Public AdministrationWritten evidence submitted by UKCG (PROC 25)

1. The UK Contractors Group (UKCG) welcomes the opportunity to respond to the Public Administration Committee’s inquiry. UKCG represents over 30 leading construction contractors who together account for a third of industry turnover. The construction industry as a whole remains a major contributor to the UK economy—the construction value chain accounts for 14% of UK GDP, and the industry employs over 10% of the workforce.

2. The industry continues to make good progress towards the government’s goal of a 15–20% reduction in the costs of construction procurement (as set out in the construction strategy), with cost reductions of £72 million having been achieved in-year (2011–12). UKCG is working closely with the Cabinet Office on implementing the construction strategy, and achieving the goal of more efficient procurement.

3. Our responses to some of the questions set out by the Committee are given below.

4. How successful has the Cabinet Office been at improving public procurement policy and practice?

Construction is not a simple commodity—and hence procurement of construction services is a complex process. Improving procurement skills within the public sector is essential to improving procurement practice, so that skills levels in the public sector are more comparable to the private sector.

Too little public construction is procured centrally (in contrast to private sector clients), and proposals for more centralised procurement set out in the recent PFI review were a welcome step. Central procurement allows teams to gain experience, build up their expertise, and learn lessons from project to project. The increasing tendency towards devolved decision making and localism works against this principle.

5. What should be the strategic aim of the Government’s public procurement policy?

To secure best value for the UK taxpayer, and world class outcomes from construction projects.

6. Does the government have the right skills and capabilities to procure effectively?
— Does the Civil service have the skills and capabilities required to negotiate and manage contracts effectively?

No, there is insufficient in-house skills and experience. As a result the public sector often relies on a myriad of independent advisers, which often complicates the process.

— What skills do procurement authorities require in-house, what skills can be bought in and what skills can be contracted out?

The key skills required are project management and the ability to understand and manage risk. The current lack of understanding of risk often results in micro management of projects, resulting in delays and extra costs. In practice what is required are realistic output specifications, against which contractors can innovate and propose solutions to deliver what is required to best effect.

— What lessons can central government learn from local government on procurement?

There are throughout both central and local government examples of best and worst procurement practices, but there are no really effective mechanisms to spread the best practice more widely.

7. How should the civil service ensure it recruits and retains staff with the right skills to run procurements, to negotiate and manage contracts and to deliver major projects effectively?

Recruit people with the right skill sets and reward them with appropriate remuneration. People need to be properly incentivised to manage risk.

8. Does the government have the organisational structures in place to enable it to procure effectively?

For the reasons set out above, UKCG believes a more central approach to procurement would be helpful. The establishment of the post of Chief Construction Adviser (within BIS) and the Construction Clients Board (in which all major spending departments participate) has been helpful in establishing some common goals to obtain better value and spreading best practice between departments. The construction strategy was developed with private sector input. The challenge now is to deliver it.

9. Does the government collect the management information it needs to understand how public procurement is working?

The establishment of a “construction pipeline” (http://data.gov.uk/dataset/government-construction-pipeline) some 18 months ago drawing together all central and some local government investment programmes was helpful. This provided greater certainty to the construction sector on future workloads. The challenge now is to deliver the projects in the pipeline. Over time the pipeline will identify which departments and agencies are procuring projects on schedule and which are seeing delays and slippages in timeframes. However more information is required within the current pipeline to make clear which projects are on or behind schedule.

10. How should government assess and manage risk when negotiating procurement projects?

Government needs to have the ability to assess how much risk it wants to take for individual construction projects. The spectrum ranges from no risk at all (eg some schemes under old PFI model where large amount of risk was transferred to private sector), to considerable risk and increased costs if projects overrun. A way of managing risk is to bundle projects into framework agreements so that the same contractor(s) are delivering repeat projects (eg new schools) so that the risks involved are better understood.

11. What is the best role for “prime contractors” and what are the advantages and disadvantages of relying on “prime contractors”?

The advantage of using prime contractors is that they have the balance sheet strength to manage large projects and programmes. This allows government to bundle projects together to create economies of scale and gain efficiencies through learning the lessons from the first phases of any programme. It is often suggested that the disadvantage is that it squeezes SMEs out of the market. However in practice main contractors act as enablers of opportunities for SMEs in their supply chains, helping them to access work on major projects. A recent UKCG survey of member contractors found that for every sub-contracted on a project, 64p goes to SMEs (See Appendix 1).

12. What are the key lessons to be learned from the experience of cost overruns, delays and project failures in central government procurement over the past five years or so?

That government needs to devote more up-front resource and centralised expertise to the process.

January 2013

APPENDIX 1

The Value of SMEs in the Supply Chain—UKCG Research

SMEs are a vital part of the construction supply chain. Main contractors working on a construction project will be reliant on a network of often local SMEs to provide material supplies, on-site labour, and specialist services.

UKCG represents over 30 leading contractors, who together account for a third of construction output. In October 2012, UKCG conducted a survey of members on the involvement of SMEs in their supply chain. A total of 19 members responded.

Value of Business Sub-Contracted to SMEs

The UKCG survey found a significant amount of work is sub-contracted to SMEs:

For every £1 subcontracted on a project, 64 pence goes to SMEs.

Almost half of members in the survey subcontract over 70 pence in the £1 with SMEs.

Breaking down the value of business with SMEs between micro, small and medium firms1—the majority of the 64 pence goes to small firms (with less than 50 employees).

The Number of SMEs in the Supply Chain

The vast majority of firms in UKCG member supply chains are SMEs:

On average, 82% of UKCG member supply chains are SMEs.

The number of SMEs in the supply chain varies by the size of the business—ranging from under 100 to over 5,000. On average there were just over 1,500 SMEs in a member’s supply chain.

In total, the 18 UKCG members who provided data on this question are supporting almost 30,000 SMEs.