Modernising Construction

Transcription

1 Moderisig Costructio REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 87 Sessio : 11 Jauary 2001 LONDON: The Statioery Office 0.00 Ordered by the House of Commos to be prited o 8 Jauary 2001

2 executive summary I this chapter The challege - Improvig 4 costructio performace Improvig the 5 perfomace of departmets ad cotractors Procurig ad Maagig 9 Costructio Recommedatios 12 Key questios for lie 14 departmets 1 This report is about how the procuremet ad delivery of costructio projects i the Uited Kigdom ca be moderised, with beefits for all - the Costructio Idustry as well as cliets. The costructio busiess is worth 65 billio a year, of which direct expediture by govermet departmets ad their agecies accouts for 7.5 billio. Govermet spedig o costructio will icrease substatially followig the spedig Review 2000 which has doubled et public ivestmet o ifrastructure over the ext three years to 19 billio to deliver improved trasport, schools ad hospitals. This higher level of spedig o capital projects icreases the urgecy of the eed for improvemets i public sector procuremet ad maagemet of ew costructio, refurbishmet ad repair ad maiteace. 2 A successio of major studies (Figure 1) have highlighted the iefficiecies of traditioal methods of procurig ad maagig major projects - i particular the fallacy of awardig cotracts solely o the basis of the lowest price bid oly to see the fial price for the work icrease sigificatly through cotract variatios with buildigs ofte completed late (Figure 2 overleaf). Experiece has show that acceptace of the lowest price bid does ot provide value for moey i either the fial cost of costructio or the through life ad operatioal costs. Relatios betwee the costructio idustry ad govermet departmets have also ofte bee typically characterised by coflict ad distrust which have cotributed to poor performace. 1 Key Reviews of UK Costructio Costructig the Team - Sir Michael Latham (1994) Recommeded more stadardised costructio cotracts, better guidace o best practice ad legislative chages to simplify dispute resolutio. May of the legislative chages were made through the Housig Grats, Costructio ad Regeeratio Act The report cosidered that efficiecy savigs of 30 per cet i costructio costs over five years were achievable. Levee Efficiecy Scrutiy (1995) Recommeded that departmets should: commuicate better with cotractors to reduce coflict ad disputes; icrease the traiig which their staff received i procuremet ad risk maagemet; ad establish a sigle cotact poit for the costructio idustry to resolve problems commo to a umber of departmets. Rethikig Costructio - Sir Joh Ega (1998) Idetified five "drivers" which eeded to be i place to secure improvemet i costructio; four processes that had to be sigificatly ehaced; ad set seve quatified improvemet targets, icludig aual reductios i costructio costs ad delivery times of 10 per cet ad reductios i buildig defects of 20 per cet a year. 3executive summary

3 Performace of departmets' ad agecies' costructio projects Cost - 73 per cet were over budget 73% Over Teder Price Source: 13% Uder Teder Price 14% O Teder Price Time - 70 per cet were delivered late 70% Delivered Late 10% Delivered Early 20% Delivered O Time Bechmarkig the Govermet Cliet Stage Two Study December Estimates of the cost of these iefficiet practices are ievitably broad brush. But studies have idetified the potetial for major savigs - 30 per cet i the cost of costructio. Specifically by idustry ad its cliets adoptig a more collaborative approach strogly fouded o a competitive process with appropriate risk sharig i which value for moey is obtaied for all parties through a clear uderstadig of the project's requiremets, trasparecy as to costs ad profits, uderpied by clearly uderstood rights ad obligatios, ad appropriate icetives. More attetio to desig ad early ivolvemet of the whole costructio team could also improve the operatioal efficiecy of completed buildigs resultig i potetially greater savigs over the whole life of the buildig. Resposibilities: The Departmet of the Eviromet, Trasport ad the Regios has cetral resposibility for securig improvemets withi the idustry ad its cliets. The Office of Govermet Commerce leads the promotio of improvemets i the performace of departmets ad agecies as purchasers of costructio services. 4 This report is forward lookig ad highlights good practice beig adopted by departmets ad idustry which if applied more widely could achieve sustaiable improvemets i costructio performace achievig better value for moey for taxpayers. We show that, through chagig their approach to the procuremet ad maagemet of costructio, the larger spedig departmets ad agecies estimate that they will achieve efficiecy gais of over 600 millio aually ad improve the quality of the costructio. For idustry, we show that the applicatio of best practice has the potetial to lead to improved profitability compared with the curret idustry average of oe per cet of turover. The challege - Improvig costructio performace 5 May reasos are give as to why costructio projects are ofte completed late ad sigificatly over budget - Figure 3 summarises aspects of the maagemet of costructio requirig improvemet. But all the more recet reviews agree that a sigificat cotributory factor is the tedecy for a adversarial relatioship to exist betwee costructio firms, cosultats ad their cliets ad betwee cotractors, sub-cotractors ad suppliers. This is attributed i part to cliets placig too much emphasis o lowest price i awardig cotracts. As a result some firms have priced work urealistically low ad the sought to recoup their profit margis through cotract cost variatios arisig from, for example desig chages, ad other claims leadig to disputes ad litigatio. 4executive summary 6 There eeds to be a greater cocetratio o achievig a better costructio which meets the eeds of the ed user at lower through life costs. The etire supply chai icludig cliets, professioal advisers, cotractors, subcotractors ad suppliers of materials must be itegrated to maage risk ad apply value maagemet ad egieerig techiques to improve buildability ad drive waste out of the process. This process should reduce through life ad operatioal costs, lead to greater certaity of project time ad budgeted costs, fewer accidets ad more sustaiable costructio.

