CONSTRUCTION JOURNAL

The way ahead for Portuguese construction

Investment, internationalisation and innovation are critical to the future of construction in Portugal, as are ensuring proper qualifications, regulation, standards and contracting

Author:

  • Bruno de Carvalho Matos

08 December 2020

Lisbon, Portugal

Even before the onset of COVID-19, political and economic turmoil have had a drastic impact on Portuguese construction. Between 2002 and 2016, the industry suffered a cumulative loss of more than 50% in productivity as a result of dwindling public investment and the 2008 economic crash.

The sector began to recover in 2017, however, and steady growth is expected in coming years despite the impact of the pandemic, mainly due to private investment in residential building and public investment in infrastructure.

A host of challenges

As my previous article indicated, Portuguese construction is highly fragmented and there is no standard way of working. Each project is essentially a prototype because of its many unique features: the site and its conditions, the geographic area and climate, the existing labour market for skilled trades, financing constraints, and the time available for the work.

Furthermore, there are few barriers to entering what is an already highly competitive market based on lowest-cost bids. This results in businesses having low profit margins, and there is no size advantage when dealing with suppliers or buyers. Other issues include the industry’s traditionally high rate of short-term and low-skilled labour, with companies failing to invest sufficiently in the workforce. Recently, the shortage of specialised skilled labour and steady growth in the cost of construction materials have further damaged the sector’s profitability.

Ensuring efficient use of materials and energy to minimise the industry’s environmental impact is another consideration, as failure to comply with standards and legislation is not uncommon. Rules are usually highly restrictive, thus making compliance difficult, and this is compounded by a lack of inspection and audit. Meanwhile, the costs for re-use and recycling of construction and demolition waste are high, and there is no comprehensive policy to support or encourage these practices.

Nevertheless, Portugal has been evolving towards greater energy efficiency, as seen in large-scale projects, including new-builds, and the marketing of products for retrofit, such as thermic insulation in existing buildings. Energy certification of buildings for sale or rental was made compulsory in 2013, and Portugal also has voluntary systems to support sustainability including the construction leadership initiative LiderA.

But in terms of innovation, Portuguese construction performs poorly compared with other EU countries. No Portuguese construction-related firm ranks among the top 1,000 companies in the union for expenditure on research and development, according to the 2019 industrial R&D investment scoreboard. In fact, businesses’ research and development expenditure has been declining in Portugal since 2010.

Overcoming these challenges will involve investment, internationalisation and innovation, each of which requires various conditions to be in place.
  • Public infrastructure investment can boost the economy and stimulate private-sector development, but will require greater political and legal stability, tax incentives and access to credit, with financing from foreign banks as an alternative to local lending. Less bureaucracy and more effective administration across municipalities could cut the time needed to obtain building permits and licences as well.
  • To develop the international networks necessary to sustain construction, government support is needed for Portuguese firms to expand into new markets and partner with organisations in countries with developed and competitive construction markets.
  • Innovation should be used to enable the diversification and sustainable expansion of companies. This requires greater investment in the industry, including the development of new materials and construction technologies, and the circular economy.

“The industry traditionally has a high rate of short-term and low-skilled labour, with companies failing to invest sufficiently in the workforce”

Regulatory restrictions

The country’s administrative and regulatory framework for construction services is one of the most restrictive in the EU, constituting the most significant barrier for foreign companies aiming to operate in the Portuguese market.

Company registration schemes impose complex financial, economic, technical, professional and insurance conditions for potential entrants, while the fees that construction service providers are charged for this process are usually higher than in other EU countries. Similarly, professions such as civil engineering and architecture are highly regulated in Portugal, more so than elsewhere in the EU.

Moreover, municipalities exercise considerable power over land use, but the time needed to obtain licences from them varies according to their respective administrative capacities. Portuguese authorities are therefore trying to streamline procedures for obtaining construction permits and encouraging the use of online portals.

“Portugal’s administrative and regulatory framework for construction services is one of the most restrictive in the EU”

Skills and standards

Until recently, the most active construction markets in Portugal have been residential refurbishment, office, hospitality and healthcare. In the near future, however, new-build residential, industrial and logistics facilities, transport and infrastructure are expected to expand, despite the pandemic. This should generate significant employment opportunities and stimulate the industry.

But that increasing demand requires the government to promote professional courses and encourage construction firms to play their part, to ensure that the necessary labour is available to avoid skills shortage. There is already a particular need to strengthen the construction workforce so more technical and vocational education should be offered at upper-secondary level, as well as on-the-job training for those that need it.

