Sunset for the frameworks?
With Ofwat set to limit future returns, there is speculation that water companies will seek an end to the framework system. But, as Dean Stiles reports, that may not be workable.The value of work procured in the UK through frameworks runs to many billions: the largest 20 frameworks announced in the past year alone are valued at more than £19B, according to research by Barbour ABI.
Frameworks work well especially when quality contractors are in short supply by offering a steady offering of future work. But recession has reduced work volumes and contractors are competing aggressively for business.
Water companies are not isolated from these economic pressures and, faced with Ofwat's decision to limit future returns, will put their contractors under renewed pressure to deliver costs and efficiency savings in the order of 12% if the regulator holds firm on its pricing decision, says Paul Mullord, UK director at British Water.
Mullord says: "Some companies may adopt a more adversarial way of working as the best way to achieve results; others will expand their partnering arrangements. I expect that we will see every reaction between the two extremes."
Some contractors expect a return to single-stage tendering characterised by short, confrontational relationships between clients and contractors, because competitive tenders are the surest way for a client to get the lowest price. Earlier this year Steve Morgan, British Airports Authority's (BAA) capital director, surprised and disappointed BAA's suppliers by terminating its five-year construction framework.
Will water companies follow suit with AMP5?
Contractors privately confirm that some water companies have asked them to re-assess charges, even when fee structures have been agreed as part of the framework. This undermines what frameworks were supposed to achieve - reducing procurement costs and improving quality by encouraging long-term partnerships between clients and contractors.
As in the last recession, contractors that have not previously shown interest in the water sector are now approaching water companies, says Mullord.
He says: "The last time it happened the water companies were able to deliver their business by looking project by project, tender by tender. That was a time when there were a small number of large projects around. Now we've got a different type of work and the average size of project has dropped dramatically. I don't think water companies will be able to work in the old way of tendering one by one and managing one by one."
Colin Davis, director of supply chain at United Utilities (UU), believes the trend in the water industry is for greater partnering within frameworks that will also involve tier two and three contractors. Davis says: "There is a place for partnering type arrangements or alliance type arrangements where we can clearly define the targets and what the measures are.
"We've got a portfolio of approaches that we apply dependent on various criteria. Those criteria are what's commercially the best way and where the value is in the process. If a major contractor is going to subcontract most of the output because of its specialist nature why wouldn't we contract directly with the sub-contractors?"
Davis adds: "Our plan is to recognise the second tier and to achieve some standardisation of commercials across the second tier. Where we have main contractors buying a number of commodities that are the same, why does United Utilities pay five or six different rates for those commodities because they buy from five or six different contractors?
"With our alliance partners, we are shoulder-to-shoulder in terms of regulatory measures working against common drivers. If we deliver against them and they deliver against them, we will win. We are not soft on cost we will maintain absolute rigour in that regard."
One of the lessons learnt about AMP4 is duplication, especially double head counting in areas such as scheduling and project management, says Davis. "There is a cost implication if you can remove waste. You have to take care in your contract management process and your clinical delivery of the programme, to make sure that those costs come out and are realised in profit."
UU is reviewing the AMP5 contracts for design engineering, civils work, and network civils on long-cycle work and short-cycle repair and maintenance work. Also, 10-15% of UU's work is put out to market. "This tends to be areas where the specialism does not exist within the standard framework agreements, therefore to avoid paying margin on margin with sub-contractors we push it out through the competitive tender work stream," Davis says.
"We established our strategy about nine months ago as to what type of work we were going to put down each delivery stream and therefore what type of contractors we would like to work with. From that we developed through the procurement teams activities, either negotiating with some of the existing contractors where there was a strong commercial position to extend agreements, or going out to the market.
Davis says: "The unhelpful pattern for water companies to drop projects ad hoc at the end of the AMP cycle, because at some stage they have not managed to deliver projects for the agreed budgetary provision, can be avoided. If we can get these contracts so that they are mutually agreed and beneficial drivers for all, and we are delivering the whole programme for break even point, or even better and make profit, that is surely what we should be doing."
The framework process is an appropriate method and the cost of set up, for client and contractor, is justified, says Davis. "Yes, it is a very involved process, but the cost of getting this wrong and the cost of working with a contractor or partner where the relationship has broken down can be very expensive in terms of claims and everything else."
He says: "In order to place £3.5B of water business and about £1B of electricity business we will spend short of £1M. In terms of delivering a sizeable programme in a short space of time I'd say it's money sensibly spent."
Severn Trent does not use the partnering word. "We always felt it meant different things to different people," says Paul Goddard, Severn Trent Water commercial manager, purchasing and supply chain management.
"We have for some time now been working ever more closely with our supply chain. We talk about things like working together, and more recently, good supply chain management, which to us is the elimination of waste, either of time or money," Goddard says.
"We are committed to this because some of those efficiencies emanated from us, so we've got to sort that ourselves. We can make our partners efficient, but we know there are opportunities that the members of the supply chain can bring to us. That's happening in other industries as well." he says.
This collaborative working applies from a £5,000 project to major projects. Goddard recognises that there is an industry-wide issue regarding lack of certainty about projects.
"The knowledge of the detail of the programme and the security of it, is something we recognise. Our thinking used to be at a fairly high level on this in terms of a commitment to a certain amount of capital spend," he says.
"We have realised that the important thing is to bring it down to the level of each supplier. Every contractor's programme of work needs to be that much more visibly and actually secure," Goddard says.
Seven Trent is taking this bottom-up point of view and for AMP5 is moving into co-located, integrated teams. "It means we can work together to understand exactly what the programme is and what the implications are if a scheme starts to fall back," he said.
Part of this approach is an early-doors involvement by contractors to engage their expertise as soon as necessary.
Frameworks are part of the solution. Goddard says: "We will wish to be engaged with all of the supply chain to find efficiencies and innovation. We recognise that a lot of the innovation comes from the people who do the work that might be tier 2 and 3 in some cases.
"It's a case of the whole supply chain recognising that in the current times we have to work together to increase that efficiency, reduce that waste: to survive, quite simply."
In the first downturn for a decade, it is no surprise that frameworks will be tested. But although water companies will want to alter frameworks, it seems unlikely they will want to abandon them.