Prime number

Trust and openness are hard targets in any business and many partnerships fall foul of these basic principles. But as core features of prime contracting, the Defence Estate's new procurement method, they are essential to the success of any project managed in this way.

Members of the construction team on a £38 million Ministry of Defence (MoD) redevelopment in Hampshire are putting this theory to the test. The 34-acre Andover North Site was used as an airfield during the two World Wars and sits adjacent to another MoD site already in use. The basis of the redevelopment is to bring together the tri-services Defence Logistics Organisation onto the site. In practical terms, this involves the demolition of the existing structures to replace them with five new buildings: three-storey offices for 780 staff; a 45 000 ft2 stores and technical facility; a two-storey accommodation block for 68 members; a gatehouse and a pre-school nursery. These are currently at varying stages of completion, but will all be handed over in September 2002.

Primed for projects?
More important than the physical factors of this scheme, are its implications for the procurement of future MoD projects.

The Andover North Site scheme was the second to be let by the MoD as a prime contract. It was, however, the first to include design, construction and maintenance, and is to date the most advanced prime contract; it is, in essence, a testbed for the method.

But what is prime contracting? "It's the procurement process developed by the MoD to embrace the Latham and Egan principles," explains Bob Hall, md of the project's m&e contractor Southern Electric Contracting (SEC). "The construction industry historically has been a very confrontational industry, with a lot of energies expended defending claim and counter-claim between contractor and subcontractor. The big attraction of prime contracting is that it's completely different."

Prime contracting stemmed from the Government's Building Down Barriers initiative. The aim is for the entire supply chain to work selflessly together to achieve the most suitable and cost-effective solution for the client. Value for money is measured on a whole-life basis, not just capital costs. To do this you need to establish a team of like-minded people. But to get the teamwork needed, any potential conflict between the team members must be eradicated. This is done by removing the hierarchical structure; making payment equal and fair; and promoting openness throughout.

The prime contractor provides a one-stop solution for design, construction and maintenance and contracts directly with the client. It is supported by a team of cluster leaders, which each support a different part of the construction process and all of which have equal status. For the Andover project, business infrastructure management company Citex is the client's principal contractor; SEC is the m&e cluster leader.

Chris Gostling, Citex senior project manager explains: "The MoD has contracted with Citex, which then employs the rest of the cluster leaders. But the reality of it is that everybody sits at the top table and everybody has their say in how the project should be managed in terms of design and construction."

The team here was chosen as a result of existing relationships with Citex. Some firms had worked together on other projects, but this is the first time that they have all worked together.

Staging a prime contract
There are six basic stages to a prime contract. The process begins with an expression of interest, usually in response to a notification of the project in the European Journal. The client will assess applicants and select the teams it would like to formally pre-qualify for the opportunity to tender. Of the 29 teams entering step one of the Andover project, 12 were selected for step 2 – pre-qualification – of which the Citex team was the only consultant-led tender.

Four of these teams moved onto step three – invitation to tender – which resulted in the appointment of a preferred bidder (step 4), after which the prime contractor is appointed. "A large percentage of the selection criteria is the ability of the team to be able to deliver the client's expectations, in terms of being able to satisfy the strategic brief," stresses Gostling.

Hall agrees: "They are selecting a team as well. We went in as a team knowing that we either won it or lost it together, because part of the prime contracting principles is about supply chain management. They're looking for people to take part in this that have a predetermined supply chain and are managing that supply chain to get best value and best performance out of it."

One very different aspect of prime contracting in comparison to traditional procurement is the pricing structures. "Prime contracting is based on the principles of cost recovery, overhead recovery and ring-fenced profit on an open book basis, which is more attractive because it allows the MoD to have cost certainty," explains Gostling. In the initial bidding stages pricing is not the number one priority, although value for money had to be proven: "The decisions are based on: the design solution to meet the strategic brief; delivering value for money and whether or not the client considers the team capable of delivering the project," explains Hall.

