Procurement

Over the past few months, wise men from companies around Britain have been journeying to Heathrow to find out more about the revolution that is taking place at Terminal 5. Word has, of course, spread about the shining star that is known to some as "the T5 agreement", and to others as the biggest shake-up in the management of procurement in a generation.

The idea for the agreement emerged in the 1990s, before the T5 project had embarked on a public inquiry that was to last for about the same time as the Trojan Wars. While BAA brooded on T5, it researched what had gone askew at other megaprojects, such as the Channel Tunnel Rail Link and the Jubilee Line Extension.

It realised that each of these projects had suffered serious problems, contractually and financially, and that each had caused massive damage to the client's reputation. BAA knew that it had somehow to pre-empt the problems. It had to rethink the client's role. It therefore decided to take responsibility for the total risk of all contracts on the project.

The result was the T5 agreement. Matthew Riley, T5's commercial director, explains that under the agreement, contractors do not shoulder any risk of failure; instead, the client takes on legal responsibility for the the project's risk. Part of the reasoning for this is that the financial liabilities created by a project this size are unsupportable for any private sector company. "So we take that risk away," says Riley.

Under the terms of the deal, BAA envisaged that all the suppliers working on the project operated as a virtual company. Executives were asked to lose their company allegiances and share their information and knowledge with colleagues in other professions.

Part of the problem in traditional construction procurement is that when problems arise, each supplier starts to frantically look for ways to divert blame to other team members. Under the T5 agreement, the suppliers pull together to solve the problem.

"The idea is to have the best brains in all companies working out solutions to problems on the project and not working on how best to defend their own corner in court," says Riley. As a consequence, contractors benefit by spending more time on finding innovative solutions to the services that they are supplying. A key concept is that BAA ringfences its suppliers' profits; if the supplier delivers the job for less, then it can directly translate efficiency savings into higher margins.

Riley points to the M&E contractors on the T5 project as evidence as to where BAA can benefit under the agreement. He says that, as part of the agreement, M&E suppliers have pooled their purchasing power and bought their cabling and other products at a discount.

"So far, on a couple of the packages, savings of up to 30% have been achieved," he says.

Riley adds that a key factor in realising these savings has been that BAA demands complete transparency in all business dealings with its suppliers. He says that the freedom of information helps the suppliers from similar sectors, such as M&E, to work together, even if they are working on different parts of the project.

Problem-solving is another strand to the agreement's success. Riley points to delays on the first stage of the lifting of the terminal roof as an example. He says that as a result of bad weather in the winter of 2002, a lot of time was lost on the substructure, and that it resulted in that stage of the project falling 14 weeks behind schedule. The ethos that the T5 agreement had created meant that the stakeholders were able to combine the brains of their best people and work out the best way to get the project back on track. The result was that the substructure team handed over to the roof team on 27 October, exactly on time.

As for the suppliers themselves, they seem to believe there is no better way of working. Peter Emerson, managing director of steel fabricator Severfield-Rowen, which has worked on the roof structure, says the agreement was essential in finding a successful solution to the problems. "Under a normal form of contract, there would have been an adversarial environment where you would end up defending yourself, but under the T5 agreement we all had the time and incentive to work together to find a solution," he says.

Most of the other suppliers have been selected for T5 on the basis that they were parties to BAA's celebrated framework agreements, and had worked on projects at Gatwick and Stansted. Riley says the suppliers were selected in accordance with European procurement law but that dialogue with many of the suppliers had been in place right from the project's conception in the 1990s.

The final strand to the T5 agreement is the insurance policy.

BAA has paid a single premium for the multibillion-pound project for the benefit of all suppliers, providing one insurance plan for the main risk.

And those wise men? Riley says chief executives from industries outside construction have been keen to learn from the procurement deal of the project. "We've had a lot of external interest because the T5 agreement is not only a totally new way of procuring a construction project, but is a whole new way of working," he says. "The T5 agreement could certainly be a marketable blueprint for other industries – but we've got the copyright on it."