The industry is up in arms because it has seen a draft of the prime contract, and it has not lived up to the promise of the Building Down Barriers pilot projects, which were supposed to lay the groundwork for a new relationship between the MOD and construction. Instead of being a valuable and valued partner, the industry is concerned that it is being asked to shoulder all the risk.
The aim of the new procurement route was to squeeze better value out of the notoriously wasteful way Defence Estates, the property arm of the MOD, spent its £7bn budget. So two years ago, Defence Estates got together with Laing and Amec to launch Building Down Barriers. This was an experiment in bringing the supply chain together at the design stage, sharing risks and rewards. It produced two successful projects, which were completed earlier this year.
In an attempt to advance the lessons of Building Down Barriers, Defence Estates came up with a bespoke procurement route known as prime contracting – the system whereby a client hands full responsibility for a project and its supply chain over to a single contractor.
But with the first major prime contract set to be advertised in the next few months, the industry is furious over what it sees as a betrayal of the principles established in Building Down Barriers.
Representatives from all levels of the industry, from small builders to government departments, are now laying siege to Defence Estates in a bid to persuade it to reinstate the principles of partnering.
“We are very concerned that the way prime contracting is being developed by Defence Estates is pulling away from the ethos of Building Down Barriers,” says Clare Edwards, director of legal affairs at the Construction Confederation.
This contract could mean a return to the kind of abuse seen in traditional contracts
Meanwhile, Laing is believed to have instructed solicitor Clifford Chance to circulate copies of the draft prime contract with the particularly onerous clauses highlighted in fluorescent marker. One of the most controversial conditions – for main contractors – is that the prime contractor will not be paid until it has paid its specialists, meaning it is effectively financing the job on behalf of the MOD.
Laing has asked potential prime contractors to peruse and comment on the contract, in effect treating it as an unofficial consultation document. The views collected will be used as ammunition to pressurise the MOD into reviewing the allocation of risk in prime contracts. “This contract could quite easily encourage a return to the kind of abuse seen in traditional contracts because it has such ridiculous clauses. The most ridiculous is having to pay the subbies before the contractor gets paid,” said one main contractor.
Procurement reformers within government are also putting pressure on the ministry to revisit prime contracting because they feel that dumping risk on the contractor will entail higher prices. Both the Government Construction Client’s Panel, a grouping of all departments that procure construction work, including Defence Estates, and the Office of Government Commerce are concerned enough to be leaning on the ministry to bring prime contracting more in line with the Egan principles, which expect the client to take a share of risk and reward along with the rest of the supply chain.
Causes for concern
Since the MOD drew the draft contract up – with no industry input – Edwards has been going through it with a fine-tooth comb. Her conclusions are not encouraging.
For example, the prime contractor will be responsible for the site, but it is not clear whether it will have adequate access to assess it. The prime contractor will also have to sign off the project brief and is not allowed to deviate from it without penalties. And Defence Estates maintains the right to dismiss any specialist regardless of the views of the prime contractor. This kind of overriding authority contradicts the principle that the prime contractor is in charge.
We are not arrogant enough to say that we have got it completely right
Clive Cain, Defence Estates
“With a lot of these clauses we just don’t know how they will operate in practice,” says Edwards. “It is open to abuse by the client if it wanted to. And with the contractors bidding from the backfoot, are they going to get the best prices?”
One industry source has indicated privately that a number of recent developments within Defence Estates point to a distancing from Building Down Barriers. The two-year project finished in July, and the research has been taken on by the Design Build Foundation. And the current champion of partnering at Defence Estates, quality director Clive Cain, is retiring from the post at the end of the year. He was the driving force behind Building Down Barriers, and industry sources are concerned that any commitment to partnering will go with him.
While the current line at Defence Estates is that the contract is not an unfair allocation of risk, Cain says it is up to the contractor to identify the risks in each category and to allocate the party best able to deal with them.
However, opponents ask what would happen if the contractor knows the site is a bog, but really wants the job? Surely, it will be tempted to put in a low price and try to shift the risk down the supply chain when the barracks sink into the marshy ground.
Cain believes these glitches can be ironed out by listening to the contractors. “We have always said that nothing is set in stone,” he says.
“We are ready to listen to the contractors. Prime contracting is continually under improvement and we are not arrogant enough to say we have got it completely right.”
It is just another way of rearranging the deckchairs on the Titanic
Alastair Collins, DL&E
Sceptics counter that continuous improvement may not guard against rogue bidders. They say there will always be firms prepared to bid at a low price because they are desperate for work, and then try to recoup the money later with claims.
“In a competitive environment, people do silly things,” says Alastair Collins, partner in Davis Langdon & Everest. “If a contractor has too much responsibility, it will try and offload it somewhere else. It is just another way of rearranging deckchairs on the Titanic.”
Certainly, the MOD’s track record of introducing new methods of procurement for military hardware is one of unsurpassed disaster. In July this year, the National Audit Office slammed it for squandering £2.8bn by badly managing its shopping list.
The NAO named three projects in particular that were delivered late or overbudget. There was a 10-year delay in bringing Brimstone, an air-launched anti-armour weapon, into service; a £1.5bn cost overrun and 42-month delay on the Eurofighter; and Bowman, a tactical communications system, running six years late. All were delivered using a form of prime contracting known as “smart procurement”.
Despite these ill omens, contractors are not going to walk away from the massive contracts on offer. Major contractors with Defence Estates insist they are still upbeat about the new prime contracting conditions, saying they are prepared to accept that it will not be an easy ride, but looking forward to increased status in the City if long-term property management deals emerge. By carving up the country into regional management contracts worth £200m each a year, Defence Estates is keeping the major players sweet.
Balfour Beatty will throw its hat into the ring for the £200m Scotland contract due to be advertised by the end of the year. Managing director Paul Lester is unfazed by the contractual obligations. “The MOD is on a learning curve and so are we, but we feel reasonably comfortable. We have to keep sitting down with them and make sure it is workable,” he says.
Similarly, Amec, which built the Building Down Barriers pilot in Aldershot, had very little to say about the turnaround in Defence Estates. John Warren, Amec’s business leader for the MOD, is also keen to bid for the Scotland deal but would not comment on the contract in particular. But of the new prime contacting conditions, he says: “Onerous conditions do not equal value for money.”
After years of being held to account for delays and overspending on the procurement of guns and planes, Defence Estates seems desperate to prove to parliament and the NAO that it is capable of delivering value for money to the taxpayer.