Economy, Energy and Fair Work Committee

Meeting date: Tuesday, February 26, 2019

Official Report 711KB pdf

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Construction and Scotland’s Economy

Item 4 on the agenda is our inquiry into construction and Scotland’s economy. We have been joined by our witnesses. Robin Crawford is the chair of the review of Scottish public sector procurement in construction; Gillian Cameron is the programme manager with the supplier development programme; Alan Wilson is the national executive officer with Specialist Engineering Contractors Group Scotland; and Jeanette MacIntyre is the managing director of Indeglås Ltd. Good morning and welcome to you all.

By way of introduction, I point out that there is no need to press any buttons, as the microphone system will be operated by the sound engineer. Do not feel obliged to answer every single question. I will let the discussion develop, and you may come in on one question and not another, and so forth. I ask members to keep their questions short and, in answering, to try to cover the points that you think are important but also to be brief.

I will ask the opening question. You might be familiar with the 2018 Audit Scotland report, “Major project and procurement lessons”, which says that

“the public sector does not always do”

procurement “well”, and comments that

“There are ... recent well-documented publicly funded projects with serious failings”.

What are your comments on that?

There are a number of fundamental issues in relation to failures, including the whole model of procurement, the drive towards lowest-cost tendering and the lack of expertise in a number of local authority and public sector bodies, all of which contribute to poor construction. When you are building something, if you start with the premise that the cheapest tender will win, you will not necessarily always get the best outcome, in any sector. There are a number of examples from across the country that highlight that that is the case.

In our industry, specialist engineering contractors experience late engagement, passing on of risk and delays in payment—all of which cause issues with construction programmes generally. It is an endemic issue that unfortunately cuts across almost every project that we see, and almost every project that our members are involved in.

You refer to projects being awarded on the basis of the lowest cost. Of course, the procurement regulations do not require contracts to be awarded to the lowest bidder; public bodies can take other factors into account. Is the difficulty that public bodies look too much to the price and not enough to the other factors that they are entitled to take into account?

Yes. There is definitely pressure on public bodies to look for the lowest-cost option. What then happens is that, when a contract is awarded to, for example, a tier 1 contractor, which is often a management contractor rather than an actual construction company, it passes on the risk and the cost savings. The term that has come into vogue in the past few years is “value engineering”, which is really “cost-cutting”, but using a different form of words. All that happens is that, down the chain, the costs are cut and the risk is passed on until the person at the end has most to lose if the contract goes wrong.

At the top, where the work is procured in local authorities, there is often a procurement team sitting above those whom we might term the industry professionals, including quantity surveyors, that determines how contracts are awarded.

I saw Jeanette MacIntyre nodding her head. Do you want to come in?

Yes. I second much of what has been said.

One key driver in construction generally is elimination of waste. Many of the tier 1 contractors and those in every tier below it are challenged to improve in that regard. We are driven by current procurement models that encourage waste throughout the whole process—multiple companies price and design in the knowledge that only one of the designs will be implemented. That flows through the supply chain.

All the tier 1 contractors, working through the entire process, have agreed on the requirement for a procurement model that focuses on the whole life of the building, as opposed to just how much it costs to put it up. That expertise is lacking in most public procurement processes.

An essential step forward would be the engagement of appropriately experienced chartered construction specialists in the procurement process.

Is there too much short-termism?

Yes. Short-termism is prevalent, and perceived construction-stage savings can become extremely costly to the organisation that inherits the building and to every subsequent occupier of the building over its life. The contractor’s responsibility can end as little as 12 months after construction of the building—the 12 months defects liability period.

Design, structure, fire-rating, compartmentation and all the other technical aspects that are essential to a building performing well are cascaded down the supply chain, with their associated risks. My company is in one of those trades: very few public buildings, including schools and hospitals, do not involve some kind of design, engineering, supply, installation or maintenance service from such companies. There is very poor understanding of that at the procurement stage.

It is slightly depressing that every single one of those issues was raised in the “Review of Scottish Public Sector Procurement in Construction” report. Six years on, it is disappointing that so little progress has been made in tackling many of them. For example, the whole-of-life costing issue has been addressed by the Scottish Futures Trust in a very good document that is on its website and which gives details of how to carry out a whole-of-life costing that looks not only at the initial costs of a building or infrastructure project, but at the costs throughout its operation. The initial cost is very often only a fraction of the total costs to operate the building. It is disappointing that that tool has not been taken up sufficiently by public authorities.

One of the key recommendations in our report is that the issue of risk transfer should be addressed. On the race to the bottom and lowest-cost tenders being the ones that inevitably tend to be the most successful, clearly the public sector has to look for value for money—that is a given—but quality is also important. We believe that it is essential that there be wider scoring, such that quality scoring would be given greater prominence and the decision would not come down to the lowest price. Sadly, it remains the case that the lowest price very often wins.

Before I bring Gillian Cameron in, you mentioned the 2013 “Review of Scottish Public Sector Procurement in Construction” which Andy Wightman wants to explore.

