Best Value Procurement

Best Value and PartneringBest Value and Partnering

John Ruskin, 1860 (quoted in

Accelerating Change) John Ruskin, 1860 (quoted in

Accelerating Change)

“It is unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money - that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.

The common law of business balance prohibits paying a little and getting a lot - it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”

Best Value - DevelopmentBest Value - Development‘In exercising its purchasing power, the Government has two

fundamental aims (HMG, 1994): value for money; and improving the competitiveness of its suppliers’

Constructing the Team (Latham, DoE, 1994) places 'value for money' first in a list of eight client wishes. Latham also suggests that many clients remain dissatisfied with

the value for money they receive from the construction industry Aimed for 30% cost reduction within 6 years

This tendency to focus on the issue of cost reduction is reflective of a commonly held (mis) conception that value for money in construction can be achieved simply by building cost-effectively

Latham's other recommendations related to the need for clients to formulate a clear project strategy which involved need assessment and consideration of resources available

Achievement of value for money is dependent upon two sequential processes. it is necessary to define a clear and unambiguous set of objectives. it is then necessary to ensure that the objectives are achieved cost-

effectively

Want to buy a new car?Want to buy a new car?

Initial cost ? Fuel consumption ? Service costs ? Depreciation ?

Status symbol ? Performance ? Luxury ? Carrying space ?

projects seek to satisfy the differing requirements of several parties (HM Treasury, 1994) The process of achieving a consensus cannot be taken for

granted. One of the key obstacles to the achievement of value for

money is the need to cater for a range of stakeholders, each of whom may well have a different interpretation of what constitutes 'good value'

'Defining requirements, and their communication to others is the root of good briefing. Value for money depends on this being done. Deciding on a final design or other solution before making a full assessment of the client's and users' needs and problems may prove very costly.' (O'Reilly, 1987)

Value – where should the focus be?Value – where should the focus be?

Viewed over a 30 year period, initial building costs account for approximately just 2% of the total, while operations and maintenance costs equal 6%, and personnel costs equal 92%. (US Dept. of Energy, 1996)

Value Management and EngineeringValue Management and Engineering

Value management is the strategic level analysis that defines the clients’ business High quality vs lowest cost to customer Stability vs innovation Corporate value and business value

Value engineering is an organised approach to the identification and elimination of unnecessary costs which are defined as costs which provide neither use, nor life, nor quality nor appearance nor customer features (Kelly, Morledge and Wilkinson, 2002)

Project Value ChainProject Value Chain

Corporate value Business value Project value Design value Construction value Commission value

External stakeholders valueRegulatory values

Client's valueFinancier value

Internal stakeholders value

Customers valueSub contractor value

Supplier value

Project Mgr value

Client's valueDesigner's value

Contractors valueRegulatory value

Quality Surveyor value

User valueContractors valueRegulators value

Operational value

Cutomers valueClients valueFinancier value

Procurement for Best ValueProcurement for Best Value

Client views project as solution to business challenge

Project may be short term need / opportunity or long term business development

Development of client brief must not lose sight of primary objectives In the initial project stage there is a sense of urgency

fuelled by the desire for an immediate solution (CIB, 1997)

Determine Primary ObjectivesDetermine Primary Objectives Performance – function and quality Time – duration and time certainty Cost – price and cost certainty Example Owner/

occupierDeveloper Investor

Performance 45 20 50

Time 25 50 30

Cost 30 30 20

Procurement Strategy FactorsProcurement Strategy Factors

1. Outside of project team control Interest rates, changes in demand, legislation

2. Client resources Staff, experience, funding

3. Project characteristics Size, complexity, location, novelty

4. Ability to make changes Technological, scope, time, cost, performance Late changes have a disproportionate effect

Procurement Strategy FactorsProcurement Strategy Factors

5. Risk management By contractor for fee or by client accepting risk

6. Cost issues Longer procurement strategies have greater cost

certainty, effect of changes7. Time

Risk minimisation takes time to collect data Cost of contract ‘crashing’ or overruns

8. Performance Over specification has cost and time implications

Procurement OptionsProcurement Options1. Traditional ( design – bid – build)

Make changes during design only, client takes design & performance risk, contractor cost risk

2. Remeasurement ( cost +, term contracts etc.) Changes easy, quick overall time, client cost risk

3. Construction Mgt. (Construction Mgr coordinates design & construction, trades have contracts with Client)

Changes can be made before trade contractor starts, less cost certainty, less time certainty, ‘fast track’ possible. Relies on good client brief to Constr. Mgr.

Procurement OptionsProcurement Options4. Management Contracting (trades contracted to Mgt.

