A Comparative Cost Analysis of Construction Methods in the UK: Literature Review

A COMPARATIVE COST ANALYSIS OF MODERN METHODS OF CONSTRUCTION AND TRADITIONAL METHODS OF CONSTRUCTION IN UK

LITERATURE REVIEW

2.1 Introduction

In the previous chapter, a brief account was given about the UK construction industry and the gradual shift from the traditional method to modern methods construction in the UK. When reviewing the construction process two areas that regularly occur are: cost and time (Cooke and Williams 2004). Construction projects are immensely capital intensive and require a huge sum of investment and this makes cost control a very important factor to the contractor and client (Olawale & Sun, 2014). The construction industry contributes largely to the economy but is also associated with high costs. To fully cover the scope of this research, this chapter investigates different aspects of relevant literature relating to the history of UK construction industry; the modern and traditional methods of construction and its advantages and disadvantages to the construction industry; the modern or traditional building materials and their characteristics; what method of construction that allows for cost variances within itself and why; the factors that affect the cost of construction and construction cost analysis, the sustainability of the  method of construction and how this reduces cost. Furthermore, this chapter compares the MMC with TMC in terms of the opinions given by various writers regarding if the MMC or TMC allows for costs savings; what method of construction is faster and not so expensive; are the buildings which are cheaper and faster relaxed on durability; is there an acceptance/gradual setting aside of regulations in the construction industry.

Consequently, the findings gotten from this literature review are used later on in the research to act as a benchmark to analyse data gotten from BCIS and interviewing construction professionals who have used Off Site Manufacturing (OSM), Modern Methods of Construction (MMC) and Traditional Methods of Construction (TMC) on their site. However, owing to the industry interest, wide-spread concerns and home builders perceptions about the cost of modern methods of construction, rather than detailed evaluations of the cost implications on the various methods of construction, most of the literature that has been referred to are somewhat limited; restating the need for a more in-depth research on the aspects of modern and traditional methods of construction with which this work is concerned and examined in this research.

2.2 Overview of UK construction Industry

“We are … very conscious that we have not built enough homes in this country year on year for many decades … We have been very clear that we want to be very ambitious. We want to deliver homes across all tenures. We want to drive home ownership up as well. Working to deliver one million homes in this Parliament is a target we should be very ambitious about, and go beyond, if we can.” Brandon Lewis MP, Minister for Housing, 22 March 2016.

(House of Lords 2016)

Presently the UK housing-business is undergoing some challenges such as; under supply of good quality houses (NAO 2017), mismatch in nature, minimal sustainability and cost effectiveness (Pan and Goodier 2012). However the housing shortage has provided room for a reformation in the construction industry and the need to prepare for the future by fully exploring other methods of construction and it’s potential. The government is looking to hit a target of one million homes by 2020 and this is in response to research which concluded that a total number of 300,000 houses are needed each year (House of Lords 2016). The National Audit Office (NAO 2017) states that 2015 had a total number of 23.5m homes in England, £286bn was estimated to have been spent on housing in 2015-16 and the government aims to deliver 1m number of homes by 2015-2020. HM Government (2017) conducted an investigation to review the legislation and implementation of 1m homes in England by 2020 and discovered thematic areas from planning to burdens on SMEs.

On the other hand, the construction industry is susceptible to the highs and lows of the economy. (Pan et al. 2006) has stated that time, cost, quality and productivity are the drivers of the construction industry. If these three drivers are available in any method of construction being used, there is hope for the UK construction industry. Therefore, CITB (2015) opines that with the current housing demand, there should be futuristic solutions with key factors such as: people, sustainability, technology advancement and leadership for long term success. The UK housing markets can be characterised with housing demand, housing affordability and homelessness; between 2001 and 2010, an average of 144,000 new homes were completed annually: 100,000 fewer per year than in the 1970s (NAO 2017), the housing crisis (House of Lords 2016), the amount that first-time buyers have to borrow to buy their first home has risen from 2.3 times average income in 2000 to 3.2 times income in 2014 except in London where prices earnings rose with the rent (NAO 2017). At the end of March 2016, 71,500 homeless households in England were in temporary accommodation, up from around 48,000 in 2010-11 (NAO 2017).

