New Models of Construction Procurement and the Public Procurement Regulations 2015

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1 New Models of Construction Procurement and the Public Procurement Regulations 2015 Conference on Innovation, New Technology & Processes in Construction Chartered Institute of Building Construction Manager Olswang 4 June 2015 By Trevor Drury MBA, PG Dip Bar, PG Dip Law, PG Dip Project Management, FRICS, FCIOB, MCIArb Managing Director Morecraft Drury

2 New Models of Construction Procurement Cabinet Office publication New Models of Construction Procurement Introduction to the Guidance for Cost Led Procurement, Integrated Project Insurance and Two Stage Open Book 2 July 2014

3 New Models of Construction Procurement Consistent with Government objectives set out in: Government Construction Strategy ( May 2011) Industrial Strategy for Construction, Construction 2025 (July 2013) In adopting these models the intention is that they will contribute considerably to the reduction in the cost of construction and should provide cost certainty. Clients should know what their projects will cost and that the procurement method adopted provides confidence of outturn cost at the outset

4 New Models of Construction Procurement In the forward to the 2 July 2014 document, Peter Hansford, the Government Chief Construction Adviser commended...the models as vehicles for implementing these best practice principles on construction projects, in central Government departments and agencies, in the wider public sector and in the private sector.

5 New Models of Construction Procurement In 2012 the Government with support from representatives of the construction industry established a trial of three new models of procurement Cost Led Procurement (CLP) Two Stage Open Book (2SOB) Integrated Project Insurance (IPI) With the exception of the last model, there is nothing particularly new and it is a case of evolution rather than revolution

6 New Models of Construction Procurement The focus is to change the way that the public sector procures construction, where the supply chain respond to an outline requirement and a declared budget. This is compared to the traditional method used in the past of contractors and suppliers tendering against detailed client specifications without consideration of the client budget The new models use existing best practice in: Client leadership Collaboration throughout the supply chain

7 New Models of Construction Procurement The new models are intended to produce: Efficiency gains Which generate funds for additional work New employment More affordable and fundable projects and Make the UK construction industry more competitive These aspirations are realisable based on a number of trial projects using the new models of procurement Savings 447m (2012/13) 840m (2013/14)

8 New Models of Construction Procurement Delivery by integrated project teams and collaborative working leading to: Reduced costs Reduced risk Programme certainty Increased innovation Better working relationships throughout the supply chain Better value for money and cost effective solutions and not lowest price! Consistency, behaviour change and continuous improvement

9 New Models of Construction Procurement Common to all models: A reduction in commercial risk A clearly defined functional output Costs based on available data, benchmarking and cost-planning. Cost estimates should be realistic but challenging. Reductions on repetitive/series of projects Early contractor and supply chain involvement A robust review process create commercial tension Ensure those charged with delivery have the necessary skills

10 Cost Led Procurement (CLP) One or more integrated supply chain team selected from a framework Delivery below a cost ceiling on the first project Cost reductions on subsequent projects for same output 2/3 teams introduced early to develop bids with the client Utilisation of innovation to bring about cost savings Selection on relative scoring of the teams bidding based on commercial factors, physical proposition and team members

11 Cost Led Procurement (CLP) So what s new? If one of the framework contractors and their supply chain cannot deliver to the client budget it will be offered for bids outside of the framework. If the client budget cannot be met then the scheme should not proceed! The client may have to reconsider the specification and budget but there is a burden on the client to set a realistically challenging price for the supply chain to meet

12 Two Stage Open Book (2SOB) A number of contractors and their consultants invited to bid for the 1st stage of a project Selection based on capability, capacity, stability, experience, supply chain and fee ( OH&P) 2 nd stage the successful team from the 1 st stage produce a proposal on an open book and benchmarked cost basis Early contractor and supply chain involvement Agreed fixed price and risk profile prior to construction stage authorisation

13 Two Stage Open Book (2SOB) Supply chain collaboration Tier 1 contractors propose their supply chain Client team works with Tier 1 contractor to re-engineer supply chain to maximise best value Better understanding of supply chain achieved Potential sharing of supply chain members between Tier 1 contractors on common terms leading to savings

