Examination of Witnesses (Questions 340-359)
NSCC, SECG
10 DECEMBER 2007
Q340 Mr Bailey: So there is no monitoring
of them to see that they are?
Mr Hursthouse: Others may tell
you different. If there is, with respect to whoever does it, it
is not working.
Q341 Mr Hunter: Can I invite you
to stay for a moment on these issues of supply chain integration?
You made a number of recommendations in the evidence that you
placed before the Select Committee specifically dealing with integrated
project teams. One of the notions you advanced was the one about
appointing a champion, as you refer to it, to promote the integrated
project teams in public sector construction, and various other
things. Could you just tell us a little bit more about this champion
concept? What form would this champion of integrated delivery
take in your view? Are we talking about a single official or perhaps
a Ministerial role, or do you actually envisage a whole new Government
body? What activities would you see this champion being responsible
for carrying out?
Mr Wren: I would like to think
of a champion in the sense of—the analogy being a client,
and the best integration happens when that client or champion
takes a very central role in the procurement of his project, his
or her project, through the supply chain. So good practice in
terms of payment, no retention, is driven from the top rather
than driven down to what I would call tier one, which is the main
contractors. Because if it is just driven down to that level,
then all of the other business drivers that I talked about earlier,
in terms of the contractor makes money out of cash, the supply
chain makes money out of doing things, all that is lost, so all
of the best integrated projects are on the basis of a very clear
direction given by the client or champion about how that project
is going to be delivered in terms of good practice.
Q342 Mr Hunter: So that is the function
and purpose, but who or what is the champion, as you see it?
Mr Wren: Well, if you take public
procurement, it would be very nice to think, at the very highest
level, in terms of a construction minister. A construction minister
could set down the rules and good practice by which all public
procurement is to take place. I think the problem we have at the
moment is that there is a growing commitment to best practice,
to good payment practices, to nil retention, but there is no enforcement.
Q343 Mr Hunter: I think we accept
that the case is there for this kind of thing. It seems to me
you make a fairly logical case for it, but is it your contention
that this job ought to be at ministerial level? Is that what you
are actually advocating, or did you have in mind somebody else
who is an expert in the sector being brought in specifically to
do it? I am just trying to understand how it would work in practice
if the Select Committee were able to say, "Your wish is granted,
we are going to set up this champion", what exactly is it?
Mr Hursthouse: The minister perhaps
might be an obvious person to be the champion, to have a level
of authority.
Q344 Mr Hunter: It might be the obvious
one, but is it the one that you would personally want to see?
Mr Hursthouse: Ideally, but I
think as an alternative, it would be a high profile individual
who was briefed with the task—perhaps with a small staff
driving these benefits into public procurement.
Q345 Mr Hunter: Okay, that is helpful.
Just on the same thing, my final point is: could you perhaps give
us your views on whether or not private sector clients are any
better at stipulating the use of integrated teams when procuring
projects? If they are, why that might be the case?
Mr Wren: Generally, yes. It is
not as widespread even in the private sector as we would all hope,
sitting at the specialist sector level, but generally, where it
does work in the private sector, it is very successful, and what
I think distinguishes them is that they do take a very active
role, as I have described earlier, in terms of determining the
agenda for their project. We are often talking about a discrete
and single project, it may be quite large, but nevertheless it
is just one project, and they pay very close attention to the
risks associated with their project, so who is in the supply chain,
and the competence of the people within their project. Some of
the best clients that actually I have worked for in my company
are the ones that actually sit at the table with all of the team
associated with their project and run through risk assessments;
they actively allocate risk to those people who are best placed
to deal with that risk, and they understand, most importantly,
the differentiation between value and price. That is something
which is still not appreciated in our industry, and there is still
a tendency to fall back to lowest price. The good clients are
the ones that understand the best value.
Q346 Mr Hunter: Your case is that
there is clear evidence that the problem is much more in the public
sector than private sector?
Mr Wren: In my experience, yes.
