The Farmer Review - Reviewed
21st October 2016 | Ian Anfield
Modernise or Die - Ian Anfield reviews this latest industry report
The timing of the Farmer Review of the UK Construction Labour Model could not be better. The Department for Education and Department for Business are currently reviewing the role of the Industrial Training Boards, the Apprenticeship Levy starts in April 2017, and the recommendations from the Sainsbury Review will shake up technical education. Mark Farmer begins his review by recalling that he wanted it to be ‘an exercise that led to change’ (p.4). Let’s hope his wish is granted.
He has done a fantastic job and makes a lot of interesting points. At the same time, there is a strange sense of familiarity in what he says. When I started out on site in 1990, the most highly skilled tradesmen were in their late 40s early 50s, and the talk was of what would happen when they retired. The same is true now.
The review devotes appropriate attention to structural issues in the industry, and these are significant. What has happened over the last 25 years is a shift in expectation from the owners of construction firms. Banks and other institutions used to use the large construction firms to generate cash flow. Traditional contracts based on a schedule of staged payments generated up-front cash flow and small profits at the end as the spend curve caught up with income. The higher the risk level and complexity of the project, the higher the margin. Mark Farmer said (p.24) that he struggled to grasp the origin of this dynamic, so if anyone still has the course notes from Balfour Beatty’s commercial awareness courses from the early 1990s, please send them to him. They explain it perfectly. Likewise with the notes from the Mowlem Cash Management Course run in the noughties, which explain what is wrong with the new world when contractors need to know day by day what is coming in and what is going out.
The large firms generate cash flow by strangling their supply chain which, as Mr Farmer identifies, suffers ‘downward and often inappropriate risk transfer’ (p.17). It’s all about the share price now with long term, low risk, low margin, high turnover projects being more attractive than real engineering challenges. As Mr Farmer notes (same page): ‘This leads to an industry that tends to be cost-focused rather than value-focused.’
In the wake of Latham and Egan, mentioned by Mr Farmer (pp.5,23), we did see change, and I have enjoyed working on Design and Build and early Contractor Involvement schemes. However, when contractors tell clients how much their projects will actually cost, they think they are being ripped off and revert to competitive tendering. As Mr Farmer notes, ‘in competitive tendering, whoever wins a project is often the party that has made the largest mistake in pricing it!’ (p.24); a ridiculous state of affairs.
As high risk schemes have become unattractive to shareholders, the large contractors have become more interested in term maintenance projects. The lobbying power of the large contractors and Build UK have had a toxic effect on the SME market. The Government and Local Authorities are bundling up small projects and maintenance into mega contracts which lock out most of the traditional regional contractors. Those who employ locally and take on trainees and apprentices are being driven out of business.
The fact is that major contractors and house builders do not employ or train construction trades. As Mr Farmer highlights, they subcontract 90 -100% of their work to others so unless the industry is willing to go back 25 years, the key to developing skills lies within empowering and improving the cash-flow to the SME’s.
MrFarmer talks about self-employed labour having a ‘floating price point’ based on demand and he suggests that this is a bad thing because it does not allow for fixed costs. Many would disagree, and if he scratched a little deeper, he would see that most mega contracts include clauses for varying the costs due to inflation and taking into account new taxes imposed during the life of a project. Competitive tendering with a fixed cost is criticised in the report, so it seems strange to argue at the same time that labour costs should always be fixed.
When you get past the structural issues, you get down to the crux of how training is funded and delivered. Although Mr Farmer states (p.25) that ‘it is not the intention here to undertake a detailed critique of the CITB,’ he clearly found it unavoidable, since the CITB has failed on every objective set when it, along with approximately 30 other ITB's, was conceived in 1964. Little wonder that Mr Farmer’s second headline recommendation is that the CITB ‘should be comprehensively reviewed and a reform programme instituted’ (p.11).
Mr Farmer rightly concurs with what we have been saying about the levy and grant scheme becoming a meaningless money-go-round without actually having any real impact on the type and quality of training carried out. The review makes the point that whilst the levy has ‘laudable principles’ (p.27), it has little or no impact; but there are substantiating facts that underscore this even more forcibly. For example, one important point that Mr Farmer misses is that only 70,000 of a potential 235,000 firms are registered with the CITB. He also overlooks the fact that only 15,000 firms claim grants, even though the vast majority of the 70,000 provide training.
The point is also made that the industry is worth £100bn and only raises £180m in levy, of which only £140m is returned in grants. £40m is a lot to spend on pen-pushing and publicity.
