Highways Agency

Overlying Principles for Future Procurement

In addition to the need to comply with legislation and government policy there are a number of basic principles which can be applied to all categories of work to achieve best value. To be fully effective all of the principles need to be applied as a package when procuring a product or a service. Each of the principles could be adopted in isolation but in total they provide suppliers the structure within which to identify optimal solutions and the incentives to deliver continual improvement over long-term periods. The principles are set out below:

Early creation of the delivery team

Under traditional forms of procurement used in the construction industry, the contractor was not involved at all in the design and development of the end product, they simply constructed what had been designed by an engineer employed by the client. Since the mid 1990s the HA has used design and build for some categories of work, but even with this the contractor has not been involved until after planning approval has been obtained. At this stage it has been estimated that the design is at least 80% constrained and there is little scope for innovation and consideration of buildability, including health and safety planning.

The earlier involvement of the contractor and the supply chain allows more scope for innovation, improved risk management, better forward planning of resource requirements, better ability to recruit and retain staff, improved consideration of buildability and health and safety, shorter construction periods and reduced impacts during construction. Overall, the early creation of delivery teams clearly offers the opportunity for better value and improved performance.

An integrated and incentivised supply chain

The parties normally involved in the delivery of a project or a service under a contract are the client, the designer, the contractor and the supply chain. In the past under traditional forms of procurement, the contractual arrangements have driven a wedge between the client and the contractor. It has also been common practice for the supply chain to be appointed only after the award of the main contract. This has contributed to undesirable practices such as "Dutch auctions" to get the lowest prices from the supply chain without considering the consequences on quality, performance or the sustainability of the supply chain.

It is often the case that it is now specialist sub-contractors and suppliers who possess the detailed knowledge of products and solutions. In order to provide maximum scope for innovation and the identification of optimal solutions this detailed knowledge needs to be fed into the development of the project as early as possible. The whole supply chain needs to be integrated in a seamless manner and incentivised to contribute innovative ideas which lead to better value and to be rewarded appropriately.

Maintaining a competitive and sustainable supply chain

The HA needs to establish and maintain a supplier base that is motivated and incentivised to continue to seek work opportunities with the HA and to seek to improve the service it delivers. To achieve this, the HA must identify future work programmes and delivery requirements. It must also recognise the need for the supply chain to make a fair and reasonable profit for the delivery of the required performance. The move to longer-term relationships based on continual improvement targets will lead over time to the HA working with fewer but better suppliers. Those suppliers will need to demonstrate that they have the ability to deliver the required resources either in-house or through good supply chain management arrangements. The HA will seek to be recognised as a best practice client in all respects and, in demanding high standards and good performance from its suppliers and their supply chain partners, it will make fair rewards.

Clear points of responsibility with no unnecessary layers of supervision

Traditional forms of procurement involve different parties having responsibility for different aspects of the project. For example, in contracts where the solution is designed by an independent engineer that is then constructed by a contractor, and if any problems are found in the design then the contractor has to wait for new instructions. That form of procurement also requires the engineer to supervise the construction to ensure compliance with the design.

The clarification of roles and responsibilities helps to avoid problems at contractual interfaces. It improves the scope for partnership working and reduces the wastage of valuable resources through the different layers of unnecessary supervision. It requires the development of quality systems which do require the industry to change culture but which will over time contribute better value by encouraging a "right first time" attitude.

E-procurement

The HA will introduce E-procurement systems to make tendering processes more efficient, to improve the quality of communications, to help make financial controls and reporting more efficient, and to support performance measuring and reporting. They will be compatible and integrated with the HA's new "System for Managing" (SfM) business framework which will support electronic purchase ordering and payment. (Also see separate section on E-procurement.)

