Introduction
Continuing from my last post on procurement I am going to be covering partnering and then lead into Public Private Partnerships (and Private Finance Initiative).
Partnering
Partnering isn’t really a procurement route but an agreement that sits on top of the procurement route to allow for collaboration. The RICS Guidance Note states that partnering is a concept applied to many procurements.
It is co-operation, dispute avoidance and self-improvement between the client and his supply chain. The agreement can be implemented separately from the contract, like similar mechanisms such as collateral warranties (but that’s something I’ll cover on a later entry).
Under the NEC 3 Options x12 (x12.2 (6)) states that the partnering agreement does not create a legal partnership agreement under law (such as the Limited Partnership Act.)
The tendering route used for partnering is negotiated rather than undertaking a competitive tender. Even if it starts off as an open tender (due to the value of the project) it is negotiated during the tendering stages prior to finalisation of the prices.
Advantage
- Reduce disputes
- Improved early supply chain involvement
- Open book and win/win culture
- The design process is integrated with the construction process
- Payment incentives can be used when KPI are reached.
Disadvantage
- One party can abuse partnering process
- Due to negotiation approach the client may require additional support to deal with the supply chain
- Long learning curve
Now that you understand the principles of partnering we’ll cover PPP and PFI.
Public Private Partnerships
Public Private Partnerships (PPP) are agreements made between public and private sectors; the most common agreement is the Private Finance Initiative (PFI). The PFI is a long-term contractual engagement where the private sector agrees to Finance, Build and operate an infrastructure.
An example of this is the DBFO (Design, Build, Finance and Operate) that Ferrovial Agroman has been contracted on the M8 in Scotland .
These infrastructures can include projects such as hospital, schools, road or prison. This includes a long-term investment from the private party to finance and operate the infrastructure. This may also include ‘soft services’ such as catering and cleaning within the whole life cycle of the infrastructure.
The PFI is created through creating a separate entity (a company) known as a Special Purpose Vehicle (‘SPV’). This SPV then is run throughout the life of the infrastructure to receive payment over the life of the agreement with the public body. An example of this is Ferrovial on the M8, after the construction of the motorway they will install tollbooths and charge users to use the motorway. If you have travelled across Europe, you would have gone through Cintra tollbooths, which are owned by Ferrovial. Pretty great investment don’t you think?
In the UK PFI projects accounts for the largest portion of the infrastructure.
The SPV private parties may include:
- Contractors
- Facility Managers
- Insurance companies
- Banks and bonds investors
- Equity investors
- Professional advisors
On the public sector the SPV parties may include:
- Department of Health
- Department of Transport
- Department of Defence
- Local authorities (councils)
Looking back at the RIBA plan of work 2007 we identify the project flow from inception to completion. An extract of this is illustrated below:
Using the above illustration I have built my own model to explain it in a much simpler way so that you understand the project outline.
The procurement route starts off with a small amount of design brief for which he goes out to tender to the open market (we’ll cover open tenders in the tendering entry next week). Once the tenders are back, they are evaluated to allow for 2 to 3 contractors to be selected for negotiation.
The contractor then enters into detailed contract negotiation while the contractor submitting their proposal is developing the design. Once the design is in a state that can be used to price the whole of the works with some certainty.
The construction is undertaken and any CDP is finalised while construction is taken place. After the construction is completed the commission or payments from the public sector for the use of the infrastructure starts until the end of the agreement.
Design
The client only undertakes the design brief to allow the contractors to tender. Once selected the contractor will be developing the design while negotiating the final price.
Design can continue beyond award to finish off
Tender
Note: my illustration I’ve given above is only for a 12-month period but in actual fact the tender process is very long and there is a lot of negotiation taking place. There is a lot of financial consideration during these stages and they need to assess the likely profit on the investment of financing the project.
The process of the tender filters through from 4–6 tenders to finally selecting a preferred bidder.
This is better illustrated below:
You can grab the Estimating and Tendering in Construction book from Amazon. So far this book has been very clear at explaining PFI route.
The initial tender is undertaken through an open stage for which the contractors would return their interest. After the interest is received a selection of 4–6 bidders is selected for a Pre-qualification questionnaire (‘PQQ’). (You will learn when we cover tender that limiting tenders to 4-6 contractors is more beneficial and will save you time). Thereafter, 3 to 4 bidders are selected through competitive dialogue, which includes an interim submission of their bid.
During the second phase of the competitive dialogue, the number of bidders is reduced to 2–3 where they prepare a detail design proposal submission to enter into the final bids.
In the final bids, there are 2 bidders who then are invited to submit their final bid for the works.
On the selection of the preferred bidder the contractor finishes off the design, facility management and other legal arrangement for the PFI project.
As explained this whole process can take a lot longer and would take some time before you can start on site.
Construct
Once the works have been awarded the contractor will continue to finish the design while the construction works takes place.
After the construction, the management of the infrastructure will be undertaken by the SPV to get the commission back from the Government or from running the facility until operating agreement runs out.
Advantage
- Privately funded so there is no burden on public sector
- Transfer of risk to private sector
- The contractor fully manages the operation and it is better value for money
- More innovative input from the private sector to make the work more efficient to maximise profit and value
Disadvantage
- This route is very expensive
- Bid preparation can be very high
- The government is committed to making payments for the life of the agreement
Summary
Now that you understand what the different procurement routes are you will be able to make an informative choice when advising your client.
I would identify the procurement routes on your past and present projects so that you know what route it is. Try not to confuse yourself with the contract, we’ll get to that at a later stage once we’ve covered tendering.
I will revisit the procurement routes section in the future and possibly go through more detail on selecting the appropriate route. But the information provided right now is adequate enough to allow you to formulate the best route based on Time, Cost, and Quality/performance.
