Examination of Witnesses (Questions 520-539)
ODA
15 JANUARY 2008
Q520 Mr Weir: That was my next question,
that we would like to see the evidence of that, and I think we
all appreciate the confidentiality of it. Why is it that there
was only one eventual bidder for the Olympic Stadium contract
and the Aquatic Centre?
Mr Shiplee: There are two very
different reasons. As far as the stadium is concerned, it was
the first major venue that had been out to the marketplace and
I think at that time, some 16 months ago now, our own plans were
just being formalised, we had really only just been constituted
as a board and most of us came to the ODA at or about that time
in terms of the current management team. I think, frankly, the
industry simply looked at it and took a vote not in any darkened
room, but they simply voted with their feet. I have talked to
the chief executives of many of the companies who we would have
thought would have bid and the general response I have received,
and did receive, was, "Well, just look at who's bidding.
The company that is bidding or one of the companies is the company
that has just finished what has been seen to be an incredibly
successful major sporting venue, so why should we bother getting
into this competition? That's the best team, they've done it before.
You're taking on a designer and a contractor at the same time,
so why reinvent the wheel? We'll go and spend our money on bidding
for something somewhere else". That is the fact of it.
Q521 Mr Weir: That seems a rather
timid response from the construction industry. There is a widespread
belief apparently within the industry that the Olympics presents
a massive opportunity for the sector, but what you are describing
seems to be a rather timid approach to it if they are not prepared
even to bid for the large contracts.
Mr Shiplee: Well, if I could spin
it round the other way for you, and I am making no comment about
Wembley whatsoever other than the fact that the industry did not
appear to be terribly excited about it, it is interesting that
the contractor that got it and successfully completed it, which
is, I think, a tribute to them, it was the first project in this
country for a contractor which had not operated in this country
before. I do not want to see contractors coming and saying, "We're
really very good and are going to take on huge risk", but
what we are looking for is confidence in the capability of delivery,
and people have recognised risk and have taken a view. If that
was their business judgment that they did not wish to participate,
there is not a lot that we can do about it. However, just to complete
it, the second one where we finished up with a single bidder,
and I should just give you the background to that and say that
those are the only two and in many other areas we have had very
substantive and effective bid lists from industry where industry
has obviously decided that it is appropriate to bid, we have also
learnt because one of the things we do now on every one of our
bids is that we hold industry days and we talk to industry way
in advance of going out to tender both to explain to them what
is coming up and to hear their views about whether it is attractive
to them and, as a result of that, we have found ourselves in a
generally much better position. The second area is the Aquatic
Centre and we have learnt from the stadium and we went through
a process and had a very solid bid list. We, however, finished
up with three bidders actually commencing the bid process. Of
those three bidders, one dropped out because during the process
they were simply not prepared to accept our terms and conditions,
they wanted an alternative set of terms and conditions which we
felt were unacceptable, so we said, "We're not going to adjust
on this one", another one was very simple, that during the
process, they are an international company, not from the UK but
Europe, and they came in and said, "We're very, very sorry,
but we've just been awarded some huge, multi-billion dollar contracts
in the near and Far East. They're sucking up huge amounts of resource
and, rather than give you half a job or a sham, we're going to
tell you that we're withdrawing. We're very sorry about it and
we're sorry that we've taken it to this position, but we're withdrawing",
and we said, "Thank you for being honest about it",
and it left us with a one-horse race. We have worked hard in that
and what is important is that the form of contract that we have
been using allows us to have discussions with contractors so that
we do not finish up in a stand-off position, nor do we become
a hostage to fortune, so in both of those contracts we have worked
our way through negotiating with the contractors to conclude arrangements
which are within our budgetary arrangements and which, we believe,
provide value for money.
Q522 Mr Weir: Was the cost of actually
quoting for the main stadium, for example, a factor, do you think,
in companies being unwilling to move forward and actually put
in a bid in the first instance?
Mr Shiplee: I think there is always
a debate about cost, about the cost of bidding, and I think substantially
that comes out a lot in PFI areas where it is exceptionally expensive
to bid. We have tried to make it such that it is not an expensive
operation. We still require a considerable amount of input and,
after all, if people are not prepared to make the investment,
then they do not deserve to get the job, but we are trying to
ensure that we can, if you like, take some of the risk out of
it, so in a number of areas, once we have got a contractor into
the state of progressing forward through negotiations, we have
on occasions agreed with one or two contractors that we will actually
fund some of their early design work, as long as of course we
have the intellectual property rights for that work and we may
use it as we see fit, to try and reduce what are seen as the potential
loss costs of tendering so as to align contractors with a desire
to get on board with us and to start the process of building a
relationship, and the new engineering contract is a helpful way
of doing that as well.