Selection of suppliers on the basis of best value, ie. the optimal combination of quality and price

The HA has moved away from the use of lowest price to award contracts. The key to the assessment of best value is to identify what aspects of quality add real, affordable value to the delivery of the service. This is discussed elsewhere in this document in the section on selecting the supplier. With forms of procurement such as early design and build, the objective is not to identify the optimal solution during the tender period but to identify the best team who are most likely to be able to identify the optimal solution and to deliver it efficiently to the required standards. Assessment procedures will be improved to achieve greater transparency of requirements and consistency of the assessments. Reality checks will be introduced to validate tender submissions and to audit the quality of service delivery.

Price and affordability needs to play a part in the overall assessment of best value. The focus however, needs to be on a supplier's commitment to working in partnership to manage risk and remove wastage and unnecessary cost. This is best achieved by incentivisation through target cost arrangements. The HA will require reliable and robust systems for establishing fair and reasonable target costs that provide real incentives to deliver best value and continual improvement.

Fair allocation of risks

The HA has sought to improve the certainty of out-turn prices on certain contracts by the transfer of most risks to the contractor. This has been successful in improving certainty of price and time but it may not necessarily deliver best value as it comes at the price of a risk premium. A fair allocation of risks requires that risks are identified prior to the establishment of a contract. In addition, tenderers need to be able to assess the potential consequence of a risk and to be able to include an appropriate risk allowance in the price bid. It is unlikely that a client will get best value if tenderers have had to rely on guesswork if they have had inadequate information or if they will not be in a position to manage the risk. The outcome will be that the tenderers will either guess too high or too low, neither of which scenarios will result in best value. The client will either pay too much or the quality of the product or service may be threatened by commercial pressure.

In theory, best value is achieved by the client paying for appropriate risk management measures together with the costs of dealing with the consequences of only those risks that actually occur. However, the contractor and the supply chain are more likely to contribute to the effective and efficient management of risks if they have fair and reasonable incentives. The judgement required by a client is how much to pay for the transfer of a risk, and at what level it is judged better value to retain the risk and to pay any consequential costs. The HA will accept risks where suppliers are prepared to work in partnership to manage the risks and control the consequences.

High quality design

The HA will seek to deliver sustainable and safe solutions that deliver best whole-life value. Procurement processes will incorporate incentives to bring forward innovative ideas to provide added value and life cycle cost reductions. Projects will be assessed at key stages by value engineering and management reviews integrated with the Office of Government Commerce gateway review processes. The HA is committed to achieving the principles of high quality design set out by the Government in its strategy for better public buildings.

Partnership approach based on long-term relationships

The HA has entered project partnering arrangements with its suppliers on major projects for a number of years. These have been successful and beneficial through the agreement of cooperative working arrangements to deliver mutually agreed common objectives. The HA is now seeking to develop longer-term partnerships with suppliers which allow successful teams to be retained and maximum use made of developed skills and invested knowledge.

Long-term relationships allow the supply chain to be involved in the development and planning of work programmes and to deliver them more efficiently and safely. They also facilitate the recruitment and retention of the skilled resources needed to deliver the programmes.

Performance measurement with continual improvement targets

Measuring performance, learning the lessons and delivering continual improvement are vital to the achievement of best value. It is even more important in the context of longer-term relationships. The HA will use the Clients' Charter operated by the Confederation of Construction Clients as the basis for establishing a programme of improvement and measuring its performance. It will require its suppliers to implement measurement indicators and develop benchmarks to support the Clients' Charter process. The key performance indicators used by the Charter scheme are consistent with those that are in use generally throughout industry, although it is likely that the HA will also adopt additional sustainability indicators and targets.

The development of measurement processes to support the identification of best practice, continual improvement and the delivery of best value will require the HA to develop its knowledge and understanding of actual costs. Traditionally, reimbursement has been based on rates or prices that may or may not reflect actual costs that need to be known if real and sustainable improvements are to be achieved. This will require the adoption of open-book accounting techniques together with methods of reimbursement based on actual costs. Incentives based on target costs will be used to deliver best value solutions and efficient implementation.