In another report by (NAO 2007) stated that the government has set sustainability standards for the construction and refurbishment of buildings on the government estate, but these are not being met and CITB (2004) stated that, for there to be sustainable development what, how and where to build is the main focus and the challenge beyond legislations and regulation in the construction industry should be ‘…changing the way the industry builds rather than what it builds…’. The construction industry affects the economy of any nation, society and environment and due to its nature, sustainability is of utmost concern, therefore more nations are striving to achieve sustainability in construction (Mustow, 2006). In the UK however, through policies and initiatives from the government, progress is continually made on improving sustainability in construction (DTI, 2006); (Ogunbiyi et al. 2014).

Image 1.1: Long term drivers, implications and responses affecting the construction industry. CITB (2010).

The construction industry is known for delivering building projects over the initial budget estimate almost all the time (Jackson n.d). The conventional method of construction in UK is TMC and the growing use of MMC, the present phase is a mixture of TMC and MMC. In the history of British construction technology prefabrication has been in existence since the eleventh century (O’Neille and Organ 2016), offsite construction is not a new concept in the UK construction industry (Pan et al. 2004). However, offsite construction is now being established as method of construction in the UK even though the use of modular construction is widely accepted and used in Europe (Lawson et al. 2012).(Taylor 2010) also noticed that the UK construction industry is slow in acknowledging and using OSP techniques.

2.3 Traditional methods of construction (TMC)

In TMC, there is a high level of waste in materials such as packaging, timber, plasterboards and insulation (Waste and Resources Action Program (WRAP) 2007). NOA (2007) cited Kate Barker (March 2004) who stated that traditional and block methods in construction remain cheaper… the time saving available do not provide a compelling financial reason to switch production. 

Offsite construction is perceived to be more expensive than traditional construction Lusby-Taylor et al. (2004) reported that though less volatile when compared to TMC, MMC would not necessarily reduce the time cost of construction. There is an observation by those in the housebuilding business that traditional methods of construction are not as expensive as offsite methods of construction are (Birkbeck and Scoones, 2005).

Concrete and stone products have played and are still playing a very important role in construction in terms of adequate supply this has been analyses and investigated at least five times by the Competition Commission and its predecessors, with reports on timber the most competitive segment, asbestos products, and steel which is being used in various sectors apart from construction and is viewed as oligopolistic since 1967 when British Steel Corporation was created Nadim and Goulding (2010). Structural metal products can now be classified as low competition. (Lowe 2011). In general, comparative costs between traditional methods of construction and MMC on a project basis, cost still remains the dominant factor in specifications and has been a key reason for the slow uptake of many types of MMC in the UK.

2.4 Modern methods of construction

Undeniably, the Construction Industry in the UK has fully embraced the use of modern methods of construction and these includes timber frame, pods, composite panels, precast cladding, volumetric and panellised steel frame (Waste and Resources Action Program (WRAP) 2007).

MMC/modular building method has a good potential for multi space occupational premises especially if it meets the specifications of the residents (McGrath and Horton 2011).

‘It is expected that the use of MMC is likely to grow over the next 3 years; 45% anticipate that it will play a greater role in their organisation’s construction processes. Only 3% of those surveyed expect the role of MMC to decline’ (NHBC Foundation, 2013).

MMC requires few trade operatives unlike the traditional method of construction (Kolo et al. 2014).

The authors focused on the history of prefabricated construction methods in low-rise buildings noted that the timber frame was associated with pre-fabrication between the 1200s AD -1700s AD, the 1800s-1918 brought new technologies which brought about the type of prefabrication we see today and the 1960s onward introduced volumetric systems which made prefab more industrialised and this MMC where used far back before the war and handled transportation issues in the past very well (O’Neille and Organ 2016).