Mr Crawford, why has the review that you chaired in 2013 not had the impact that you expected? For example, I note that one of the recommendations in the review report relates to what the report calls “painshare/gainshare arrangements”, which is interesting terminology. The report says that

“The construction industry has a background of confrontational attitudes between client and contractor.”

10:00  

You talk about such arrangements having been put in place in the health sector but not elsewhere. Your recommendation on that issue is that

“Specific guidance should be developed”.

The report mentions guidance in a few places. Is one reason why we have not made much progress the fact that although guidance is useful, in order to implement recommendations for changes in practice we need, at the end of the day, laws, financial penalties or contractual obligations?

There are, to my mind, three essential aspects to the issue. The first is to get the guidance in place, the second is to ensure that there is the correct level of skills in the procuring authorities, and the third is to determine whether the people who are responsible for construction procurement are following the guidance, and that they have the correct level of skills to carry out the construction project.

With regard to the guidance, there are 66 recommendations in the review report, 65 of which were accepted by the Government and one of which was neither accepted nor rejected, but was put in limbo.

A great deal of work was done immediately following the report. A construction review development group was formed and I attended a number of its meetings, as the report’s author, as did most of the large public authorities that are involved in construction spending. The group met monthly and tried to drive progress—there was a lot of documentation.

The first stage that was considered to be necessary was to set out what should be done. That was because if we do not tell people what they should do, we cannot really expect them to do it. A lot of effort has gone into that process and it has, by and large, been successful. There are still a number of key gaps, but we now have the “Construction Procurement Handbook”, which is on the Scottish Government website. The manual is, however, incomplete; there are bits to be added to it. A number of construction procurement notices have been published, which give guidance on some of the key areas on which we made recommendations.

We are making good progress on the guidance, but it is currently underresourced. A lot of resources were put in at the beginning, but they have been gradually whittled down. I do not think that there are enough resources to get to the critical next stage of completion, which is to digitise the process, so that the manual is readily accessible and available to all public sector bodies that are involved in construction procurement.

Stage 2 relates to the skills issue: other panel members have referred to the great concern about whether there is an adequate skills base in procuring authorities.

The third stage is to determine whether people who have the correct skills are being deployed and whether they are following the guidance. Sadly, that has not really got off the ground yet. In my view, until we have a system of following up to ensure that the guidance is being followed, and that proper procedures in construction procurement are being followed, it will be difficult to address a number of the issues that were referred to at the outset.

I will follow up on what Robin Crawford said. With the publication of the procurement manual, steps have been made to address the lack of knowledge about construction procurement in the public sector, but there is an issue about implementation of the manual and how it is passed on to the various people who should be reading it and acting on it.

I do not have as much construction experience as my colleagues on the panel, but our programme supports all Scottish small and medium-sized enterprises in how to tender. However, construction is a huge sector, and a number of suppliers that come to us feel that they do not get an early enough indication of projects that are coming up, which can stymie progress. Also, the public sector is risk averse in respect of taking on board innovation that might be available in the marketplace.

Mr Crawford, can you point to any procurement projects in the past few years that have effectively reflected the improvements that you sought in 2013? With there being incomplete guidance and a skills problem, are we still some way from achieving the ambitions that you set out?

I do not want to paint the picture that all construction and infrastructure in Scotland is procured poorly. Many of the large authorities already embrace best practice and have skilled people in procurement, so a large number of major infrastructure procurements are done competently and well. The problem cases that have been referred to do not represent the larger portion of the infrastructure that has been procured in Scotland. A lot is being done well and our report drew on a lot of examples of good practice.

The difficulty is in rolling good practice out across all the public sector bodies. We estimated that there was about £4 billion of spend on infrastructure in Scotland, which is a huge sum. Nobody pulls that figure together, so we had to estimate it—we set out in the report how we did that. The problems occur when an authority that is responsible for a major procurement does not follow the guidance or the best practice that we have recommended. The authority’s procurement capacity might be underresourced—reference has been made to that—and might go ahead on the basis of people saying, “We will muddle through with what we’ve got,” rather than saying, “Sorry, we do not have the proper resources to carry out the procurement competently, so we need to buy in resources or share with some other public body that has those resources in order to make the thing work.”

Do you think that that is a key observation for the future? Some evidence has been given about a more co-ordinated and, in some cases, a more centralised procurement model.

In our report, we recommended that authorities that lack the competence to do a big infrastructure procurement should go to authorities that have that competence. There should be more collaboration—

That would rely on a self-declaration—people saying, “Hey, I do not have the capacity.” That would be difficult in some cases.

That is clearly an issue.

Some of the best examples of procurement and whole-life building analysis that I have seen recently have not been in the public sector. Buildings that have key drivers for what they are expected to deliver, such as Maggie’s centres for healthcare, seem to go seamlessly through procurement, design, engineering and construction, with lots of post-occupancy evaluation surveys to see how the building performs for the end user. Those are fantastic examples of good practice.

The best examples that we have had go back in time a bit. The Commonwealth games construction in Glasgow was one of the best examples that we have been given of early engagement with contractors, which is another key issue. Often those who construct the building are brought in at the very end, having gone through a process of getting to the lowest cost and passing on the risk, as Jeanette MacIntyre mentioned. Such early engagement is with the people who carry out the work, and who often undertake the design.

