WATER INDUSTRY skills shortages will force up the cost of capital projects in future, industry suppliers warned clients this week.
Rather than over stretch sparse resources, suppliers will operate a first come, first served policy, with contracts being carried out only for clients offering the best terms.
The radical message is being sent by water industry suppliers to their clients as they roll out a new five year, £15.6bn capital expenditure programme after 12 months' delay.
According to supplier association British Water's municipal market chairman Tony Williams, the climate now is very different from the past. 'We will not be stretching ourselves beyond what is reasonable, ' he said.
'The message from British Water members to water clients is that it's first come, first served to gain access to the available resource.'
Williams, who is also proposal director for Biwater, said that water companies traditionally tended to defer spending programmes to compress work to the end of the five year spending period. But this time, he said, suppliers were looking to avoid the chase for turnover, which in the past had preceded a sudden cut in workload.
The strong message from suppliers this week comes despite figures released by Ofwat last month showing a dramatic drop in capital expenditure for 2000/2001 of over £1bn to £2.7bn.
This heralded the start of the latest five year AMP3 regulated spending period which is traditionally a slow time. Figures were £700M less than the water companies had projected to Ofwat.
But this delay in spending - put down to the Regulator's demand in his 1999 periodic review that water companies reduce the cost of the capital expenditure by 30% without corresponding cuts in expenditure plans - has fuelled the skills crisis.
British Water commercial manager Paul Mullord highlighted that although suppliers had been busy rescoping and retendering schemes to bring down costs, the number of actual orders halved.
'With little revenue or construction orders, staff were redeployed and contract staff laid off, ' he said. 'Now that work is coming through - some companies are about to commit £50M a month for the next few years - the staff aren't there, and to bring them back costs money which will push prices up.'
The fact that 20% less capital work than expected has started in the last year will also have a knock on effect on prices, it is claimed.
Paterson Candy sales manager John Ashridge said: 'The programme has been truncated so tenders will go up. If companies take on extra work they will want a premium rate.' This premium rate, according to companies contacted by NCE, could add as much as 3% to a supplier's margin.
However, the crisis could prove the value of framework agreements to clients. MJ Gleeson chief executive David Eyre said that its long term arrangements meant it would share any extra costs with clients and look for savings by inventive management.
But he added: 'The current situation means we can be selective who we work for [when asked to bid by potential new clients]. Some clients will find it difficult to attract contractors on their - the clients' - terms.'
Water clients are aware of the threat of rising costs, according to regulations advisor for Water UK Robert Weeden. 'Framework agreements will help us to control them, as will competitive tendering, ' he said.
Anglian, North West (now United Utilities), Yorkshire and Northumbrian have also retained the right to seek interim price determinations between five year price reviews because of rising construction costs, he added. However, the rest all agreed to drop the right in 1994 in exchange for an extra allowance for risk in the cost of their capital.