14 Integrated Project Insurance (IPI) Roots go back at least to 2003 and the publication of the Strategic Forum for Construction Integration Toolkit concern in integrated project teams and supply chains Key members of the group that developed the toolkit have produced the insurance product IPI Ltd Insurance brokers - Griffiths & Armour Current trial project Dudley College

15 Integrated Project Insurance (IPI) Competition to appoint members of an integrated project team Selection includes assessing competence, capability, track record, maturity of behaviours, lean thinking, removal of waste and inefficiency, and fee Successful team work up a solution to the client s defined outcome with savings against cost benchmarks The differentiator compared to other procurement routes is the insurance policy ( 3 rd Party Assured) that covers all usual construction insurances up and down the supply chain

16 Integrated Project Insurance (IPI) No need for each member of the team to have own insurance. All are covered by one policy - 2.5% premium Includes P.I. and 12 years latent defects cover Includes a top slice of the commercial risk on cost overruns above the pain-share policy excess threshold but up to a cap imposed by the insurer Removes the traditional blame culture and risk allocation by passing down risk via contracts Insurance payout by demonstration of loss

17 Integrated Project Insurance (IPI) To secure the insurance: Credible proposal Validated by independent expert assurer Maintenance of commercial tension 3 rd party independent facilitation Gateway process Value for money

18 Summary of Options CLP Selection of integrated team from 2/3 bidders Mini competition on price and design (commercial tension) 2/3 designs produced during mini competition Winning bidder recovers pre-contract costs through construction contract Suitable collaborative contracts JCT, NEC, PPC, CPC 2013 Early supply chain involvement identifies risks mitigation, allocation and joint risk fund Collaboration and incentivisation through target cost pain-gain share Option for independent technical and cost validation

19 Summary of Options 2SOB or IPI Single alliance/partner Mini competition on ability to deliver plus open book accounting Single design produced after 1 st stage selection process Contract is an alliance / collaborative form Risk allocation for 2SOB is as CLP whereas IPI has the pain share and sharing of insurance up to cap Collaboration/integration IPI has facilitation and no blame insurance 2SOB has client engagement at all levels of supply chain with pain-gain share Incentivisation pain-gain share plus with 2SOB the option to ring fence OH&P Independent validation for 2SOB by external technical and cost validation. IPI has the independent risk assurers.

20 Public Contract Regulations 2015 Came into force 26 February 2015 Directive 2014/24/EU Implemented in England, Wales & N.I. over a year in advance Regulation 1 the requirement for tender processes to be on a fully electronic basis effective only from 18 October 2018

21 Public Contract Regulations 2015 What are the main changes? In most cases the tender return date is now 30 days down from 40 days in the 2006 Regulations All tender documents must refer to contracts as being awarded on the basis of the most economically advantageous tender ( Regulation 67) and not lowest price Award criteria can include staff qualifications and experience 30 day payment terms for a valid and undisputed invoice. Authorities are required to publish statistics on the internet Innovation Partnerships SME friendly provisions

22 Public Contract Regulations 2015 Innovation Partnerships (Regulation 31) The need for an innovative product, service or works that cannot be currently met by the market Tender documentation must identify the nature and scope of the solution sought Can be one or many partners conducting R&D Awarded on the sole basis of the award criteria of best price-quality ratio The aim is that the development of innovative products, services or works are subsequently purchased by the authority

23 Public Contract Regulations 2015 SME friendly To increase SME participation (Regulations ) Increased transparency publication on Contract Finder, the Government website for contracts > 10K, where advertised elsewhere Ban on pre-qualification on small below-threshold contracts i.e. 10, ,676 for central government and 25, ,514 for other contracting authorities Above threshold contracts a requirement to publish opportunities and award notices on Contracts Finder Cabinet Office Guidance reduce bureaucracy of over burdensome PQQs

24 Thank You Questions? Trevor Drury MBA, PG Dip Bar, PG Dip Law, PG Dip Project Management, FRICS, FCIOB, MCIArb Managing Director Morecraft Drury morecraft-drury.com Castlemead, Lower Castle Street, Bristol BS1 3AG Central Court, 25 Southampton Buildings, London WC2A 1AL