Q523 Mr Weir: Given obviously that
the Olympics is different from many construction projects in the
sense that it has to be finished by a specific date and you cannot
afford to have much slippage in that date, I would suspect, can
you tell us what the risks are associated with having just one
bidder for these prime contracts and do you foresee any problems
with that? You have mentioned before that you were not in a stand-off
situation with one bidder, but surely, if you have got one bidder
for a contract and they know they are the only bidder, which I
presume they did by that point, then they are in a much stronger
position in dealing with you than if they were in a competitive
situation.
Mr Shiplee: I think that must
be right to some extent, but I think there is a balance in that
debate. When talking with contractors who are bidding and have
bid to us or wish to bid, one of the strong issues that they put
forward is that of reputation and, after all, I do not think it
behoves any contractor to feel that they have endeavoured to take
advantage of a situation and what we have seen is in fact proposals
coming forward to us which do not indicate that anyone is taking
advantage of us. Some of these projects are complex projects,
they attract a price and we have been through those prices, we
have been through issues like overheads and profits, and we believe
that in the circumstances they are reasonable, so we do not believe
that we are being taken to the cleaners by the construction industry;
quite the contrary.
Q524 Mr Weir: You presumably will
say you are, but are you satisfied that the contract you have
is tight enough that we are not going to get massive overrun in
cost in the run-up at speed to finish this prior to the Games
commencing?
Mr Shiplee: The answer is yes,
but I think it is important to give you some background as to
why I say it is yes so firmly. We started the discussions and
negotiations with the contractor on the main stadium actually
16 months ago. That 16 months that we have spent now working together
has not been spent on negotiating a contract, but it has been
spent on actually creating the design for the stadium. When they
were appointed, what we had was the broad brief as to what we
required, but we went through a long period of iterations while
we established the optimum design for the stadium, and what I
think we have got now is quite a revolutionary approach to the
stadium delivery. We have also great clarity of what that scope
is and the scope has been backed up and agreed with LOCOG who
will be the prime user and, ultimately, with various organisations
who will collect it in the legacy, so we have created a very large
element of certainty in this so that, when we start the construction,
and I can report to you that the site officers, whom I think you
saw when you came round a week or two back, are going up on site,
our integrated team, with us as client, the contractor and the
design team and now some of their specialist sub-contractors,
will be moving on to the site as an integrated team within the
next six weeks and with the level of certainty where we have identified
very clearly what we want, how much it is to cost, and the big
issue is that we must not change our minds.
Mr Weir: I hope you are right and we
will watch with interest.
Chairman: I must remind myself and you
and the Committee that we are trying to learn the lessons for
the whole construction sector of what you are doing with the Olympics,
so that is why it is very helpful that you drew the parallel,
for example, with PFI contracts earlier on, so do feel free to
draw on experience from elsewhere as well in answering the questions.
Q525 Mr Binley: So 500 companies,
which surprises me as I would have thought it would have been
more, involved in the Olympics, you might correct me if my figures
are wrong, and about 24,000 people in total; a sizeable project.
On how many of the main projects to date has the construction
team been identified and have they been involved in the early
design process, and what you said intimates they have, and how
much has that whole process involved sub-contractors who are a
vital element of this operation?
Mr Wright: A significant number
of contracts have already been placed.
Q526 Mr Binley: Can you be more specific
than "significant"?
Mr Wright: I would guess at around
ten, and I am talking about construction contracts. Clearly there
are many other kinds of procurement, including, for instance,
stationery and all that sort of thing which I do not get too much
involved with, but major orders have been placed in the utility
market and for the initial venues clearly we are in the midst
of procurement, so, when you say, "Have orders been placed?",
it is a question of what stage of the process you include.
Q527 Mr Binley: When I was a salesman,
I always thought an order was when I got a signature on a piece
of paper.
Mr Wright: Well, quite, but European
procurement has a number of steps to it.
Q528 Mr Binley: I understand that.
Mr Wright: In all of those procurements,
we have engaged with a supply chain at an early stage, including,
for instance, on the energy network where we are at preferred
bidder stage, so the order is placed and the contract is being
finalised. It is a design-build-finance-and-operate procurement
and we have engaged with the private sector to invest in the long-term
regeneration of the Park, so this is an energy centre not just
for the Olympic Games, but for the long-term development of the
site post-Games. They have put a significant amount of their own
capital into the project, or they will be, on the basis that they
achieve the income from selling energy.
Q529 Mr Binley: If I can cut you
short, I want to be specific with this question, if I might. We
are talking about a defined number of projects.