4 Better costructio performace - What is eeded? Better maagemet of costructio supply chais - for example: desigers, subcotractors, specialist cosultats, materials suppliers Develop a learig culture o projects ad withi orgaisatios Better health ad safety record Loger term relatioships betwee cliets ad cotractors to promote cotiuous improvemets i time, cost ad quality Better itegratio of all stages i the costructio process - desig, plaig ad costructio - to remove waste ad iefficiecy Better Costructio Performace Costructio meets user requiremets ad is fit for a specific purpose Lower through life ad operatioal costs Greater certaity over project costs ad time Elimiatio of waste i labour ad materials Parterig betwee cliets ad cotractors to resolve problems collaboratively, to reduce project slippage ad cost overrus ad elimiate waste i labour ad materials Much more cosideratio of ed users i desig ad costructio of buildigs Move away from adversarial approaches betwee the idustry ad cliets Experiece has show that acceptig the lowest price cost bid does ot provide value for moey ad more cosideratio eeds to be give to the costs ad value of a buildig over its whole life ad the quality of the cotractors Source: Natioal Audit Office aalysis of Latham, Levee ad Ega Reports Improvig the performace of departmets ad cotractors (i) Departmets 7 The Departmet of the Eviromet, Trasport ad the Regios ad the Treasury (from April 2000 the Office of Govermet Commerce) have take a umber of iitiatives to improve costructio performace. These iclude most otably: The Movemet for Iovatio ad the Housig Forum to promote iovatio i the costructio idustry pricipally through demostratio projects selected as examples of iovatio i costructio practice. At 31 July 2000 there were 171 demostratio projects, the lessos from which are beig dissemiated through cofereces, semiars ad electroically o the Web. Achievig Excellece Programme to improve the performace of departmets as purchasers of costructio services. Key elemets iclude the targets set for departmets, agecies ad o-departmetal public bodies for maagemet, stadard practices, itegratio of supply chais ad performace measuremet; procuremet guidace; ad a series of workshops to dissemiate the message that departmets eed to improve their costructio procuremet ad to draw up actio plas to do so. All targets must be met by March There are also may other orgaisatios ad etworks - some privately ad some publicly fuded whose aim is to promote good practice suggestig some duplicatio. These have succeeded i raisig awareess amog the differet parts of the idustry - cliets, cotractors, cosultats, ad specialist suppliers - but there is ow a eed for more co-ordiatio ad better directio of their activities. 8 As well as these iitiatives, the Office of Govermet Commerce, departmets ad agecies are workig to improve their performace as cliets of the costructio idustry i four key areas: differet forms of cotractig; parterig; the itroductio of the gateway process; ad performace measuremet. The Office of Govermet Commerce has issued useful guidace o may of these issues ad others icludig sustaiability. 5executive summary

