CONS6817_S08'16

Procurement (CONS6817) Lara Tookey & John Boon
PROCUREMENT – SESSION #8
Strategic Long Term Partnering
Framework agreements
Introduction to PPPs – Public Private Partnering

WHAT’S THE PROBLEM?
The behavioural aspects of projects

Typical organisation on DBB project
All parties selected on the
basis of lowest price
• Need to minimise
expenditure
• Need to increase price
wherever possible
Architect Engineers QS Construction
Contractor
Sub-contractors &
Suppliers
Project
Manager

Normal behaviour is…..
• Tendency is for parties to the project to
stand apart from one another;
• Demand the other party perform as required
by the contract; and
• Pursue claims against them when they fail to
perform.

Normal behaviour is…..
• Do not seek to assist other party(s) to perform;
• No attempt to help the other party overcome a
problem when they hit one;
• Never consider exceeding the requirements of
the contract; and
• Never consider mutually beneficial ways of
improving on the deliverables

End result tends to be….
• Projects delivered to marginally acceptable
quality standards;
• Contractors and consultants only achieve
marginally acceptable levels of profitability;
• Cost and time overruns; and
• Contract completion involves a process of
resolving significant numbers of claims either by
negotiation or litigation.

Plus the issues of lack of
constructor input into
the design process ……

WHEN THINGS GO RIGHT...
Strategic partnering – long(er) term relationships

IF YOU CAN MAKE SIGNIFICANT GAINS
BY COLLABORATING ON ONE OFF
PROJECTS YOU SHOULD BE ABLE TO
MAKE EVEN BIGGER GAINS IF YOU
WORKED TOGETHER
COLLABORATIVELY ON A SERIES OF
PROJECTS.
LONG TERM STRATEGIC
RELATIONSHIPS

UK EXPERIENCE

Egan report – Rethinking
Construction 1998
• Debilitating cycle of competitive tender,
conflict, low margins and dissatisfied clients
• The industry must replace competitive
tendering with long time relationships based
on clear measurement of performance and
sustained improvement in quality and
efficiency

CLIENT LED CHANGE

• Early 2000 Sinclair Knight Merz (SKM) was
appointed as part of a client-led team to
undertake a fundamental review of the design,
procurement and construction of retail assets
for Tesco Stores Limited.
• The brief (design & construction professionals):
• significantly reduce construction costs and build
programmes for new retail space, whilst improving
the shopping experience, through rationalisation,
standardisation and simplification.

• A trial store at Haverfordwest (£4.75m),
completed in March 2000, confirmed the
success of the design initiatives as the target
costs and programme were achieved.
• Retaining the same team, building on the
success of the original project & improving all
aspects of the store design and construction
• two new trial store projects at Downham Market
(£3.5m) and Cardiff, Pengam Green (£6.15m) were
commissioned

• A complete review of the building structure,
fabric and services, together with the retail
design, was undertaken and new initiatives
were included in particular to modularise plant,
specific retail elements and ancillary areas, such
as toilets.
• The new stores were completed in April 2001,
again within cost and programme targets,
despite significant site-specific challenges.

• Sovereign Construction has been working
with Tesco Stores Limited for over 30 years.
• Challenges on a project:
• A short program duration in order to complete and open pre-xmas
in order to benefit from the enhanced trading period.
• An extremely busy and congested central London location.
• Noise and delivery restrictions creating greater pressure on the
short program duration.
• Local Authority planning restrictions and The Kensington Society ( a
local residents association) conservation requirements.

• Solutions:
• Promote a "One Team" approach with the client, retail,
professionals and Local Authority.
• Detailed and complex programming in order to meet the required
opening date and adhere to the significant restrictions on working
times and deliveries.
• Working within pre-agreed times to ensure that residents were not
disturbed.
• Detailed planning with regards to deliveries to overcome the traffic
and congestion issues.
• Good, consistent and regular communication with both the local
authority, the Kensington Society and where appropriate local
residents and businesses.

