I am not fond of some of the 'big' contracting outfits in the UK and thus am loathe to think well of them whilst they undergo the Office of Fair Trading investigation of uncompetitive practices and collusion. However, I do have a lot of sympathy as I believe that it's the Competition Laws and government buying policies that drive companies to collude or collaborate. The practice is widespread it seems so for some they have colluded unwittingly.
The Office of Fair Trading police are there to find unfair trading, on their dawn raids – and so they will and have done. Their powers are terrifying and encourage people to NOT bid for publicly funded projects. I've very recently retired from a contracting company – they don't build schools or hospitals and are very much of the mechanical/electrical discipline rather than building or civils – so collaboration is unnatural -we don't trust our contracting colleagues (sorry). Nevertheless I am sure that we will have transgressed the competition laws and no doubt we will have colluded.
The whole competitive process is unfair and stacked against the idea of competitive sustainable contracting. We are not talking about cartels here or' ringing' prices for commodities such as cement, bricks and bolts. We are talking about guessing the price of something very complex, like a school or hospital, and then being able to deliver and make 2% net profit. In my experience it is all too easy to guess, I mean, estimate, low by 10%. Making 2% net is pretty good, especially as costs have been known to go up over the life of a project.
About 10 years back I was involved with an initiative driven by the DTI to make contractors more competitive – ACTIVE it was/is called, born out of something called CRINE. Analysis of the acronyms reveals:
- Achieving Competitiveness through Innovation and Value Engineering (if I remember correctly) and,
- Cost Reduction in a New Era.
Basically these mean: early collaboration by clients with contractors; choosing the best contractor most able to do the job; don't compete on price – compete on ability; concentrate on the engineering and project management not on the provision of a cost that equals or is less than the budget; carry out cost and value analysis at every stage of a project; don't replicate roles within client and contractor teams; encourage collaboration through the supply chain … and so on. I know it works, because that's the way my company worked and I saw in ACTIVE the way forward for a sustainable contracting industry.
However, at the same time, government was pushing the answer to life the universe and everything – COMPETITION. How would they build hospitals? How would they decommission the nuclear industry? How would they restore our heritage? - COMPETITION.
I found myself at an ACTIVE workshop at the DTI offices in the morning of the same day, where in the afternoon I attended a seminar at the same office on - COMPETITION. Competition, as described by the men in grey suits, is all to do with getting as many companies as possible to bid for the work and also to bid with the best safety record; best engineering record; best quality record; best corporate social record; best administration record; best financial record. All very laudable but guaranteed under PFI and PPP projects to put costs up drive projects into over-run and companies and clients out of business. 15% of the costs of a PFI are taken up with getting the contract wording 'right' and policing to make sure the contractor doesn't rip off the client. A £10million project thus only has £8.5m available to the contractor to actually build. Where's the 2% profit? The industry is littered with write-offs by PFI contractors.
So, why does competition drive people to collude?.
The tendering process demands much more of the contractor. The ACTIVE approach discourages the growth of pre-contract resources (pre-engineering ?) and claims/clever estimate driven quantity surveying departments. The COMPETITION process does the opposite – confrontation and counter actions cost much more than facilitation and action. My retired from company specialises in Nuclear Decommissioning and Heritage Restoration and they saw their marketing and tendering and post contract effort increase from 2% of staff effort to 9%. These costs have to be recovered from the client thus putting further pressure on the 2% margin.
The competition process usually demands that at least 5 contractors are asked to bid and have to show either in a one stage or two stage process that they are capable of doing the work safely, well and without going bust, whilst investing in the local community for the best value price (lowest). The resources and costs required to prepare the bid – with all the bells and whistles can reach £80k (weigh 22kg and be in 12 lever-arch files) or so for a £5M project. £30k for even the smallest of projects. For 4 of these people this is lost money and they may be struggling for resources or borrowing off other projects. Yet we cannot refuse to bid because we have been asked to and may not get asked again and the client needs to make up the numbers to obey the rules. We have been encouraged through ACTIVE and others to collaborate with our competition and supply chain as the projects have become multidiscipline and clients only want to place one contract. Clients also encourage teaming in the supply chain to fulfil the building of capacity in the locality as tenders over a certain amount have to bid across the European union. Being too busy is no excuse – it makes sense then that the contractor with the resource to produce a good bid and estimate of costs does it and uses his supply chain to help him. Hopefully he is able to guess his costs correctly to allow the 2% margin and pay for the tender and fees to the lawyers. If bidding in a team or consortium it is likely that another member might also be bidding with a member of another consortium – how can there be collaboration without breaking of the competition rules. It's inevitable that the 'others' get some idea of the prices and elect to cover the price of the company likely to win rather than lose face by not putting in a bid. Just ringing up a supplier and saying have the others asked you for a price for supply of pipe and then saying can you copy me in I'm too busy to send you the details and quantities separately can be construed as collusion. One company sending out all the specs to the supply chain instead of five all sending out the equivalent of a small forest in Norway must be a better use of the planet's resources.
On TV yesterday an expert reporter was explaining that Company 'A' had won a hospital contract at £12M because companies 'B' and 'C' had 'covered' the company 'A' prices by bidding £12M plus; the client's budget was £10M – meaning that the tax payer had paid £2M too much. I have a feeling that the real price should have been nearer £15M and contractor 'A' got his estimate wrong. Contractors 'B' and 'C' would still have had to have done a load of work submitting the other tender deliverables even if they didn't work up a proper price. A fixed price bid is a wild guess to 3 decimal places – so my old chief estimator used to say.
I have a solution:
The client should put major effort into working up the right price for the job- he could even pay a contractor – 1 only, or a consortium to provide that price and if necessary value engineer it to the budget. The project could then go out for bidding. Contractors would in effect all bid the same price. "Yes – I can do that project for your budget price of £12M and make 2% profit". The client should then make his decision based on who is most capable of doing the work and has the resource to be able to do it in the timescale.
I'd also be prepared to pay 10% more just for peace of mind and the luxury of not having any claims or employing a shed load of quantity surveyors, lawyers and auditors to argue over the final account. Oh- and I'd also scrap all this KPI based payments and bonus nonsense. By all means measure performance and run KPI's but don't make them a reason to pay or not pay.
There are projects that have gone well under the competitive process. I know of an £8m project, where the public client was brave enough to choose and defend to the auditors the 2nd lowest bid because he wanted the specialist experience of this particular contractor. The job went well – the QS's were sent away – effort went into engineering and project management not apportioning of blame for the things that were wrong. The project came in well under budget – slightly late. The contractor made 6% and enhanced his own and the client's reputation. An analysis of this project would make good reading but the grey suits would only say 'they should have taken the lowest price and saved the difference'
I could go on… but… back to my retirement lair.