Network Rail has warned its major suppliers that some of them will have to rebuild their businesses as subcontractors as it slashes the number of main contractors it works with.
A swathe of lucrative contract awards and frameworks are to be awarded in the next few months. They will define who will benefit most from rail spending over the next five years.
Contracts to be let will represent 65% of the £23bn spend planned by Network Rail’s Infrastructure Projects division for CP5, the next five year control period which starts in April.
Network Rail has made clear that it intends to let the work to fewer partners on longer-term arrangements, with winners selected more on the basis of behavioural fit more than value.
Last week the track operator warned established tier one suppliers that they may find themselves having to drop down to tier two – subcontractors – if they fail to win work at the top level.
“We are in a massive time of investment and there is some intense bidding in the market at the moment,” said Network Rail Infrastructure Projects director Simon Kirby.
“We want to get into long-term relationships where suppliers invest in skills and you don’t get that by tendering every contract,” he said.
Kirby said there will be losers who will have to adapt their businesses as a result, but that by bringing forward the contract and framework awards they have time to do this.
“Suppliers would prefer to know that they are losers now rather than wait two years,” he said.
Network Rail finance and commercial director David McLoughlin echoed Kirby’s view.
“In the first instance, they [suppliers] know what’s coming.
Every organisation, every supplier knows what the pipeline looks like,” he said. “So a good, competent supplier will be able to target where they are going to win work.
“And if they are not going to win that they have got time to change their business model. They can drop down to be a tier two supplier,” he said. “There’s plenty of work there – there’s no need to be a loser in this. Everyone’s still in the game. One way or another there’s still an opportunity.”
McLoughlin said that by April there will be firms making that change.
“We’re still in the process [of awarding contracts]. By April 2014 we will have awarded 65% of the work and you will start to see firms that see that tier two option,” he said.
The bulk of the civils renewals work is being let regionally so that allowances can be made for the type of work or type of geography in any given region.
As a result, each framework is likely to be set up differently, with different numbers of contractors likely to appointed.
But Kirby stressed that in every case the amount of work to be done will be guaranteed.
“These are not zero value contracts. We are making a commitment to workload so we can get a commitment in training,” he said.
Civils renewals contracts set for award first include two London North West and East Midlands frameworks worth £1.6bn over five years, two Southern region frameworks worth £1.3bn combined, a Scotland & North East deal worth £760M and deals for Western & Wales worth £491M.
Overall, 87% of the CP5 work will be done by firms working in long term frameworks or alliances with just 13% competitively tendered.
Kirby said the breakdown of what type of firm would win framework places was yet to be determined.
“In the Western region we have some bigger projects such as electrification which will inevitably go to a tier one contractor,” he said.
But he added that it was possible for tier two contractors working in joint venture to win places on some frameworks. Kirby also emphasised the key role to be played by all contractors in the next control period.
“The only thing we are looking for is a step change in worker safety,” he said.
“Because they’ve got longer term commitment they can then employ their own people, which is our preference,” he said. Driving out a low cost culture is also key, said Kirby. He added that Network Rail aims to eliminate major reportable accidents by the end of the control period, by improving skills in the workforce.
“They can’t buy the jobs on low cost,” Kirby stressed.
“Repeat business is obviously what they want. If they don’t perform [on quality and safety], they won’t win much work.”
CP5 work bank values broken down into business units
The four regions and three major programmes account for the vast majority of expected CP5 expenditure:
Scotland & North East £2.5bn
Western & Wales £4.7bn (including major projects)