Improving Construction Outcomes Through New Procurement Systems

Salford City Council/ Urban Vision Partnership Forum

24th September 2007

Paul Mallinder Director of Urban Vision

Traditional Contracting Problems (1)• Tender every scheme irrespective of value, slow, costly

and bureaucratic and wasted valuable resources• Select on lowest price - risk created by the use of fixed

tendered rates• A slow process for getting projects on site and hence

completed, impact on spend targets• Little incentive to perform well as the next project will

still be tendered• The Council is at the mercy of the market

Traditional Contracting Problems (2)• Insufficient resource planning• Unable to involve the constructor at the planning and

design stage• Different designer/ constructor teams on each project• Does not encourage flexibility or innovation• Little incentive to develop new ways of working which

reduce costs/improve systems/processes etc• No collaborative working on supply chains/local

employment / environmental issues

The Impact of Fixed Price Tendering

• Highly competitive• Rates and prelims are often cut to the bone or subject to a

mistake• The value of risk is often reduced/excluded to win reducing quality• Other means are used to recover from a low bid:

– Exploit variations/delays/disruption– Minimise on site labour/supervision costs– Cut subcontractor costs– Cut supplier costs– Delay payment

• Adverse impact of a souring of relationships

Improvements required by Salford’s clients in 2003• Buildings fit for purpose• Customer satisfaction• Completion on time and budget• Reduced conflict• Zero defects/ good quality of Build• Sympathy with social regeneration issues• Added Value – quality environment• Whole life costs

Results of Salford’s schemes in 2003Results 2002-03

Completion within programme 60%

Completion within estimated cost 33%

Average customer score on quality (out of 10) 7.7

Number of defects at handover Significant,

Number of reportable accidents Nil

Period from sending out tenders to start on site 16 weeks

Constructors mobilisation period after appointment 6 weeks

Percentage of projects with early constructor input 0%

The National Drivers of Change

• Constructing the Team, Latham (1994)• Rethinking Construction, Egan , ODPM,(1998)• Modernising Construction, National Audit Office (2001)• National Procurement Strategy for Local Government,

ODPM(2003)• Comprehensive Performance Assessment, Audit Commission

(2004)• Skills for Sustainable Communities, Egan/ODPM( 2004)• Sustainable Construction, Constructing Excellence, (2004• Improving Services through Better Procurement, National Audit

Office (2005)• UK Government Sustainable Procurement Action Plan (2007)

New Practices in Procurement

– Removal of project by project tendering and select lists to create more certainty providing performance standards and value for money remain high

– Getting projects on site much faster, with greater flexibility due to the creation of long term partnerships as a result of a robust selection process

– Greater use of payment linked to performance– More emphasis on quality– Increased use of target cost/open-book payment

systems

New Practices in supply chain management

- Greater use of a standardised component design policy to achieve volume and supply benefits

- Greater consideration of off site fabrication techniques

- Consideration given to where the construction expenditure is going to enhance the social and economic regeneration of a locality

- New forms of collaborative working involving the entire supply chain

Where the savings come from (1)

• Egan envisaged INDUSTRY wide, not just the construction phase.

• No tendering preparation/evaluation time/costs• More time for option appraisals/ cost modelling/whole

life cost analysis • Avoidance/reduced delay claims and settlement costs• Advanced ordering of materials, eg. steelwork • Value reviews during the design and construction

process to reduce the target cost

Where the savings come from (2)

• Supply chain management– Volume purchase agreements with suppliers– Increase in standard component use

• More streamlined approval/ legal processes• Proximity of projects may lead to site establishment

savings• Final account settlement time/costs• Reducing journey time and transport/ fuel costs

through local supply

Conclusions from the July 2007 workshop

with Blackpool Council • Clients at Blackpool would not go back to tendering, however expectations have

been raised.• The flexibility, qualitative and added value benefits of partnering have been

demonstrated. There has been Insufficient recording of those benefits.• The main benefits are the ability to get projects on site quickly, the vastly improved

quality and loss of fear of costly claims• Blackpool’s experiment with market testing and tendering within the framework

have provided mixed results• Partnering has been wrongly blamed for project problems which we caused by

management /administrative issues that would have had a far worse result with a tendered project

• More work needs to be done to get construction costs down ( negotiations, robust challenge on value matters)

• Partnering can work for all types and values of schemes• Understanding about partnering, training and up-skilling are crucial

