The government wants to make frameworks more open to small and medium-sized firms while at the same time making big savings in public sector procurement. Here’s what the construction industry can expect
Confusion, concern and panic are never a good combination. And when Cabinet Office minister Francis Maude took to the floor at an SME summit at the Treasury last month, he put forward a set of proposals that left the construction industry reeling from all three. Since his talk of breaking down the “procurement oligarchy” that shuts out small and medium-sized enterprises, everyone has desperately struggled to work out what he meant, and what impact it will have on the future of public sector procurement.
While it is extremely unlikely frameworks will be scrapped altogether, according to government officials and industry figures alike, public sector frameworks, just like those in the private sector before them, will need to change if savings are to be made. The question is, how?
Like any client, the government will need to toughen up to get value for money - especially with up to 40% savings demanded across every department. The recent confusion has come about from the fact that the other goals the government wants to achieve - especially that of making frameworks more open to SMEs - are not necessarily conducive to cost saving.
Frameworks must be seen to deliver value to taxpayers and not become a shield against competitive pressure. Nor should they close the market to SMEs
Paul Morrell, chief construction adviser
“The government is still looking for a balance,” says Keith Rayner, academies director at Bam Construct. “There is an obvious conflict between trying to make savings across the board and splitting up frameworks to make them more palatable for SMEs.”
Here we investigate how this balance might be achieved by delving into the detail of the government’s latest stance on public sector procurement, considering how the changes might affect the industry, and looking at existing procurement models that are proving popular with large firms and SMEs alike.
A change, not an overhaul
Following Maude’s announcements at the SME summit, the government is keen to reassure the construction industry that it does not plan to do away with frameworks altogether, but to make them work more efficiently and be more accessible for SMEs. In short, there is no need to panic.
Chief construction adviser Paul Morrell is quick to clarify some of the points that might have spooked the industry. First and foremost, that Maude’s comments were not made in reference to construction: “The announcements made drew on a consideration of procurement across the whole government programme,” says Morrell. “The emphasis was likely to be on the procurement of commodities and ICT. The details of procurement policy will differ from sector to sector, but there will be common objectives.” He acknowledges the specific intricacies of construction procurement and the desire to “assemble integrated, collaborative and skilled supply chains, rather than breaking them up.”
But Maude’s desire to save money by standardising procurement is well documented and government frameworks will certainly change: “What is heralded is a new rigour,” says Morrell. “Frameworks must be seen to deliver value to taxpayers and not become a shield against competitive pressure. Nor should they close the market to smaller businesses that might be perfectly capable of doing the work at lower cost. The messages that do read over to construction are a call for a more competitive offer; a drive to eliminate waste and duplication; a desire to nurture SMEs; and a parallel desire to keep down barriers to entry, while recognising the value of early involvement and longer-term relationships.”
Although Morrell’s explanation offers some reassurance that the government doesn’t plan to tear up frameworks altogether, he still fails to pinpoint exactly what might happen. Many are concerned that this apparent haziness is storing up trouble and that government clients under pressure to award work to SMEs might back away from deals that have traditionally favoured bigger firms. But others argue that whatever happens, allowing smaller firms more opportunity to work on government projects needn’t have an adverse effect on existing incumbents.
How could it work?
It is well known that government departments, including the Ministry of Defence, Ministry of Justice and the Highways Agency, have all had contact with BAA - the airports operator that overhauled its framework system in 2008 under the leadership of capital projects director, Steven Morgan. Morgan has always insisted that doing away with frameworks on projects over £25m did not mean dumping them entirely; they have remained in place for projects under this value. He maintains that competition on the open market was the only way to get the best value for money and ensure he was working with the “A-team, the best of the best”.
There has been much speculation that this might be the procurement route the government looks to emulate. And you can see why - three years on, the group has increased the value of work that can now be undertaken over the next five years by more than £400m. Stephen Livingstone, BAA’s programme control director, insists this additional value has not been created at the expense of locking out SMEs. Rather the opposite, he argues, and adds that he can’t see any reason why government departments couldn’t benefit in the same way: “We think the best way to get value is to let the market compete. If we can demonstrate value to our shareholders in an OJEU world, then there is no reason public clients can’t do the same. In terms of SME involvement, we sit on procurement panels to make sure our tier one firms are using an open and transparent tender process and competition is encouraged all down the supply chain.”
Small jobs can be given to small firms, medium to medium-sized firms, with main contractors taking on the larger jobs
Don Ward, Constructing Excellence
Bam’s Rayner adds that, even as a main contractor itself, the firm doesn’t think the inclusion of more SMEs on public frameworks should be seen as a huge cause for concern: “There is a place in the market for everyone,” he says. “We don’t feel threatened in the slightest. Obviously the less competition we have, the better. But I wouldn’t say SMEs having more opportunities is a bad thing.” He adds that the government has no choice but to toughen up as a client: “It is doing what it has to do,” he says.
But not all main contractors are as relaxed about a potential move away from frameworks: “I don’t think the best method of procurement is to go down a pure competitive tender route,” says Paul Sheffield, chief executive officer of Kier. “Moving away from frameworks would be an extremely retrograde step and would send the industry back years.”
The right frameworks
While some industry bodies and figures come down on one side or the other in terms of using frameworks as a procurement method, there are others who argue it’s not that clear cut. Don Ward, chief executive of Constructing Excellence, says the key is not just whether or not frameworks are successful, but whether they are the right kind. And this, he says, is what the government needs to keep firmly in mind as it looks to the future of public sector procurement: “Frameworks are a valuable tool that, if they are properly managed, will reduce the cost of any work job after job as teams get used to working together. And the right frameworks don’t have to give all the work to main contractors and shut out SMEs. There is no reason why small jobs can’t be given to small firms, medium jobs given to medium-sized firms with main contractors taking on the larger jobs.”