5 4 The three mai procuremet approaches for cetral govermet departmets' costructio projects Public Private Parterships, particularly Private Fiace Iitiative projects - A supplier is cotracted ot oly to costruct a facility such as a road or priso but pricipally to deliver the services which the facility is iteded to provide. Risks associated with providig the service are trasferred to those best able to maage them. The outputs which the service is iteded to deliver must be clearly defied. Desig ad build - A sigle supplier is resposible for both the desig ad costructio of the facility. Prime Cotractig - Whilst Desig ad Build makes a sigle supplier resposible for the desig ad build of a facility, prime cotractig exteds this basic cocept very substatially. The Prime Cotractor will be expected to have a well-established supply chai of reliable suppliers of quality products so ecouragig the icreased quality ad value for moey that results from a elemet of cosistecy ad stadardisatio. As well as itegratig that supply chai ito the desig process with cotributios from key suppliers, the Prime Cotractor co-ordiates ad project maages all activities throughout the desig ad costructio period to provide a facility which is fit for the specified purpose ad which meets predicted through-life costs. Differet forms of cotractig Traditioal forms of cotractig - tederig for each key stage i a costructio project such as desig, selectig the mai cotractor, appoitig subcotractors, ad awardig cotracts o the basis of lowest price bid does ot provide value for moey i the loger term. This is because selectig the lowest price cotract may result i a buildig or road that is more expesive to operate uless careful cosideratio is give to the desig ad likely quality of the proposed buildig, the methods which the cotractor proposes to use to costruct it, ad the potetial to be iovative to improve value for moey. I recogitio of this the Office of Govermet Commerce advises departmets to udertake costructio projects usig oe of three routes (Figure 4). The differet forms of cotractig are desiged to trasfer risk to those best able to maage it; to promote itegratio ad maagemet of all those ivolved i the costructio process ad to icetivise them to reduce costs ad deliver o time; ad to make departmets miimise desig chages ad focus much more o the outputs they expect from the cotract i terms of costructio which better meets ed user requiremets. The Office of Govermet Commerce advises that the traditioal procuremet route - tederig for the desig ad costructio separately - should be used oly if a departmet ca demostrate that it will provide better value for moey tha ay of the other three types of procuremet. Parterig Private sector cliets are icreasigly establishig log term collaborative relatioships or parterig with costructio firms for the beefit of both parties - cliet ad supplier. The beefits iclude cliet ad cotractor workig together to improve buildig desig, miimise the eed for costly desig chages, idetify ways of drivig out iefficiecy i the costructio process, replicate good practice leared o earlier projects ad miimise the risk of costly disputes. I the private sector differet forms of parterig have delivered savigs of betwee two per cet (project based parterig) ad 30 per cet where strategic parterig is used i the cost of costructig buildigs ad the cost of parterig - settig it up ad moitorig - is assessed as relatively low, addig usually less tha oe per cet to project costs. As emphasised i the research paper, which we commissioed from Professor Norma Fisher ad Dr Stuart Gree of Readig Uiversity (Appedix 4), parterig offers good potetial to improve the performace of govermet departmets' costructio projects. We foud examples of differet forms of parterig beig used by departmets ad agecies. For example, project based parterig was used i costructig the Dudley Souther Bypass 2, loger term relatioships with cotractors are beig developed by the Highways Agecy 3, ad the Miistry of Defece, represeted by the Defece Estates Agecy 4, are usig parterig to improve the maagemetofallcotractorsivolveditheircostructiosupplychai. 6executive summary Parterig does ot mea that departmets have a cosy relatioship with cotractors - thus icreasig the risk of less value for moey ad possibly fraud ad impropriety. If established reliably, parterig ca provide departmets with greater assurace that value for moey is beig achieved. For example, parters should still be appoited competitively, ad clear improvemet targets should be set. There should be a commitmet by both parties to cotiuous improvemet ad ope book accoutig - with departmets havig access to cotractors' records - is key so that departmets ca have assurace about cotractors' costs ad efficiecy improvemets. 2 More detail is provided i Appedix 12 3 More detail is provided i Appedix 7 4 More detail is provided i Appedix 6

