New Models of Construction Procurement

1. New Models of Construction Procurement Cost Led Procurement, Integrated Project Insurance and Two Stage Open Book

2. Government Construction Strategy • In 2011 the Government Construction Strategy set out to achieve savings in construction procurement of up to 20% by making efficiencies through • reforming procurement practices • effecting behavioural and cultural change. • This was reinforced in 2013 by the industry’s own ambitions as set out in the Industrial Strategy for Construction (Construction 2025).

3. Government Construction Strategy • In 2012, Government with the support of industry, established a programmeto trial three new models of procurement proposed by industry and incorporated within the Strategy. • Cost Led Procurement • Integrated Project Insurance • Two Stage Open Book

4. Common principles • These models draw together and utilise a range of common principles, together with specific features, in changing the way government buys construction services. • Government promotes the adoption of these common principles, which are encapsulated by each of the three new models of procurement that sit within a range of appropriate procurement models available for clients to adopt.

5. help generate savings • The models bring together existing effective practices and behaviours that leading practitioners are already using to help generate savings reported by Government (£447m in FY 2012/13 savings and £840m in FY 2013/14).

6. From (requirement) to (requirement + budget) • The models seek to change the way public sector clients buy construction to a process where the supply chain responds to an outline client requirement and declared budget. This contrasts with the historical process of the supply chain building up a price against a detailed client requirement without understanding what the client can afford.

7. Evolution rather than revolution • The models represent evolution rather than revolution and establish clearly defined client-led collaborative processes developed from existing best practice. They are intended to • achieve efficiency gains that can be released for additional work • create new employment and industry activity • make projects more affordable and fundable • make the UK construction industry morecompetitive.

8. Expectations • The new procurement models are based around delivery by integrated project teams working collaboratively. • The models are expected to: • Reduce costs • contribute to improved programme certainty • reduce risk • encourage greater innovation • improve relationships across clients and the supply chain. • The models do not deliver the cheapest construction project, but will deliver the most cost effective and value for money outcome.

9. Common Principles The presumption for all the new models of procurement is that: • high levels of supply chain integration • innovation • good working relationships between client and industry significant change in the costs and risks of construction projects. will lead to a

10. Common Principles • All three models are designed to considerably reduce the commercial risk of construction procurement, execution and commission.

11. The models all require clients to: • Clearly define the desired functional outcome including specific requirements, e.g. • carbon reduction • use of apprentices • etc.

12. The models all require clients to: 2. Identify typical costs and delivering the outcomes based on • available data • benchmarkingand • cost-planning work • This will enable the client to set a realistic yet challenging cost ceiling, that would be achieved or bettered. • costs would be further reduced over a series of projects or programmesof work.

13. The models all require clients to: 3. Take steps to ensure that those appointed to carry out the processes of the models, whether internal or external to the client organisation, have the skills to do so effectively.

14. The models all require clients to: 4. Engage with the supply chain that embraces the principles of • Early Contractor Involvement (ECI) • high level of supply chain integration 5. ensure that on completion of the capital phase the specified output performance is achieved.

15. The models all require clients to: 6. Apply a robust review process to • ensure appropriate scheme definition • create commercial tension • monitor scheme development • address any unnecessary scope, risks and potentially missed opportunities.

16. Cost Led Procurement (CLP) • The client selects one or more integrated supply chain teams from a framework. • Teams are selected on their ability to work in a collaborative fashionto: • deliver below the cost ceiling on the first project, and • achieve cost reductions on subsequent projects whilemaintaining the required quality outcomes.

17. Cost Led Procurement (CLP) • The Cost Led Procurement method is ‘...intended to allow industry to use its experience and knowledge to develop innovative solutions through leveraging design, materials, subcontracting, direct labour and experience to the advantage of the Public Sector Client...focused on achieving target costs whilst maintaining, if not improving value’ (Cabinet Office, 2014). • In Cost Led Procurement, the project details are clearly identified and a ceiling cost calculated. Typically, an integrated supply team (one or more) is identified through a framework agreement and the team work together to complete the project at below the ceiling cost. In subsequent similar projects within a framework, Cost Led Procurement offers the opportunity for further reduction of costs. • The project is offered to suppliers outside the framework if none of the existing teams are able to deliver the project below the ceiling cost.

18. Cost Led Procurement (CLP) • In competition, two or three integrated framework supply teams are then given the opportunity early in the life of projects to develop their bids with the client team, allowing them to bring their experience to • innovateand • drive cost reductions. • Providedat least one of the supply teams can beat the cost ceiling, it will be selected on the relativescoredattractiveness of its commercial and physical proposition and of its team members before being awarded the contract to deliver the project.

19. Cost Led Procurement (CLP) • Should none of the teams be able to deliver the work within the affordable budget, the project is offered to suppliers outside the framework. • The expectation is that this would be unusual on a well-managed framework delivering similar types of projects, where the client and suppliers have an excellent understanding of cost.