I congratulate the Government on providing surety of payment through the introduction of project bank accounts and reducing the thresholds from £4 million to £2 million, which will make a difference and is a positive step forward. That was one of the recommendations in Robin Crawford’s report.

The Commonwealth games construction is a good example of early engagement that meant that things worked—buildings were built on time and within budget and were properly constructed.

I have a few other points to follow up, but as we are a bit tight for time, I will, hopefully, come back to them later.

I want to explore frameworks and hubcos as models of procurement. When I consider some of the work that has been done on that, I see that hubcos are dominated by about five big companies that operate at tier 2 and tier 3, which means that the relationship could be deemed to be quite incestuous. Four of those five companies are headquartered outwith Scotland. In addition, I do not recognise many of the SMEs that are involved at the very end of the food chain as being local—some come from the rest of the United Kingdom. Does the framework and hubco approach work against SMEs?

My experience is of Hub South West Scotland, which is one of the larger hubcos and is very proactive. We are hosted by South Lanarkshire Council and we work quite closely with both the council and the hubco. They have set up the build Lanarkshire initiative to encourage local businesses to get involved in the supply chain. My experience of that and of the Aspire development programme is that the hubco is being proactive.

I cannot comment on some of the other hubcos where I have not seen that happening—I might not be close enough to see that. With large infrastructure projects there is always the challenge that the risk-averse public sector will look for a larger contractor to be at the front face. In some areas, steps are being taken to try to address that by bringing smaller contractors into the supply chain, but I do not see that happening nationally across Scotland.

Hubcos are organisations that microbusinesses and SMEs find it difficult to break into if they are not part of what has already been established. The hubcos were meant to become centres of excellence and there is some evidence that that might be happening at the top level. However, our members see them as a barrier to entry for bidding for work in those areas.

I am seeing nods from everyone else. I understand that the hubco model is about to change: the Government announced that it was considering the model that is used in Wales. Does that address those concerns or will we just see more of the same with a different name?

I fear that it could be the case that we see more of the same. Having dealt with almost all the hubs now, I endorse what Gillian Cameron said about Hub South West being way ahead: the hub’s cascade of key drivers is very clear, perhaps because of the involvement at board level by John McClelland and the others who drive that team. We are very engaged with them; they tend to maintain more responsibility through the procurement of buildings and they attend meetings while the tier 2, 3 and 4 contractors are being appointed. There is definite evidence of more engagement with local employability and supported employment. Hub South West goes way above and beyond some of the other hubs in respect of that type of engagement.

Having said that, Hub South West still minimises the tier 1 contractors to four or five companies. Not all of those contractors are based in Scotland and not all of them have local employment as a key driver. The current project contractors for Hub South West are Morgan Sindall, Graham Construction—which is Irish owned—and Morrison Construction. We still experience situations where the specification for the product will clearly identify the properties that the product has to achieve, but when we engage with the main contractor it will say, “Well, Jeanette, we know that you need all the terms of the spec and our engagement, but we have a much cheaper price from a company based in Leeds or Birmingham, and that is the price that you will need to achieve to be engaged.”

10:15  

So we lose out on local economic benefit.

We lose out big time.

You said “big time”; will you try to unpack that? When we are spending billions of pounds on construction, I think that it is a missed opportunity not to ensure that local companies get a slice of the action.

You are quite right; all your fears are realised out there. We are sacrificing local employment, skills, training, development and so on by not keeping control of procurement at that level.

For example, Indeglås just employed North Lanarkshire Council’s 100th supported placement, and I have more than eight apprentices, at various levels—we are fully engaged. However, none of those statistics or accreditations is key at the point when we are being compared with a man and a van and an account with Travis Perkins, who happens to be based in Blackpool, if his price is cheapest—at certain levels.

At Hub South West, there is more evidence of an interest in that level than is the case in any other area.

But Hub South West is just one of five hubcos.

It is just one of five, I am sad to say.

The Scottish Government has done great work to put in the sustainable procurement duty, which is about the local economy, local wealth building and so on. At the high level, that approach is put in place in the contracts, but the minute we kick down into the tier 1s it gets lost.

Jeanette MacIntyre is right to say that there is a drive almost to the bottom line, which is where the smaller businesses that might be investing a lot to do good and to take on apprentices are losing out. Work is leaking into other parts of the UK, as opposed to staying in Scotland.

You are saying that it is fine to have the duty, but the theory does not match the reality on the ground.

Yes. There is an opportunity here. The UK Government put out a procurement policy note that was all about keeping such a duty in contracts all the way down the supply chain. The Scottish Government has not put out a policy note about that, although it is trying to encourage such practice.

That takes us back to what Robin Crawford was saying. It is about implementation. The guidance needs to go further to drive the approach, so that people say, “Well, you can’t just award a contract on price all the way down the supply chain; you need to include these benefits.”

Hub South West has tried to do that. It is under pressure from the local authorities to do that, and it is going some of the way. I am getting feedback about there being improvements. However, that is just one area; the approach is not national.

