If public bodies continue to award tenders to the lowest price, no matter how low, contractors will have no option but to submit unsustainable ‘suicide bids’, writes Tim Ahern
Civil

 

Author: Tim Ahern BE CEng FIEI, chartered engineer and freelance consultant 

This paper is a personal review of public procurement in Ireland. It is based on my experience with the National Roads Authority (NRA), where a major infrastructure programme was delivered on time and within budget.

The NRA’s procurement strategy was progressive and innovative. Significant opposition was raised against many of the practices introduced but, in all cases, real and meaningful negotiations were held before the introduction of new forms of contract or procedures.

The development of design and build (D&B) forms of contract is a good illustration of this level of consultation. It is important to highlight that while there was initial universal resistance to this initiative from consultants, local aothorities and contractors, the industry did engage in meaningful dialogue. In particular, the Construction Industry Federation collaborated in the development of an acceptable model form of D&B contract, based on the Scottish ‘alternative tendering initiative’ model.

This agreed form was used on the early NRA D&B projects and was seen to work exceptionally well. Under the aegis of of the Forum for the ConstructionIndustry, the NRA once again engaged with the industry via working groups and it helped develop an International Federation of Consulting Engineers-based (FIDIC-based) D&B contract. This form was used in the later NRA D&B contracts. The ‘consultation’ phase of the Forum for the Construction Industry involved representatives from all sectors spending time on each and every clause of the new contracts and involved real dialogue. Regretfully, this level of real dialogue was not repeated, by either side, in the production of the public works contract (PWC) forms.

The realities of the construction industry in the 1990s were that:

  1. There was a serious ‘capacity’ problem in terms of engineers, labour and plant;
  2. There was a concern that construction inflation would impact on value for money achieved, as had happened in previous spikes in infrastructure spending;
  3. There was a reluctant recognition that Latham innovations in the UK were showing benefits for all – a win-win scenario.

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INCREASING EFFICIENCY

In this context, the NRA saw great potential in both framework contracts (particularly in the appointment of consultants) and D&B as a way of increasing efficiency in the delivery of major projects. The NRA sought and received Government Contracts Committee (GCC) permission to engage on a series of pilot projects in D&B contracts and frameworks for the appointment of consultants.

I have spent some time running through this background, in light of the fact that the Department of Finance has acknowledged that the PWC forms are largely based on NRA experience. It must be remembered that the NRA procurement regime was flexible, there was genuine engagement between industry and the NRA and the processes were modified in light of experience.

By the time the NRA contracts were adopted by the Deparment of Finance, the NRA was exploring more collaborative forms of contracts, e.g. early contractor involvement/target price.

A key element of NRA policy was the encouragement of small and medium enterprises to engage – hence, the threshold for both turnover and previous experience were set at very low levels. This liberal policy worked well and the end result is evident in the highly skilled and efficient road-building industry we now have, delivering motorway projects at a rate per kilometre less than any other EU country – all it needs is projects.

The climate has changed. We still have a capacity problem, but it is that there is too little work for the available resources. A startling statistic I recall is that over a very short period, the labour content on NRA projects fell from 4,000 to 400.

EFFICIENCY

For the PWC contracts to have any hope of success, they must be kept under constant review and modified in the light of experience. This demands a level of mature and genuine dialogue that has been missing to date. Efficiency must be at the core of any successful procurement policy.

‘’Strictly speaking, it is not possible for efficiency to be at odds with the principles of legality, since legality implies efficiency, which means it is enough to argue that inefficient management is unlawful.’’ Advocate General C-196/08

Any review of the performance of PWC should factor in this type of test, but more importantly should focus on how ‘efficiency’ is to be measured. The NRA model has the advantage that:

  • a well-defined programme of works was delivered over a decade;
  • the on-time delivery, unit cost and quality of the outputs can be readily measured;
  • the advantages gained of real and meaningful dialogue with the Industry are demonstrable; and
  • early dispute resolution was proven to be an important element in the efficient close-out of final accounts

The bottom line is that a high quality road network was produced (predominantly by Irish contractors) on time and at the lowest unit costs of any country in Europe. This in an environment where construction inflation ran at over 60% and labour rates were among the highest in Europe.

GAP MANAGEMENT

The ‘gap’ between tendered price and outturn is undoubtedly important, but it is not the only ‘gap’ .The ‘gaps’ between estimate, lowest tender and highest tender must also be considered.

On a broad sample of roads projects, the ‘gap’ between tender and outturn was typically 10-15%, with the mean tender price (excluding highest and lowest) very close to the outturn. But the gap between highest and lowest was typically 30-50%.