20. Cost Led Procurement (CLP) • If the scheme price cannot be matched or bettered, it should not proceed. • Under these circumstances the client may have to reconsider its budget or specification. There is a burden on the client to select a realistically challenging price, and work to enable its achievement by the industry supply chain.

21. Two Stage Open Book (2SOB) • Based on an outline brief and cost benchmark, the Two Stage Open Book model sees the client invite prospective team members for a single project or from a framework to bid for a project. • First stage: A number of contractors and consultant teams compete for the contract in a with bidders being chosen based on their capacity, capability, stability, experience, strength of their supply chain, and fee (profit plus company overhead). • Second stage: the successful contractor and consultant team are appointed to work up a proposal on the basis of an open book cost that meets the client’s stated outcomes and cost benchmark.

22. Two Stage Open Book (2SOB) - Summary 1. Client establishes outline brief and cost benchmark. 2.Clientinvite prospective team members to bid for a project. 3. Contractors and consultant teams compete(Stage 1). 4. The successful contractor and consultant team work up a proposal (Stage 2).

23. Two Stage Open Book (2SOB) • The Two Stage Open Book differs from Cost Led Procurement in • reducing industry bidding costs • enabling faster mobilisation • providing the opportunity for clients to work earlier with a single integrated team testing design, cost and risk issues ahead of start on site on award at the end of the second stage.

24. Two Stage Open Book (2SOB) • At the heart of this model is a systematic approach to early contractor/subcontractor engagement. • The model: • includes deadlines for the contractor’s/subcontractor’s design and risk contributions during the first stage • has an agreed fixed price and clear risk profile before the client authorises the construction stage.

25. Integrated Project Insurance (IPI) • This approach incorporates many features common to the other two models, together with the introduction of an innovative project insurance product.

26. Integrated Project Insurance (IPI) • In implementing Integrated Project Insurance, the client holds a competition to appoint the members of an integrated project team (IPT) who will be responsible for delivering of the project. • Scoring may include elements assessing: • competence • capability • proven track record • maturity of behaviours • proposals for removing waste and inefficiency • fee declaration.

27. Integrated Project Insurance (IPI) • The chosen team then works up a preferred solution that will deliver the outcome defined by the client, with savings against existing cost benchmarks.

28. Integrated Project Insurance (IPI) • The difference between this and existing procurement models is the adoption of a single (third party assured) insurance policy to cover risks associated with delivery of the project. • This policy: • packages up all construction-related insurances currently held by the client and supply chain members. • takes a top slice of commercial risks, covering any cost overruns on the project above and beyond a “pain-share” threshold which is split transparently between client and the contracted parties (including any key members of the supply chain).

29. Integrated Project Insurance (IPI) • The model introduces third party independent facilitation and assurance of the scheme through a series of gateways. • The facilitation helps ensure good value for money and that a wholesome, balanced commercial position has been struck which an insurer can take on board.

30. Integrated Project Insurance (IPI) • With excess cost overruns (up to a “cap”) covered by this policy, it removes the potential for a blame culture to try to pass on liability within the team. • Payment of claims is based on the demonstration of loss not the assignment of blame. • Yet in order to secure the insurance in the first place, the team will have to prepare a credible proposal, validated by the independent expert assurer to ensure that: • the commercial tension is maintained, and • the insurer is comfortable that it can be delivered.

31. Integrated Project Insurance (IPI) • Insurers are prepared to agree a wider range of cover than under traditional project policies; they have an overview of all potential risks, and are in a better position to understand them. IPI insurers have been carefully selected by the brokers; their contracts are subject to utmost good faith; and they are expected to recognise and fund overspends promptly after they have been identified and verified by the FIRA. • Until the IPI product is fully established and a much simplified integrated format can be developed, the IPI policy comprises: • Section 1: Construction All Risks (including Terrorism Extension) • Section 2: Third Party Liability (including Non-Negligent Liability) • Section 3: Delay in Completion (resulting from damage under Section 1) • Section 4: Financial Loss cover

32. Integrated Project Insurance (IPI) • Latent Defects cover (for 12 years) – a “no fault” commercial latent defects insurance policy. • This use of known products is seen as an advantage in the early days of IPI as those who will benefit from the cover are better able to relate to the protection they are used to seeing. • The “financial loss” cover under the IPI policy has an agreed cap (limit of insurers’ indemnity), and its exclusions are limited to ‘normal industry exclusions’ which are: • nuclear and war risks and sonic bang • wilful default • employer’s (client’s) risks • change of law • any other specific exclusions relating to the particular circumstances of the project (e.g. MOD security issues).

33. References • Cabinet Office (2014) New Models of Construction Procurement - Introduction to the Guidance for Cost Led Procurement, Integrated Project Insurance and Two Stage Open Book.