The Ministry of Defence, through its agency ‘Defence Estates’, spends well over a billion pounds each year on estate maintenance and refurbishment. From now on it will spend a large chunk of that money through Prime Contracting, a new procurement strategy. As our firm was and is external adviser to Defence Estates I thought I would shed some light on these issues by taking a look at what Prime Contracting really is.
Prime Contracting – revolution or evolution?
The essence of Prime Contracting is single point responsibility. The consolidation and integration of work and services under longer-term contracts is intended to provide opportunities for improved efficiencies and savings throughout the contract period.
There is no universal form of Prime Contract. However, most have certain similarities; they will follow an output specification model; will frequently be priced on the basis of target cost and the Prime Contractor will provide the construction and services, with some degree of partnering within a supply chain.
The challenge will be in assessing the risks and determining a price given the size and diversity of work within the package. The relationship with, and management of, the supply chain will also be key to success.
All well and good but what does it comprise?
The principles are reflected in the Core Conditions1, a template that will be used to produce the Conditions for each project. These will be adapted and supplemented by other documents to form bespoke arrangements.
One contractor will be appointed to have overall responsibility for the management and delivery of a project, including co-ordination and integration of the activities of a number of sub-contractors to meet the overall specification efficiently, economically and on time. The MoD does not play a direct role in the approval or appointment of the subcontractors.
Effective supply chain management and integration are key features. Partnering is encouraged at the supply chain level. The Conditions do not provide for a strategic alliance but opt for fostering greater collaboration and a less adversarial relationship. At the centre is a target cost pricing arrangement with a pain/gain sharing provision between the MoD and the Prime Contractor up to a maximum price target cost. Target profit is identified as a separate margin. The MoD has indicated that Prime Contractors should be entitled to a fair profit margin, which they would be able to pass down through the supply chain.
The Core Conditions provide for a Dispute Resolution Board throughout the duration of the contract. It comprises 3 experts, 2 of whom are nominated by either party, from lists provided at the outset. The Board can decide on the method of dispute resolution but only after representations from the parties. The clear intention is that the Board will comprise experienced lawyers and other specialists well versed in MoD contracting. They can bring that knowledge and experience to bear in the dispute process.
The emphasis is towards greater openness, shared development and improvement with concepts such as through life costs, continuous improvement, open book accounting, joint equality of information and innovation. Throughout the contract period there are opportunities for collaboration and discussion between the Defence Estates Project Manager (DEPM) and the Prime Contractor.
The Prime Contracts fall into two categories. Under the Regional Prime Contract, the Prime Contractor will be required to carry out estate maintenance and operation across a number of sites within a region and a certain amount of new build. The contract period will be a minimum of five or seven years. Under the stand-alone works project, the Prime Contractor will be required to design and construct an asset to be fit for its intended purpose with a through life cost compliance period of probably three years.
The Conditions include options for the MoD to extend both contracts, bringing potential benefits to both parties. The terms of extension would be based on specific pricing parameters identified at tender. Contractors will have to give careful consideration to the identification of such parameters.
Criticisms
Disappointment has been expressed in some quarters that these contracts will be competitively tendered.
There has been comment that the Prime Contracts pass too much risk on to the Prime Contractor as Prime Contracting takes the view that risk should be carried by the party best able to bear it. However, there are special provisions for the costing of contingent risk. A provisional target cost is allocated to each risk and if a risk arises then the DEPM will consider whether an adjustment should be made to the maximum price target cost (MPTC) mechanism and there is a provision for the parties to agree on the adjustment.
Opportunity and Challenge
The Core Conditions allow for strategic rather than tactical procurement. Prime Contracting represents a radical shift in the MoD’s approach to procurement and raises particular challenges for contractors.
The advantage to contractors will be the security and benefit of long term contracts on their balance sheets. There are long-term commitments required on both sides and opportunities for shared learning and development
Conclusions
This procurement strategy has already been embraced by the private sector. Sainsbury’s recently announced that Prime Contracting was to be its preferred form of procurement. With committed clients the strategy ought to succeed. The challenge is there – the benefits are obvious.
Chris Wilcock is a partner in the Construction & Engineering Unit at Hammond Suddards Edge, Birmingham. Tel: +44 121 222 3286
1 Defence Estates website: www.defenceestates.mod.uk/prime_contracting/core_conditions_and_summary_guide