Large scale cuts in government spending initiated in 2010 reached across all Whitehall departments. For the Highways Agency the effect of the axe on Department for Transport funding led to the instruction to achieve efficiencies of 25% over the next five years.
The response, launched the following summer, brought a lump to the throat of many of the Agency’s maintenance contractors.
The established regime of Managing Agent Contractor (MAC) contracts would be replaced by a new, leaner arrangement, the Asset Support Contract (ASC). This would deliver maintenance of motorways and trunk roads at less cost, the Agency announced. Contractors would work to a lump sum and target cost contract and a new key output specification – the Asset Maintenance & Operations Requirements (AMOR).
But there would be less prescription for how they go about it. The big aim, the Agency said, was to encourage its suppliers to be innovative in finding ways of delivering a good service more cheaply.
On the surface it all sounded commendable, but a collective groan could be heard from some quarters. It seemed that a business with margins already tight was getting the last of any fat squeezed out. “With bidding focused on price, lump sum and target cost, margins are further reduced from what was already a low level,” said one established MAC contractor. “You have to wonder whether the Agency will get good value or a level of service acceptable to the public.”
Two years on, ASCs have been awarded for three of the Agency’s maintenance areas. In June, award of Area 3 covering counties in southern England was announced in favour of Enterprise Mouchel. This added to the ASC contracts already under way in Area 2 in the south west and Area 10 across Greater Manchester, awarded to Atkins/ Skanska and Balfour Beatty/ Mott MacDonald (BBMM) respectively.
According to the Agency and at least one of the new ASC contract holders, the reality of how these contracts are working is quite different from how they first appeared.
“The ASC form of contract was developed following discussions we held with our suppliers on the subject of reducing costs, many of whom said we were being too prescriptive. So we have been trying to move to a more outcome based specification, where possible specifying what must be achieved rather than how it should be done,” says the Agency’s commercial and procurement director David Poole.
The ASCs are not aimed at reducing anybody’s margins. We want a sustainable supply chain.
David Poole, Highways Agency
“In terms of how the contracts are priced, the MACs contained lump sum routine maintenance duties and derived pricing sample schemes under which discrete projects were priced. Now, the ASCs still have lump sum duties but [also have] a schedule of rates for working out the pricing of schemes. This was aligned to the Agency’s ambition of increasing commercial understanding of what projects should cost. The ASCs are not aimed at reducing anybody’s margins. We want a sustainable supply chain.”
Not all of the 25% of efficiencies will come from maintenance contracts, Poole adds. Some must come from major projects and the Agency’s own costs. But the majority, around 20%, will be made through ASCs and existing MACs. The Agency has negotiated with MAC suppliers to retrofit some elements of the AMOR specification to reduce the costs of their contracts as well.
The Agency’s acting director for network delivery and development is Mike Wilson. He says: “A number of changes have been made to improve the performance of maintenance contracts, including a minimum improvement in cost over time and extension of the threshold of works delivered by ASC suppliers.”
All capital improvements up to £5M are now carried out by ASC contractors, whereas everything over £500,000 was put out to tender by the MACs.
“We’ve also improved project bank accounting, to ensure the whole supply chain is paid promptly, and worked on greater safety at roadworks and better alignment between the Agency and ASC contractor, making sure everyone is clear on the objectives,” says Wilson. “Not everything is focused solely on the efficiency target.”
Not all has been plain sailing with procurement of the first ASCs. The competition for Area 2 overran by six months and Area 10 was also awarded months later than expected, leading the Agency to revamp its tender assessment procedures.
You have to wonder whether the Highways Agency will get good value or a level of service acceptable to the public
BBMM had suffered the ignominy of being kicked out of the Area 2 bidding, but had then won the Area 10 contract. As NCE reported in July 2012, BBMM’s Area 2 bid was rejected due to a “pricing irregularity”, explained by industry sources as the tendering of zero rates against items it knew it would not use.
Then, this year, the Agency has discovered problems with bids submitted for Areas 6 and 8. Both have now been switched to the negotiated route under European public procurement rules to allow the Agency the opportunity to talk to its bidders about their submissions. While the Agency confirmed last year that it altered its schedule of rates to counter zero pricing, the problems this year are said to be different.
“With regard to Areas 2 and 10, there were more tender enquiries from bidders than anticipated, but we dealt with those and ultimately awarded the contracts successfully,” says Poole. “That’s the major aim. It’s important that we run these procurements in a way that allows us some flexibility of time so that we can be confident in the outcome and deliver the right contract.
“Areas 6 and 8 are live procurements so we’re limited on what we can say. Both have been changed to the negotiated route to sort out some issues with non-compliance with the invitation for tender (IFT). “Under the public procurement regulations, if an IFT is issued, bids have to be compliant. If we go to the market and ask for one thing, bidders cannot then say, what you really want is something else. The negotiated route is one way of sorting out such issues. The advantage of it is that it offers the chance for dialogue with the supply chain.”
Some misunderstanding between the Agency and its suppliers could be understandable given that the ASC contract has been set out with the aim of giving suppliers less instruction on how they do things. A principal performance requirement is a year on year cost reduction of 2.5%. Balfour Beatty executive director Stephen Tarr says there are subtle differences introduced through ASCs allowing suppliers greater freedom for how they aim for that target.
“As a business we are involved in a number of different procurement models, such as DBFO, where we have been able to factor in whole life thinking, aiming to maintain the performance of the asset in a cost effective way,” he says. “These new forms of ASC contract provide opportunity to apply the same intelligent asset management decisions on the condition and performance of the network over time, taking a risk based approach to match the intervention regime with the life of the asset.
“In terms of margins, we shouldn’t conflate cost and value. Driving out cost is a good thing. We want to drive the quality of our earnings up, but we have to earn it. If we engage our supply chain and find ways of doing things better with our resources, then there are mechanisms within the ASC to reward us.
“There are the lump sum routine maintenance tasks that we can try to do at less overall cost. Then there are the discrete schemes. Once their budget is set, there is an incentive to outperform.
“There is no doubt that the 2.5% year on year improvement will get harder to achieve. While there are some quick wins, we will have to constantly find new ways of doing things.”
An example of this risk-based approach is CCTV surveys of drain runs and bridge inspections, says Tarr. Both were previously carried out to rigid regimes under the MAC maintenance manual.
“If a CCTV survey was done 12 months ago and it’s known the drain is operating well then there’s no need to do another,” says Tarr. “Likewise, the condition of some bridges is so good that inspection regimes can be scaled back. These are all little things that aggregate over the whole network and it is this type of approach that the ASC is about; a more risk based understanding of the asset and what the issues are.”