He highlights the way local authorities like Birmingham and Manchester have chosen to set up framework procurement systems where job size is matched to company size to ensure that everyone gets a fair chance to win work.
John Lorimer, capital programme director at Manchester council, says SME involvement on frameworks is all about how clients are engaged: “It all starts off with having arrangements in place that allow for open dialogue with contractors. And the key is for the client to be proactive all the way along the supply chain to make sure SMEs are getting the right treatment. Are clients really making the time to do this? We certainly do.”
And he has this tip: “One trick when procuring frameworks is to do it in stages so there are lower value bands for contractors who can deliver schemes between a certain value up to, say, half a million. This allows you to get even closer to SMEs.”
While it remains unclear whether this is the type of system other parts of government will look to adopt, Constructing Excellence’s Ward does predict differences between the development of frameworks in large and small departments: “I think bigger departments will follow a similar trend to BAA which has proven, so far, to be effective. But I think the smaller, less experienced departments may end up with a two-tier system tending to go more towards lowest cost tendering. And that could go horribly wrong. It could mean they end up with 20-25% cost overruns and big budgetary problems as a result. It’s a question of well managed, organised frameworks.”
Still working it out
And this is where many industry concerns lie. While most firms would accept that, in tough times, they will be expected to work harder and deliver more for less, they have doubts about the government’s proposals to factor in more SME involvement. Not everyone is convinced the procurement changes will be well managed: “The government is sending out some very mixed messages,” says David Mathieson, director at Turner & Townsend. Another senior industry source adds: “There is a contradiction between the SME agenda and the integrated working and driving down cost agendas. I always worry when an objective is set other than the most basic: price.”
Michael Dunning from the Cabinet Office says in response: “The government’s primary objective is to ensure value for money for the UK taxpayer. This can, and will, where appropriate, be achieved on a category basis, driven by the specific category strategy, which will also address the element of spend that will be directed to SMEs. It may be achieved through the aggregation of requirements into larger contracts. It should also be noted that aggregation and centralisation of government spend does not necessarily mean the supply base is aggregated. Large procurement contracts frequently utilise some form of lotting structure in order to harness a diverse supply base and value for money.”
Then there are the other, age-old issues that fill so many industry professionals with dread when they catch wind of any change in procurement: will this have a negative effect on collaborative working? Will it be the next step towards returning to adversarial relationships? Kier’s Sheffield says: “Continuous improvement on jobs brought about by frameworks demonstrates savings; renouncing them would undo an awful lot of good work done over the last 10 years.”
The reaction of previous incumbents on government frameworks - historically, main contractors - to the idea of having to work harder to fight off an influx of new competitors is mixed. While some, like Bam, accept the fact that value driven by competition may be the public sector’s best option to make savings, others are less understanding - especially those who have paid to be on frameworks like Procure 21+.
Although the future of public sector procurement remains unclear, it seems unlikely - based on recent moves towards standardised frameworks and the fact that some government departments have already emulated systems that are tried and tested in the private sector - that huge changes are around the corner. But there will be changes. And if this debate has taught us anything, it’s that even small fry can have a fair old impact.
FRAMEWORKS: GOOD OR BAD?
FOR: Paul Sheffield, chief executive, Kier Group
Eighty per cent of the work in our construction business is from either frameworks or collaborative bidding. We like frameworks as everyone can be a winner. Clients can save money by looking at whole-of-life costing, rather than just selecting the cheapest bid up front; and the relationships developed help when working together.
There is no denying there is proof that best value comes from serial procurement. That’s one of the main reasons the Office of Government Commerce is extremely supportive of frameworks. It would be wasteful to the country if the government decided to go out to the market for multiple frameworks.
Getting rid of frameworks encourages underbidding. If you have a £10m job and there is a 2% profit margin, your contractor will make £200,000 profit. If you go out to competitive tender for every single £10m job, then the basic cost won’t vary but people will fight over the profit and customers will end up with someone who is prepared to do the job £200,000 cheaper than someone who actually wants to make a profit.
A good example of how collaborative working through frameworks has been successful would be the academies framework. It was stopped last summer because Michael Gove decided he wanted to cut the cost of schools by 25%. All the contractors were able to come up with a standard type of school and there has been a high degree of agreement that those 25% of savings would now be available. As a result, the framework now have the green light to build £800m worth of academies.
AGAINST: Roger Skehan, managing director, Leeds-based contractor Oddy Builders
Frameworks are a real problem for small builders. You generally fail to get on them because your turnover is too small or because you don’t have a vast file of client references to call upon. The system is biased against smaller businesses.
The growth of frameworks has had a big effect on my business. We have lost the opportunity to tender for work in areas where we had previously successfully won contracts. A couple of years ago one of the major housing associations, for which we had done £750,000 worth of work, decided to go for a national framework which meant we immediately lost access to this work because we couldn’t cover the geographic area.
An even bigger threat is the creation of mega-frameworks. They remove opportunities for contractors to win lower value tenders. We submitted three tenders for one council last year but this year all their procurement is to come from a large region-wide framework called Yor-Build. Now we do not expect any opportunity to tender to this council.
The message seems to be if you want to work for the public sector you have to become a subcontractor to larger organisations. This is easier said than done, as large contractors already have established supply chains. A number of my friends managed to get work with Rok and Connaught, only to get burnt when they went bust, so losing independence is an added risk.
I’ve heard both large contractors and public sector employees complain about frameworks. Large contractors say they do not get enough work for the effort they put into winning positions on frameworks, and public sector employees are frustrated by procurement rules that restrict their actions. We’ve got to look at making tendering more fair and equitable.
Additional reporting by Iain Withers