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15 APR 2019

Changing construction: Consistency is key

Will-Myles-RICS

Will Myles

Regional Managing Director, Asia Pacific

Singapore

RICS

Traditionally, construction tends to be a local industry; it's largely domestic players, tapping into local labor, materials and technology where available, otherwise importing them. There are increasingly international players with access to international finance, particularly on "big ticket" infrastructure projects and Grade A buildings. The industry feels the ripple effect of global market forces but tends to oscillate mostly to local dynamics.

The "buyers" of construction projects are often government agencies (for infrastructure) and local developers (for real estate), for whom expertise may vary. Lowest cost procurement is often preferred, incentivising "just-over-the-hurdle" quality output, and often leading to an adversarial approach to delivery.

Barriers to entry are relatively low for construction groups, which make for intense competition, and the industry consequently suffers chronically low margins. Global productivity growth has stagnated across much of the sector in recent decades, though players with economies of scale have the best chance to achieve better margins.

More collaborative delivery methods have been tried — with mixed success — and industry value-chain fragmentation often disincentivises project life-cycle thinking.

The industry has long lead-in times — from "yes, let's make the investment", through to land acquisition, planning, design and procurement — it can take years just to reach the construction phase. Lack of land access and unforeseen underground risks can cause significant delays. Government permits and licensing follow local regulations and are like cottage industries in some geographies.

There's a key difference between the needs of developing and developed nations. In Vietnam, for example, expected infrastructure needs are almost 100% "new projects", whereas in South Korea it's over 50% "repair and maintenance".

Rising costs & labour needs

What we've seen is that demand remains fairly strong but there are expectations of materials price inflation over the next 12 months and that's expected to deteriorate margins over the region. In our APAC Construction Survey for Q3 2018, financial constraints were identified by a significant portion of respondents in Australia, India and Malaysia, and also in China, where the rising cost of materials and strong competition were denting margins.

Across APAC, there was a fairly universal need for more skilled labour. In some of the more developed markets like Australia, New Zealand, Singapore and Hong Kong, there was a shortage of workers with specific expertise and in developing countries there was a general shortage of skilled workers.

Construction-working-together-pexels
Construction workers collaborating

A conservative industry

Construction is a conservative industry for good reason — if things fall down, people get hurt. Low industry margins limit the potential to recycle retained profits into research and development, and cookie-cutter project procurement processes make it difficult to offer new and innovative solutions.

Globally, one of the factors holding back innovation is the lack of consistency in standards. It's notoriously difficult to benchmark between projects and geographies: land, construction and property measurement standards have historically differed by country, and often by city. This generates a lack of transparency; the "buyer" has no easy benchmark for construction costs. For example, should a railway of 1,000 kms cost $3 billion or $10 billion? When estimates are available, what was included in the scope of capital investment in any case?

To address this, RICS and 40 other international professional bodies have come together to create International Construction Measurement Standards. These are intended as a way of doing 'apple for apple' comparisons between projects, an important enabler for benchmarking across the construction industry – something that has not been possible in the past.

Read more: Why ICMS is a global game changer

We are also working with 30 other professional bodies to create the International Land Measurement Standards, which are intended to provide greater certainty and transparency over land rights, and helping to overcome hurdles when negotiating large-scale infrastructure projects, such as utility or transport networks.

Consistent comparisons

The standards apply to professional services, and how professionals in the industry would measure and value assets rather than the product standards themselves. Clearly, the standards ensure transparent reporting to enable proper comparisons between assets of similar construction, for example between two single-storey buildings of brick construction, or between two roads of concrete construction.

To have a consistent way of comparing projects, the standard needs to take into account the materials that go into the benchmarks.

connection, light, RICS, SB, 310118

ICMS: Ensuring global consistency in the definition and measurement of construction projects.

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This article is an extract from S&P Global Platts special report 'Building Bridges: Energy and Commodities in the Construction Sector', published March 2019.

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Will-Myles-RICS

Will Myles

Regional Managing Director, Asia Pacific

Singapore

RICS

Will is passionate about the internationalisation of standards in the built environment and the benefits that this will bring to an increasingly globally connected world. Previously Managing Director for Bahrain and Kuwait for WS Atkins plc, Will led the organisation through a period of significant change. Prior to this, he established a management consulting arm for Atkins in the Middle East and has held business development and project management roles in East Asia and Oceania.

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