A claim that PFI models deliver best value will illicit strong opinions. The alternative is directly procured and funded capital works. However, public health sector traditionally procured works have a poor track record – all too familiar are cost overruns and delays.
The Government Procurement Strategy has recognised the challenge and has produced guidance on models intended to inject rigour into public sector procurement which will challenge those spending from the public purse to really demonstrate best value. We look below at the impact that implementing the strategy may have on NHS Trusts for future capital work procurements.
The guidance introduces three new procurement models; Two Stage Open Book, Integrated Project Insurance and Cost Led Procurement. In this article, we look at the three models in more detail. Are they really innovative approached to procurement or just guidance on client- side project management tool? There could also be EU public procurement issues where the contractor is brought in early.
The three models
- Two Stage Open Book
The basic structure of this model will be familiar to construction professionals who use two stage tendering. At stage 1, bidders compete for the contract and the successful team is appointed to stage 1 on grounds of capability, experience, efficiency, and so on. At stage 1, the successful team is appointed to work up a proposal with the client on the basis of an open book cost. The main contract for works is then awarded for stage 2. The key feature of this model is the early involvement of the project team to curtail risks, develop the design and agree a fixed contract price before starting on site.
- Integrated Project Insurance (IPI)
Members of an integrated project team are appointed through a competition which assesses capability, experience, efficiency, and so on. The chosen team then forms an “alliance” (similar to a virtual company) with the client and works up a proposal in line with the client’s required outcome and cost benchmark. The key difference here with other models is that the whole project is underwritten by a single insurance policy covering risks in the project, such as cost overruns. The Technical Independent Risk Assessor (TIRA) and the Financial Independent Risk Assurer (FIRA) advise and monitor the procurement procedure and report to the insurers on the chosen team’s final proposal to enable the IPI policy inception to take place. Throughout the construction phase, the insurers are kept informed as to progress. The insurers have sight of the whole risk of the project at inception, meaning that insurance premiums are lower as a result and cost overruns are controlled. This procedure is reportedly suitable for projects worth £10-25m and is available through Griffiths & Armour Professional Risks.
- Cost Led Procurement
This procedure is mainly used with framework agreements and is a two stage process, with two teams being taken forwards to the second stage to refine their proposals. The client selects the successful team based on their ability to bring the project costs in below its cost benchmark. If none of the framework members are able to beat the cost benchmark, the project is offered to suppliers outside the framework. If this cannot be achieved then the project should not proceed and the client then reviews its requirements and reconsiders them where necessary. Team members are encouraged to work collaboratively to drive cost reductions in subsequent projects. This is suitable for projects where costs cannot be exceeded and are repeatable, for example, the construction of schools and roads.
Is the guidance just a client-sided project management tool?
It many ways it is. The main aim of the new models is to try and correct some of the inconsistent procurement practices that studies show have been occurring in the health sector in past years. There has been wastage through inefficiency and not enough focus on what outcomes the client wishes to achieve at the beginning of the project, in terms of output and costs. The new models seek to focus minds on this at the start and firm up a proper budget. They put the onus on the project team to build to the client’s requirements and budget and as such, give control back to the client over the scope and costs.
So is there anything new in it for the project team? As a result of more careful planning at the beginning, the benefits of these approaches should filter direct to them in terms of certainty of scope and fees and encourage good practice through the supply chain.
Could there be EU public procurement issues where the chosen project team is brought in early?
The risk of procurement challenge in the health sector is very real. The models have been designed to be compatible with the EU public procurement directives for use with any of the procedures (Open, Restricted, Negotiated or Competitive Dialogue) but there could be EU public procurement issues where the chosen team is brought in early to develop their proposal but has not yet been formally appointed. For example, with the Two Stage Open Book Procedure, if the client enters into a contract with the chosen team that only covers its work during that pre-construction phase, the parties will need to enter into a new contract for the construction phase. This could risk an EU procurement challenge as the new contract may break the continuity of the pre-construction phase. The client should therefore link the two contracts together by ensuring that the successful implementation of pre-construction activities leads to the award of the construction phase contract.
In contrast, some aspects of the Cost Led Procurement model seem very EU friendly. This model encourages greater competition when using framework agreements as clients have to test the open market if the framework members are unable to beat the cost benchmark. Also, a competitive element remains at Stage 2, during the development of the proposal, as two bidders compete for the final award of the contract.
Interaction with other Department of Health procurement guidance
The models seek to drive efficiency and value through public sector procurement processes. However, NHS Trusts cannot just follow these models in isolation. NHS Trusts will need to consider other guidance or policies that exist within the health sector and which will continue to apply to and constrain any procurement . For example, last year, the Department of Health published a programme titled “Better Procurement Better Value Better Care” which looked at balancing cost efficiencies with driving economic growth by supporting SMEs. This acknowledged that in order to achieve the desired effect and support SMEs, standard and prompt payment terms are required and these must also be adopted by prime contractors for their sub-contractors on public contracts.
To conclude, the new models of construction procurement are certainly a step in the right direction and using a more focussed and rigorous procurement approach will help achieve projects where the client gets what it wants, with the hope of little or no cost overruns. The first challenge for the Government Construction Strategy will most likely be encouraging the uptake of the new models of procurement by public bodies beyond central government. However, procurers will also need to navigate the tensions of compliance with other policies e.g. the Department of Health’s commitment to supporting SMEs, which may not always align with rigorously driving value.