Levy and Grant
The Secretary of State’s granting of the Levy Order is based on the evidence presented by the CITB that the levy has industry support. Mr Farmer, however, reports that ‘the conclusion of this review is that CITB does not currently appear to speak for industry collectively’ (p.40). No surprise, since the CITB’s own data makes clear that support from the levy actually comes from consensus groups representing only 14-17% of the industry.
Many feel that Build UK, The House Builders Federation and the large companies which they represent have far too much say in the levy and grant design. The burden of the CITB levy falls low within the supply chain, rather than being at client, house builder or tier 1 contractor level, and this has been made worse by recent levy changes which pass the burden lower and introduce multiple levy and no levy chains linked to tax status. Large employers get a 92% return on levy without employing trades, while SME’s carry the burden of training apprentices and up-skilling the workforce and yet only get a 30% return. Not only is this grossly unfair, it’s bad for the future of the industry. The impact assessment for the 2015 levy order shows that large employers would be sharing a £17m levy reduction in 2017, and the CITB has pledged a share of £41m to this group to compensate for the introduction of the Apprenticeship Levy. So the figures that Mr Farmer reviewed showing a disparity between what large and small employers get from the levy would look even worse if examined again next year. Indeed, with all the pledges that the CITB has made to large businesses and their federations, the levy and grant scheme would appear to be running into insolvency.
Mr Farmer appears to share the CITB’s belief that it cannot fund innovation due to constraints within its legislative framework. This is simply not true. The Industrial Training Act sets out the rules for levy collection, and builds in a triennial consensus process, but it gives the ITBs the broad remit of raising funds to cover its expenses. There is no constraint on funding innovation.
The only problem the CITB has with legislation is the triennial consensus process. Without the support of large businesses and trade federations it would lose its levy raising powers. This has led to a system in which the federations receive generous funding without paying in, and the cost to large businesses is negligible. Schemes such as the supplementary payment scheme, under which levy payers who apply get a 10% uplift on grants for returning their paperwork on time sees 10% of the entire grant pot returned to approximately 100 large employers. Most SME’s are not aware of the consensus cycle so have no say, and as a consequence they pay more and take less from the levy and grant system. This diverts funds they could use for training.
I have to disagree that all of the initiatives should be sucked up by some huge scheme as suggested by Mr Farmer. It is soul destroying to hear Build UK come out, within hours of the review being made public, with a statement which says they will coordinate and run it, and the CITB saying ‘vote change’. This will disengage employers, introduce unnecessary levels of bureaucracy, create inflexibility, divert funds, and provide yet another opportunity for self-serving groups and big business to steer the agenda.
The Farmer Review should be the catalyst for the CITB to focus on the commercial activities it performs well, and to disengage from its expensive and unsuccessful efforts to promote the industry. Many still do not understand that the CITB carries out commercial activities for which it is paid and makes a profit, such as administering the CSCS card scheme, selling training and being an awarding organisation. Given the vast amount of money that the CITB spends on PR and marketing, you’d think that kids would be lining up in droves to go into construction. Mr Farmer, however, shows that the CITB’s lack of industry support ‘undermines confidence in its ability to execute its function of wider industry promotion and outreach to schools and colleges’ (p.40).
The CITB should be left to promote itself with its own resources, with any levy, be it a reconfiguration of the old levy or a new client-paid innovation levy as suggested by Mr Farmer, being collected by HMRC and used by a new central body with a clear mission and strong leadership to provide a consistent message.
The Construction Skills Certification Scheme should also have been given greater scrutiny as part of the Farmer Review. Separate to the CITB, it is owned by Build UK, the Trade Unions and large employers. CSCS pays the CITB to administer the scheme, and does nothing itself. CSCS has been adopted as a point of entry to work on large building sites, and by local authorities. It has built a war chest of £2.3m over a short period of time, even after paying the CITB an unspecified amount each year. This begs several important questions. Were levy funds used in the creation of CSCS? Why is it not part of the CITB? Could it be used to carry more training and skills information? What happens to the profits from the scheme?
It is no surprise to anyone that Mr Farmer should note that the CITB has continued to ‘struggle to deliver across a multitude of different fronts’ and ‘struggled to get on the front foot and robustly deliver good value’ (p.54). Quite rightly, he recommends that it is time ‘to shape and evolve a more relevant and better equipped implementation body’ (same page).
Yet, while the CITB may have failed over the past half century to have a meaningful impact on skills or the image of construction, it is recognised and applauded for the quality of the courses it delivers and sells. It is time for the CITB to focus on the latter, and to leave the former to those who can do it (and already are doing it) better.
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