Vertical integration in construction

There are more challenges than ever facing the construction industry. Material availability, supply chain distortions, labour shortages and the increasing burden to monitor and reduce emissions are all weighing on profitability and performance in the sector. Could a vertically integrated supply chain help reduce the impact of some of these challenges?

Labour shortages, both on site and at a professional level, are a significant cause for concern, often impacting programmes and supressing margins, particularly where Brexit and the pandemic have made it more difficult to rely on established labour sources. Solutions that can provide greater predictability and mitigate risk are increasingly attractive within the sector.

Perhaps the biggest, and longest term, challenge is the requirement to move to net zero carbon. The Greenhouse Gas (GHG) protocol, which is the most widely used carbon accounting standard, divides emissions into three scopes:

1 Emissions from the business’s direct activity.
2 The parts of the supply chain that can be affected through contracts or choice of supplier.
3 The remaining parts of the supply chain.

Most companies have worked on Scopes 1 and 2, as these are the most straightforward. Tackling Scope 3 emissions provides an unparalleled opportunity to fundamentally change the construction process. A vertically integrated supply chain would give greater visibility of Scope 3 GHG emissions with the consequent opportunity to measure and control them.

In a vertically integrated construction business, core materials or components, which were traditionally supplied by a third party, are manufactured by the construction company itself. Having control over the manufacture of critical items should lead to an increase in quality and responsiveness as the voice of the customer can be ever present and better understood. As a result, rework should reduce, costs should go down and, ultimately, profit should go up.

Larger construction businesses that have strong purchasing power may be less incentivised to bring part of the supply chain in-house. The high upfront costs could outweigh the benefits if only a marginal reduction in unit cost can be achieved. As demand for construction materials has been outstripping supply of late, material manufacturers are commanding higher prices making vertical integration currently more attractive. Developing internal labour forces, rather than relying on often difficult to secure outside subcontractors should improve responsiveness. Developing internal capability in staff will also allow skilled labour to perform higher value-added activities with the supplement of semi-skilled staff.

A vertically integrated supply chain would afford the opportunity to closely monitor costs and performance. And close monitoring can provide analysis to improve the efficiency of integrated components. Could this drive for reducing cost move the business towards more standard manufacturing in components, which will in turn increase the appeal of modular buildings? After all, modular components can still be designed to provide flexibility without the high cost of custom building.

Persimmon, the UK’s biggest housebuilder, has chosen to vertically integrate some parts of its supply chain, including bricks, tiles and timber frames. Combined with strong cost management the business has achieved industry-leading margins of around 27%. Its timber frame manufacturer, Space4, has cut the site time to build the structure of a new home by almost two thirds as well as reducing the reliance on some traditional trades, such as bricklayers.

Vertical integration offers the opportunity to mitigate some of the supply chain challenges the industry is facing, whilst improving an organisation’s ability to track and reduce its emissions as part of its drive to Net Zero Carbon.

Collinson Grant routinely supports national and regional housebuilders. We have been doing that for more than 50 years and our work has included supplier assessment programmes, strategic sourcing initiatives and value engineering studies as part of cost reviews. We strive to use the insights and experiences we have gained from the sector and strong relationships to continue to achieve

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