(Kolo et al. 2014) agreed with the benefits of OSM regarding speed, quality, and quantity of housing delivery emphasising the benefit and challenges of MMC to shorten the timescales of a project, producing and ordering modules in bulk to reduce cost, reduction in the transportation of manpower and machinery, better onsite safety and better overall product quality, improve productivity and is also sustainable. (Waste and Resources Action Program (WRAP) 2007) in this report it was certified that MMC leads to reduction in construction waste, it identifies with the current use of MMC and its future potential. The challenges include the intensity of project planning and engineering, limitations in transportation of modular products and the initial high capital outlay (Kamali and Hewage 2016).

(Lawson et al. 2012) stated that a range of design opportunities can be achieved through the use of steel and concrete frame modules for mixed –use commercial and residential buildings creating stability that can be used in modular construction for high buildings. c examined the supply of MMC is high and its ability  to meet the markets demand but supply is limited due to supply being made on bespoke basis.

2.5 Offsite manufacturing in construction

In recent times, the construction industry is looking to be lean in terms of improving its supply chain and sustainability (Jorgensen and Emmitt, 2009). This process of introducing lean methods into the construction process comes with its own set of risks (Hook and Stehn, 2008). Lean methods in the construction process can be understood first from the supplier’s perspectives and how the lean techniques affect their performance and supply of construction products Eriksson (2010), (Ogunbiyi et al. 2014).

Perhaps, the need to meet the growing demand for houses, faster project delivery time and cost effectiveness seem to be driving Offsite Manufacturing (OSM) in Construction. Offsite construction can be classified into four: component and subassembly, volumetric and non-volumetric, preassembly and modular building (Wei Pan and Chris Goodier, 2012). Manufacturing of this sort has been around for a long time, and in recent times, the construction industry has made a major move in considering OSM. However, this has not always been a smooth sailing experience. For example, Peabody Trust’s Raines Dairy had an extensive use of prefabricated materials that resulted in cost and time overruns that couldn’t have been envisioned (Building.co.uk, 2004). Taylor (2010) opined that offsite construction is paramount to the efficiency and sustainability of the UK construction and civil engineering industry. The Construction Industry Council (2013) in their study stated that ‘…in terms of their capacity, house-builders claim that given time to resource they will be able to ramp up to undertake a build rate of 130,000 – 150,000 new homes a year in England using conventional techniques (against a current rate of around 100,000)’.

Offsite Manufacturing (OSM) has been discovered to be a means of reducing the demand of housing due to the faster speed of delivery compared to the traditional methods of construction (Jack Goulding and Mohammed Arif, 2013). There is a design process presently being used in construction manufacturing, this must be re-engineered to improve and increase the benefits that can be derived from the manufacture of construction goods. (Mohammed, John and Farzad 2012). The construction industry is also recognized as a project-based industry. Its distinctive features are related to the uniqueness of each project, including design ideas, the construction site, the production set up, material supply, management and organization, and the construction process as displayed throughout the history from the construction of the great pyramids in Egypt 5,000 years ago to the Burj Khalifa (Nawari O. Nawari, 2012).

According to National House Building Council (NHBC) Foundation (2013), the top barriers to the use of full volumetric or modular construction mentioned by housing organisations as well as large and medium house builders is a lack of suppliers and high capital cost. It can be assumed that added to the cost, the consumers of OSM do not appreciate its characteristics, instead, they create bespoke OSM products thereby creating massive waste causing lack of sustainability. The cost of OSM is deemed a significant disadvantage. Also, currently the supply of products has been limited due to OSM products like traditional housing especially those that are commonly used by developers (Venables et al., 2004). For OSM to be sustainable, the cost gap between the OSM and traditional construction must be reduced and the redesign of housing should better suit the specific characteristics of OSM not vice-versa (Venables et al., 2004). This paper discusses the feasibility of effective housing delivery using OSM and the benefits of OSM (Kolo et al. 2014). (Generalova et al. 2016), (Kamali and Hewage 2016).

