs.

There were two key characteristics of this new procurement system. First was the use of detailed drawings and design, completed before the work began. The second was the preparation of cost estimates for the project, on the basis of the design drawings. The two significant outcomes of these characteristics, that became the foundations of the modern system, were the shift to competitive tendering and the emergence of the professions of architects, engineers, surveyors and contractors during the rebuilding of London after the Great Fire of 1666.

In the 1800s the general contractor emerged as a new type of firm, winning projects through competition, responsible for organising the building process, and employing craftsmen to undertake work directly or as subcontractors. By the middle of the 19^th century large contracting businesses had taken on the form that in many ways we still see today, and procurement and contracting was using a recognizably similar system.

The construction of Westminster from 1837 was one of the first major buildings to be done using the ‘modern system’ of procurement and contracting, with detailed drawings from the architect and a bill of quantities (BQ) with full estimates based on them. Under the earlier system of measure and value, costs had been determined on completion by a measurer, originally a tradesman, and over time this became a specialised task done by surveyors.

The story of the building of the New Palace of Westminster (the British Houses of Parliament) in the mid-nineteenth century is instructive. As told by Kingsford in Builders and Building Workers, the project used new engineering techniques and machinery, the skills of hundreds of traditional craftsmen and a huge work force managed by some of the largest contractors. There were between 400 and 1,400 men employed on the project at any one time in 1848, 776 were on site, 120 in quarries and 335 in the contractor’s workshop. The project was expected to take six years and cost £700,000, but actually took almost 30 years and cost over £2 million (well over £500 million or $1 billion in today’s money).

There were disputes between the architect who won the design competition, Charles Barry, and pretty much everyone else involved, starting before construction began. There were arguments over the initial design, over the estimates and the architect’s fees, there were disputes over contract prices and supply problems with the materials. The designer of the heating and ventilation system fell out with Barry and the two became enemies. The masons went on strike for 30 weeks after a foreman swore at them.

The project was carried out through a series of successive contracts awarded through competitive tender or by recommendation by Barry. The first two contracts were let by the government department in charge. The third contract was put out for tender to eight firms recommended by Barry, and was won by one of the largest London contractors (Grissell and Peto) who were then given the following four contracts by negotiation without further competition.

In the third contract the prices were set by the builder and agreed to by the architect, however in the fourth contract prices were determined by the government department and set lower than prices arrived at through competition. The assumption was that the new industrial technology appearing on building sites, such as mechanical scaffolding and steam powered hoists and pumps, would reduce the costs. These contracts had detailed specifications on all aspects of the work and were priced in a form recognizably similar to a modern bill of quantities. The work of each trade was specified separately. The contractor later renegotiated a new set of prices as these were profitless contracts otherwise.

The 1844 contract for ‘finishings’ was on a unit price basis, reduced by 22 percent by the Office of Works and Public Buildings on the basis that the new machinery coming into use would save time and labour. As it turned out much of the carpentry work, although initially carved by new machines, had to be completed by hand at significant extra cost. Grissell terminated the contract in 1845 and the complex negotiations that followed went on over many years. Building agreements in those days did not include provision for claims and variations.

This was also a time a rapid technological innovation and development, both by and for contractors. Satoh has six chapters on 19^th century technical advances in his Building in Britain, covering stone, wood, bricks, components, pumps and lifting machinery. Like other industries the widespread availability of steam power was transformational in the application of new machinery and the use of mechanization on building sites slowly increased. There was also an ongoing transfer of site work into the contractors' workshops. For the largest firms these were huge, William Cubitt (contractor brother of property developer Thomas Cubitt) had 25 acres on the Isle of Dogs in 1845, complete with wharves, sawmills, cement kilns, an iron foundry, brickfields, a pottery and so on, linked by an internal railway and employing about 800 men. Westminster was also where many of these new technologies and innovations were used, some of them for the first time.

During the 19^th century general contractors, often winning projects in competitive tenders, became responsible for organising projects and employing workers. While there were recognizable elements of the old system still in use in the 19^th century, the building industry was becoming a complex and confusing conglomeration of businesses and individuals. Many of these characteristics of the industry, as the example of the building of Westminster shows, are still part of the building and construction industry today. The same can be said for issues in procurement and contracting.

Many major modern projects have the same or similar story arc, such as the Scottish Parliament building (initially budgeted for £40 million and three years construction but taking six years and costing over £400 million.) and Australia’s Parliament House. The Sydney Opera House is famous not only for its location and design but also for its probable world record cost blowout of 1,400%. Other famous cost overruns in recent years include the Boston Big Dig and Denver airport, and all these projects had problems recognizably similar to those found in the building of the Palace of Westminster.

Satoh closes his book with a series of quotes from opponents of the modern system from the mid-nineteenth century. These include: poor quality work due to low price bidding, or subcontracting; builders undercutting each other to win work under the new system of competitive tenders; the lack of provision for variations in fixed price contracts; unjustified claims by contractors; arbitrary decisions by superintendents and architects; non-payment by clients; and collusion between contractors. To address these issues the procurement and contracting system began to incorporate increasingly detailed drawings and specifications, and a schedule of prices was often attached for claims and variations. The unilateral nature of the contract led to the drafting of the Conditions of Contract.

In 1870 the terms of a document called the Heads of Conditions of Builders Contracts was agreed between the Royal Institute of British Architects and the Builders’ Society This established the basic outline and principles of the standard building contract which could then be varied to particular circumstances, and addressed the concern of builders who felt that previous contracts made no provision for variations in materials prices or the cost of extra work. Bills of quantities were introduced as part of the contract in 1902, after many revisions in the meantime, and this remained the basic form until 1931 when the Joint Contract Tribunal was set up and the standard forms of contract came into use. These are still the basis of the majority of building contracts in the UK today.