6 Gateway process Idepedet reviews at critical poits (kow as gates) i the procuremet process are a major compoet of private sector best practice. I Jue 2000 the Office of Govermet Commerce itroduced o a pilot basis "the Gateway process" requirig major procuremets icludig costructio to be subject to review at certai key stages, such as agreeig the busiess eed for a project, ad before a cotract is awarded, by a team sufficietly idepedet of the project. The purpose is to esure that the project is justified ad that the proposed procuremet approach is likely to achieve value for moey. The process will be itroduced across govermet i early Performace Measuremet Measurig costructio projects' performace is essetial for esurig that plaed improvemets i cost, time ad quality are achieved, comparig achieved performace with that of similar projects, idetifyig potetial for doig thigs better, ad for assessig how cotractors compare with other potetial suppliers. The Departmet of the Eviromet, Trasport ad the Regios i collaboratio with the costructio idustry has developed a rage of Key Performace Idicators coverig, for example, the time it takes to complete projects, their costs ad quality, cliet satisfactio ad health ad safety. The Govermet Costructio Cliets Pael ad the Office of Govermet Commerce have developed a series of key performace idicators to measure performace durig the life of a project. The system will be itroduced across govermet early i We assessed the impact which the iitiatives to improve costructio were havig o the performace of four orgaisatios - NHS Estates, Defece Estates, the Highways Agecy ad the Eviromet Agecy - which collectively are resposible for a sped of over 5 billio a year o costructio ad represet the majority of ew works by cetral govermet. We foud that each were implemetig a programme of reforms to improve their procuremet ad maagemet of costructio. As yet, however, it is too early to quatify the beefits beig achieved ad little iformatio is available but all four orgaisatios predict sigificat savigs i costructio costs ad improvemets i quality (Figure 5). Cotract strategies which icetivise costructio firms to perform better; which require departmets to cosider the idividual risk ivolved with ay costructio project carefully ad place the risk with the party who is best able to maage it; ad differet forms of parterig betwee departmets ad cotractors committed to cotiuous improvemet all have cosiderable potetial to improve the quality ad cost effective delivery of cetral govermet departmets' costructio. To be successful, however, reliable performace measuremet is eeded to esure that plaed beefits are achieved ad remedial actio is take quickly whe performace is less tha satisfactory. 5 Estimated improvemets achievable i costructio performace Orgaisatio Estimate NHS Estates Defece Estates The Highways Agecy The Eviromet Agecy Te per cet reductio i costructio costs for the NHS as a whole ad should release 300 millio each year. Thirty per cet (approximately millio improvemet i value for moey) o the cost of costructig ad ruig buildigs aually by At preset little quatifiable iformatio is available other tha at idividual project level. The Agecy evisages, however, that its ew strategy will deliver improvemets i time, cost ad quality. It is curretly quatifyig the beefits. Thirty per cet (approximately 35 millio) i costructio costs by executive summary Source: Natioal Audit Office aalysis

7 (ii) The costructio idustry 10 The Departmet of the Eviromet, Trasport ad the Regios, workig with the costructio idustry, has ecouraged a umber of iitiatives to promote improvemets i the performace of costructio firms. For example, i respose to a challege from the Departmet of Eviromet, Trasport ad the Regios Miisters, the Costructio Cliet s Forum (ow the Cofederatio of Costructio Cliets) has developed the Cliets Charter. Cliets who sig the Charter commit to three to five year programmes for improvig their performace, ad to measure both their ow performace ad that of the projects for which they are cliet. The Costructio Idustry Board, represetig all sectios of the idustry, cliets as well as suppliers, also develops policies aimed at improvig costructio performace such as ehacig the quality ad skills of the costructio workforce. 11 We asked 11 large costructio firms ad 17 specialist cotractors ad cosultats (Figure 6) to idetify the iitiatives they were takig to improve the services which they provided to their customers. 6 Large costructio firms, specialist cotractors ad cosultats cosulted Costructio firms Specialist cotractors ad cosultats Balfour Beatty PLC Allford Hall Moagha Morris Jackso Buildig Ltd Amey Plc Joh Laig Atelier Te Kavaerer Costructio Ltd Beetts Associates Ltd Alfred McAlpie Buildig Desig Partership AMEC Plc Drake ad Scull Egieerig Coulso Group Ltd Edward Cullia MANSELL plc Gardier ad Theobald Morriso Gibb Joh Doyle Ltd Halcrow Tedrig Costructio Ltd Mace Property Tectoics Staah Lifts Ltd Terrapi Ltd Thorbur Colquhou The Cook ad Butler Partership WS Atkis Specific examples icluded establishig loger term relatioships ad parterig arragemets (Balfour Beatty PLC); providig more value to customers with greater cosideratio of their eeds (Alfred McAlpie ad Halcrow); better supply maagemet (Terrapi Ltd), learig from promotig good practice (MANSELL plc) ad ivestig i research ad developmet to 8executive summary

