Trevor Drury FCIOB, managing director of Morecraft Drury, tries to read between the lines on three new piloted procurement methods.
The Cabinet Office published its latest initiative, New Models of Construction Procurement on 2 July. Not again I hear you cry!
For the past 20 years we have had Latham and partnering, Egan and “Rethinking Construction”, Best Value procurement and framework agreements, only to see it all to go back to lowest price tendering during the recession. Now that we are on the upward slope on the next economic cycle, we have the next bright idea from government.
Except that once you delve under the skin of the new publications it is not that “new”, just a change of focus. Even the introduction to this publication states that it is “about evolution rather than revolution and establish[ing] clearly defined client-led collaborative processes developed from existing best practice”.
In 2011 the Government Construction Strategy, which set out a vision to achieve 20% savings in construction procurement, included a pilot scheme to trial three models of procurement:
- Cost led procurement
- Integrated project insurance
- Two stage open book
The aim of these models is to change the way in which government buys construction. They attempt to change the procurement process so that the supply chain responds to an outline declared budget and client requirements. This is different from the usual process where the price is built up against a specification without the tendering organisations knowing what budget the client has available.
It is reported that the pilot projects helped deliver savings of £447m in 2012/13 and £840m in 2013/14. So what exactly are the three procurement models?
The client, who may have existing framework agreements, invites one or more integrated teams or supply chains to deliver a project using collaborative behaviour, tools and techniques under the declared budget on the initial project and then is required to achieve cost savings on future projects for the same quality standard.
In competition with other similar integrated supply chain organisations from the framework, two to three organisations are involved early in the procurement process to encourage the use of innovative design and working practice to develop bids that identify cost reductions. To be successful, the bidding organisations must achieve a price below the budget and are scored on a mix of commercial and physical benefits. If there are no prices below the budget, then others from outside of the framework are permitted to bid. If the budget cannot be met or improved upon, then the client will have to consider increasing the budget or reducing the specification.
Integrated project insurance (IPI)
The origins of IPI go back over a decade, as it was being discussed in the early 2000s when I was part of the team that developed the Strategic Forum for Construction’s “Integration Tool Kit” for developing integrated project teams and supply chains. In Europe decennial liability insurance has been in the marketplace for many years.
To implement IPI, the client holds a competitive appointment process for selecting an integrated project team (IPT) who will be responsible for project delivery. Criteria for selecting the IPT will include the common requirements for capability – such as proven track record – plus demonstration of maturity behaviours, lean thinking, removal of wasteful processes and fee.
The successful team then creates a preferred solution that will provide the outcome required by the client, including the generation of savings measured against historical cost benchmarks.
The differentiator between this and other forms of procurement is the insurance policy which covers all the usual construction insurances for the client and all supply chain members involved in the project.
The insurance also absorbs some of the commercial risk of cost escalation beyond the budget. However, before that facility is available there is a pain-share threshold divided up on an open basis between the client and the other supply chain members.
This IPI model includes independent facilitation and a gateway process which ensures value for money and helps balance commercial risk to a level at which an insurer is prepared to provide the insurance. This third party intervention and review process is seen as a considerable benefit to the successful outcome of the project.
The insurance provides for cost overruns only up to a financial cap, thus limiting the insurer’s potential exposure and will not meet all of an over spend, but helps remove some of the blame culture prevalent within the industry.
Payment under the policy will be on the basis of proven loss. However, to obtain the insurance cover at the outset, the proposed scheme will be subjected to independent validation to ensure that the project is deliverable and that it is commercially competitive or, as the guidance refers to it, as the maintenance of “commercial tension”.
Two stage open book
This is a two stage tender process where a contractor is selected after the first phase rather than at the end of a two stage tendering process.
The first stage involves contractors and their consultant team being selected on the basis of “capacity, capability, stability, experience, strength of their supply chain and fee (profit plus company overhead)”. The second stage consists of the successful team being asked to produce a proposal on an open book basis against the client’s brief and cost benchmarks.
The intention is that this will allow early engagement of the supply chain leading to an agreed price and risk profile prior to the client committing to construction.
An interesting feature of this approach is that it is intended that the client will be able to “re-engineer” the supply chain as part of a joint review, with the potential of Tier 1 contractors sharing their supply chain members with the client and other Tier 1 contractors.
Two of the models really are further developments of existing procurement methods. But the cost led procurement method is a departure from previous practice in that the client is now going to declare the budget openly and up front. If the bidding contractors cannot meet the budget then the project does not go ahead unless more finance is found or the specification level is reduced.
The two stage open book method is really about the client getting access to the supply chain early in the procurement process and ring fencing the overhead and profit fee at stage 1. In reality what does a main contractor (Tier 1 contractor) do other than take risk, provide management resource and expertise and broker the contractual relationship between client, itself, the subcontractors and suppliers?
But what about construction management? Could the public sector “go direct” and manage its own supply chains? It would appear not, although surely it is food for thought given that the client teams will need to have competent project and cost management capability to procure these models.
The real game changer and innovation, as far as the UK construction industry is concerned, is the integrated project insurance. It has been a long time coming but it is about to surface both within the public sector and also private sector. The issue will be how much it will it cost in terms of premium and whether it is affordable in terms of the cost of the premium when weighed up against the project risks. As they say time will tell!