In procurement and contracting in the building and construction industry change happens slowly. This may, however, not be true of the 21^st century.

This is one in a series of procurement case studies. Other ones are on the building of the  the Scottish parliament house Holyrood Building in 1997 and Heathrow Terminal 5.


References 

Kingsford, P.W. 1973. Builders and Building Workers, London: Edward Arnold.

Satoh, A. 1995. Building in Britain: The Origins of a Modern Industry, London: Scholar Press.

Review of ONS

Interim Report on ONS Released

Over the last couple of years there have been a series of well-publicised problems with the UK’s Office of National Statistics, including some major revisions to construction output figures. In 2013 Mark Carney from the Bank of England went public with his concerns about the poor quality of investment stats, and said the Bank was no longer using them. Issues with construction stats were so serious they led to Construction Output being de-designated as a National Statistic due to quality problems in December 2014. National Statistics are a list of key data that meet a fairly high standard.

The various problems with the ONS led to formation of an inquiry led by Professor Charles Bean from LSE (ex BoE), with wide terms of reference. In early December we got the draft report of his Independent Review of UK Economic Statistics.

Some of the report covers previous inquiries and reports, international comparisons, internal culture and the effects of moving out of London, but the important topics get addressed. These include the obvious such as the trade-off between timeliness and accuracy in monthly and quarterly data, issues in measuring a modern economy’s GDP, and improving regional statistics. There is extensive discussion on access and use of public sector microdata. Also, there is an overview of recent history and performance that highlights the problem areas.

Some of this is interesting (digital disintermediation) some not so much (financial sector measurement). There is a lot on prices and price data, and thankfully a discussion on double deflation of input and output data to overcome the downward bias in single deflation, an issue I believe has great significance for construction data because of the industry’s backward linkages. The argument about increasing data access and use from new (i.e. digital) sources gets a lot of air, which is an important point that could have implications for construction data collection. There are also recommendations about more engagement with academia, industry and users.

As they say, the excitement never stops. It’s a very wide ranging review, however there is limited coverage of construction, which is not a criticism because the review is about the ONS not any single industry. Where construction is covered and what the report says is below:

P.33. Fixed capital - series reinstated in 2014 after 'improvements' in depreciation method. Intangible capital is now included. Construction share of GFCE is not addressed.

2.102 Currently ONS applies a linear depreciation scheme to physical capital assets although alternative depreciation schemes are under consideration. A better understanding of the service lives of assets should benefit from the work presently being undertaken on ONS’s behalf by the National Institute of Economic and Social Research. Finally, accounting for richer detail of capital could be informative for explaining business cycle movements better, including second-hand or used capital and capacity utilisation.

P. 46. Table with Construction Output de-designated as a National Statistic due to quality problems in Dec 2014.

P. 47. Copied below with reference to 2011 release, but note the August 2015 revisions of construction output that increased output by 10 percent over the July release are not included:

3.39 Another criticism of ONS has been that a lack of expertise has led to the publication of erroneous data, particularly in the wake of relocation to Newport. An example of this occurred in 2011, when ONS published construction statistics which quoted quarter-on-quarter growth as 2.3%, rather than the correct figure of 0.5%26. This resulted in an incorrect revision to GDP. The error was identified by a journalist during a press lock-in briefing and was described by ONS as the most fundamental and basic of errors, whereby a mistake had occurred while copying and pasting figures from different columns in a spreadsheet.

P.59. Annual business survey, number of firms across the economy sampled is very small - another issue that really needs to be discussed. There are two sectors in the Annual Business Survey and short and long forms of questionnaires. For the Production and construction sectors 6,415 firms do the long form and 10,340 the short form. About three times those numbers do the Services sector surveys. While this minimises the “burden on respondents” and cuts costs “the fact that the sample is only made up of a small proportion of businesses means that it lacks sufficient granularity if the sample needs to be stratified finely by size, industry or region.”

And finally, with the important bit last, Interim Strategic Recommendation 4: Address established statistical limitations:

• Addressing existing shortcomings in the production of National Accounts, including the absence of double deflated volume measures;
• Using administrative data sources to improve early estimates of GDP, including by making greater use of information from the expenditure and income measures;
• Producing detailed Flow of Fund statistics that meet user needs in terms of breadth and detail;
• Improving the measurement of the service sector, including developing more detailed deflators and volume indices to reflect the service sector better;
• Exploring how the use of administrative data might help meet the diverse and granular needs of users of regional statistics; and
• Implementing sufficient improvements to the UK Trade, Construction and CPIH statistics to warrant their re-designation as National Statistics.

Given the problems the ONS has had the review is timely. The recommendations are all good and most would not be too expensive, an important consideration with the tight (and tightening) budget the ONS has. The move to big data and use of data science is clearly the path forward, and may yet surprise us with the outcome.

Whether it will improve the quality of construction stats it is hard to say, there are no specific measures discussed and the relevant recommendations are too broad to give an indication of how the ONS might proceed. There is work going on within the ONS, like the current review of building and construction price indices, however in the report’s extended discussion on deflators and the necessity of moving to double deflation generally (planned for 2020, maybe), construction input price indices do not get a mention.

It is unfortunate that an industry accounting for nearly 7 percent of GDP directly through on-site work, and that much again in supply of materials, components and services, does not warrant more attention. This is not a new phenomena, but unfortunate nonetheless.