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Supply chain will bear the impact

News - Water companies have been told to find efficiency savings of close to 20%. Contractors will bear the brunt.

Water regulator Philip Fletcher made it clear in last week's price determinations that water companies need to work more efficiently, and make cost savings in both their operating costs and capital spending over the next five years.

The result is that consultants and contractors bidding for work are finding clients demanding savings of up to 18.8% on capital expenditure over the next five years.

So where are these savings going to come from?

According to contractor and supplier body British Water, the supply chain will bear the brunt.

'Attitudes across the water companies vary. Some acknowledge that suppliers need to make a profit while others try and get suppliers for the bare minimum.

'Squeezing the profit margins of contractors is definitely a concern, ' says British Water director Paul Mullord.

In some cases water companies are expecting contractors to take on work at zero profit with potential returns through pain/gain share the only incentive. 'But this is just too risky, we don't want to go for it, ' says one contractor.

Another direct effect of these targets, according to British Water, is that first tier contractors will be forced to collaborate more with the supply chain.

'Big contractors won't be able to squeeze their second tier suppliers any more because this won't deliver the savings that are required. They need to work with them to get better solutions, ' says Mullord.

Pressure is also mounting on consultants who are being asked to develop better value design solutions. 'It could mean looking at the appropriateness of a design and cutting out the bells and whistles, ' says Black & Veatch regional business manager Jim Aldridge.

Improving the relationship between water company and consultant could also produce savings. 'There is definitely scope for water companies to work more closely with the designers.

Communication is vital and if the client is involved early on then we won't have to undertake redesign after redesign to get to the optimum solution, ' says Aldridge.

It is not just the capital costs that have to fall. Average annual operational savings across the industry have been set at 2.4% for water services and 2.3% for sewerage.

This follows the target set in 1999 by then regulator Ian Byatt, asking companies to make operational savings of 4.3%. This was met comfortably, so it is not surprising new targets have been set.

'Lots has already been achieved so we are now talking about diminishing returns. We won't get the same rate of improvement in AMP4 (asset management plan 4) that we did in AMP3, ' says Water UK economic regulation advisor Robert Wheedon.

Companies have already restructured, reorganised and outsourced work to try and make themselves leaner, and losing more staff is definitely still an option for some companies.

Two weeks ago Anglian Water announced plans to make 200 staff redundant to meet the AMP4 efficiency targets.

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