It will also be vital to standardise working practices across the sector. Global standards such as ICMS, IPMS or NRM are not usually adopted unless there is client demand in particular cases. As my previous article detailed, it is not therefore uncommon for standards to differ significantly from one project to the next, and even within the same project. Together, the lack of skills and standardisation constitute major barriers to the industry’s efficiency and competitiveness. Regulation could then play an important role in enforcing and promoting professional standards, as well as establishing a framework for inspection and disciplinary action to inspire trust and confidence in the industry.

"Together, the lack of skills and standardisation constitute major barriers to the industry’s efficiency and competitiveness"

Contractual clarity

One area in which standardisation would be of particular benefit is contracting. Except for public and other major infrastructure projects, on which the design–build (DB) contract is more commonly adopted, the most widely used construction procurement model is design–bid–build (DBB). In this form of contract, tenders are solicited from qualified general contractors and a fixed price is set for the overall project, allowing for some incidental adjustments through alternatives or different unit prices.

Early contractor involvement (ECI), including a guaranteed maximum price (GMP) and time agreement, has recently been on the rise for construction works, especially where owners prefer to work with a specific contractor from the outset and benefit from their active participation in the project development and design.

Regardless of the model used, contracts are still often poorly prepared, leading to ambiguities and misunderstandings between parties. For instance, it is frequently the case that the scope of work is not fully specified, while insufficient time is allowed for contractors to evaluate the project and submit well-prepared bids. The lowest bidder cannot always provide assurance that it has the competencies and capacity to perform the work successfully either.

Furthermore, design professionals do not share the risk borne by a fixed-price builder, so have no incentive to mitigate design and measurement errors. Owners should therefore ensure that designers are held contractually responsible for incompatibilities, errors and omissions. The adoption of standards and contract models could support this by ensuring all relevant stakeholders understand the process properly.

"Regardless of the model used, contracts are still often poorly prepared, leading to ambiguities and misunderstandings between parties"

Promoting professionalism

Proper contractual requirements – including potential penalties – supported by appropriate standards and regulation are also needed to mitigate, monitor and control risks relating to ethics and conflicts of interest.

The following issues may arise during the project life cycle.
  • There can be conflicts of interest where confidential information about a client’s real-estate investment, such as pricing or negotiation strategy, is passed to another client by a management entity that represents both.
  • Competencies demonstrated in the tendering process may not match those actually observed during design or construction.
  • When involved early, the general contractor can influence the process according to its own interests in terms of cost, time and quality, rather than the owner’s.
  • Collusion in the tendering process can occur when the client or other tenderers, stakeholders or third parties align prices or share confidential information.
  • Contractors can price below cost, expecting to compensate for this by additional or extra work with higher margins.
  • Designers may not assume responsibility for errors, so tenderers increase the bid price to cover this risk and even actively encourage additional works during construction.
  • Running late on project planning, a contractor might generate unnecessary requests for information during construction to gain time.
  • Work may not conform to the contract documents, but the product is not remedied due to lack of transparency and quality control.
  • The documentation necessary for workers and companies to operate on site could fail to fulfil either legal or client requirements.
These risks emphasise the importance of proper regulation for professional project and construction management services, overseen by an independent entity, such as RICS, that adequately represents the clients’ interests and promotes the highest ethical standards.

The future

To address today’s challenges and create a compelling value proposition in an increasingly globalised industry, Portuguese construction needs to concentrate on investment, internationalisation and innovation. In this sense, RICS’ global professional qualifications and standards can help attract foreign investment and promote internationalisation, by ensuring a high level of service and fostering trust in the industry.

In terms of innovation, more can be done to capitalise on digital transformation and the circular economy, as both will soon be essential to remaining competitive. For instance, Portugal is not yet as advanced as other countries in implementing BIM; however, construction is increasingly turning towards a more digital and collaborative approach that will make better use of information technology.

Clients already seem to be interested in moving away from transactional contract models towards collaborative ones, where BIM could also be of benefit. Although there is no prescribed approach, ECI with a GMP and time agreement has been increasingly adopted on large-scale or complex projects with the aim of mitigating investment risk through better planning and cost control. As with all procurement models, the success of this approach is highly dependent on the project specifics and managerial effectiveness.

Companies that provide regulated, professional project and construction management services are therefore going to be crucial to help developers decide the best construction procurement model and administer competitive bids properly, as well as promoting the highest qualifications, standards and values, throughout the project life cycle.

"Portuguese construction needs to concentrate on investment, internationalisation and innovation"

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