8 idetify better ways of reducig the whole life cost such as maiteace of buildigs (WS Atkis). There are however a umber of factors which could limit improvemets i costructio performace. Skills of the costructio workforce. Betwee 1994 ad 1998 applicatios for costructio related courses ru by Uiversities for professioal staff fell by 26 per cet ad both cotractors ad cosultats expressed cocer that the idustry is becomig icreasigly reliat o a less skilled work force. There is also cocer that departmets' staff are ot sufficietly well traied to be itelliget costructio cliets. Iformatio techology. There is cosiderable potetial to achieve efficiecy improvemets by improvig the cost effectiveess of costructio ad by makig much greater use of iformatio techology to assist i the desig of buildigs ad streamliig the maagemet of the costructio process. Our survey of how the UK compared with costructio good practice overseas (Appedix 3) foud that the UK was geerally behid other coutries i the use of iformatio techology i costructio. Research ad Developmet. Ivestmet i research ad developmet i the costructio idustry is low. I 1999/2000, i a idustry with a turover of 65 billio, 270 millio was spet o costructio research ad developmet, of this 47 millio was fuded by cetral govermet departmets; 147 millio by idustry; ad the remaider by other orgaisatios (Research Coucils, Higher Educatio Fudig Coucil, Europea Uio for example). However, the majority of the idustry research is commissioed by the costructio materials, compoets ad systems suppliers. The idustry's ability to improve ad to be iovative could be impeded if it does ot ivest more i research ad developmet. I Japa the top five costructio compaies ivest oe per cet of their turover i research ad developmet. Procurig ad Maagig Costructio 12 Our examiatio of costructio projects foud geeral recogitio by departmets ad agecies of the importace of procurig ad maagig costructio better ad a commitmet to improve. The extet to which good practice is beig applied was, however, variable ad was geerally, better uderstood by those departmets ad agecies such as NHS Estates, Defece Estates ad the Highways Agecy which have large o-goig costructio programmes ad dedicated cetres of costructio maagemet expertise. Smaller Govermet orgaisatios udertake a costructio project oly oce every few years ad as a result may have less experiece of curret good practice. Our examiatio idetified six essetial requiremets for all costructio projects, oce the eed for such a project has bee established, if value for moey is to be achieved (Figure 7). 9executive summary