Contractor) As Construction Mgt. Except that client has less

direct involvement with trades

5. Design & Build Good client time and cost certainty, performance

dependant on client brief and B&B contractor Changes difficult

Procurement Summary for Best ValueProcurement Summary for Best Value

For a successful project; A good client brief must be developed in accordance

with strategic aims Client should identify which risks he is able / willing

to accommodate Buildability must be encouraged – designers and

contractors jointly develop design On many projects there should be scope for changes

to allow value engineering It must be recognised that overlapping of design &

construction has both benefits and risks

Major ClientsMajor Clients Defined as clients who

Regularly let similar projects or Large, complex projects

Have well developed strategic objectives Are less vulnerable to contract risks Can guarantee recurring work Have tended to move to closer alliances with

preferred contractors / consultants via PARTNERING

Partnering Partnering Partnering includes the concepts of teamwork between supplier and

client, and of total continuous improvement. It requires openness between the parties, ready acceptance of new ideas, trust and perceived mutual benefit... We are confident that partnering can bring significant benefits by improving quality and timeliness of completion whilst reducing costs.

Partnering arrangements are also beneficial between firms... Such arrangements should have the principal objective of improving performance and reducing costs for clients. They should not become cozy . The construction process exists to satisfy the client. Good relationships based on mutual trust benefit clients. (Constructing the Team,1994, (the Latham Report)

DefinitionsDefinitions Partnering is the term used to describe a collaborative

relationship between purchasers and providers. It aims to achieve specific business objectives by maximising the effectiveness of each partner’s contribution. It builds on the inherent advantages of teamwork by creating a positive environment in which risks can be managed and expertise shared in a mutual search for improvement.(Davis Langdon Consultancy with Kent C.C., 2001)

Partnering involves two or more organisations working together to improve performance through agreeing mutual objectives, devising ways for resolving disputes and committing themselves to continuous improvement, measuring progress and sharing the gains. (DETR Rethinking Construction, 1998)

What does Partnering involve?What does Partnering involve?

Most collaborative arrangements involve: the purchaser entering into a strategic business alliance with

an individual or a limited number of key providers mutual trust and openness in dealings between team

members commitment to continuous improvement incentives related to performance (pain / gain share) agreed procedures for dealing with problems measuring, setting targets and benchmarking.

The real value of successful partnering is that it helps partners focus on the requirements of the end users.

Client ObjectivesClient Objectives As the principal ‘purchaser’ of construction

services, the client expects a partnering arrangement to: improve the project team’s focus on meeting the

business objectives increase certainty of meeting the cost, quality and

time targets improve the value (cost, quality and levels of service)

obtained from a project reduce the opportunities for conflict.

Other Partners ObjectivesOther Partners Objectives The other partners – the service providers – consultants, contractors,

specialists, suppliers and so on, all have expectations of partnering. developing a medium/long-term source of work increasing the likelihood of making a reasonable profit improving the value obtained from their supply chain increased efficiency by removing wasteful practices building or maintaining a reputation reducing opportunities for conflict.

These are legitimate expectations for responsible businesses and it is in the client’s interest that construction service providers are healthy, profitable and efficient. Partnering provides the opportunity to support this aim.

Single Project PartneringSingle Project Partnering Single-project partnering is a short-term relationship, set up for

the life of a single job to exploit mutual advantage for that project. It can be used if the project is a ‘one-off’, or if it is not possible

to plan more than one job at a time. While this type of partnering can enhance teamwork and

eliminate unnecessary duplication, it presents fewer opportunities to take advantage of team learning.

It may be suitable where workload or finances constrain opportunities for longer-term partnering.

Case study evidence illustrates the value of single-project partnering in appropriate circumstances, in particular where the partners are able to contribute to the design process.

Serial partnering/framework agreements Serial partnering/framework agreements

Framework agreements establish a common set of arrangements for a number of projects. They are most productive where the workflow allows the same team to

work on all the projects over a specified period of time. Regular benchmarking is an essential feature of these longer-term

relationships, both to ensure that partnering continues to deliver real value throughout the life of the agreement, and as a basis for any mutual incentivisation scheme.

Partnering can be as effective for cyclical repair and maintenance programmes as for major capital works, provided that the management arrangements are tailored to the type of work. Indeed, it is often easier to plan a steady workflow for cyclical maintenance.

Business AlliancesBusiness Alliances Business alliances are not based on specific projects.

They are adopted where there is a need to develop mutually complementary services (or skills) over a period of time.

For example, contractors may enter into business alliances with frequently used specialist suppliers.

Business alliances are most appropriate where the parties have a regular need for each other’s services, for example between main contractors and their regular suppliers or specialist subcontractors.

The manner in which these different arrangements are set up varies widely, ranging from voluntary agreements to formally binding contract.

Size & Type of ProjectSize & Type of Project Dependent on several criteria which are likely to be different for single-project

partnering and framework agreements. A major factor for single-project partnering is how the time required relates to the

potential benefits. A single project has to be of a large enough scale, or involve sufficient risk or

complexity, to repay the effort required to prepare and maintain the partnering. partnering is unlikely to be appropriate for a single project if the value of the work

is less than £1- 2m (2000 prices), unless: it is extremely complex or risky a great deal depends on achieving the project targets the teams already have experience of working successfully together.

