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Defence Estates

Client guide

Prime contracting is exciting keen interest and also some anxiety among consultants and contractors. It has been routinely used by the MoD for more than two decades in the procurement of weapons systems and defence equipment. Defence Estates has been at the forefront of developing it as a means of buying construction and managing facilities. Prime contracting is predicated on the principle that a client should get what it asks for at a competitive price and with a guarantee of service.

DE's prime contracting initiative is closely allied to recommendations made by Sir John Egan in the 1998 report, Rethinking construction. In its Prime Contract Capital Project Summary published last week DE defines a prime contractor as 'one having overall responsibility for the management and delivery of a project, including co-ordinating and integrating the activities of a number of sub-contractors to meet the overall specification efficiently, economically and to time. In other words, 'single point of responsibility'.'

The model aims to streamline delivery of projects, bringing costs of construction down. Savings will be shared equally between client and contractor. Prime contracting demonstration projects have delivered 65-70% labour efficiency and up to 60% reduction in cost of sub-structure elements. DE quality director Clive Cain predicts greater gains are possible.

At the same time though, the onus to optimise performance is squarely on the contractor. DE will be letting work on a target cost basis, with guaranteed maximum price. In the unlikely event of an overrun, Cain comments, excess cost is borne solely by the contractor. Similarly, if a facility fails to meet through-life cost predictions the prime contractor is 'locked in for long enough to make its eyes water.'

Throughout the life of a contract the prime contractor will be paid against pre-determined milestones. Payment will be conditional on the prime contractor having paid its supply chain in full. DE is demanding open book accounting to ensure that all costs are transparent.

DE commercial director Ted Pearson says that providing a firm can demonstrate an understanding of DE's business, has the financial muscle to deliver the project to target and appropriate project management experience, there is no barrier to prime contracting. 'Providing they are able to deliver, I don't have a problem with a partnership between smaller firms heading a prime contract or a single in-house entity,' he said.

Prime contractors will be required to develop a detailed understanding of the client's needs in order to meet DE's rising standards of performance. A three-stage selection process is being implemented starting with definition of requirements by a DE project team.

Expression of interest will be invited, followed by a pre-qualification questionnaire, allowing extensive exchange of information between DE and would-be prime contractors.

At this stage DE will be evaluating candidates on commercial and contractual issues, management processes, their ability to deliver, health and safety, and supply chain integration. They will also be subjected to screening for fraud and sounded out on 'soft' issues. These include the prime contractor's understanding of MoD culture, market awareness, approach to innovation, willingness to share risk, value engineering, flexibility, team working and trust, safety, quality, and resources management. Finally invitations to negotiate will be issued, allowing for further detailed briefing and site visits.

Only three bidders will be shortlisted. They will be expected to develop detailed proposals laying bare their pricing mechanism, demonstrating through-life cost predictions, and showing a fully integrated project team is in place. Pearson says the additional cost of preparing the detailed bid submissions must be borne by the would-be prime contractor as a commercial risk. Selection of a prime contractor will be weighted 60-40 between technical design including cost, and soft criteria.

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