“As a leading construction company we aim to be the UK's first choice
construction partner for delivery of services to the community.”
MANSELL

• “Our dedication to customer service and
nurturing long-term relationships brings us
high levels of repeat business and the ability
to invest and grow”.
• 85% repeat business – frameworks and
sustainable relationships
• Turnover up 24%

COMMERCIAL ARRANGEMENTS
Framework agreement

Framework Agreement
• An umbrella agreement under which the
parties enter into a number of project
specific contracts
• Typically 3 – 5 year agreements
• Can be non-binding or legally binding

Contents of framework
agreement include - 1
• Scope - the services to be provided
• Volume – the agreement may specify the
volume of work to be provided
• Pricing mechanisms – how the price for the
services on individual projects will be
determined
• Risk and reward – painshare/gainshare
provisions

• Performance specification
• Performance measures (KPIs) (often raised during
the period of the framework)
• Performance incentives
• Direct payments on achieving targets
• Share of total work relative to other framework
contractors
• Learning from project to project
• Innovation provisions
• How the parties will work together to achieve
innovation
• Who will fund what R&D

• Supply chain provisions
• Working with other framework contractors (eg
design consultants)
• How the contractor will manage their own
supply chain (will they have framework
agreements with sub-contractors)

Typical building project under
a framework agreement
• Contractor involved in cost planning
throughout early design stages to establish a
target cost (verified by independent QS)
• As the design phase progresses the target
cost is refined and then fixed
• A contract is entered into between the client
and the framework contractor (based on
terms and conditions specified in the
framework agreement)

Typical payment models
• Full cost reimbursement + margin
• P&G + margin
• Cost reimbursement of subcontractors and
suppliers
• In either case gainshare/painshare provisions
apply

Benefits to client
• Improved predictability
• Cost
• Time
• Improved risk management
• Reduced time and cost in tendering individual
projects
• Improved performance over time:
• Value for money (cost efficiency)
• Project duration
• Quality

Benefits to contractor
• Continuity of work
• Ability to contribute to the design phase and
achieve construction efficiency
• Benefits from gainshare provisions
• Reduction in tender costs

PPP’s
ARE THESE JUST THE NEXT STEP, OR
ARE THEY SOMETHING A BIT MORE
SERIOUS?

Public Procurement
Engineer / Architect
D
Contractor
B
Bank / Financier
F
Operator
O
Public Authority
Investors Users
Shareholders
Agreement
Consultancy
Agreement
Construction
Contract
Loan
Employment /
O&M Contract
Tax/Rates/Tolls/Le
ase

PPP Procurement
Engineer / Architect
D
Contractor
B
Bank / Financier
F
Operator
O
Special Purpose
Vehicle
Investors Users
Shareholders
Agreement
Consultancy
Agreement
Construction
Contract
Loan
Employment /
O&M Contract
Tax/Rates/Tolls/Le
ase
Public Authority
Concession
Agreement

What is a PPP / PFi?
• Public = public sector authority
• Private = private organisations
• Partnership = risk sharing relationship (not
merely regulatory or short term contract)
• PFI (Private Finance Initiative)
• A generic classifier for all types of PPP
construction.

What are Public Private
Partnerships?
• ‘A contractual arrangement between public
and private sectors with clear agreement on
shared objectives for the delivery of public
infrastructure and/or public services by the
private sector that would have otherwise
been provided through traditional public
sector procurement’
• Extracted from Russell Kenley notes quoting Akintoye 2003

Public-Private-Partnerships
• Narrow definition: “instead of the public
sector procuring a capital asset by paying for
it in full up front, the effect of a typical PPP
structure is usually to create a single stand
alone business, financed and operated by
the private sector. The purpose is to create
the asset and then deliver a service to the
public sector client, in return for payment
commensurate with the service levels
provided.”
• International Financial Services, June 2001

Underlying Philosophy
• The private sector executes projects and
delivers services more efficiently and
manages the risks better.
• If the private sector bears both the initial capital
and operating costs it will make better “whole of
life” cost judgements.

A few important things:
• It must relate to the provision of public
services or public infrastructure.
• It necessitates the transfer of risk between
partners.
• If the arrangement does not include these two
concepts, they are not technically “ppp’s”.
• No universal definition of P3.
• Covers a wide range of projects, depending
on asset ownership, risk sharing, financing &
operation.

• FOR PPP’s/PFI’s “government” can mean any
level of government
• national, regional or local.

WHAT DOES A PPP LOOK LIKE?

Wi
Wiri Prison – Full Service PPP
DBFOM

Special Purpose Vehicle (SPV)
• A company incorporated solely for the
implementation / management of the
project.
• Enters into contracts with the Government
and sub-contractors.
• Finances, develops, builds, maintains and
operates the project (or any other
combination).
• Guarantee and secure cash flows.

CONS6817_S08'16

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