2.5 Differences in the methods of construction

One of the sectors in the UK is the construction industry, which is characterised by an industrial sector that is dispersed and possesses few barriers of entry (OECD, 2010; Ball et al., 2000). This paper confirmed this study by the production of concentration ratios (Mahajan, 2006). (Lowe 2011) in this paper agrees that in the criteria of the top (5 per cent) the construction industry comes in in terms of most concentrated sector comes in as the fourth least, and in the league of top 15 firms (9 per cent), the industry obtains the least position in the third place.

2.6 Cost Analysis

 ‘…a full appraisal of costs involved in previously constructed buildings… aimed…at providing reliable information which will assist in accurately estimating (the) cost of future buildings. It provides a product-based cost model, providing data on which initial elemental estimates and elemental cost plans can be based.’ (UK RICS New Rules of Measurement (NRM) 2012, p.12).’

(Okmen and Oztas, 2009) opined in their report construction projects have major differences and similarities but one of the ways that construction projects might be different from each other are in terms of its complexity, different clients and teams. (McGrath and Horton 2011) stated that with OSM and general construction, when clients requirements are being met, there is higher consumer satisfaction, this doesn’t generally mean the higher the construction cost, the higher the client satisfaction.

The authors also stated that, there are different factors causing risk which affect construction costs, therefore, the actual costs are generally straying from the estimated costs and this can take a favourable or contrary direction. This brings about constrained issues with money which is the underlying force in construction. Therefore, there has to be an estimation of cost alongside and estimation of uncertainty that may arise from the estimated costs (Okmen and Oztas, 2009). In these reports, the authors (Halphin and Woodhead, 1998; Griffis and Farr, 2000; Oberlender, 2000) stated that there are ways to measure how successful construction projects are based on factors such as: quality, safety, time, cost and functionality. Cost estimation is considered the most important task that is required for construction projects to be successful (Okmen and Oztas, 2009).

Construction cost analysis can be carried out when applied to whole life cost of building projects in association with the operation of the building and its construction. Also the means by which it can be modelled is based on the cost, duration and scope of works of the construction projects. the authours opined that to get a detailed results further emphasis should highlight factors such as: the key design element and the cost features (RICS, 2013). This is a method of cost analysis that has been simplified by the RICS, therefore there will be a review of literature looking into these features of cost analysis by various authors below.

Construction cost: Before a construction projects is carried out, there is a cost estimate for the total project pre-construction and this is to ensure that it is accurate and credible, there is also the added assistance of historical data which act as a backup which interpret the control of costs which leads to an accurate estimates and genuine budget (Loosemore 2015). The perception of offsite construction of achieving maximum value but one which requires a huge capital outlay is one that should be given great attention (see Blismas et al., 2006; Homes and Communities Agency, 2010). The increase in initial capital outlay in a survey was perceived by 92% of respondents to be high and that was a reason for the limited use in offsite production technology (Nadim and Goulding 2010) (Lowe 2011). (Charles et al. 2015) argues that that the overruns of cost due to the changes is insignificant when compared to how it affects the life cycle value of the construction projects.

(Pan and Sidwell 2010), discovered that the cost of apartment building was not so different to that of conventional options, the cost of offsite construction for apartments could be reduced and effective management can lead to a reduction in construction costs. The authors stated that OSM doesn’t guarantee a sustained cost reduction and effectiveness, there has to be a long term commitment by the organisations on new OSM technologies unless the myth of MMC/OSM having a high capital cost will become a reality. In a research conducted by Pan et al (2007) the barrier of MMC that was most significant was high capital costs and this was discovered after a survey of 100 UK homebuilders and in their response, some were perceived and others real. It takes a cost as low as a third of traditionally built in-situ bathrooms to create offsite modules Pan et al. (2008), in discusses the whole life cost of OSM this paper therefore, does not contest its value but on how the construction cost is perceived (Pan and Sidwell 2011).