Anecdotal evidence on PWC would suggest that after the initial honeymoon period, the tender/outturn gap is no better than before, but perhaps the high/low gap is increasing.

However, if public bodies continue to award to the lowest price, no matter how low, the consequences are obvious. Contractors, to stay in business, will have no option but to submit ‘suicide bids’. Current bids are so low as to be unsustainable. The recovery of losses in many cases is now down to expensive lawyers.

The question has to be asked: does awarding work below cost constitute ‘efficient’ procurement? Rather than the tender/outurn ‘gap’, should we not be concentrating on the bottom line – which is whether the project is being delivered to an acceptable quality and at a fair price?

At the end of the day, most infrastructure projects are not ‘leading edge technology’. By and large, they are straightforward, civil-engineering projects with labour, plant and materials elements that can be estimated with reasonable certainty. The ‘variance’ in outturn cost per kilomtre of green field motorway projects was less than 10%. Why, then, were tender spreads up to 50%? No contractor is 50% more efficient than his or her competitors.

DISPUTE RESOLUTION

Abraham Lincoln was right when he said,Discourage litigation. Persuade your neighbours to compromise whenever you can. Point out to them how the nominal winner is often a real loser in fees, expenses and waste of time.’’

Robust dispute resolution mechanism is essential to the effective management of any construction project. It is essential that disputes are resolved early. As Chief Justice Susan Denham said recently, delays in resolving disputes undermines confidence in the country.

This is particularly true of construction disputes. Once the lawyers have ‘discovered’, the programmers have reconstructed the timelines and the quantum experts have done their work – all with the benefit of hindsight – the dispute being argued over two years after the job has been completed may have little or nothing in common with the original dispute.

Plus, there is a vibrant disputes industry out there, willing to extract as much money over as long a period as possible from both client and contractor. In the handful of NRA disputes that went to arbitration, costs would have easily exceeded the real ‘gap’ between the parties – yet another ‘gap’ that needs attention.

The NRA, I believe very effectively, introduced a ‘standing conciliator’ or ‘one man dispute adjudication board (DAB)’ into later contracts. This allowed for early resolution of many problems before they escalated into full-blown disputes. It effectively eliminated ‘final account’ claims, in that the DAB was on site every month and could be alerted to emerging issues. Unfortunately, the Department of Finance did not adopt this practice when embracing the NRA contract experience. However, I would hope that any review would at least give this approach serious consideration. It has been a feature of FIDIC contracts since 1999.

In my current role as conciliator/advisor, all too often I see evidence of poor quality contract documents and inadequate contract administration by employer’s representative, combined with below-cost tenders. Too often, the employer ends up relying on the ‘bullet proof’ contract to control cost escalation. Evidence to date would suggest that, in the opinion of the disputes industry, the contract is far from ‘bullet proof’.

It is unfortunate that under the 2010 Arbitration Act, the prospect of getting definitive interpretations of the PWC clauses is remote. An even more disturbing aspect is the escalation of lawyer/expert involvement in conciliation. In my opinion, conciliation offers the final opportunity for practical engineers to resolve engineering difficulties before handing their business over to the claims industry.

REVIEW OF PWC

Niels Bohr once said: ‘’An expert is a man who has made all the mistakes which can be made, in a very narrow field.’’ Hopefully, the review of the PWC will be undertaken by the experts from all sides accepting this definition. Some of the lessons I would like to think that I have learned over four decades in the construction of roads are:

  1. Resolve differences early – on major projects, the small additional cost of a standing DAB is warranted;
  2. Where possible, keep engineers in control of the process – use lawyers/experts for input, not control;
  3. Maturity – keep real dialogue going between Government and industry, with the aim of improving efficiency;
  4. Unreasonable risk transfer via supposedly ‘bullet proof’ contract forms rarely works.

Tim Ahern BE CEng FIEI is a chartered engineer and has worked on roads contracts in Ireland and in the UK for the last four decades. He was instrumental in shaping the NRA Procurement Policy and introduced D&B contracts. He was a member of the GCC and founder member of the Engineers Ireland Disputes Committee. Ahern currently practices as a freelance consultant and has acted as conciliator on a number of disputes.

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  Author: Tim Ahern BE CEng FIEI, chartered engineer and freelance consultant  This paper is a personal review of public procurement in Ireland. It is based on my experience with the National Roads Authority (NRA), where a major infrastructure programme was delivered on time and within budget. The NRA’s procurement strategy was...