Hampshire County Council

Cabinet Item *

27 September 2004

Construction Related Procurement

Report by the Director of Property, Business and Regulatory Services

How the conclusion in this report fits with the Corporate Strategy

The key objectives of Constructing Excellence (formerly Rethinking Construction) are to improve the quality and efficiency of construction and provide value for money, recruit and retain a skilled workforce; and to promote sustainability. These objectives significantly contribute towards:

Aim 2 Stewardship of the Environment - by considering whole life costs, and working closely with our partners to eliminate waste, we aim to develop more sustainable solutions

Aim 3 Achieving Economic Prosperity - encouraging and developing the use of local resources contributes to the local economy and leads to greater prosperity

Aim 5 Improving Services - the new arrangements involve closer working and collaboration with the industry which is instrumental in driving continuous improvement into our services.

Aim 6 - Developing councillors and staff - by developing procurement skills and competencies of staff.

1

Summary

1.1

The purpose of this report is to advise Members on the impact of the earlier decision to move away from traditional lowest cost competitive tendering to a more balanced Best Value regime involving the evaluation of contractors' bids on criteria other than simply cost. The report reviews the costs and benefits of this approach over the last two years and suggests a change in the overall balance of the work with a further 10% of the workload being identified for Best Value programmes. This would alter the existing policy and move from the current 60/40 split to a 70/30 split in favour of Best Value procurement.

1.2

The Cabinet will also be aware that over the last four years or so it has been one of our objectives to build capacity with the contracting industry and in the light of recruitment difficulties, to develop long term partnering agreements with private sector consultants. Both these objectives have been achieved. This should ensure that the County Council has sufficient capacity in the medium term to deliver the objectives of the Capital Programme and that the opportunities for value for money are maximised through these arrangements. This report looks at the effectiveness of these arrangements, the model for construction procurement that has emerged and how this could be developed. The report goes on to recommend that the model be consolidated and be the principal means by which future building programmes are delivered.

2.

Background

2.1

Members will be aware of the National Procurement Strategy for Local Government (NPSLG) published in October 2003 and approved by the Executive Member for Policy and Resources on 19 February 2004, which the Council is committed to, and the implications emerging from the Gershon Review for procurement. The NPSLG sets out a timetable for Councils to adopt longer term partnering relationships. It is likely that the Audit Commission will review the Council's alignment with the NPSLG as part of the Comprehensive Performance Assessment for 2005/6. It also seems certain that the ability to demonstrate effective procurement through strategic partnerships and alliances will be closely scrutinised by the Government before awarding key programmes of work, (eg Building Schools for the Future). It therefore seems appropriate to:

· review our current procurement practice;

· evaluate the costs, benefits and implications; and

· set out a framework for the next two years.

2.2

The latest advise from the Local Government Task Force, set up to deliver the Rethinking Construction Agenda, is for Councils to abandon lowest price competitive tendering altogether in favour of a strategic partnering approach in line with the NPSLG, with best value selection criteria used, including price, to choose contractors. The group also advocates the development of performance management techniques (basically Key Performance Indicators (KPI's)) for authorities to verify that value for money is being achieved through alternative arrangements.

3.0

The Hampshire Model and Approach

3.1

The Hampshire model is made up of three constituent parts:

(i) in-house provision, including client management;

(ii) external consultant provision (using Framework Partnerships); and

(iii) early contractor involvement.

The particular changes that have been made include the development of strategic partnering arrangements with consultants and contractors. This has given both external parties a medium term business opportunity with the County Council and, in particular allowed the early involvement of contractors in key design and construction decisions, project planning, joint risk management and supply chain development. This in turn has significantly increased the Council's capacity to deliver. This contrasts with the more traditional model where the contractor has no specific involvement until after the award of the contract.