In longer-term and multi-project arrangements, partnering should be seriously considered where there is a need for: improved reliability of outcome (time, cost and quality and reducing the likelihood

of claims and disputes), improved reliability of building performance through repeat building and learning

from job to job a strong focus on client/user, including the possibility of late changes to the

building requirements high-level construction expertise to manage technical construction complexity speed of building by using the contractor’s knowledge of fast-track construction

techniques and making the building process easier through early involvement of the contractor and specialist subcontractors

improved buying power by taking advantage of the contractor’s or specialists’ purchasing arrangements

Partnering QuestionsPartnering Questions Much printed case study material showing

reductions in cost / time. how is gain calculated ? how is gain distributed, client, designer, main

contractor, sub contractor, supplier ? who benefits the most or is there equal gain?

There are less contractual claim problems. the problems that do arise can be much more

complex.

Partnering QuestionsPartnering Questions Long term partnerships give contractors continuous

work smaller contractors cannot tender because of overall value of

work reduced number of main contractors win work workload implications for unsuccessful contractors ? what happens to resources at end of partnership period ?

Partnering includes the whole supply chain what happens to team when 1 company does not perform? position of specialist sub contractors / suppliers ?

Guidance Notes of the Option X12 (2001)


1. “Parties must recognise that by entering into a contract which includes Option X12 they will be undertaking responsibilities additional to those in the basic NEC contract.”

These additional responsibilities require additional resources. Partners invest these resources in order to get a return and much of this return comes from the bonuses associated with hitting or exceeding the agreed targets (shown in the Schedule of Partners)



2. “If one partner lets the others down for a particular target by poor performance, then all lose their bonus for that target”

This places more dependency on others. One partners payment is dependent on another partner’s performance

3. “The final sanction against any partner who fails to act as stated in the Partnering Option is for the Partner who employed them not to invite them to partner again”.

This suggests that partners get locked into the partnership for the duration of the contract. Even if one partner consistently lets others down, for the rest of the partners, there is no way out of the partnership.

Accelerating Change (SFC, 2002)Accelerating Change (SFC, 2002)

Intended to produce a more modern and dynamic industry, the report challenges the construction industry to provide maximum value for clients and end users and provide a consistently world class product.


Key targets By the end of 2004, 20% of construction projects by value

should be undertaken by integrated teams and supply chains to increase to 50% by 2007.

20% of client activity by value should embrace the principles of the Clients’ Charter, increasing to 50% by 2007

Strategic Forum members will develop and implement strategies which will enable the industry to recruit and retain 300,000 qualified people by the end of 2006, resulting in a 50% increase in suitable applications to built environment higher and further education courses by 2007


People Issues: "The image of our industry lies at the heart of our ability to

attract, develop and retain the best human resources. We need to marshal our forces to ensure that we have

practical, relevant and joined-up people initiatives in place that make a real impact on the image of the industry and that businesses understand and want to adopt. We don’t have that at present and that’s why one of our first tasks must be to critically examine the people initiatives we have in place.


Client Leadership "Clients must identify what functionality and performance they need from

their built environment assets, how these contribute to the efficiency of their business, and how they add stakeholder value. They need then to articulate these in a clear brief, so that they lead a fully integrated supply team to contribute their particular expertise to achieving the optimum solution to the clients’ requirements.

Clients want suppliers to come together to give them the mechanism whereby they can recognise the options available in terms of whole life performance, cost time and quality reliability and value for money.

They can then move away from the traditional tendering approach, and select supply teams on the basis of track records of performance, productivity and best practice.


Integrated Team Working: "If clients really intend to unlock the potential of the

supply side they will have to start projects entirely differently. This means assembling alliances (of consultants, specialists and key manufacturers) into integrated teams that will genuinely align with challenging performance targets. Then the supply side should be expected to drive and deliver.


Product Focus: "The construction industry must reshape the way it

works. In doing so, it must focus as much on the product it produces as on the way it is produced. We are urging clients to set clear project frameworks that enable the industry to deliver sustainable solutions of demonstrable quality, by safe and efficient means and in ways that promote the recruitment and retention of a talented and motivated workforce."

ConclusionsConclusions

1. Construction procurement should be Client focused2. The Client must be responsible for identifying project

objectives and communicating them to the construction team

3. The best procurement option is dependant on client attitude to risk in time, cost & function

4. An inclusive construction team will generally provide best value

ConclusionsConclusions

5. Major clients have moved towards alliances with preferred consultants and contractors

6. Partnering has many advantages for an experienced client

7. Partnering does involve additional resources and risks

8. The UK construction industry has seen developing procurement strategies since the 1990’s, but still has scope for improvement

Documents

Best Value Procurement