The hubcos are controlled by the Scottish Futures Trust, which is national. The SFT is the national body that we would expect to drive all that good practice, but it is not doing that. Without beginning to look at whether local authorities or health boards are doing that, we can see that, in effect, the Government is not following its own guidance, which is most disturbing.

I am conscious that hubcos have greater involvement from the private sector, following the changes with the European system of accounts 2010 framework. The private sector is now in a controlling position, which is not necessarily helpful in meeting some of the objectives that the witnesses have outlined.

Do the hubcos lead to a further separation between local authorities and contractors? That is my concern, given that a lot of the expertise that Alan Wilson referred to has been stripped out of local authorities and, I suspect, now rests with hubs. Is that a good thing?

Is it a good thing? I would say no. There has to be a fair spread of expertise across all procuring bodies, and it cannot be right to overload one area at the expense of others.

Robin Crawford has not said anything, so I invite him to speak.

When we did our review, the hubcos were pretty much in their infancy. We were concerned about access for SMEs and we spoke to all five hubcos about that. We received assurances that SMEs would be included in the frameworks. However, other panel members have spoken to the current experience of the hubcos.

On frameworks generally, guidance on the Scottish Government’s website now sets out the importance of operating frameworks in a way that gives SMEs proper access to the frameworks—there is guidance on splitting the contracts into bite-size chunks that SMEs are capable of bidding for, and a lot more besides—but the problem to which we return is whether that is being applied in practice.

If the Government agency SFT is not applying that in practice, one wonders what hope there is for the rest of us, but there you go.

I will explore one or two of the panellists’ comments. I think it was Robin Crawford who mentioned the skills that are available in local authorities, and the comment was made that the bigger local authorities appear to have greater quality, quantity or whatever of skills to tackle developments. By implication, the smaller ones do not have the same level of expertise. Will you comment on that?

One piece of evidence that we were made privy to during the review was that there has been a winnowing out of construction expertise in local authorities’ procurement teams. We heard that they are often quite well resourced, but not with people who have a construction specialism. That diminution of expertise in local authorities is giving rise to a lot of construction and procurement issues.

Have the bigger local authorities retained a larger measure of those skills?

Clearly, the bigger local authorities have more resourcing, but even some of them have experienced a reduction in the skills base.

In our report, we emphasise the need for any authority that is involved in construction procurement—we are not talking just about local authorities, because many public bodies are involved in infrastructure procurement—to make sure that it has the correct skill base before it takes part in that procurement. If it does not have that, it must recognise that and seek other means to achieve that skill base.

What does that mean in practical terms in relation to the impact on projects?

It means that you are not getting a proper brief at the start and not ensuring that the infrastructure is design led. Following our review, we would regard those as the essential components. There must be a proper brief that sets out what the procuring authority is seeking to achieve. That might seem to be a statement of the blindingly obvious, but it is quite often the case that that has not been properly documented at the outset.

After that, you need to look at the design and ensure that you have the best design, taking account of pre-market engagement. Many authorities have been nervous about pre-market engagement, because you have to get it right in order not to invalidate the procurement. Nonetheless, we regard it as an essential element of a proper procurement so that you can understand what is available out there and then get the design right.

There are a series of processes. I will not go through them all, but it is about getting all the steps right before you procure. Once the procurement is under way, it is about giving proper cognisance to quality and whole-of-life costing. Those are the essential elements in a build project ultimately being successful.

If we look at the other side of the coin, does the construction industry have the skills to be part of the procurement process? Is its position similar to that of local authorities? Do bigger companies have bigger resources and therefore tend to be favoured, whereas smaller companies struggle a bit more on the resource level?

There is no doubt that a lot of SMEs have found it difficult to respond to many public sector procurement requirements, but training has been put in place to address those issues.

The position varies. The large contractors—the tier 1s—have largely become project management organisations, and many of those with the trade skills that we recognise as part of building, such as electricians and plumbers, have been driven down to tier 2 or 3 as subcontractors.

Is that a good thing?

There are a lot of difficulties. Placing the contract for a fairly small project with a tier 1 contractor builds in additional costs. To address the issue, Scottish Water, for example, has developed a system whereby it is more specific about giving work to the body that will carry it out.

From what you say, the system in the private sector and among local authorities seems to favour the big boys, in terms of the quality outcome that might be expected. Are they becoming the market leaders?

The big boys are more capable of meeting the procurement tendering requirements. Not having the resources to compete in the public sector has been a big issue for SMEs. It is easy for a large tier 1 contractor to have all the resources available to undertake a procurement exercise, put in bids and so forth, but that is much harder for SMEs.

Resources in public bodies have substantially reduced, too. Dealing with one large firm rather than 10 or 12 small firms is easier to manage within a public body’s resources. Some areas are looking at a step change because they wish to grow the local economy and get more small businesses involved, but the larger companies have the resources to bid. Tender documents can be quite onerous, and the risk is another aspect.

Another big area involves accreditation and health and safety. Some smaller businesses that wish to work with tier 1 contractors use an accreditation scheme, but different tier 1 contractors use different schemes, so a small business might have to sign up to two or three schemes if it wants to work with tier 1 contractors. Signing up can cost just a couple of hundred quid, but that is a barrier to small businesses getting more involved.

