Private practice

The way construction is procured goes through fashions. Management Contracting was popular in the 1980s until clients realised they were adopting most of the risk while paying the managing contractor a guaranteed fee.

This encouraged the growth in Design and Build projects, albeit there was still the need for fast track construction where the build ran in parallel with design to achieve early completion. Thus Two-Stage Tendering and Construction Management both gained in popularity, although the latter proved difficult to impose a robust cost control regime, as evidenced by the new Scottish Parliament building.

In November 1992, as an import from New Zealand, the Private Finance Initiative (PFI) was launched in the UK. The first major PFI project was the Queen Elizabeth II Bridge crossing the Thames at Dartford. This project stands alone financially; the only public sector contribution being the cost of constructing the approach roads and transferring revenue from the existing tunnel that the PFI supplier took over.

The supplier designed, constructed and now operates the bridge and recovers revenue from tolls. The concession period is for a maximum of 20 years or until the company has accumulated sufficient revenue to meet the outstanding debt, whichever is sooner.

PFI is, therefore, not another form of procurement like Construction Management or Management Contracting. It is the purchasing of services, be they the provision of school desks, hospital beds, or a means of crossing the River Thames.

After a long and painful gestation period, PFI has now become a popular way to finance and provide public sector amenities by using private funding. The way this works, as illustrated by the Queen Elizabeth II Bridge project, is a private organisation funds, constructs and operates a facility for a period of time. This is either self-funding through the collection of tolls or by charging the client in an appropriate way for the provision of the amenity.

Various terms are used to describe a PFI including DBFO (Design, Build, Finance, Operate), DCMF (Design, Construct, Manage and Finance), BOO (Build, Own and Operate) and BOOT (Build, Own, Operate and Transfer). Apart from the important distinction between BOO and BOOT schemes, which depends on whether or not the asset is transferred from the supplier to the client at the end of the contract, all these abbreviations have the same meaning. There is also PPP (Public Private Partnership) which, as the name implies, is a partnership between the client and the supplier where they work together with a mix of responsibility.

The construction element of a PFI is therefore only one component. During the term of the contract, the supplier has ongoing responsibilities including facilities management, repairs, renewals and maintenance. Because of this operations component it is incorrect to call a PFI a construction procurement route.

A PFI can use any of the well-known procurement routes, such as Lump Sum, Design and Build or Construction Management for the construction of facilities. In the early days, many main contractors misunderstood this and saw PFI as just another way of winning construction projects. Now they often form a joint venture with other disciplines to provide funding, construction and operational expertise which is known as a Special Purpose Vehicle (SPV). It is the SPV that bids for a PFI.

It is usual that only major contractors, as part of a SPV, will bid for a PFI. This bidding process is lengthy and expensive and brought the whole concept into disrepute in its early days. Government, through the Treasury and Office of Government Commerce, has attempted to simplify the approach with well developed guidance and procedures for public sector clients to follow.

Because the bidding process is complex, clients sometimes contribute to the costs of each tenderer’s submission. The tendering procedure is usually in two stages; the second being when the most attractive proposal becomes the preferred bid and other tenderers are either stood down or put on hold. During this second stage, the client will negotiate with the preferred bidder to reach contract agreement and remunerates the preferred bidder for this second stage.

There has been a trend for a number of individual projects to be “bundled” into one PFI. For example, ten separate schools could be let as one PFI. A concern with this is that it reduces opportunities for contractors (particularly SMEs) working for the SPV as probably only a small panel of contractors will be used on all ten construction projects. In addition, the same panel will probably then be retained during the operating period to be responsible for repairs, renewals and maintenance. For this reason, while PFI is not a procurement method in itself, it does have a marked impact on the way construction procurement occurs.