Mr Hursthouse: I would say I have
shared that experience.
Q347 Chairman: Just give me an example
of good practice in the private sector—not Terminal 5, we
have heard enough about Terminal 5. Another good case history
in practice.
Mr Wren: I can give you a personal
one, if that would help. Around about seven years ago, a private
developer in London determined that he was going to not take the
traditional approach of just appointing a contractor to let that
contractor get on with it, he was not going to just appoint a
designer to design the work, he chose upfront his supply chain,
he did a lot of homework in terms of who that supply chain would
be, and brought them in on a single action basis to work up the
design with his professional team. Then as the chairman, almost,
of the group around a table, he decided how he was going to allocate
the risk associated with the project. The most important aspect
of this is that the supply chain, because they were locked into
the project, were willing to share all of the risks and opportunities
associated with the project with the client. The client was then
able to see not only the risk but the opportunity he might have
to improve upon the project, and the philosophy was simple. By
involving early, he understood in a lot greater detail all of
the risks and opportunities associated with his project, and he
had much greater certainty of time and money, to the point where
he was able to negotiate with his whole supply chain credits if
we all went quicker. We actually paid back to the client some
money at the end of our project, almost unheard of. That was some
time before integration really was taking off.
Chairman: Thank you, that is a very helpful
illustration of the point. Before I bring in Mike Weir, Adrian
Bailey has one last question.
Q348 Mr Bailey: Very interesting.
On the surface, it would appear that you are almost calling for
more regulation. Is it an issue of more regulation or better enforcement
of existing regulation to achieve this?
Mr Hursthouse: If we are talking
about the public sector client, which I think we are particularly,
then I think better enforcement of current knowledge. It just
seems, well, almost bizarre, the fact that there is a wealth of
information out there which everybody agrees—there is nothing
wrong with it. I do not see reports saying that "Egan is
nonsense, Latham is nonsense, the 2012 commitments are nonsense",
nobody is saying that. Even OGC set out, as I said earlier, clear
guidelines, directions, support as to how to carry these things
out. Yet there is a break, there is a link missing, that when
people come to do the work, they do not use it. If a respected
Government department like OGC gives advice on best practice,
why would you not use it? Why do you say, "Well, I have heard
all that, I have read all that, but I am just not going to do
it"?
Q349 Mr Bailey: Just ignore it.
Mr Hursthouse: It seems odd.
Chairman: We are going to dig a little
deeper now with some questions from Mike Weir.
Q350 Mr Weir: Mr Hursthouse, in your
memorandum you stated that project bank accounts would help facilitate
integrated working; you also suggest these could equate to a 2.5%
saving on project costs. Could you tell us first of all how it
would create savings for clients, and given what you say, why
have main contractors and clients not sought to use project bank
accounts to date?
Mr Hursthouse: Well, how does
it save money for clients: there are costs associated with acquiring
credit in the industry generally, and if you do not receive prompt
payment, those costs have to go somewhere. At the end of the day,
the client pays all the costs, that is inevitable. We will perhaps
talk about it in due course, but if you have an industry which
has a problem with late payment, then it has to cope with that
by paying for credit. One of the issues about which there is most
dispute on any project, and I am afraid there is sometimes too
much dispute in construction projects, is about payment. Perhaps
we will discuss them in a little while, but project bank accounts
can solve a lot of those issues. The money is directed into the
supply chain simultaneously, rather than cascading down and being
delayed for good or bad reason. I think there is money saved,
because people have to spend a lot of money collecting cash when
there are payment issues. Another issue that is not necessarily
recognised is insolvency. There is a case where because cash has
not reached people on time and in the right amount, insolvency
occurs in the supply chain, and that can be very, very disruptive,
and very, very costly, and there are examples of that. There is
another further hidden issue, which is that if people in the construction
supply chain are not paid on time, and not able therefore to discharge
their responsibilities and debts, the thing begins to stack up
down the system. There can be difficulties with suppliers created
because of that, and again, that is disruptive to the supply chain
team and again that becomes disruptive to the project. So all
of those are costs which can impact on the project and therefore
ultimately on the client. As to why main contractors and clients
do not use them, Graham spoke earlier about the main contractors'
access to cash, and cashflow management, and the extent to which
he has large sums of cash, very often, which are being disbursed
to other parties in the project team. The current mechanism is
that all the money arrives with the main contractor and then it
is disbursed. You hear us referring to main contractors here;
I would not want to give completely the wrong impression. Not
every main contractor is doing every bad thing that every main
contractor would ever do, there are some perfectly respectable
main contractors in the industry who are champions of the industry
and behave in a very different way. So why would those sort of
people, who are using that cash to perhaps rob Peter to pay Paul,
or whatever, keep their business going with the cash in hand,
and being able to hold it back a little while, bear in mind these
are relatively large sums of money. So if you have the wages to
pay on Friday and somebody owes you half a million pounds on Wednesday,
and it does not turn up by Thursday night, you can have a very
sleepless night.
