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Case for the defence

Defence Estates, pioneer of the new prime contracting procurement method, is looking to optimise efficiency by creating fewer and larger contract packages. Andrew Mylius reports.

Super-client Defence Estates is in the avant garde of procurement change. Responsible for managing all Ministry of Defence land, buildings and installations, DE is aiming to achieve at least 30% efficiency on its £1bn/year spend by letting huge, aggregated regional contracts to single firms, or prime contractors.

Prime contracting is a new and little tested way of buying construction and facilities management services. In principle a single company will assume control of a project, assembling and co-ordinating a project team capable of interpreting the client's brief, then designing, building, delivering and maintaining the structure. The client gets what it asks for at a competitive price and with a guarantee of service.

In March this year DE revealed plans to divide the UK into 12 regions (NCE 9 March).

Each would be let as a multi million pound package to a single prime contractor, responsible for new build, maintenance, and facilities management. Contracts would run for five years, renewable in two year chunks to a maximum of 10.

Before prime contracting is even fully up and running, DE is already revising its plans. It is redrawing its map of the UK and cutting the number of regional contracts to be awarded by a third. The new map of the regions is to be revealed in February, but DE commercial director Ted Pearson is anticipating eight will emerge. Where the largest of the original regional contracts was valued at £300M£400M, new regional prime contracts could top £800M.

Pearson says: 'Fewer, larger contracts allow for economies of scale.' Firms taking on regional contracts will have to be extraordinarily competent, whether they are worth £400M or £800M.

If contractors are able to cope with the very large original packages, they should be able to stretch just a little further to take on the expanded workload.

Meanwhile, strategies and methods will have to be put in place to cope with the geographic, operational and financial scope of each region.

Minimising the number of prime contractors will enable DE to avoid unnecessary and potentially wasteful duplication.

DE has so far completed just two prime contracting pilot projects, construction of accommodation and training facilities at Aldershot and Wattisham (NCE 30 March). It has now appointed prime contractors for two far larger capital works projects - delivery of nuclear submarine berthing at Faslane naval base and offices and accommodation at Andover.

But the client has been thrashing out the detail of prime contracting with 80 consultants and contractors on paper for over three years, at the same time as using the private finance initiative to buy construction services. Pearson describes the skills needed by client and prime contract bidders alike as 'a straight lift' from PFI - although regional contracts will be larger than any single PFI deal yet.

Prime contracting requires the same kinds of partnership between client and contractor.

But it will demand the creation of 'special purpose vehicles' - firms working in alliance to take on projects. The client's specification is 'output based' and so is geared around what the finished product must do and how it must perform - as with PFI. But where PFI bidders must deliver their own finance, prime contracting is funded by the client. Pearson is confident the difference in project finance will reduce bidding costs and the time period needed to agree bid packages.

Pearson has already received expressions of interest from continental firms and predicts competition for prime contracts will also come from the US.

Prime contractors will not necessarily be big construction firms. The procurement model places a premium on management skills - prime contractors will have to be superlative project, financial, organisational and operational managers. Pearson says DE is looking for 'Ateam' capabilities. This opens opportunities for premier league consultants or project or facilities managers to take the lead role in a prime contracting team.

But they could equally come from outside the construction and facilities management spheres. Companies which know Defence Estates or the Ministry of Defence from other procurement areas may be in the best position to deliver.

The MoD has been using prime contracts to buy military hardware and weapons for over a decade. DE believes prime contracting is now well enough developed to take into other areas. The huge contract value of DE's new regional packages will make it worthwhile for big defence contractors to look at a sideways move.

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