3.2

In terms of contractor involvement the procurement model that has emerged has been in response to a number of key factors, principally:

· Significant expansion of the capital programme - requiring a more strategic approach to delivery (in 2003/4 £120m of construction work was procured by the department)

· Avoidance of adversarial arrangements designed to avoid protracted disputes and claims - particularly prevalent with major projects in the 1990's secured on price alone

· Higher standards of maintenance and repair required in response to Service Level Agreements with schools and for other end users

· Need for better planning and control of the construction process on increasingly complex schemes

· Legal requirement for rigorous Health and Safety management - requiring better control of construction process

· A smaller pool of contractors following the introduction of a new register in 2000 linked to much higher insurance thresholds following risk assessment and more stringent health and safety vetting - resulted in 70 less approved building firms (40% reduction)

· Government funding often conditional upon meeting challenging spending deadlines - sometimes with completion required in the same financial year as approval

· Alignment with NPSLG - particularly as Government funding likely to be linked to ability to deliver through strategic partnerships

3.3

A Strategic Approach

3.3.1

The way in which these factors have been addressed has been to develop a more strategic approach to procurement through:

· Early contractor involvement - developing a partnering approach to major schemes culminating in the introduction of long term framework agreement for major capital works in 2003

· Establishing key supply chains and specialist frameworks

· Selection of contractors on the basis of best value rather than lowest price

· Developing long term partnering arrangements for professional services

· Packaging similar work

· Developing term agreements for essential maintenance work

3.3.2

The pace of this development followed an incremental low risk approach. Initial steps were taken by packaging a number of projects with a single contractor in response to the `Class of 30 Initiative' and the new John Hanson Community School was procured as a demonstration project under the Movement for Innovation (formed in 1998 to implement the recommendations of `Rethinking Construction'). Over the last four years a wide range of Best Value projects have successfully been undertaken. Recently, following the launch of Major Frameworks, (approved by Cabinet in May 2003) three national contractors were selected to deliver significant elements of the Nursing Care strategy. The project involves an innovative form of construction developed jointly with the contractors and major supply chains applying across the programme. This strategy has attracted national interest in terms of innovation. Other forms of procurement would not have met such an ambitious programme.

3.3.3

Over the last financial year some £120 m of construction work, representing a considerable expansion to the Capital Programme, has been procured though a variety of techniques. The use of best value procurement has made a significant contribution towards this achievement. Currently no more than 60% of the programme is procured through best value means, with the remaining 40% subject to selective competitive tendering.

3.3.4

The key theme in the development of the procurement approach has been to seek strategic partnering alliances, which involve the same partnering team on a series of projects, or preferred contractors offered repeat opportunities. This may be compared with the traditional approach where:

· Minimal integration of the project team can lead to a disjointed process where activities are segregated

· Adversarial relationships, where defence of respective positions can lead to loss of quality in the end product and increased costs/time and dissatisfied clients

3.3.5

Major strategies such as the Nursing Care (£50m in construction work) or a new secondary school such as John Hunt of Everest (£22m in construction work) can account for a large proportion of work within the current 60% ceiling, and yet only represents a small proportion of the number of projects undertaken. This distortion against the current threshold tends to leave limited scope for significant development. It should also be noted that in general terms, on framework projects 80% of the work is competitively procured through domestic supply chains and larger projects are subject to a best value selection process involving up to 4 of the contractors.

4.0

Linkage between Funding and Procurement

4.1

A major factor in the award of the Nursing Care project to Hampshire County Council was an ability to achieve an earlier completion, ahead of other potential options such as PFI. The Nursing Care project, has benefited significantly from collaborative working with three framework contractors in terms of design and project implementation. This project is now well underway with six of the major new builds at an advanced stage. All this has been achieved in less than 18 months from approval to proceed with the option appraisals. The project has now been selected as a demonstration project in terms of `Constructing Excellence'. The success of this project will be a significant demonstration of the benefits of a strategic partnership approach, which could be adopted on new opportunities (and by other local authorities).

4.2

Future Government funding streams also seem likely to be dependant on a strategic approach to procurement. Building Schools for the Future for example requires a delivery model that ensures stakeholders work together in a strategic partnership to maximise effectiveness and best value for money. Under the arrangements, once a Local Education Partnership has been established it may be possible to deliver the capital funded element though existing partnerships. This would be important to ensure that the County Council maintains good control over the future development of the built estate and its relationship with schools.

