Outsourcing predicted to increase during AMP3

In an interview with WWT, Bruno Speed, director of Miller Water, makes clear his views on the future of contracting in the water industry and predicts that in the AMP3 period from 2000-2005, even more work will be outsourced by the plcs.

WWT: How do partnering and framework agreements work? Mr Speed: Originally partnering was about working as a team. As a contractor, you gave them a figure for your profit and overheads and then discussions where held regarding some of the more peripheral issues. Most water companies are now moving towards partnering in some form, although Southern have turned back towards a more traditional approach since being bought by Scottish Power ­ despite being the first to develop partnering.

Yorkshire Water has been running a selected list of contractors throughout AMP2. All of its major schemes over £2M have effectively had a list of nine contractors. There were always three on any one list, so effectively three could bid for each contract, ensuring a competitive element. Thames Water is also moving towards the framework approach on a regional basis.

South West Water runs what the industry generally terms as Œfull' partnering. South West has identified three civils contractors, three process contractors and three consultants.

From this, South West then selects a team to build a project. It then sets a budget for the project and everybody buys into it, including South West. So, each party establishes the costs, with the aim being to undercut the budget. Everyone stands and falls together ­ in this case it's not down to each partner, but how the whole team performs.

WWT: So what we have in effect is the concept of end-product delivery. The plc sets the budget, chooses the team and tells them to go away and build it. A big change from the old Œengineer, procure, contract' (EPC) method?
Mr Speed: Yes. And at South West it means that the contractor is more involved with feasibility and pre-design work, and therefore has a greater opportunity to make cost savings.

WWT: What are the advantages and disadvantages of partnering for you as a contractor?
Mr Speed: For us, it helps to minimise confrontation on site. And it helps avoid the Œ¹lowest price wins' approach, once common in the water industry. The other main advantage is that it establishes long-term relationships. For instance, at South West, we've just finished a job at Plymouth and started one at Torbay with the same project manager. By working in this way, teams get to know each other.

One difficulty that water companies often have is how to demonstrate the actual monetary value of partnering. South West, however, has managed to compare the average overrun costs on partnering with traditional EPC projects ­ and found that partnering offers better value for money.

WWT: How will the change from AMP2 to AMP3 affect partnering arrangements?
Mr Speed: Water companies are increasingly looking at framework agreements because of the change. The AMP2 period was characterised by large, specific schemes. Smaller projects will dominate AMP3, but there will be a lot more of them.

One of the problems the plcs will have is how to administer lots of small projects. Either they can use smaller contractors or they can group work together for the bigger contractors.

WWT: Given this change, what is Miller Water¹s strategy over the next five years?
Mr Speed: We have recently formalised our M&E structure, and appointed a new manager.

We now have a very strong M&E capability and will be able to offer clients a full service within the context of a framework agreement. We can now get rid of the interface between M&E and civils and manage the whole project. That¹s how we¹ve structured our business for the future. There are, however, areas which we will not deal with, like utility work, pipelaying and mains rehabilitation.

WWT: What is the biggest problem facing contractors in the UK at the moment?
Mr Speed: The downturn in workload in other sectors has forced other contractors to focus on the water industry.

So one of the main difficulties we have is the number of players in the market ­ a proliferation of contractors has meant that clients can get a very reasonable price.

The other main issue is the five-year cycle typically seen in the water industry. At the start of AMP2, there was a drop-off in work as the water companies attempted to reduce costs. This drop has been followed by a Œworkload overheat' leading up to 2000. Ofwat is clearly concerned about this trend, and in AMP3, hopes to force the water companies to take a more holistic view of the five-year period.

WWT: What is the biggest single change likely to affect the water industry when the price review is completed?
Mr Speed: Almost certainly it will be how the water companies manage to achieve the savings they are set for AMP3.

A lot of them do not do the design and build work anymore, and so other than the customer interface, outsourcing would make sense. You could also begin to ask whether In the future, a water company's core business may well be to sell water, with O&M taking more of a back seat.

Contractors have often been asked to maintain a project for a year or two after completion, and it would not be too great step for them to maintain it for 20 years ­ or even indefinitely.


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