PFI, partnering and negotiation or lump sum competitive bids? We report from the HVCA Summit on an industry undergoing a culture change.
Construction is currently split into two camps. On the one hand are enlightened clients who look to partner their projects, strive for value for money not lowest cost, and go for long-term relationships which are given a chance to improve over time. Unfortunately, they are still outnumbered by those embarking on a tender process to select the cheapest bid, lacking in the experience to know that value for money is probably the last thing they are likely to get.

M&E contractors can be forgiven for being cynical about another conference talking about partnering, but delegates to March's HVCA Summit will not have wasted their time. Much evidence of changing client attitudes was presented to contractors left weary after decades of profit erosion brought about by lowest bid culture.

Those low profits have contributed to low investment in training and r&d, low levels of innovation, an industry that cuts corners on safety and hence has a poor perception amongst potential entrants.

The Latham and Egan reports on the construction industry have slowly started to turn things round. Clients have had enough with the status quo and are demanding change. As HVCA president Peter Hoyle said in his opening address, it is up to specialist contractors to deliver what clients are starting to demand: "In the real world, the client is, and always will be, king. Only by satisfying him can we succeed." So what do these enlightened clients expect from the building services sector and how can we reap the rewards of meeting those expectations? Many contractors will be wary of the public sector, traditionally the champion of lowest cost and a nightmare to work for. Deryk Eke, construction director at the Office of Government Commerce (OGC) says those days are over.

Prime contracting, PFI and design and build will be the focus from now on

Deryk Eke

Set up last year by the Treasury as a centre of excellence for procurement, the OGC is seeking the highest possible value for money for the taxpayer, and Eke has a lot of money to spend: £7.5 billion is earmarked for construction, with more promised.

Eke has over 20 years experience at BAA, so what can we expect to see happen at the OGC? Out goes the lowest bid approach of old and in comes value for money, design quality, better risk assessment and better profits.

Eke cites Procure 21 by the NHS Estates and the Defence Estates' prime contracting as examples of the new breed. "We are predicting £600 million of savings for reinvestment across these two departments," says Eke. Prime contracting, PFI and design and build will be the focus but "we are not ruling out other routes if they can deliver design quality and value for money," says Eke.

Only one company can be cheapest. The rest of us have to design our way to the top

Robin Nicholson

Eke's teams will be looking for contractors to provide evidence that they can offer whole life value, can integrate with other team members, are committed to productivity improvements, are equally committed to skills competency and training and to "be innovative and look outside the box".

All clients are different, of course. Architect and deputy chairman of the Construction Industry Council, Robin Nicholson works for many clients with an environmental agenda and is not impressed with the specialist engineering sector's track record on innovation. He called for "more brain and less kit" and told delegates: "In any sector, only one company can be the cheapest – the rest of us have to design our way to the top." If m&e contractors are to deliver the sort of industry being called for by Eke and Nicholson, they have to learn to forge better relationships with the old enemy – the dreaded builder. Delegates heard from Willmott Dixon and Laing how the leopard can change its spots.

Willmott Dixon, with Sir Michael Latham at the helm, now boasts 70% of its social housing going down the partnering route, 40-50% in its fit-out arm and 35% in general construction. Laing may be up for sale but is currently committed to a three-year plan to make changes to its supply chain, working more closely with fewer players.

We abolished retentions four years ago and it’s good for business

Bernard Rimmer

Laing has done about £80 million of business with Crown House Engineering since 1997, including Portcullis House, the Natwest Tower refurbishment and new halls at the NEC. Alun Williams, procurement manger at Laing, is in doubt that long-term relationships work: "We have built on our modular construction experience from project to project," states Williams, who claims a 4% cost reduction between Phases II and III at the NEC.

Crown House's answer is to be more selective about the clients it chooses. Last year's problems have been well documented and a move away from traditional tendering is a logical conclusion to a desire for greater profit by parent company Carillion.

Repeat business is the new mantra and Pat Brookes, head of procurement at Crown House, outlined how it can be done: "Develop joint goals and objectives with your partners, agree service standards, establish a price matrix through open book negotiations with agreed margins, agree and monitor key performance indicators and establish a regular review process." One client who would concur with that approach is David Adamson, head of procurement at the University of Cambridge. He has £490 million of new building projects currently on the go, £870 million set aside for refurbishment, and an estate growing at 6·5% per year.

Prefabrication, modularisation and 3D design all add value

Richard Lumby

Adamson adopts a two-stage contracting approach, prefers co-location of all members of the team during detailed design, goes for risk and reward sharing, and finds the ECC form of contract preferable or, if pressed, JCT 98.

Profitability for all is key, thinks Adamson: "Low profit margins are no good at all – I'd much rather work with a company making a realistic profit." Retentions hit hard when it comes to profitability. Adamson proposed 'soft landing' contracts of say two, three or even five year duration whereby retentions could be scrapped because contractors would still be around on site to sort out snags. "This is a big issue at the moment and it needs to be dealt with at a national level," thought Adamson.

With the CLG campaign to abolish retentions getting its first results with the news that the Defence Estates is to ditch retentions from prime contracting (see page 12), the audience were furthered cheered by the experience of Bernard Rimmer of Slough Estates. "We abolished retentions four years ago and it's good for business. Suppliers want to work with us, they have better cash flow and the odd problem we may have is insignificant in comparison to the overall business improvement," said Rimmer.

Rimmer surfaced again in the closing session. Strictly in the spirit of debate, he put forward the motion that contractors are ill-equipped to handle the demands of the modern client and will struggle to attract the quality applicants needed to succeed in the long term.

Rimmer argued that contractors have isolated themselves by divesting themselves of designers: "Design creates most of the things that bring value to a project, but also creates most of the things that bring the waste." With a low margin business, contractors have limited ability to invest in off-site assembly and can therefore add little value to clients. And what first class honours graduate wants to join an industry with no ability to add value for clients? A convincing argument, but fighting the industry's corner was Richard Lumby, md of Crown House Engineering. He argued that the industry's innovation was often hidden to the client. Prefabrication, modularisation and 3D design, all reduced the cost and improved the speed and quality of construction and he called for m&e contractors to make it clear to clients just how much they offered.