Framework agreements - is the industry benefiting?
Framework agreements are standard practice in the water industry, but Philip Bolton finds he is no longer alone in worrying about their long-term implications.Larry Beard, Severn Trent Water's (STW) purchasing director, attended a water conference recently and asked a number of questions surrounding framework agreements and their value within the industry.
During the conference - Water 2007: Preparing for PR09 and the Water Framework Directive - Beard observed that the majority of the sector was governed by framework agreements.
- Whether framework agreements are the best solution for the industry
- What the implications are for those left out of the frameworks
- How strictly tied-in water companies are to the agreements
- Whether they are allowed to go elsewhere for more appropriate equipment when needed
This process looks set to continue for the forthcoming AMP5 investment period from 2010 to 2015.
But being tied down to a set supplier list can cause problems on both sides, including those water companies that initially set the agreement.
Most frameworks have a clause that enables companies to buy from suppliers not on their supplier list, if those on it are unable to offer what they need. But in practice, this is a lengthy process that often requires much justification.
The increase of frameworks within the industry offers mixed consequences. For those involved in a framework agreement, it constitutes a reliable, solid income that will last long term - they often cover periods of seven to ten years.
But if you are not lucky enough to win, you are faced with the likelihood that related business from that authority will dry up.
The growing tendency for the larger water and sewerage companies in particular is to establish all-encompassing framework agreements with major contractors, and then manage this relationship to achieve supply chain savings.
This may make financial sense to the contracting authority.
But there are concerns that corners may be cut in the long run as companies compete to keep their prices unrealistically low in order to win the frameworks.
There is a danger that by keeping costs low, less attention will be paid to quality and whole-life costs. Winning a framework is so important to a company looking for financial security that it may be tempted to underestimate costs and hope they can be absorbed later.
Often they can, but there have been occasions when this situation has caused problems.
For example, one water authority asked Watson-Marlow Bredel to advise them over a new system that would not work. It turned out that the pipework was too narrow for the pumps fitted. It cost £32,000 to replace these - a cost that had to come from the contractor's profit margin.
Many framework agreements are put in place as a money saving initiative, because contracting a service for a long period of time allows companies to beat suppliers down on costs.
But it is important that too much emphasis is not placed on reducing spend to the detriment of other considerations, such as whole-life value, low maintenance costs and flexibility.
Recently, Watson-Marlow Bredel lost out on a pumping framework agreement because of its equipment being more expensive, even though the company offering the agreement admitted that its pumps were of superior quality to those
ultimately chosen and may therefore have a better whole-life value.
It is becoming increasingly difficult to find loopholes in agreements that allow those outside the supplier list to continue to do business from outside.
While in the past framework agreements have focused on types of equipment, they now tend to centre on a process as well - pumps for sludge, for example. This means their choice of supplier and, therefore, equipment will be specific and likely to preclude all others.
Those companies not on supplier lists may find themselves in an insecure financial position, which is likely to diminish the market of suppliers.
Narrowing the market in this way is contributing to the de-skilling and de-manning issues the water industry is currently experiencing.
Some water companies manage their own framework agreements, but others outsource them to external consortia, allowing them the responsibility of creating supplier lists and finalising details of the agreements. This hands-off approach may have a negative effect on those companies who are unable to manage their procurement and supply chain, and ensure that the most mutually beneficial suppliers are chosen.
Failing to keep a close eye on their supply chain could have negative implications for water companies, particularly when it comes to making initial contract decisions. It may also have implications with regard to how the water companies address sustainability in their business operations.
Ofwat now has a specific sustainable development duty.
Its report, A Sustainable Water Industry - To PR09 and beyond, published in October 2006, states: "Companies should not aim, merely, to minimise financial costs over a five-year time frame. We will look, instead, to companies to prepare far-sighted strategies based on maximising value over the long term."
Water companies may have to look again at how much of the decision-making process can be delegated via framework agreements without compromising their ability to deliver the best value, rather than the cheapest, which Ofwat will clearly be looking for.
Philip Bolton is water industry specialist at Watson-Marlow Bredel Pumps.
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