Creative forward thinking
Thinking ahead, one water company has already appointed contractors for its 2010-2015 programme of work, even before it knows what that programme comprises. Dean Stiles investigates the implications.Severn trent Water's decision to appoint major contractors for the next asset management period (AMP) a year early has been especially fortuitous for the 11 companies.
The successful contractors are: Balfour Beatty, Barhale, Biwater, Costain, Enterprise, Interserve, LoRImtech, May Gurney, Mott MacDonald Bentley, Morgan Est and North Midland Construction. The contracts awarded by Severn Trent are for ten years covering two AMPs and provide for a co-located, integrated design and build model.
Full details of the 2010-15 programme of work will be finalised once the outcome of Ofwat's PR09 price review is known but the early announcement provides supply chain stability, and the chance at an early stage, to invest in people, training and equipment, the company says.
Costain's £400M contract - over ten years - includes design and build elements. "This is a significant win for Costain and it is particularly pleasing to announce a framework contract win from a new customer," said Andrew Wyllie, Costain's chief executive.
Enterprise has been appointed as core supplier for the West Midlands region to deliver Lots One and Two, for clean and dirty water with ten-year contracts worth £60M. "The size and scale of the work is shown in the contracts announced today which demonstrate our ability to work jointly, on a long term basis, in the utility industry and the public sector," said Enterprise group CO Owen McLaughlin.
A joint venture between consultant Mott MacDonald and contractor JN Bentley, has a ten-year, £40M annual contract for design and construction of non-infrastructure schemes. As part of the contract, Mott MacDonald Bentley has been appointed a select tender list contractor for sewerage projects in AMP5, enabling it to bid for non-core sewerage projects over the same period. Design for the programme will begin now in preparation for AMP5.
The work includes improvements to water and wastewater treatment works, sludge treatment works, aqueducts, dams, impounding reservoirs, service reservoirs, sewer flooding protection works and combined sewer overflow improvements.
Morgan Est's £500M contract for improvement work on clean-water and wastewater pipelines within the southern area of Severn Trent's region is substantially larger than its £80M contract for the current period. The contract "builds on a strong relationship developed through the last two asset management periods and will further reinforce our position as one of the country's leading water and infrastructure specialists," said Mark Cutler, MD at Morgan Est.
Severn Trent's choice to bring these decisions forward a year was made in consultation with contractors in a bid to reduce the costs associated with the AMP "roller-coaster" estimated to be 2% of the water industry capital programme.
"Putting numbers on the cost is not easy but everyone inherently knew or felt that there was a waste here. We felt it was absolutely the right thing to do to bring forward contract decisions," said Paul Goddard, commercial manager, purchasing and supply chain management, at Severn Trent.
The new approach will help improve design efficiency, reduce construction costs, improve links across the supply chain, eliminate waste and drive innovation. "It means we can avoid the peaks and troughs between the beginning and end of the AMPs when we see resources drift away to other sectors as companies demobilise and remobilise; all of which is so wasteful of time and resources," he said.
"We know there are some things we will be doing in the next AMP. There will be asset renewal jobs ... removing leaks ... and jobs to meet legislation, that will be funded by the Ofwat process for AMP5 so the risk to Severn Trent making these decisions, we believe, was relatively low," he said.
Severn Trent is funding early planning work and feasibility studies from discretionary spend in the current AMP. "We think the benefits will be worth while," he added. "We're very excited about creating this extra time to work together. Our integration plan covers the next 12 months and includes development of business plans and joint training events as we set up co-located, integrated teams."
Work will start ahead of the next AMP and Severn Trent appointed feasibility contractors last year to handle the process. "We have bought ourselves and our contractors additional planning time and the accepted wisdom is that with more time to plan we can deliver more efficiently. That benefits contractors and our customers," he said.
"We are identifying those projects we think will need planning permission, particularly the more complex permissions, and our feasibility consultants will be picking that up. We are also looking to appoint a small number of experts to assist our contractors and us in that process.
"Some of the things that ultimately cause delays are land acquisition, planning, electricity supplies and the like. The further in advance you can start those processes and get the discussions going the better."
The successful Tier 1 contractors were selected from an original list of 47, using a new process including e-auctions designed to shorten the selection period. These enabled Severn Trent to establish a market rate for projects in the course of a few hours, a process that would previously have taken two months and involved numerous individual meetings with contractors, Goddard said.
The selection process focuses on a number of areas including safety, corporate responsibility, and environmental management, as well as pricing and with 80% of the marks in the quality categories. "While price is obviously a factor, we've made our decision based on a whole host of factors that are of equal importance," he said.
"Our prime concern has been to select contractors whose ethos and working approach fit best with that of Severn Trent. We recognise that contractors are also looking for like-minded clients. With cultural and behavioural alignment, we can, together, achieve so much more."
"We have been exploring essentially the relationship fit; whether our businesses can work together; what the contractor is looking for and what are we looking for. We are probing the DNA of the contractors," Goddard said, using a phrase coined by one of the contractors.
"I don't think it matters whether they are big or small. And we are looking to see this in Tier 2 contractors too. We are looking for that genuine commitment to our operation which we think which can be evidenced by sharing ideas with contractors and by them sharing ideas with each other."
Severn Trent's tender process is designed to find evidence of this behaviour. "The maturity that we are seeking is that collaboration and sharing of good ideas, basically to reduce waste and improve margins for everyone."
This sharing has already been hugely beneficial in heath and safety programmes that provide a solid basis in which to build, he says. Severn Trent has been working with its contractors in open book type arrangements for more than ten years but "it has never embraced the P word. We felt partnering had too many different definitions", he said.
Closer collaboration with contractors will continue and Severn Trent, which has traditionally shied away from design and build approaches, is now willing to trust its contractors to design work.
As the company has moved through the AMP phases it has shed contractors because "you cannot have these sorts of relationships with large number of contractors that enable you to influence quality, and health and safety, and all those things", according to Goddard. "We have progressively moved to smaller numbers but we are getting more interested in Tier 2 and we are looking for the sort of engagements that we have with out Tier 1 to be similar between Tier 1 and some of their Tier 2 contractors," he said.
Limiting the risk
The Tier 1 model is not always appropriate. "There are lots of very good companies within the supply chain for whom it is absolutely right to work either on a schedule of rates or even a fixed price, which limits the risk for both themselves and for the companies employing them."
As we move into AMP5 and 6, Goddard expects low carbon solutions to become more important. "We at Severn Trent are obviously very committed to carbon reduction and we will be measuring the carbon footprint of our solutions."
Like all companies, Severn Trent is working without an agreed or consistent method for carbon calculation. "We have just about settled on a mechanism on which we are going to measure ourselves and our projects. And we'll be sharing that with our contractors."
The existing tender process already includes an element of carbon footprint assessment but contractors face the dilemma of having to decide which of the many tools for carbon measurement to use. And each water company has its own preference. A standardised method would be an enormous help, he said.