One strange feature of the we play it is that clients pay £10bn a year to cut costs – and encourage incompetent contractors to muck up their schemes. Time to change the rules
For years and years the bidding process has given rise to a ritual game. All those involved – clients and the supply chain – have an inkling of the rules. If you are the client, the aim is to obtain the lowest price for the work. Six contractors (or more) are invited to tender and between them they invite 36 subcontractors to submit bids. The 36, in turn, invite sub-subcontractors to bid and on it goes. There are countless value engineering exercises at all levels to get the price down. That costs about £10bn a year. The fact that this comes out of clients’ pockets never seems to register with them. Moreover, why do we keep regurgitating prices? By now we should know what things costs. After all, this is what QSs are for.
A judge said in a case a few years ago that the odds were stacked against the tenderer. If you don’t tender when invited you are threatened with removal from the list – a threat aimed at making sure the client gets lots of bidders. The obvious next move in this game is for the supply side to adopt self-defence measures such as cover pricing.
The trouble with the game is that all who participate are losers. For instance, in their quest for the lowest price, Cheshire police appointed Pierse Construction to build a £10.7bn tactical police training centre at Winsford. Pierse was worth minus £4m and had 23 unpaid county court judgments against it. Unsurprisingly, it went bust in April, owing substantial sums to its supply chain. As a results at least one reputable local contractor also failed, and its employees were put on the dole. Cheshire police has had to waste taxpayers’ money to retender the job.
So, do we now change the rules or get rid of this daft game altogether? I think I have suggested the answer. Last year Sir John Egan said: “I have little sympathy for the government over this Office of Fair Trading investigation. What does it expect if it procures on lowest price?”
If the client is a public sector procurer, it must comply with regulation 30 of the Public Contracts Regulations 2006. This requires it to award contracts on the basis of “the most economically advantageous [offer] from the point of view of the contracting authority” or on the lowest price. The procurer has a broad discretion in determining whether an offer is the most “economically advantageous” one. Its criteria can stretch from “aesthetic and functional” to “environmental” characteristics. Contrary to what many in the industry think, price does not have to be one of the criteria. The procurer is required to provide weightings to each criterion, and the weighting given to price (if price is a criterion) is at its sole discretion.
How can the law force public sector procurers to change current practice so all public contracts are procured by appointing integrated project teams that
Barriers to entry in the industry are non-existent. It’s time clients insisted that all members of their delivery teams are competent
have the best chance in delivering clients’ requirements? This would require an amendment to the Public Contracts Regulations that could be difficult to accommodate within the terms of the original directive. There is an easier solution. Since the Treasury and the National Audit Office and the Audit Commission are opposed to lowest price, consideration should now be given to removing the lowest price option from the 2006 Public Contracts Regulations. Moreover, it’s about time that we extended the scope of the regulations to include subcontracts above a certain value. Far greater value is being delivered by the supply chain than by the tier one contractor. These proposals should be on the law reform agenda for the next government.
During the Wembley saga I was asked this question: “How can the industry guarantee that our facilities will be built on time and within budget? I replied: “When the delivery team has bought into the design solutions, the cost plan and the decisions on risk.” The trouble is, this never happens in the game we play.
One more thing. If we want to promote fair competition we should have a level playing field. Time and time again firms complain that they are reluctant to bid because they would be competing with poorly resourced firms that fail to comply with relevant regulations and have poor employment practices. Barriers to entry in the industry are non-existent. It’s time clients insist that all members of their delivery teams are competent (that is, technically proficient and properly resourced with an excellent health and safety record).
We already have the means in law to exclude firms that are not health and safety competent. The 2007 CDM regulations require the appointment of competent firms. The core criteria for competence are set out in the Approved Code of Practice accompanying the regulations. If a firm does not comply with these criteria (either individually or through membership of a licensing or registration scheme) a client could be acting illegally in allowing such a firm to undertake a construction project on its behalf.
Hopefully, the OFT saga will cause us to revisit our procurement strategies. That would be a positive outcome – as distinct from wasteful litigation. Let’s play a different game in which, as Sir Michael Latham has often spelled out in these columns, everyone is a winner.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors’ Group