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Taking back control

News

News that many rail consultants, mainly signallers, have lost or are about to lose their private sector jobs is a fair indication of the belt tightening that is going on in the rail industry.

Network Rail's push to drive down costs and take more control of its own workload is having a direct impact on its supply base. And if the operator fails to ramp up spending in the coming year more job losses will follow, suppliers say.

By nancial year end in March the rail operator will have underspent £850M of the huge £6.7bn total outlay planned for 2004/5 (News last week). That is 14% less than expected. In fact, the underspend is almost wholly confined to the renewals and enhancements budget of £3.03bn. When this is taken into account, investment in renewals and enhancements, but excluding the ringfenced West Coast Main Line, is actually 28% below budget.

And suppliers are feeling the pinch. 'I'm bringing in only a quarter of the work that I expected to each month, ' said one rail consultant. 'We are all desperate to know when Network Rail is going to turn the tap on. At the moment it's just dripping.' Well, the good news is that the man in charge of the tap said that there will be more work around next year. 'We do have increased spending in the plan for 2005/06, mostly on track and signalling, ' said Network Rail director of major projects and investment Simon Kirby.

'And a lot of companies will find they are busier.

'But we are looking for reduced cost. Those who are more proactive on this will be a lot busier than others who are not.' The fact that cost is a Network Rail key driver will be a surprise to no one.

It is charged by the rail regulator with reducing costs by 31% over the five year period of the current review and the operator is expecting a big contribution from its suppliers. Renewals contractors are being told to expect margins of no more than 2% on new contract awards and consultants are being asked to lop 20% off their hourly rates.

Despite the attraction of a huge amount of work it may oblige some firms to reduce their rail work or move out of it altogether. 'Who has profit margins of 20%, ' said one consultant. 'Ours is 5% at best. There aren't the margins in the industry for this - they are trying to squeeze a sponge that is already dry. I can't see quality companies buying work at a loss.' 'Supplier costs look high, ' said another consultant, 'because Network Rail has spent significant money on buying in services to go up blind alleys. If its project management had been better it would have had smaller bills.' Kirby recognises this issue it seems, and is working on plans to take more design back in house - starting with signalling, telecoms, electrification and power plant.

'I'm making 20 job offers a week to commercial project managers so we can do that, ' he said.

Firm control from the centre is being backed by working closely with contractors and consultants to reduce the prices of around 2,000 live projects while providing a return for suppliers. 'We are looking at appropriate margins for risk for instance, ' he said.

The operator is also open to ideas of shifting design work to lower cost centres like eastern Europe and India.

'We are looking at all aspects of how to save costs as long as we deliver safe projects, ' said Kirby.

'We are going to spend the £26bn in the five year plan efficiently and the objective is to maintain the figures in the overall plan.

'We have in some areas underspent in year one though, ' he added. Schemes have been delayed because costs have spiralled and they have been put through a process of value engineering.

Others have gone right back into the design process. The five year spending review period allows Network Rail the leeway to do this. It will not be playing catch up in 2005/06, it will be 'reprofiling', Kirby said.

The rail regulator's concern is that Network Rail hits all its outputs. Kirby said he was confident he can achieve his in the four years he has left without the last minute, high price panic the water industry consistently finds itself going through.

No one in the sector wants to see the railway's money finding its way back to the Treasury in 2009 because it has not been spent. Network Rail still has a large amount of goodwill among its suppliers and it is unlikely to want to squeeze the good ones so hard that they quit. It may be that the current hard ball approach will soften once the operator has beefed up its in house resource and feels it is back in charge of its spending.

Jackie Whitelaw

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