Procurement: New tricks?

The government’s guidance documents New Models of Construction Procurement raises questions, not least because of the use of the terms “new”, “cost-led procurement”, “integrated project insurance” (IPI) and “two stage open book”.

The guidance states that it covers a range of effective procurement practices that are already being used by leading practitioners. Therefore the approaches, at least in part, will be recognisable. In other ways they are not that clear because of the possible confusion as to what constitutes a procurement approach. Integrated project insurance is not a procurement approach as such but a means of insuring the works. It is not dependent on a single approach. To some extent this is also true of two-stage open book and cost-led procurement.

Notwithstanding this point, the overall approach to procurement that is advocated is one that seeks early engagement of the supply chain to create an integrated team. The benefit of such an approach is well known as it has potential to reduce risk. This facilitates greater cost certainty, better long-term value and improved time performance. It also has the potential to encourage innovations and improve relationships in a way that lessens time spent with disputes.

The three approaches identified have common features, for instance:

• A client brief The important question is what form should it take - wholly prescriptive or one that simply states performance requirements?
• Selection of integrated team(s) comprising consultants and suppliers Despite what is said in the guidance, the selection process for the team or teams can be ad hoc for each project or from a pre-existing framework. Whether a single team or a number of teams is identified depends on factors such as the level of competition required and whether a team has worked on similar projects.
• Cost (cost ceiling or benchmark).

The cost-led approach has the objective of an integrated supply team(s) working with the client team to develop their bid(s) within a pre-stated cost ceiling. This approach facilitates the possibility of different innovative solutions. However, it requires robust pre-determined and transparent assessment criteria.

Integrated project insurance is not a procurement approach as such but a means of insuring the works. It is not dependent on a single approach

The disadvantage is the potentially higher level of tendering costs when more than one proposal is sought and the difficulty in establishing proper objective assessment criteria. In terms of price the proposal may be required to be expressed in one of a number of ways. This could result in a lump sum/fixed price (which is lower than or equal to the ceiling cost) or a target cost with a guaranteed maximum price (the ceiling price).

The guidance acknowledges there are variants of the two stage open book approach; here the first stage is where the principal competition among a number of contractors and consultant teams takes place. The assessment criteria will vary depending on whether suppliers have been identified for a single project or taken from a pre-existing framework. Compared with the cost-led approach, innovation arises generally only from the selected team because it is at the second stage that the proposal is worked up by the single integrated team against a cost benchmark. However, this has the advantage of reducing tendering costs. Although innovation may arise at the first stage, it requires different assessment criteria.

Open book can incorporate a variety of pricing mechanism such as measured rates,, lump sum quotations, prime cost for labour, materials and plant. The reference in the guidance to agreed fixed price in this model is unclear because although that would be fine for a two stage approach, it is incompatible with open book, either with or without a target price.

Integrated project insurance is not a recognised stand-alone procurement route but might become one. It requires a competition to appoint the members of the integrated project team. This may be done in a similar manner to stage one of the two stage open book approach but may be extended to include more of the supply chain. The successful team then works up a solution against a cost benchmark in the same way as for two stage open book.

Integrated project insurance is a single policy that covers identified insurable risks for the project, which might include cost overruns beyond a certain level. This type of insurance is still not generally available and where it is there is a requirement that an independent assessor will act on behalf of the insurer. The assessor will validate the project so as to satisfy the insurer with regard to risk and project delivery and thereafter to monitor it during construction.

The principle behind such insurance is to eliminate insurance overlaps and avoid disputes as to who is to blame. No mention is made of a price mechanism but there is reference to bearing a slice of cost overruns before insurance kicks in.

Any type of price mechanism could work with IPI but it is usually premised on the basis that it lends itself more to a target cost approach than lump sum/fixed price.

Peter Hibberd is the chairman of the Joint Contracts Tribunal