Recipes for a lean future

The Government is worried about putting on the pounds. It wants to slim down public sector construction expenditure by 15% to 20% by 2015. As part of the new financial diet, the appropriately-named Government Procurement and Lean Client Task Group has come up with three new public sector procurement recipes.

Cost-Led Procurement

Two or three integrated supply chain teams from the client’s framework are invited to develop proposals to deliver a project within the client’s cost ceiling. Successful completion of the project by the selected team would lead to it being offered similar projects, but with the expectation of lower cost, achieved through continuous improvement.

Integrated project insurance

Again an integrated project team, selected through a competition, has to meet the specification within a cost ceiling but the whole project is covered by a single insurance policy which includes cover for any cost overruns above an agreed ‘pain-share’ threshold. Estimated likely cost of this overrun cover is 2.5% of the project sum, but the expectation is that it will be matched by the saving from having just one project policy.

Two-Stage Open Book

Integrated teams selected from a framework bid against an outline brief and cost benchmark. The winning team then works up a full proposal to meet the cost ceiling and functional outcome with the client on an open book cost basis, with independent verification at stage-gate reviews.

The contracts recommended for trials of the new recipes are JCT Constructing Excellence, PPC 2000 and NEC3 Option C, with only minor amendments and subject to certain rules, for example, no retentions in the supply chain and use of project bank accounts. NEC3, in particular, has been chosen for current high profile projects, notably CrossRail, though with substantial amendments.

So might the new procurement approaches produce the savings that the Government wants? Construction contracts should give effect to the parties’ risk allocation, even if it takes a court to work out what that was, and the risk allocation obviously affects the final financial outcome. The contract contains the price and risk recipe. The new options could therefore make a difference, but life is rarely as simple as that and the Task Group has warned that technical reform efforts “...must be supported by behavioural change within the industry...”

As a start it has mapped out the DNA of “the intelligent client”, identifying the “... commercial and behavioural competencies that must be instilled within public clients...” to achieve 20% cost savings on the pilot projects.

The draft list of these competencies currently includes:

• consistency in the procurement models used;
• strong leadership;
• development of collaborative culture within the client;
• focus on early supply chain involvement;
• ensuring supplier engagement based on ability to collaborate;
• establishing mutual objectives;
• commitment to continuous improvement;
• transparent issue resolution; and
• opportunity to innovate throughout project development and implementation.

The list might look ambitious, but the Task Group has asked the government to roll out professional development within public sector clients so that their staff can deliver the competencies. It also recommends a similar push in industry to encourage equivalent best practice to be promoted within the whole supply chain.

And there is, of course, that word “integrated” that recurs in the descriptions of the teams in the three new procurement models. Successful integration is another challenge.

In addition, the Task Group has been looking at the effectiveness of public sector framework agreements and has developed a scorecard of attributes by which future agreements can be judged, with a Framework Quality Mark awarded to those that meet the required characteristics.

It has also raised the possibility (for consideration by the Government Procurement Service) of cross government collaboration on procurement, to achieve savings through aggregation of goods and services, i.e. mobilising the collective bargaining power of public sector bodies.

It’s not going to be easy, but then slimming regimes rarely are. As they say, no pain, no gain.

Richard Craven is a professional support lawyer and Wisam Sirhan is an associate in the Construction & Engineering Group at Mayer Brown International.