Our perception from speaking to small businesses is that some prefer to be in the supply chain because they do not have to go through the tender process with all its documentation and risks. The system works for small businesses in some instances, but not in others.

Gillian Cameron talked about what is easier and about risk. It is fair to say that lots of businesses in the electrical, plumbing and mechanical engineering sectors are capable of engaging directly—that relates to Robin Crawford’s point about Scottish Water.

As I said, all that happens is that the risk is often passed down the path anyway. As has been acknowledged, whether it is involved at the start or the end of the process, the tier 1 contractor nowadays is a management contractor that manages the project, rather than an actual contractor. The tier 1 organisation passes the design, the risk and the issues of late and delayed payments, retentions and withheld payments all the way down the line to the businesses that do the work. I suggest more early engagement with those smaller firms.

Part of the problem in construction—the Parliament building is perhaps a good example—is that, after a building has been considered, people want to change something. That is a natural progression in anyone’s life—I am sure that we have all got a contractor into our homes and said, “Instead of putting this there, I want it over here.” Everyone can do that, but it has a cost. In construction projects, cost often results from late changes in the design and in where things are placed.

Early engagement with specialist contractors on a project to ask for their expertise would enable us to avoid some of the issues that add cost and confusion and lead to delayed payments—payments are often affected by disputes about added cost. Early engagement with specialist contractors is vital to avoid some of those big issues.

10:30  

Previous panels have raised the issue of the transfer of risk. Given that a multiplicity of subcontractors and so forth are involved in the construction industry, is the question of risk properly addressed? Is there confusion about it in the system?

The issue of risk came up a lot in the review that we carried out. The concern was expressed, particularly by subcontractors, that risk is passed down the chain. It was felt that public authorities try to pass the risk on to the main contractor, and then the main contractor will try to pass it down the line. As has been said, the risk often ends up with the party that is least able to bear it, which is a comment that we make in our report.

That situation has all sorts of implications. It gives rise to the risk of insolvency if the risks materialise, which can have an impact not just on the subcontractor that is involved but on the whole project, because the critical path might be thrown out by the subcontractor going into insolvency.

We believed—and we recommend in the report—that there is a need for a much better understanding of the allocation of risk at the outset of public sector contracts. It is not always appropriate for the public sector body to pass as much risk as possible on to the main contractor. That might seem counterintuitive, but a sensible, grown-up addressing of the issue of risk allows it to be priced accordingly. If the contractor has to carry a huge amount of risk, it is going to price accordingly. If the risk can be more reasonably apportioned, the pricing can be more realistic.

Part of that is about the issue of “painshare/gainshare” contracts, which were mentioned earlier. Such contracts have been used down south for some time and there are now recommendations on the Scottish Government website as to how to use them. They allow a more measured view of risk. However, Mr Beattie is right to say that risk remains a significant problem.

I represent an area that has some very remote and rural communities, but they still require public projects to be delivered—for example, local schools and hospitals, particularly in Orkney and the northern isles, where I am from. Those contracts are being delivered by large national companies rather than by more regional operators. Are the current procurement procedures and systems suitable and do they work for regional operators and small businesses such as construction companies in the Highlands and Islands?

I am involved in supplying all the internal glass screens to the hospital in Orkney. I have been engaged through Robertson, whose main office in the central region is dealing with that. We were specified through the design process by the lead design team, which is Keppie Design. However, even that experience is compromised in that the health board’s original intent for the building was to achieve something quite special in relation to what the healing powers of light and fresh air can do. That idea goes back to the Victorian age. It is about appreciating the importance of fresh air and daylight in healthcare and healing.

However, that intent was sacrificed at the construction stage due to perceived cost drivers. Many of the sophisticated, high-performance glass screens that were originally intended have come out of the building. On my most recent site visit, there were significant journeys along corridors in the hospital where I wondered when I was going to see the light of day again.

Such decisions are ill-advised. The savings are purely for the construction stage and they will have a cost related to the wellbeing of not only the people who are trying to get well, but the staff in the building. At some point in the journey through engagement with the tier 1 contractor, which cascaded down through the sub-contractors, there was a driver to value engineer that package.

Will that decision have been made not locally but by the construction company?

It will probably have been made by the construction company. That is an example of the type of decisions that are being made by the tier 1 contractor that are not, in my opinion, in the interests of the health board or the end user—the patient.

Hospitals and healthcare buildings are being built that are better exemplars. We have gone all the way back to Florence Nightingale and her values, with appreciation of the importance of daylight and fresh air, in the recent building of the hospital at Alder Hey. Those values were key drivers that were appreciated by the client—the health board—and driven all the way through the process. They were not sacrificed at any point in the delivery of the building.

You are suggesting that the national procurement model might take away from the local aspect of decision making, to some extent.

Yes.

Some responders argued that it is

“unfair that the procurement process does not do more to incentivise the direct employment of apprentices.”

How could a national procurement model do better in encouraging more apprenticeships or skills training? Where are the barriers to that? We know that small businesses can have an issue in accessing apprentices.