Q351 Mr Weir: I understand all that,
and I can see from your explanation why a main contractor may
not want to go down this route, because he would not have the
use of that money, but surely it is in the client's interest for
the smooth running of a contract to go down that route, so where
is the logjam for imposing it? Do clients have the power to say
to main contractors, "I want to do this so my contract runs
smoothly"?
Mr Hursthouse: Yes, they do, and
you would expect they would want to, although sometimes, because
of the reasons we were talking about earlier, the client has a
relationship with the main contractor and a small team at the
head of the project, not with the specialists, and does not necessarily
recognise the extent to which those specialists are carrying out
the work, and rely on an appropriate flow of cash to allow them
to be able to deliver the service that he is looking for. I think
that is sometimes just not appreciated that the client can say,
"We will have a project bank account".
Q352 Mr Weir: So basically the contractor
that Mr Wren told us about, his approach would probably push him
towards doing that perhaps, but your average client would just
say to contractors, "Here is a job, get on with it",
and not really be interested in the nuts and bolts.
Mr Hursthouse: Just that, without
looking at the bigger picture. Very often, if you were contracting
a large construction job and you know that to complete that job,
you need a group of people, specialists—
Q353 Mr Weir: Then the question is:
how do you get clients to take more of an interest and to insist
upon doing this?
Mr Wren: It just goes back to
the central issue of the client understanding what best value
means. I have some sympathy with clients because why should the
client have to get involved through the supply chain? You know,
I have appointed a contractor, I have appointed my professional
team, and if I am a one-off client in the construction industry,
why do I have to go through the whole supply chain, and also make
sure that I understand all of their issues and their payments
as well? Well, the reality of the situation as it is currently
structured is that unless the client does that, there is a very
real risk his project will go wrong, it will go over budget, it
will go over time, simply because of all the business drivers
which we described earlier. The contractor makes money out of
his cash, the supply chain need the cash to do the work, and as
soon as those two fundamentals go out of kilter a lot, that is
when you get the disputes coming through your project.
Q354 Mr Weir: It does not sound to
me like there is an awful lot of drivers for anybody to actually
push this forward in any way, the contractors or the clients,
from your explanations.
Mr Wren: Sorry, the problem we
have is we have lots and lots of good practice in our industry,
you know, in my own business, I am sure in Trevor's business,
we can point to lots and lots of good practice. We are not joining
it up.
Q355 Mr Weir: I think we had better
move on. You also mentioned collaborative contracts; can you tell
us what the key features are of a collaborative contract and whether
there are any good examples from the public sector of such contracts
in operation?
Mr Wren: Yes, there are some key
features, I think, of a good collaborative contract. Not in any
particular order of importance, but I think early supply chain
involvement, that is where you will realise best value in your
project; an understanding that actually the supply chain also
do quite a lot of design; contrary to what you might think, probably
most of the design in a project is carried out by the supply chain
and not actually by maybe a consulting engineer or a structural
engineer, and payment for that, I think, should be recognised,
and it is not currently; a clear identification, I think, of how
risks are to be handled on a project; fair payment mechanisms;
no retention; and a clear path that escalates disputes with the
courts being last resort. I think for me, those would be the key
features.