Creating a Robust Approach

– Hands on’ Leadership and clear communication– Know your strengths/areas for improvement– Adopt a strategic approach (Strategic Brief)– Consider packaging and number of frameworks very carefully– Assess how buoyant the local market is– Open day with contractors on select list– Extensive staff training (Partnering & Open book, negotiating )– Extensive training workshops (4 days each team member!)– Risk assessments– Design robust selection & evaluation system– Wholesale review of roles and responsibilities of the team

Salford’s Supply Chain ModelSalford City Council

Framework of Main Constructor Partners

The Salford Construction PartnershipMembership: Salford’s economic and regeneration staff, Connexions, Jobcentre Plus, Chamberlink, Learning and Skills Council, Action 4 Employment, Salford University, Salford College, local companies etc.

Network of local Sub-Contractors

Network of local suppliers

Urban VisionPartnership

Salford’s Construction Framework

• Work categories ( 5+2 yrs or 4 year terms):– Major New Build and Refurbishments: £500k - £5m (2)– Other New Build and Refurbishments: £125k - £500k (2)– Landscape Work All values (2)– Highways Civil Engineering Up to £2m (3)– Highway Responsive/ routine maintenance All values (1)( Urban Vision)

– Electrical All values (1)– Responsive and Routine Building Maintenance All values (2)– Minor Building Works: £20k - £125k (2)– Mechanical All values (1)– Major new build and refurbishments £5m-£30m (3)– Demolition All values (1)

Improved PerformanceResults 2003-04 2006/7

Completion within programme 60% 100%

Completion within estimated cost 33% 85%

Average customer score on quality (out of 100) 77% 84%

Number of defects at handover Significant, but not

measured

100% defect free

Percentage of projects free of reportable accidents - 86%

Period from sending out tenders to start on site. NB. This means get projects are on site much sooner.

16 weeks Planning start on site

commeces very early

Constructors mobilisation period. 6 weeks 4 months or greater

Percentage of projects with early constructor input 0% 100%

Design Stage Savings

• Ordsall Primary Schools- £45,000 was saved (2% of construction costs) by working with the contractor early on the project to arrive at the pre cast plank and insitu beam and wall solution

• Salford Sports Village- Steel was ordered very early to minimise the incurring increases in costs and encountering supply difficulties leading to delay and extra cost. This would not have been possible on a tendered scheme.

Tendering/contract Stage Savings and Efficiencies• Urban Vision is no longer spending time on the tendering process

for each project. This has saved 250 days (2000 hours) in staff time per annum allowing more projects to be undertaken without using agency staff .

• Legal agreements are now completed via a letter referring to a pre agreed standard contract. This has saved c.200 hours per annum ( £10,000)

• As a result of not tendering the 32 schemes approx 50,000 A4 pages and 4000 drawings have not had to be copied. This has saved approx £15,000

• Companies have not incurred £1.3m of abortive costs as a result of unsuccessful tenders. This amounts to 4300 days (34,400 hours) of capacity created

Construction Stage Savings

• Salford traditionally paid out £350,000 per annum in claims plus 100 days ( 800 hours) per annum settlement time/fees. There have been no claims on any partnered project.

• The Cadishead Way Phase 2 partnered scheme completed 9 months early and £1m below target cost

• The 7 architectural projects completed to date have achieved an average saving of 14%.

• On competitively tendered engineering projects it was normal for there to be a long schedule of defects at practical completion and for the contractor to take the full defects liability period (normally 6 or 12 months) to rectify them. This is now not the case under partnering.

• Under tendering only 26% of projects had final accounts settled within 18 months of practical completion. Final accounts are now settled as part of the valuation work . This has saved time as now agreed close to the end of completion.

Project Examples• Salford Sports Village• Commenced on site much sooner than a tendered

project would have.• Achievement of spend targets helped to secure

additional funding• Completed on time and 1% over budget despite

encountering unforseen ground conditions and delays by statutory bodies. This could have led to a delay and disruption claim of tens of thousands of pounds.

Comparison of final project costs (per property)

Comparison of cost per property for block improvement schemes

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Comparison of final project costs (per m2)New Build and Major Extension Schemes

Comparison of Partnered and Tendered Schemes - 10/07/07

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Conclusions on project costs• The cost of construction work is about the same, perhaps slightly

lower – – Tender ,estimators have a tendency to inflate rates where risk is

uncertain or overestimate the time to undertake a task.

– Tender, Contractors tend to price materials at a high level and then seek lower cost suppliers during the construction phase.