We currently have an apprentice scheme. We have engaged with the Construction Industry Training Board and Skills Development Scotland about the fact that many of the existing formalised and recognised qualifications for apprentices are based on what are deemed to be traditional trades.

For example, in my company, I have no option but to bring an apprentice through a traditional carpentry and joinery apprenticeship; on completing that, they have to start training again from scratch with the completely different discipline of working with aluminium and glass, because there is no apprenticeship in the industry that would give an apprentice a recognised qualification in that sector. Yet, when glass is required internally to bring daylight through a building—the Scottish Parliament is a good exception to this—the glass is less likely to be framed by timber, particularly in healthcare buildings, because of infection control, than by steel or aluminium.

Formalised SQA qualifications for those specialist trades do not exist, so we are engaging with the CITB, Skills Development Scotland and other bodies to address that. The CITB is limited in the assistance that it can give SMEs with training, because its remit is to cover skills that are being used on building sites. It cannot cover anything to do with pre-manufacturing or development of products coming from a supplier; it cannot cover a company such as mine for anything that does not happen on a building site, so I have to self-fund a lot of the specialist training that our apprentices require beyond the traditional apprenticeship.

I do not want to go too far into innovative new areas, as one of my colleagues will probably cover that.

Procurement contracts require bidders to look at community benefits. Often, the industry takes that to mean apprenticeships. It is fair to say that procuring authorities have taken a pretty poor view about how community benefits should operate.

If you look at the record of businesses in our sector, you will find that apprentices are recruited predominantly by micro and small businesses. In the electrical industry, we recruit approximately 1,000 apprentices each year. Not many of the apprenticeships are correlated to the community benefit aspect. Apprenticeships are a hefty investment for a business; it probably costs in the region of £15,000 per year to recruit and train an apprentice, with little given back to the business afterwards—certainly not in the first year. That is a direct cost to those businesses but, year after year, those micro and small businesses see the benefits of recruiting apprentices and train the workforce of the future by taking them on.

Such businesses, which are at the most risk of delayed and late payment, are taking on yet another level of pain—in their minds, quite rightly so, because they are developing their businesses. However, the opportunity to develop two apprentices instead of one is stymied because of the procurement processes, with the delays in payment. The processes are not conducive to engaging in, developing and building such small businesses.

In the electrical industry, FES Ltd is one of our largest members, with 250-plus electricians; it started as a one-person business in the 1960s. It would be difficult these days for a business to go from one person to 250 people in a few years because of how procurement works, certainly in the public sector. Pressures on payment in the private sector would also make it difficult for a business to grow exponentially in that way.

Until we flip things over and realise that the people who are doing the work and the training are those small and micro businesses rather than the tier 1 contractors, we will always have this malaise around apprenticeship recruitment and payment.

May I clarify something before we move on? I do not know the detail of the contract in Orkney that was commented on, but usually it would not be just the contractor that decided to alter the design—the decision would be made in conjunction with the design team and the employer, under whatever contract terms applied to the contractor. A difficulty can arise, because a bid is made and a contract is awarded based on a certain design and price, and then a bit further down the road the design is dumbed down, for want of a better expression.

Is part of the problem with the procurement process the fact that not enough account is taken of the realities of what will happen under a contract? A larger company can bid and get the contract but then, ultimately, the design is pared down because of cost, whereas other companies might bid on the basis that they could deliver the design as originally envisaged.

One of the areas in which that has been a concern is so-called suicide bidding, whereby people come in with a very low bid and that bid is accepted. That has been an endemic problem and I think that it remains a problem.

The difficulty is that the contractor that bids at a very low price then seeks to make a lot of savings throughout the contract; there will also be a lot of claims. In part, that is a procurement issue in terms of getting the design right at the start but it is also about having a price that is deliverable. If the price is not deliverable, you will see a lot of value engineering and a lot of claims.

10:45  

The committee has heard evidence that a number of factors are having a negative impact on productivity and innovation in the construction sector. We have heard about limited investment in skills, limited adoption of technology and digital platforms, and low margins in the sector. I would like to hear your views on what is holding back productivity and innovation and what steps could be taken to improve them in the sector.

I will start. That has been an issue since earlier reports than mine. Egan and Latham focus very much on the issue of innovation in the construction sector, which remains an industry wedded to boots on the ground in muddy sites. Innovation has been hard to achieve.

The Scottish funding council has invested in the Construction Scotland innovation centre, which is now making some progress in empowering innovation and looking at different methods to increase efficiency. There have been issues with prefabrication, particularly in the housing sector in social housing, and there are some very good pilot schemes in Scotland in which innovative methods are being pioneered.

However, there is no doubt that more can be done, particularly on the issue of sustainability. We refer to that a lot in our report, because modern methods of building properly insulated buildings using greener methods of construction may cost a bit more at the outset. However, the whole-of-life cost of the building will prove that using those methods is very much the correct decision.

On that note, the Construction Scotland innovation centre is a great opportunity, but there is a lack of awareness of it. We quite often refer suppliers to the centre and say that it offers an opportunity. It is not just about the big projects; guidance is available on smaller things as well, but I do not think that businesses in general are aware that it is available to support them.