Mr Hursthouse: Yes, sharing risk
is the thing, collaboration, as it is defined; I think one of
the troubles we have is people arrive and become a party to the
contract, progressively, too late. We arrive as the electrical
engineer for the job and somebody tells me, "This is the
design and this is our target costs". Well, if you say they
are both wrong, it is a bit late to be doing anything about that,
and thereafter, everyone has a problem. But if you buy into it
at the very beginning and say, "We agree this is the right
design, we agree this is the right target cost", we are not
in a very good position to start saying later on, "Well,
the price has all gone terribly wrong", because the client
understandably says, "Well, you bought into it, you had better
put it right", so it is a shared risk.
Q356 Mr Weir: And an example in the
public sector? Have you got any good examples from the public
sector?
Mr Hursthouse: From the public
sector?
Mr Wren: I think the NEC contract?
Mr Hursthouse: Well, the contracts
themselves; the project I thought you were referring to. Yes,
the new engineering contract is something which is being used
by ODA, for example, on the Olympics, and I think it is the recommended
contract by OGC, it should be the contract of choice but I do
not think I have ever seen it used on a public contract.
Q357 Mr Weir: You also say in your
memorandum that different Government departments are using different
types of contract. Do you think the Government are making sufficient
progress into standardising contracts across departments, and
indeed to what extent is it possible to achieve such standardisation?
Mr Hursthouse: Again, forgive
me, but the straight answer to your first question is no. It is
not as simple as that. There are a plethora of contracts, I suppose,
because they have been built up by, with respect, this sort of
unjoined-up construction procurement that has gone on across Government,
so they have really been almost in silos, creating the contractual
arrangements. Now is the opportunity for OGC and others—I
am sorry to keep referring back to it, but you would expect me
to—to say, "Look, this is how you should procure construction
and this is the contractual arrangement you should have".
I suppose thereafter, you say, well, why do they not get on with
it and do it?
Q358 Mr Weir: That one does not seem
terribly hopeful either, so I will try your third mention of project
insurance. Can you tell us what progress, if any, has been made
towards widescale adoption of integrated project insurance?
Mr Hursthouse: Well, not necessarily
widescale adoption, but it is a new concept for the industry,
and one that has enormous potential value, and some pilot projects
have been identified. I think the intention was that there would
be ten public sector trial projects with a value of about £250
million, and that is actually coming to fruition now. There is
a project, I believe, which has been identified for the purpose,
at Southport General Infirmary, where this will be trialled, and
on the rest of the 10 projects, to see whether the theory—well,
not the whole theory, because elements of it have already been
applied successfully—will turn into practice. But inevitably
when you are doing it with construction, these things take time
to be implemented, for the outcome to be seen.
Q359 Mr Weir: Are insurers generally
willing to offer such insurance, in your experience?
Mr Hursthouse: There is a group
of insurers who have agreed in principle to collaborate in developing
the concept on the pilot projects. This is an initiative that
SEC Group and OGC in particular have been involved in, in bringing
the whole idea together, and bringing the right people together
to insure projects. It is one of those concepts that is, I suppose,
almost, you would think, quite obvious. Everybody in a design
team has to pay professional indemnity, everybody on site has
all risks insurance and so on, so the insurer looks at the project
collectively rather than looking at each party's business and
thinking of all the things that might happen to it in any given
year which it cannot really control, and in doing that, it is
looking at the competence of the construction team, who of course
can take risks away from the insurer. But it does go a stage further,
and the real opportunity out of it is it will in fact then insure
the project itself, in terms of its outturn, both cost and time,
but again, to do that, there is a bigger emphasis on the project
team, because the insurer is saying, "Can these people deliver?
Will I insure them?" In a way, it is a catalyst, I guess,
for integrated project teams to be put in place.
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