– Open book eliminates this situation

• We cannot be certain whether preliminaries may be slightly higher or lower than a tendered project as they tend to be cut in a competitive local market or increased during buoyant times.

• Open book working may well have protected the council from the costs of a buoyant market ( and may do so in the future)

Analysis of the local Market• Since Salford’s partnership began in 2004 tender prices have

risen on 'average' by 16.3% (Source BCIS)- an average of 5.4% per year.

• The Olympics and BSF programme will result in skilled labour shortages, particularly in the bricklaying, carpentry and plastering trades.

• BCIS are currently forecasting a further increase in 'average' tender prices over the next two years of 12.1%an average of 6% per year.

• There will also be particular “hotspot” areas.These areas will see a greater rise in tenders than the national average above. It is considered that the North West of England is such a region due to major works going on in both Liverpool and Manchester.

How we intend to continue to improve value for money• Early projects have provided opportunities to learn

– Use of rates for target cost negotiation– Contractors eager to please

• Target costs have been coming down– Rigorous negotiation– Capping share of savings– Tightening up when savings are eligible to be shared– Target cost for the next scheme are based on the actual cost of the previous scheme

• Considering ways to tighten up arrangements further– a mini competition at an early stage of all schemes– Preliminaries ( security and supervision costs)– Fixed price preliminaries– Why the company should be awarded the project– Programme review

– Primary schools – extensive use of off site fabrication

Added Value

• Many local sub-contractors and suppliers are involved in the supply chain

• Constructors have become involved with community events

• Working with closely with companies and local supply chains produces environmental benefits in the form of more sustainable product choices, increased recycling and reduced transport miles and fuel used with associated cost benefits

Added Value

• The City Academy access road scheme in Eccles has been recently nominated to receive an award under the Considerate Constructor’s scheme, the assessor commenting; ’…an exceptionally high standard especially with environmental and good neighbour issues’.

• The partnership is also committed to supporting the local community, assisting with an anti–bullying initiative and by providing assistance with the purchase of school playground equipment. It is also hoping to contribute to a future ‘safer routes to school’ project.

• Companies have demonstrated active support for the training initiatives delivered by the Salford Construction Partnership in May / June last year and the STEP 1 IN Salford training programme launched in January 2006.

Recognition for the Council

• Procurement has contributed to the Councils CPA rating• Procurement Commendation :LGC National Awards 2005.• Salford Sports Village - • Won the Builder and Engineer award for Public Project of the Year

2006• Won Gold award from the Considerate Constructors organisation

in 2006• Highly commended in the I.C.E Merit awards 2006• Highly commended in the Quality in Construction awards 2006• Won Silver award from the Considerate Constructors organisation

in 2005 and 2007

Regenerative impact of £100m construction investment• £7m profit/ohd recovery to main contractors/ developers• £4m Profit/ohd recovery to sub contractors• £3m profit/ohd recovery to suppliers• £15m of labour employed by main contractors (c 600 people)• £28m labour employed by sub contractors (c 1100 people)• £43m of materials manufactured/delivered by suppliers

Aim to keep as much as this as possible within

the local economy

The Impact of Construction

• Creating a thriving local construction industry can become a vital aspect of sustainable regeneration

• The construction industry employs c2.5m people in various roles

• Many people who start off in the trades progress into managerial and professional roles and some also establish their own small businesses.

• 245,000 workers required over the next 4 years

• Construction work is forecast to expand by 3% a year

Social Sustainability • Salford Sports Village• 22 main contractor workforce of which 12 (54%) were Salford

residents• 11 local sub contractors were used ( 100%) saving saving

transportation costs/fuel. • 87% of the materials supplied came from local suppliers ( 47 out

of 54 suppliers), saving transportation costs/fuel. • 3 new employment opportunities were created for Salford

residents.• 3 Salford local school children benefited from work experience on

the project.• Local people involved in the management of the facility

Social Sustainability• 583 Local unemployed residents supported into employment.

• This saves approx £7m per annum in benefits. For every unemployed person placed into a job this saves £12,000 in benefits and improves they and their families social and economic circumstances

• 242 Local unemployed residents into Construction related apprenticeships

• 93 Local unemployed residents supported into bespoke construction training

• 209 Local residents registered on SCP database/skills register

• 67 Major Primary Building Contractors signed up to the SCP Employment Protocol/Agreement

New Developments in Supply Chain Management through SCP

Thank You

Questions and Discussion

Paul Mallinder07970 941783

www.urbanvision.org.uk