"When you get down into preferred bidder stage you are working with the MoD team, and you are refining your design principles to ensure you are meeting their strategic brief. Then you confirm your price."

As the team was predetermined, each cluster leader was responsible for pricing its individual area of work, with Citex co-ordinating the process until a total project price was established.

The trust and openness needed for prime contracting must be fully in place by this stage to meet the costing structure. Two prices are set: a target price and a guaranteed maximum price (gmp). The target price is the one the team is aiming to hit; the gmp takes into account the changes that may occur once the contract has begun.

The difference in prices is carefully controlled by a "pain-gain sharing mechanism", explains Gostling. For this, the client and prime contractor, in this case Citex, agree in the initial contract, what percentage of any costs that fall between the two figures each party will be responsible for in the event that the target price is exceeded. The percentage agreed for the prime contractor is then further broken down, with partial responsibility falling to each of the cluster leaders. If the final cost is below the target price then profits are shared to the agreed percentages.

If the gmp is exceeded, the excess is down to the prime contractor and its cluster groups. This makes the need for accuracy in the initial design and pricing essential, meaning a lot more front-end work than on a traditional contract.

The significance of this, explains SEC's project manager Dave Vivian is increased focus on the total project rather than individual gain: "The management of the project differs from traditional as I am now no longer trying to minimise my costs at somebody else's expense. What I'm trying to do, along with everybody else, is minimise the project cost," stresses Vivian. If successful, the teams each get their share of the gain, irrelevant of where savings were made.

Vivian elaborates: "What it means is that as you go through the project, if it becomes apparent that it could be done at a lower cost by [making changes] it doesn't matter, nobody's arguing about it. It's the project costs that count." This thinking has allowed more innovative construction methods to be used on the project and helped to maintain schedules.

A decision to use existing buildings on site to collocate the construction team has meant fewer meetings than expected. "There are less meetings because there is no confrontation, so there is no need to get around the table and sort things out," suggests Gostling.

Perhaps a bigger factor in the lack of confrontation was the decision to use electronic communications. A rule established early in the process was that all correspondence should be by e-mail. Gostling explains: "E-mail is far less threatening than a letter landing on your desk, and I think that's reflected by the relationships."

All e-mails are added to an internet-based information system, which also holds the drawings, documentation, specifications and financial details. All team members have access to this – further promoting the ethos of openness.

Paying for prosperity
Electronic mail and teamwork aside; openness and trust can only be maintained if a fair payment structure is in place. As Hall so rightly says: "One of the important issues for us, and dear to the heart of subcontractors, is getting paid." Gostling agrees: "Money is important to everybody and if you take away the normal problem with money you've probably knocked out 75-80% of normal site disputes."

The method used here is somewhat unique in the construction industry. In a system agreed with the MoD, each team member submits applications for payment on a predetermined basis, payment is then made to a project bank account, from which those owed are directly paid. No team member can influence the process or make interest at another's expense.

This method differs to that of a prime contracting clause that asks for proof of subcontractor payment before the main contractor is paid. Gostling reasons: "That [clause] has its own problems because everybody incurs interest costs. Our payment process provides for a cash-neutral situation, and reduces project financing costs."

Among all the positive aspects of prime contracting, Hall submits only two downsides: "The actual cost of the bid process is higher than it would be on a traditional contract. On prime contracting you have to invest a lot more time and effort in making sure that you can convince the client that you are able to do the job, and also designing your concepts, so the actual cost of entry is higher.

"The other thing is that you are unlikely to make significant increases on your planned profits. But equally, you shouldn't lose money. Your final profit should be very close to that which you agreed up front. What you get is a much lower commercial risk for everyone."

Prime contracting should, it appears, open up a field of work that some firms may not have otherwise entered. Hall confirms: "It is unlikely that we would have got involved in a project of this size under old construction industry principles. That's got nothing to do with our capability, it's the fact that the risks are too high for the reward, and because you spend so much time in confrontational issues and contractual issues, rather than allowing your engineering expertise to be used."

The team is now in the advanced bidding stages for another project, surely a sign of the success of the process.