Hell’s clients: whatever happened to frameworks?

BAA appointed Steve Morgan as its capital director in January. Since then, the ramifications of his shake-up of the airport authority’s £6.6bn construction framework have been felt across the industry.

Morgan’s most significant move so far has been the decision to tender all major projects – those worth more than £25m – competitively, ignoring the efforts of the nine firms who had bid for and made it on to the framework in January 2008, after a year-long bidding process. BAA’s entire five-year capital programme, including the construction of further terminal buildings at Heathrow East and the expansion of Stansted airport, was to have been divided up between them, but will now be put to the open market.

The move could be described as galling for those who spent time and money getting on the framework – according to one contractor, the process can cost up to £200,000. And it seems their woes are just beginning, as BAA is not the only client that has jilted its framework.

Last week, for example, it emerged that Network Rail was re-tendering its £700m consultants framework. And although BAA and Network Rail are two of the country’s highest profile frameworks, it would be unfair to single them out. The Ministry for Justice, for example, last month announced that the construction of five 1,500-place jails would not be procured through its £2.3bn prisons framework. Supermarket Tesco has so far stood by its framework, but has asked consultants to cut fees by anything up to 50%.

The value of work procured through frameworks now runs in to tens of billions each year, with the largest 20 frameworks announced in the past year alone having a total value of over £19bn, according to research by Barbour ABI. But with clients obsessed with cutting costs, one business development director at a major contractor says the industry was in danger of returning to the days before the 1998 Egan report, when single-stage tendering and short, confrontational relationships between clients and contractors were prolific. “It’s like turning the clock back a decade,” he says.

So, can frameworks survive the recession? The chair of one major contractor says it is too early to tell. “The official line when we’re asked,” he says, “is that framework agreements are all doing very well. The reality is we’re all worried they’re not going to hold together.”

The breakdown

It happens like this: framework members receive letters from the client asking them to look again at what they’re charging, even when fee structures have been agreed as part of the framework. “First you get a real squeeze on your margins,” says one contractor, “then you get a threat that they will look outside the framework if the response isn’t good enough.”

Finding ways to shave the price, in part by squeezing their own supply chain, is something contractors are having to get used to in order to hold the framework together.

But it wasn’t supposed to be like this. Frameworks have been with the industry for more than a decade. Generally they involve contractors or consultants competing for a place on a list of prequalified firms, which are then used to carry out a broadly planned stream of work. The system was a key part of the Egan revolution, and was designed to reduce procurement costs and improve quality by encouraging long-term partnering between clients and contractors. To put it another way, they were supposed to fix the dysfunctional and confrontational relationship between those commissioning a building and those building it, and end the mentality that encouraged firms to bid low to win work and then lever in profit by charging for variations later on.

All of these reasons for using frameworks are still valid today, but another main one no longer is. Frameworks were also about clients securing the services of quality contractors at a time when they were in short supply by offering a steady supply of future work. Now that the boom is over, and contractors everywhere are competing ferociously for business, that rationale has suddenly gone.

Competitive tenders, on the other hand, have always been the surest way for a client to get a cheap price. Indeed, BAA’s move is thought to be explicitly about lowering costs. A spokesperson says: “BAA’s current five-year capital programme is one of the largest infrastructure programmes under way in the UK. Given market conditions, and BAA’s regulatory obligation to demonstrate value for money, a review of the existing procurement strategy is appropriate.”

Peter Cunningham, chief executive of the Contractors Clients’ Group, says builders need to understand the pressure clients are under. “We’re under the same pressure to cut costs as everyone else is. Construction buyers are often battling against group procurement departments who are telling them to go back out to the market again and don’t realise that it’s not the same as buying paperclips.”

You’ve been framed

‘First you get a squeeze on your margins,’ says one firm, ‘then you get a threat that they will look outside the framework if the response isn’t good enough

Rather than just the clients themselves, it is as much QSs that grumbling contractors are blaming for this shift. They claim that QS firms, under pressure to assure clients they can dramatically reduce the cost of projects, have overpromised to win work.

One contractor complains that consultants such as EC Harris have been “telling the world to abandon frameworks and that single-stage tendering is the way to go”. Some say QSs have been promising price cuts of up to 30%, despite the fact most predictions are that tender prices will fall less than 10% in 2009.

EC Harris denies that it is advising clients to leave frameworks as a matter of course, but it has been telling them that they can expect to gain savings of 20% by renegotiating them. David Sparrow, head of client solutions for the firm, says: “Simply going out to tender will not achieve the savings you need. Contractors won’t get the support of the supply chain, and you’ll end up battling to complete projects on time and to budget. But clients should be seeking to review and amend frameworks.”

Sparrow’s view is broadly supported by Murray Rowden, director of Turner & Townsend, who says: “It’s not right to just get rid of your framework, but clients should review them. Are they appropriate in the current environment, and can the prices be looked at again?”

The fact that there has to be some change in rates is something most contractors accept, but for many it is the manner in which the negotiation has been conducted that has offended. “People get narked at letters being sent presenting cuts as a fait accompli. It’s the way it’s handled that’s important,” says Rowden.

Graham Shennan is managing director of Morgan Ashurst, Morgan Sindall’s main contracting arm, and gets more than half of his business’ £800m turnover through frameworks. He estimates that at present more than three-quarters are still working, but he is being asked by a few to look at his rates. He says: “Am I happy about it? I’m realistic: the world’s a different place than it was two years ago. Most clients are asking how they get best value without damaging the delivery of the project. Unfortunately a few think best value means cheapest.”

David Bill, director of Mace’s public sector consultancy business, which gets 90% of its revenue from about 80 frameworks, adds: “Frameworks are still a fantastic way of doing business, but we are seeing clients put a real squeeze on margins. It worries us that clients think they’ll get best value by driving down input costs – history tells us it’s not the case.”

As well as reducing prices, clients are also looking at different commercial models for pricing – even when these have been explicitly negotiated in the framework deal. For example, a traditional model of costs plus overheads plus profit margin, is being replaced by fixed-price contracts or ones that include financial incentives for the contractor to squeeze its suppliers. Sources say this is already leading to painful contractual conflicts, as builders argue about whether every bit of work is inside the original scope.

Contractors on the BAA framework, for example, say they have been told that future projects will be handled in a distinctly more contractual way than previous deals – with a fixed price and scopes of works all detailed and set down in advance and all parties encouraged to work to the letter of the law. Contractors, in turn, say they are happy to play that game.

The new way of working will mean that the lawyers will be to hand on both sides. This seems a long way from the “partnership” approach espoused by Egan. Rowden, speaking about the general shift, rather than BAA specifically, says: “If we go back to that and apply it in circumstances to which it is not suited, then suppliers will just look for loopholes and hit them for changes later on.”

It will also mean that contractors who are unhappy about frameworks being abandoned have little course of redress. Most frameworks explicitly offer no guarantee of work, so firms will struggle to sue for not getting any (see box, left). As the chair of the major contractor says: “If that happens you just have to put your hands up and walk away. Life’s short, but people’s memories are long.”

The first downturn in a decade was always going to be a test of the industry’s progress since Egan. At the moment the jury on frameworks is out. It seems as if most are being renegotiated, but so far have not collapsed. Although this may hit firms in the short term, the long-term price of giving up on frameworks will be borne by clients. Altering frameworks is understandable. Abandoning them would be a step backwards.