Image: Total construction cost comparison (Pan and Sidwell, 2011)

Construction duration: (Olawale and Sun 2014) discovered that the objective of the project delivery within a time and cost are the controlling factors for determining the cost and time and that 93% of contractors claim to use project control mechanisms frequently but that project control doesn’t integrate the cost and time during project control process.

Scope of works in building: After a review of 245 UK offsite construction companies (Taylor 2010) noted that the offsite construction sector was a combination of various manufacturing, engineering and material processing services and that OSM construction industry to the GDP has been undervalued when measured against historical data.  Some of the factors that are used to create and capture value are found were there are processes, activities and risk in finance (Pan and Goodier 2012). In their paper Pan and Sidwell (2011) stated that the rise in the cost of construction can also be caused by some other factors such as: technology, design, demand and institutional and these factors when measured through positive correlation can give and accurate construction cost in both conventional (TMC) and offsite (MMC) construction.

Key design elements: In the construction process change is constant and adjustments made to the projects to accommodate this change are variations which can raise the cost of the proposed project budget or return it back to its original state. Tan (1999) stated that the height and cost of construction signals the eventual cost of offsite construction this is due to the nature of construction which determines the cost of the project based on the height of the building. It should not be concluded with cost of construction being dependent on the height of the building. (Pan and Sidwell 2010) study is about the cost barriers (what are they) that are associated with four forms in offsite construction methods: pre-cast concrete, cross-wall panel, in-situ reinforced concrete frame, steel frame and timber frame.

To determine the gross output and value of UK offsite manufacturing, (Taylor 2010) has studied the common standard activity classification codes (SIC), which produces the gross output form each substructure. (Kozlovska et. al 2015) stated that determining the budget for wood construction is very difficult to determine when individual calculation is done.  Howas (2000) argued about the changes that are made during the first design of the project, this paper states that the initial design is the most important area in the management of the project and the reason for this is when variations in the construction projects are being made after there have been defined objectives.

Different studies have been conducted too investigate the reasons for cost overruns in construction projects and it has been discovered that most projects have similar issues. The major causes of time and cost overruns are issues such as: design changes and poorly handled change control (Al-Momani, 2000; Koushki et al., 2005; Kaliba et al., 2009). A proposed taxonomy giving an overview of the most likely causes of design changes (Sun and Ming, 2009) leading with a default in the clarity of scope (Cheng 2014). Issues in financing and payment also contribute to the construction project cost overrun (Kaliba et. al., 2009; Abdul Rahman et al., 2006; Mansfeild et al., 1994).

(Charles et al. 2015) In his paper investigates the cost and value of the proactive changes that have been made through the construction process that was aimed at making value. Some of the factors that contribute in causing delays and costs overruns. Inaccurate costs estimates (Jennings, 2012; Shane et al., 2009), over or under planning (Chang, 2002; Assaf and Al-hejji, 2006) are most times caused by the inadequate design information ().  Olawale and Sun (2015) stated that to control construction project costs, the objectives of delivery has to serve as a starting point for measurement by predetermination. (Koushki et al. 2004) estimated of the causes of time delays; from change in orders, financial incapability and owners’ lack of experience and the causes of cost delays; contractor related problems, material restraint problem and also financial restraints.

Cost features: (Akintoye 1998) study gives an understanding of the factors that are involved in the costing of construction projects and this was categorised into seven factors that directly affect the productivity level and performance of the construction project in this order: project complexity, technological requirements, project information, project team requirement, contract requirement, contract requirement, project duration and market requirements. (Eksteen and Rosenberg 2002) discussed how the overhead costs affect construction companies and can limit their ability to bid for construction jobs when the construction market is booming, due to the downscaling that had to be carried out during market fluctuations. The authors agree that it would be easier for large construction companies that are clear about their overheads and are effective in monitoring and managing them. This paper assumes this wouldn’t be the case for medium and small companies who can’t monitor these cost overheads.

