Case study: prime contracting – building down barriers

The ‘Building Down Barriers’ project, set up in 1997 by the Defence Estates and the Ministry of Defence (MOD), was an initiative aimed at establishing the working principles of supply chain integration into construction.

The idea of supply-chain management (SCM) in construction is to harness the full potential in the entire ‘Chain’ of suppliers of construction services, products and materials, to deliver best value to the client. The value is measured in terms of performance and cost of the facility over the whole of its life, and the aim is to achieve this while at least maintaining – or enhancing – the profit margins of all involved.

Two projects were selected, at Aldershot and Wattisham, with prime contractors AMEC and Laing, and involved the provision of indoor sports and swimming pools for army gar-risons. A research and development group, led by The Tavistock Institute and the Warwick Manufacturing Group, developed and evaluated the supply chain process with its sup-porting tools and techniques.

The whole concept was based on the concept of setting up long-term relationships aimed at improving the value, improving the quality and reducing the underlying costs; it was based on trust, openness and teamwork.

The project started from the client’s statement of need in output terms. The design was then developed by the design team involving the key design constructors and component suppliers with the work managed in clusters. Design solutions were assessed using the through-life cost approach, rather than capital price alone, and was expressed as the net present value and also as a target through-life cost profile over time.

The approach incorporated risk management used in conjunction with value management and whole-life costing principles. Payment was made based on the target-cost approach.

The ‘Building Down Barriers’ project was highly successful in delivering a range of benefits to customers, including the following:

● Enhanced functionality for clients and facility users;

● Savings in whole-life costs;

● Delivery ahead of programme;

● Predictability of cash flow during design and construction;

● Improved collaborative relationships within the project team.

In addition, benefits to the supply chain included more efficient working processes, a positive atmosphere of team collaboration and greater confidence in design information.

It was also highly influential in changing MOD’s approach to construction procurement to place a strong emphasis on supply chain integration and single-point responsibility. The work had been taken forward via a series of workshops and training programmes, and is a good example of a joined-up approach to generating change in line with the principles of rethinking construction.

Source: Holti et al., 2000.

achieve these, it is essential that all procuring bodies move towards proper integration of design, construction and operating functions. This will require a move to integrated teams, early supply-team involvement, incentivized payment mechanisms, continuous improvement processes and joint commitment to achieving best whole-life value. Three preferred procurement routes are recommended to which framework arrangements may also add value.

Public–Private Partnerships (PPP) (particularly Private Finance Initiative (PFI))

This approach is only recommended for projects whose capital cost is likely to exceed £20 million, and is created for the provision of services and not for the exclusive provision of capital assets such as buildings.

Design and construct (and where appropriate maintain and operate)

In a ‘design and build’ contract, the integrated project team is responsible for the design and construction of the facility. The supply team is likely to deliver the greatest performance benefit through innovation, standardization and integrated supply chains, where appropriate output specifications are used.

There may be some circumstances where the design and build procurement route should be extended to cover maintenance and also possibly operation of the facility for a substantial period.

Prime contracting (requires there to be a single point of responsibility – the

‘prime contractor’ – between the client and the supply chain)

The prime contracting procurement route is mainly practised in the UK where the major supporter is the Ministry of Defence. It generally features the equal collaboration of all stake-holders, to the extent that all contractors, consultants and client representatives work together in partnership to ensure that a cost-efficient and suitable project design solution is achieved.

Prime contracting requires that there be a single point of responsibility (e.g. the prime contractor) between the client and the supply team. The prime contractor needs to be an organ-ization with the ability to bring together all of the parties (the supply team) necessary to meet the client’s requirements effectively.

It is common that long-term alliances are formed between all contracting parties and down the supply chain. These alliances are designed to allow a longer-term view to be taken for the different projects undertaken. This is particularly important since many of the projects under this arrangement also involve maintenance obligations which often last for 5 to 7 years after the project has been completed.

Prime contracting usually includes such features as pain/gain share (where the prime contractor as well as the client gains financially by reducing the project costs), target-cost pricing (where prices are agreed on the basis of a reasonable profit for the supply team and value for money to the client) and open-book accounting (where costs are made transparent to the client).