I want to separate productivity and innovation for a moment. If we talk about productivity, the time that is taken by small and micro businesses to prepare bids impacts hugely on those businesses, and then there is the issue of payment. One of our members, who is the director of such a business, told us recently that on average they spend 12 weeks per year chasing payment. That proportion is probably experienced in each such business. They have to use their productivity in the wrong ways, for example on chasing money—debts and retention sums—and formulating bids that ultimately may not be successful.

I think that the industry does better on innovation. In our engineering sector, particularly in the electrical industry, we are undertaking training on electrical vehicle charging point installation and battery storage, and we have done training on other aspects of renewables, such as solar photovoltaic panels. Often, however, having that training is not enough; the client then has to lead that through their tender. Some local authorities are good at that and include requirements for minimum installation numbers of certain things, but tier 1 contractors are not often asked to say that their design should include X of something. The client asks for X and then, as was said earlier, that X is value engineered out because of the cost to the budget overall.

I currently sit on the governance board of the Construction Scotland innovation centre. In my short journey and our time there, I have been incredibly encouraged by the number of SMEs that are engaging with the centre and coming up with all kinds of advanced technology and innovative ideas to drive either productivity or greater effectiveness in their sector.

Two products are going through the centre, so I am aware of the costs to an SME of that type of engagement. The Government should look to assist in that area in any way that it can, because there is huge potential there to invest not only in projects for Scotland but in companies that have huge potential to go on to export within Britain and abroad.

If I may, I will show you one particular product. It is always good to have something to look at—

That is great. Please go ahead.

I am not giving away any trade secrets. This is an example of a product that we are developing for introduction into schools and the education sector, particularly early learning centres. It is a sophisticated glass product. It is made from safety glass and it can be used to perform for acoustics, sound and fire internally, but we are playing around with all sorts of graphic applications and interlayers within laminations of glass for high visual and sensory development in early learning centres and schools. You will see the effect and what happens when I turn the glass around.

Ah—right. Very good.

I am not sure how we will get that into the Official Report. [Laughter.]

With great difficulty. I like to give the committee a challenge.

That is an example of something that we are working on. However, I have been told that I cannot get assistance. Even when we engage with Scottish Enterprise, there are lots of parts of that journey where there are significant gaps. Because of the types of things that can and cannot be supported, there are major gaps where I, as a company, am expected to fund things, and my ability to do that comes down to the profit levels that I can achieve in any one year. We are stifling a lot of potential innovation in SMEs.

Are there any simple steps that sector bodies or the Government could take to support best practice in the sector, highlight it and fund it where necessary?

Yes. There are lots of ways that that could be done. One of those ways would be to ask the Construction Scotland innovation centre to prepare some examples of the situations that companies are in, which will differ, so that we can get an idea of the steps on the journey that could be better supported—things such as applying for a patent attorney. There are significant fees that slow down the progress of innovations. People have to wait until they can afford it, or they have to spread the cost over five years with, perhaps, a little assistance. Those things could be done and delivered to industry much more quickly.

That is helpful. Thank you.

We have heard a lot of evidence about the benefits of early contractor involvement. There was a suggestion that the Commonwealth village in Glasgow had that early engagement. Why are we not making more use of those frameworks?

To be honest, I think that a culture change is required. The construction industry has been working under the procurement models, the payment models and things such as retention for 100-plus years, and to change that will mean a significant change in culture. There is the carrot and the stick, and I think that the two have to be used together.

The project that you mentioned is an exemplar, and more could be done to highlight it to the industry. The Government should certainly be taking the lead, showing leadership and using that project as an example for all the projects that it directly funds. That would be a step in the right direction, and I would hope that that would then percolate down through the rest of the contractual and construction industry. Things have to be shown to work. That project is an example of where things worked, but we have not made enough of that in the construction industry, and I include us in that. We probably do not promote that enough.

When the Scottish Futures Trust comes in front of the committee, should we ask it why it does not use that example, bearing in mind that it is the delivery model for the hubcos and so on?

That would be useful. However, we all have to be engaged—not just the Scottish Futures Trust, but the industry as a whole. We have to become involved and give out more information, details and examples. We all have different ways of communicating—with businesses, members and the trade as a whole. We need to take the opportunity to do that.

In relation to innovation and improved productivity, many of the materials that are used on Scottish construction sites are imported. Is there a need to build into frameworks or contracts a standardisation of product or materials that can be used, so that suppliers can become more efficient and develop more productive methods of manufacturing door handles, breeze blocks or bricks, for example, because they know that there is a pipeline of projects? Would that be beneficial?

Yes. Some of the work that the supplier development programme has done relates to the city deal. When that was first announced, we worked on raising awareness of what the city deals were about. Many small suppliers thought that it had nothing to do with them and that the big contractors were the ones that would get involved. We were interested in opening up the supply chain and enabling small suppliers to look at how to go down that route.