A cost estimation can only be determined by regarding it as a generic construction item. (Pan and Sidwell 2010) study covered the whole construction cost from preliminaries to external works and services and discovered that though MMC is regarded to be an alternative form of construction with a lot of benefits nevertheless, the cost barriers examined when comparing the performance of pre-cast concrete cross-wall panel with in situ reinforce concrete, steel and timber frame.

2.7 Construction costs and views from other parts of the world

The issues surrounding construction costs is not limited to UK alone and can be noticed in various parts of the world but with slightly differing issues based on the  environment. For (Eksteen and Rosenberg 2002) from South Africa the high capital cost of construction arises due to overhead costs affect construction companies and can limit their ability to bid for construction jobs when the construction market is booming, due to the downscaling that had to be carried out during market fluctuations. (Kamali and Hewage 2016) in Canada, thought there is a high initial capital for MMC. House designs are looking to get more complicated in the coming years. In Slovakia, (Kozlovska et. al 2015) opined that the standards for cost estimation will still remain a problem because of the variety of materials and shapes that make up a house. (Xiao and Proverbs 2002) The authors concluded by stating the reason for the higher and lower construction cost certainty in the UK was due to the rate of design variations that occur during the construction process. These variations in the construction process also create delays and sometimes increase cost. (Koushki et al. 2004) from Kuwait concluded by stating that cost overruns and time delays increased the cost of a construction process. In Russia, the study by (Generalova et al. 2016) showed that MMC favours affordable accommodation and dispels the myth that claims that MMC buildings can only be afforded by the rich.

However, advocating for the use of MMC is not only about debunking the myths surrounding the cost of MMC. In Canada, (Kamali and Hewage 2016) support the use of modular buildings because they have a better lifecycle performance, they conserve energy and their performance among others emphasizes the economy of scale in production. (Kozlovska et. al 2015) suggest that in Slovakia new materials and construction systems in wood are coming up, with open diffused systems which are environmentally friendly. The authors’ investigations showed that modular technologies are used worldwide with more applications and this goes beyond only low-rise building and is being introduced in multi storey and high rise buildings. (Generalova et al. 2016). (Xiao and Proverbs 2002) evaluated the construction cost between UK, USA and Japan and the effect of contractor’s performance. It was determined that the cost of construction in UK was the highest but the client satisfaction that is achieved is higher in Japan than in UK. Meanwhile in Kuwait owners and homebuilders spend more time inserting almost all necessary information during the design stage so they are able to hire more experienced contracting companies and engineering supervisors. This allows for a reduction in cost overruns and time delays. (Koushki et al. 2004).

In summary, the issue of construction and its cost is something which poses a problem in different countries and the author noticed that the problems such as: overhead costs, high initial capital for MMC, variety of materials and shapes, standards for cost estimation, design variations being faced as quite similar with what is experienced in UK. There is also a joint agreement on the benefits of MMC over TMC such as better lifecycle performance, energy conservation. It was also discovered that the cost of construction in UK is higher than some other parts of the world due to the regulations

2.8 Chapter summary

This chapter reviewed the body of literature centred on the costs of traditional and modern methods of construction by: acknowledging the state of the UK construction industry and the growing need for houses, the concepts researched related to the economic relevance of the construction industry in terms of demand and supply and the economic stability.

Furthermore, researching the concepts and factors that bring about cost increment in either of these construction methods. In addition to these arguments and statements based on the perception of MMC being expensive and sustainability lacking adaptable variations or both, the importance of related concepts like cost and technical skills were examined as the required changes to be made in to the adoption of MMC as the prevailing method of construction to the traditional method.

Thereafter, the benefits of the methods of construction were researched focusing on the analysis of the cost estimation practice and reasons for causing building construction projects to finish over budget in terms of time quality and most importantly cost.

Finally, focused arguments on the impact of time quality and cost on the modern and traditional methods of construction were reviewed while paying attention to variations which occur in the whole life of a construction project and the perceptions of homeowners and homebuilders to the concept of MMC.