5.0

Improved Performance

5.1

The performance of alternative procurement arrangements has been monitored closely in terms of cost and quality of delivery. The report to the Buildings, and and Procurement Panel in March 2004 showed the performance of alternative procurement relative to traditional lowest price tendering. Significant improvement was noted in most categories. Overall, best value procurement achieved on average a 21% higher performance score across the KPI's than lowest price competitive tendering. Recent sampling shows the major framework contractors are achieving a further 7% improvement on this figure, evidence that longer term arrangements are leading to an even better delivery. The diagram in Appendix 1 illustrates the above against the following set of KPI's:

· Contractor performance

· Health and safety management

· Supply chain performance

· Quality achieved

· Customer Satisfaction

· Time predictability

· Cost predictability

· Avoidance of claims and disputes

5.2

The Corporate Risk Assessment places particular emphasis on the importance of the control of health and safety in construction. This is also a legal requirement. It is notable that on alternative procurement projects fewer accidents and incidents are recorded and therefore better fulfils this requirement. This is evidenced in recent KPI sampling for major contractors, which are 37% ahead of lowest price work (refer to 5.1).

5.3

In a recent comparison to `Constructing Excellence' the `Hampshire' model was seen as performing well and exceeding the level of performance achieved by industry against headline national KPI's. A separate report will be presented to the Buildings, Land and Procurement Panel on the 19 October 2004 with the findings and conclusions of this appraisal.

5.4

The report to BL&PP on 16 July 2004 showed an analysis of construction costs which compared well with external indicators including national standards.

5.5

A major element of the cost of any construction project is the investment of professional time. Recent analysis has looked at a representative sample of 30 major projects and compared resource costs of competitive tendering with best value procurement. The analysis shows that a real saving of 9% is being achieved through best value procurement. More of these projects are completed on time, to a higher quality and protracted claims and disputes are in the main being avoided. In another example major packaging strategies have led to professional resources being rationalised. On the external redecorations packages a fee level of just 3% is being achieved as a result of reducing the number of surveyors involved from 20 to 4.

6.0

Constructing Excellence

6.1

The ODPM has recently announced the Regional Centres of Procurement Excellence programme, which is initially a 2 year programme and is a major component of the ODPM/LGA National Procurement Strategy for Local Government. In the South East, Kent County Council will be working in partnership with Surrey County Council and Hampshire County Council and the Berkshire Unitary Authorities. The County Council has been chosen to lead on property related procurement for the Regional Centre. In this arrangement it will be important that the County Council develops good practice and leads by example on innovation in the procurement process. The development and expansion of collaboration on procurement will be a key to the success of this initiative.

7.0

Future Development

7.1

Clearly much has been achieved. In order to expand and improve services approval is now sought to progress and develop a number of key areas over the next two years as highlighted in the proposed model for procurement detailed in Appendix 2. The key change in the proposed `Hampshire' model is an increase in the level of best value procurement from 60% to 70% of the value of work.

7.2

It is proposed that all arrangements are measured for performance and specific comparison with national benchmark standards is used across all services to compare with national targets and standards. Future reports to Cabinet will comment on the success of the arrangements.

Recommendation(s)

That:

1

The Hampshire Procurement Model in Appendix 2 be approved and in particular the level of best value procurement be increased from 60% to 70% of the overall value of work.

2

The `Hampshire' procurement model be reviewed in 2 years and progress be reported to Cabinet on an annual basis.

70% Best Value

30% Traditional

Framework for Major Schemes

Term Arrangements

Packaging

SME Framework

Future Strategic Developments

Six national firms appointed four years extendable by a further two

Appointments lasting between two and five years for responsive maintenance and minor works

Direct procurement of specialist supply chains for:

· Re-cladding

· Re-roofing

· Projects of a repetitive nature

· Mechanical and Electrical Services

Development of Framework with up to ten medium size firms for a four year term

Templates being developed for:

· Supply Chain Management

· Building Schools for the Future

· Response to other national funding strategies etc.

Competitive tendering processes with selection based upon lowest price only, including single stage/two stage/ develop and construct etc.

Responsible for major projects over £1 million including:

· Major schools

· Nursing Care

· Large redevelopments

· Engineering

· General building

· Decorating

· External paving repairs

· Asbestos removal

Term appointments up to four years:

· Re-cladding

· Roofing

· Standardised projects

· M&E

Responsible for intermediate size projects up to

£1 million:

· Extensions

· Refurbishment

· Smaller re-developments