Mr Wright: Yes.
Q530 Mr Binley: How many defined
number of projects are there in relation to my question and for
how many have you already got construction teams identified and
early design work started upon?
Mr Wright: Early design work has
started on all of our projects.
Q531 Mr Binley: But how many? I want
to get a grip on this. You started on ten, but how many major
construction projects have you got in total and how many have
you got signed up for?
Mr Wright: There are around 25
to 30 major construction projects. On all of those projects, design
has commenced.
Q532 Mr Binley: So that means you
have signed contracts on every one of them?
Mr Wright: For design.
Q533 Mr Binley: And you are buying
that design, irrespective of whether people get the contracts
or not?
Mr Wright: We are. In these projects,
they all require an initial design, design consultant, an architect,
engineer—
Q534 Mr Binley: Okay, so you have
signed up ten of those 25/30?
Mr Wright: No, all of those contracts
have designers signed up for them.
Q535 Mr Binley: No, my question was:
for how many of the major projects to date has the construction
team been identified?
Mr Wright: That is a different
question.
Q536 Mr Binley: It was my first question.
Mr Wright: I beg your pardon if
I misunderstood. We have initial design teams and, when we move,
by and large, we move to a design-and-construct contract, so the
initial design teams take the project through to a scheme stage
or an initial design stage so that we can get planning permission
and that type of permit. We then will tender it into normally
a design-and-construct form of contract and, for any new engineering
contract, that is very often the form of contract that we use.
Of those larger number that I mentioned, 35-odd, something significantly
less than that, eight to ten, are at a point where we have a design-and-construct
contract identified.
Q537 Mr Binley: Thank you, that is
very helpful too for my other questions. In terms of the process
at this stage, are we at too early a stage to be talking to prime
contractors about sub-contractors?
Mr Wright: No, we are not at too
early a stage and there are discussions held with the tier ones,
the prime contractors, during the tender process about who they
will engage as their tier twos or prime sub-contractors. We are
very interested in those and we want to understand who they are
going to be putting forward and that we consider them to be appropriate
organisations and then we will work with them. Often, they will
carry out the design in the detailed stages, so it is very important
that we engage with tier ones, as we are, in the earlier stages
so that we can work with them together to ensure that the designs
are locked in and effective.
Q538 Mr Binley: Thank you for that;
I now have a clearer view. How many of the projects currently
under way use project bank accounts or project insurance and how
much work have you done there?
Mr Shiplee: Let us just pick up
project insurance first. We are working on the basis of project
insurance, so we insure all of the works, and the only insurance
that the contractors have to carry is for their own liability
in terms of their employees and their own plant and equipment.
For the work itself and all the risks associated with the work,
we have blanket policies and we have found that to be the most
appropriate; again more learning. I think one of the important
issues, and I think it was mentioned by my colleagues from T5,
is the whole issue of recognition from the insurance industry
that, when you perform effectively and efficiently, and I think
Mr Wolstenholme said that accidents are expensive and this is
absolutely true in every respect, the industry reflects that in
the premiums that we are charged if we can demonstrate good performance,
and I think that is a very important issue for the future. In
terms of project bank accounts, looking down the construction
commitments and many things, it is the one area where we have
taken a view that project bank accounts, as proposed, are not
something that immediately springs out as appropriate for us.
The reason is that the project bank account approach works if
the client is holding all of the contracts and, therefore, is
the person who is actually paying and is administering the contracts.
In our case, in the vast majority of cases the prime contractors
will hold their relationship with the supply chain and we expect
them to administer both the payments and the contractual administration
of that supply chain. However, we do expect to be intrusive in
wishing to know that, when we are paying properly, that is reciprocated
by the tier one contractors and below also paying properly, so
we are not simply turning a blind eye. The other point on this
is that, if we in fact had areas, for instance, the link Mr Wolstenholme
mentioned earlier of the portfolio approach to the different types
of contract, and indeed that is exactly what we are doing, we
have different forms within the contracts, as you have heard,
some very clear about scope and price, others involving private-sector
funding. If we found a situation, say, where we thought it appropriate
to execute some work through a construction management route,
then I would have no compunction whatsoever, where all of those
contractors are directly engaged to us within that project, of
in fact taking on a project bank account approach.
Q539 Mr Binley: Good, because I do
not need to say to you that (a) the construction industry is a
bit prone to seeing bankruptcy on occasions, and (b) we are now
running into a situation where credit is becoming more difficult
to get from banks. Equally, I do not need to tell you that, if
a cog in the wheel comes to an end, you have some problems on
a very limited time-frame project.
Mr Shiplee: I agree entirely.
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