That takes us back to specification. The earlier that a contractor or small business can be brought in to understand what is being bought, the more beneficial it will be. We worked on a programme with the Scottish Government that looked at spend data to understand where spend in Scotland was going. We did a good trial of a product that could identify where spend was going out of Scotland. That could be drilled down by local authority area. It was interesting to see that it could help to identify what suppliers we have in Scotland.

There is a challenge there, too. The procurer does not always know what manufacturers and businesses are in their local or wider area that they could be connecting with when putting things out to tender. The bigger companies are very aware that they have all the systems in place and can find out about those opportunities—they have teams of people doing that. There might be a small local business that could deliver the door handles, but how does the procurer connect with such a business?

Recently, we ran an event with South Lanarkshire Council that was called, “Meet the real buyer”. At that event, small suppliers came in to meet the procurers, but they were also meeting the commissioners—the people in the local authority who are specifying and buying things. That raised awareness of the businesses that existed locally. That market awareness is really important, as is how the public sector engages with business to ensure that awareness.

That also relates to the sustainable procurement duty, which is built into the regulations when people are looking to find local contractors. How can that be used more to go down the supply chain, rather than stopping at the first level?

Much has been said about frameworks, and the development of specific Scottish frameworks has a lot of potential in looking at Scottish supply chains. Frameworks have a lot of advantages in allowing synergies right down the supply chain when companies start to work together more regularly. Frameworks also provide the opportunity for more innovation, because the companies are working together and they might be able to identify better local sourcing.

It is clearly much better to source locally, not just from the perspective of promoting the local economy or the sustainability of remote and rural parts of the economy in particular—in our review, we regarded the construction sector as playing an important role in that—but in getting better and cheaper products. Using local sources should be cheaper than bringing stuff in from a long distance away.

Given that the Scottish Government has ambitious climate change targets, should we be building into procurement frameworks a weighting to be given to the carbon cost of producing and transporting products to site? Would that help the Scottish manufacturing industry?

That is one factor that must be borne in mind. You must ensure that the product is the correct product for the build, but it is important to bear in mind all the cost elements.

11:00  

We are heading towards the end of this evidence session, so I want to give you all a final question.

We have focused on procurement, but I know that a lot of you are also knowledgeable about the wider issues that face construction. Could you all suggest one or two things that you think we should also be looking at? Brexit is the obvious one. Is that having an impact on the construction sector? We have touched on issues such as off-site construction. Some of us visited an off-site construction site recently, and we were told about some of the issues around that; for example, one council will give planning permission for buildings that are constructed in that way but another council has said that real bricks must be used rather than off-site construction methods.

The one thing that I would mention, moving away from the issue of procurement, is the quality of build. We have seen a number of examples of poor-quality builds that have resulted in significant problems with buildings. More work needs to be done on quality and how public authorities control quality during the build phase to ensure that more issues of the sort that have been well publicised in Scotland in recent months do not arise. I know that work is being done on that.

I cannot comment on the construction side but, with regard to the training aspect, there is a long way to go to ensure that SMEs are adequately trained, especially in the public procurement process. A lot of companies are averse to getting involved in that process, because they think that it is too onerous. There is no doubt that there are a lot of steps to go through and a lot of documentation to be submitted. However, once that skill has been learned, it can be re-used with every public body. There is a benefit to that.

We are constrained by the resources that we have. I have a small team of four people, yet we cover the whole of Scotland. With regard to the construction centre, we were named in the review, but we have not had any additional funding on the back of that review to enable us to grow and do more with the sector, which we would like to do. Training is a big part of the issue that we are discussing.

I can think of small businesses in my constituency that might benefit from your help, so I will be sending them your way.

Excellent.

I would make a plea for the committee to think about the four Ps, the first of which is procurement. We must change the traditional model, which is not working.

The second is payment. We must make more use of project bank accounts, in order to protect sums of retention and trust.

The third is professionalism, which goes back to the point that Robin Crawford made about quality. It is all too easy for businesses to enter the construction industry—there is really no limit to businesses. More must be done in that regard. There is already a good Government scheme—the approved certifier of construction scheme—which sets out the criteria for businesses and individuals. More should be made of that.

Finally, the fourth is policing. There are pieces of legislation in place that are being mandated. For example, the Procurement Reform (Scotland) Act 2014 places an obligation on public sector bodies, including local authorities, to check whether payment terms are being pushed down the procurement chain to tier 2s and tier 3s. A research paper that I have in front of me suggests that only 25 per cent of public bodies are taking any action on chasing those payments. Where there is legislation in place, we should ensure that it is policed. The introduction of a procurement or construction regulator would go some way towards that.

Ms MacIntyre—better glass?

I would like to conclude by reiterating the emphasis that has been placed on the importance of having expert knowledge at the procurement stage in construction. It is essential that we keep hold of the key drivers of any building and hold on to the responsibilities and a bit of the risk at that point, because there is far too much emphasis at the moment on the cost to build the building—that is, simply the construction phase—and not enough emphasis on what the building will be asked to do thereafter, throughout its life. It takes considerable expertise at the outset to ensure that those key drivers are held on to all the way through the process.

I thank all our witnesses for coming in today.

11:04 Meeting suspended.  

11:06 On resuming—