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Water tight

Water & drainageIn a bid to cut costs as they enter the next spending period, water companies are reappraising their supply chains.Adrian Greeman reports.

When water regulator Phillip Fletcher finally issued his five yearly price determination for the industry last December, he relented somewhat on interim efficiency targets.

Savings now expected of water companies are 2.4% annually for operations and 3.6% for capital maintenance.

But the fourth asset management programme (AMP4) nonetheless puts substantial pressure on the water companies. As one specialist consultant put it, 'the low-hanging fruit for cost savings has mostly been plucked' during AMP3 and before.

Work needed during the 200510 AMP4 period is of a different type to that carried out between 2000-5. Most of the major capital spending needed to bring environmental standards up to European levels is over. Now the focus has moved to maintaining and renewing infrastructure.

All of the companies have been juggling with the way things are done to find new ways to save money. Across the water sector there appears to be a move towards closer benchmarking of project performance, and this is expected to result in tighter target costs being set.

How firms procure work, however, varies across the industry, with some firms outsourcing but tightening partnering arrangements in order to regulate the supply chain more closely, and others taking work back in house.

Thames Water has been reorganising its contract management and procurement strategy. 'It demands a step change in the way we do our operations, ' says engineering director Mike Tempest.

This means taking back in house some of the strategic planning and design work that has until now been carried out by consultants. Recruitment firms report that Thames is hungry for consultants with whom to buoy up its design and management competencies.

Severn Trent also believes in keeping some design work in house and at Wessex the 'direct labour' approach has been extended to contracting, with 50% of its work to be done by its own contracting business (NCE 17 March).

On the flip side, other companies have set out to strengthen partnering arrangements, reducing the numbers of companies or teams employed.

Southern Water has gone for wholesale outsourcing of its programme with everything handed over to a joint venture headed by another water company, United Utilities, with consultant MWH and contractor Costain.

Although the 10 major companies appear to have different strategies, they share many features in common as they square up to the new period. 'For a start they have all strengthened their procurement departments and given them a higher profile, ' says Ken Farrer, managing director of consultant MWH, which is working for several of the companies.

'And there seems to be a trend for the client to take more control.' This is definitely the case at Thames. Rather than employing a partner contractor who in turn employs the consultant, Tempest says the designer will now be brought directly under Thames' control, 'working on an hourly basis while we sort out the requirements'.

The contractor will also come in early on the same basis, working 'almost like a consultant as we agree the target cost for the contract'.

Some 25% of Thames' work will also be tendered conventionally, he says, 'because the market has things to offer'. This will allow Thames to compare prices with those offered by its framework partners. To maintain 'commercial tension' the partnered jobs will also be subject to a maximum price, with a contractor able to turn down a project it does not like.

The job will then be offered to one of Thames' other framework suppliers. Partnering can get too 'clubby' otherwise, says Tempest.

Shaking up the frameworks by dropping several partners and starting AMP4 with a new team is one way to prevent any 'clubbiness'. Anglian Water has done just this (NCE 21 October 2004), bringing all its new partner firms under one umbrella as a major alliance operation.

Contractors, consultants and the company's own design and management team are being brought together under common management based in the company's Peterborough offices, although two separate teams will remain for water infrastructure.

'And any big ticket items will be done by conventional tendering, ' says head of supply chain management Nirmal Kotecha.

One big advantage of the alliance is that, other than for one or two fixed deadline projects, workload and timings can be distributed among its members to fit capacity peaks and troughs.

'Stop start is one of the biggest cost drains you have and we hope to cut that down, ' says Kotecha. To help this, upcoming workload will be planned with 'two year visibility'.

A final advantage, Kotecha adds, is removing the competition between supply chains. Whereas previously there were six separate chains to six partners, there can now be one.

Yorkshire Water is making savings by drawing up supply contracts which allow it to buy services or products that match its needs most closely, says supply chain manager John Heardman. This is to address a common water industry theme: Items like pumps and pipelines carry long term operating and whole life costs which a contractor might not weight in the same way. Therefore company negotiated deals are favoured, ensuring that all projects across a water company region are supplied to the same standard.

Yorkshire is also encouraging its partners to establish common arrangements for shared supplies, further promoting consistency of approach, and encompassing materials as well as products.

At Severn Trent the contractor list has been cut from 200 to about 20 firms, says delivery strategy manager Peter Woolford. Similar contracts are being 'batched', sometimes with negotiated follow on contracts based on past costs. Contractors have been divided into three groups. 'It is a fundamental change in approach and the firms are sure to get work, ' says Woolford. 'We are taking competition out of the system.' To keep a hand on the financial reins, Severn Trent has developed a complex set of cost curves based on past data.

'We tell them the price and time schedule. Rather than argue about costs we can invest more effort in managing risk, ' he says.

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