11.9 The NHS Procure 21 guidelines

The NHS spends in excess of £1.4 billion a year on capital investment and has the largest capital procurement programme in the UK Government. In 2002 the NHS introduced Procure 21 – an innovative approach to procurement of construction projects in excess of £1 million embracing the principles of Rethinking Construction. After the success of the scheme on two pilot projects twelve Principal Supply Chain Partners (PSCPs) were selected.

The key principles of Procure 21 (NHS Procure 21, 2002) are as under:

● scheme management by an integrated supply chain;

● cost certainty at an early stage;

● time certainty through the use of proactive project management techniques;

● assured construction quality;

● financial security;

● skills development for NHS Trust staff;

● the use of lean construction and collaboration techniques;

● cost improvement through continuous improvement;

● open-book accounting of all transactions;

● increased VAT reclaim possibilities and ‘Best Practice’ captured across all developments and fed into new projects;

● no need for Trusts to go through lengthy OJEC procurement cycle; the use of NEC ECC target-cost contract with activity schedule.

In 2005, with 38 projects completed under the national framework, The National Audit Office reported that prior to Procure 21 only 28% of projects were completed on time, and 26% had a cost overrun. In comparison under Procure 21 all projects had been completed within the agreed budget. The NAO further reported that VFM gains of around 10% against the costs of projects have been achieved using Procure 21 compared to the costs of traditional projects (NAO, 2005).

In summary the advantages of the NHS Procure 21 can be summarized as follows:

● predictable;

● develops value for money;

● encourages innovation/value management;

● enables prompt agreement of costs and start on site;

● single-cost advisor is used.

Possible disadvantages may include the following:

● Procure 21 not mandatory so Trusts may choose traditional approach, in effect this means that the PSCPs may not secure expected volume of work;

● open and collaborative approach is not consistent all the way down the supply chain;

● finance cannot be raised under this approach (unlike PFI);

● higher consultant fees may be incurred;

● skills of successful project directors may be lost if they are retained by the same Trust upon completion of major works.

11.10 Highways Agency – overlying principles for future procurement

In addition to the need to comply with legislation and government policy there are a number of basic principles which can be applied to all categories of work to achieve best value. To be fully effective all of the principles need to be applied as a package when procuring a product or a service. Each of the principles could be adopted in isolation but in total they provide suppliers the structure within which to identify optimal solutions and the incentives to deliver continuous improvement over long-term periods. The principles are set out below:

● early creation of the delivery team;

● an integrated and incentivized supply chain;

● maintaining a competitive and sustainable supply chain;

● clear points of responsibility with no unnecessary layers of supervision;

● E-procurement;

● selection of suppliers on the basis of best value, that is, the optimal combination of quality and price;

● fair allocation of risks;

● high-quality design;

● partnership approach based on long-term relationships;

● performance measurement with continual improvement targets.

(www.highways.gov.uk/business/932.aspxV [accessed 20 September 2006])

11.11 The 2012 London Olympics

The 2012 London Olympics is one of the biggest challenges facing the UK construction industry for a generation; in terms of scale it is at least twice the size of BAA’s Heathrow Terminal 5. The project is located in the Lower Lea Valley in the East of London and has required a massive clean-up of 200 hectares of contaminated land, the removal of pylons and the relocation of power lines underground.

In September 2006 the Olympic Development Authority (ODA) appointed CLM – a consortium comprising Laing O’Rourke, Mace and US consultant CH2M HILL – as delivery partner with the primary role to oversee the rest of the supply chain. Significantly both Laing O’Rourke and Mace are involved in the construction management of the flagship Terminal 5 project.

CLM will also provide resource management, technical capability and systems to manage the planning, design, procurement and delivery of the construction for the venues and infrastructure.

It will manage risk and opportunity but the ODA will always remain the contracting authority (Building, 2006).

After the appointment of CLM the next stage of procurement was the design and build of the main stadium on which a consortium including Sir Robert McAlpine and HOK has been appointed as the preferred bidder.