9 Key requiremets of procurig ad maagig costructio icludig maiteace ad refurbishmet Requiremet 1. Cotractors should be selected o the basis of achievig log term sustaiable value for moey ad ot just lowest price. The lowest teder price aloe will ot guaratee value for moey over the full life of the buildig. Cosideratio also eeds to be give to the quality of the desig, the proposed method of costructio ad the likely implicatios for the costs of operatig the completed costructio over its whole life ad meetig health ad safety performace eeds. Illustrated by Balacig quality ad price I awardig Desig ad Build cotracts, the Highways Agecy evaluates teders o quality ad price. The key elemets of which are: The Agecy gives differet weightigs to quality ad price depedig o the complexity of the project, for example, for iovative projects the split is 40 per cet o quality ad 60 per cet o price (although o some cotracts such as framework arragemets a weightig as high as 80 per cet was applied to quality) whereas for repeat projects or where a stadard desig ca be used, the split is 20 per cet o quality ad 80 per cet o price. For each project, the Highways Agecy determies the key quality aspects to be assessed, for example, iovative approaches to solvig issues such as embakmets o motorways, ad promotig health ad safety. Tederers have to submit the quality ad price elemets of their bids i separate evelopes. The quality teders must be at or above a pre-determied threshold, before the price teder is cosidered. Oly cotractors who have demostrated that they ca costruct roads of the right quality ad withi budget will be selected. The Highways Agecy is able to give greater cosideratio to the quality of the fial costructio. It also meas that cotractors have more icetive to put forward iovative desigs ad cover loger term aspects such as the whole life costs of roads ad evirometal impact because they are aware that price will ot be the oly criterio by which their teder will be judged (further detail is provided i Appedix 7). Requiremet 2. Costructio desig should ot be a separate process but be itegrated with the whole costructio process so that the desig team ca take more resposibility for the implicatios of their desig icludig cost, quality, buildability ad the health ad safety of those required to costruct, maitai ad demolish the buildig. It is at the desig stage that most ca be doe to optimise the value of a buildig to its ed users. This meas cosultig the ed users of the buildig i developig the desig ad ivolvig the mai cotractor ad specialist suppliers at a early eough stage to advise o the likely impact of the desig o the cost ad feasibility of costructio ad to agree realistic timetables. Illustrated by Itegratig the desig team - Buildig Dow Barriers Normal costructio practice is for a architect to develop the iitial buildig desig i isolatio. This ca sometimes lead to problems of "buildability" - aspects of the desig may be difficult to build or may ot be cost effective or there may be better solutios. I Buildig Dow Barriers, Defece Estates ad their Prime Cotractors - Laig ad AMEC adopted a differet approach to the desig of two physical ad recreatio cetres by orgaisig their project o the basis of "supply clusters" cetred aroud aspects of the work such as mechaical ad electrical services. All those ivolved i a "supply cluster" participated i the desig developmet ad there was also extesive cosultatio with ed users. The users are very satisfied with the physical ad recreatio cetres which fully meet their specific eeds. The ivolvemet of suppliers ad specialist cotractors i the desig also aided buildability with both projects completed early ad have resulted i buildigs which have lower predicted through life costs tha similar buildigs which are covetioally built (further detail is provided i Appedix 13). Requiremet Illustrated by executive summary Sufficiet time should be give to plaig before startig costructio. Good plaig ivolves: Gettig the costructio sequece right so as to miimise delays from key buildig materials ot beig supplied o time or oe part of the costructio beig completed late or out of sequece. Risk assessmet ad maagemet - idetifyig, assessig ad maagig project risk from the outset for example, esurig that key resources are supplied o time, costructio is completed o time ad health ad safety risks to people are effectively cotrolled. Value maagemet (assessig the cotributio or "value" of each part of the costructio process ad cosiderig how it ca be improved) to drive out waste, iefficiecy ad uecessary losses from costructio. Beefits of plaig - Dudley Souther Bypass Cosiderable effort wet ito plaig this project ad o works were carried out util the team was satisfied that it kew the site coditios, the likely risks to the project ad had adequate plas i place. The project was completed five moths ahead of schedule ad withi the target cost ad the budget agreed with Departmet of the Eviromet, Trasport ad the Regios. There are o outstadig claims o the project ad the fial accout was i July These results were achieved despite a major ehacemet to the scheme with the decisio, take after the start of the project, to costruct a ew Metro lie parallel to a sectio of the road. The team altered its plas to take accout of this i costructig the road. This work is estimated to have saved over 3 millio o the cost of the Metro lie (further detail is provided i Appedix 12).

10 Requiremet 4. Reliable project maagemet eeds to be i place. The characteristics of good project maagemet are: Comprehesive uderstadig of the key stages i costructio critical to its success. Detailed kowledge of risks associated with the project ad reliable cotigecy arragemets to maage them. Regular moitorig of key milestoes. Effective commuicatio ad co-ordiato of all those ivolved i the costructio supply chai. Illustrated by Good project maagemet Kigsto Hospital ad its cotractor Terrapi relied upo good project maagemet to esure the successful completio of a sugical block withi twety weeks. This required: meticulous plaig ad co-ordiatio of the key stages of costructio to esure there were o delays to the timetable; quick ad efficiet iformatio flows aroud all team members so that all parties had access to the iformatio eeded to carry out their tasks ad decisios could be made quickly; clear allocatio of resposibilities, but with joit problem solvig where ecessary; ad daily site meetigs to moitor progress ad idetify problems. Good project maagemet meat that the project team was able to cope with uexpected problems, such as the discovery that site iformatio was ot accurate with previously uidetified udergroud services passig udereath the site. Whilst this caused a two week delay iitially, the project was completed withi the required timescale of twety weeks (further detail is provided i Appedix 10). Requiremet 5. The performace of costructio projects should be measured to assess whether cost, time ad quality requiremets are beig met ad to lear ad dissemiate lessos for future projects. Illustrated by Measurig performace Defece Estates is measurig costructio performace i two ways: Exteral Bechmarkig Defece Estates assess the performace of the Miistry of Defece agaist other major purchasers of costructio through participatio i a umber of bechmarkig iitiatives - the Govermet Cliets Costructio Pael, the Europea Costructio Istitute, the Busiess Excellece Model ad the Major Cotractors Group. A framework for performace measuremet Icludig core performace measures which compare Defece projects' performace with that of the costructio idustry as a whole coverig time to complete projects, average cost, umber of defects, accidet frequecy, ad customer satisfactio; secodary measures which compare differet Defece Estates' projects coverig the umber of chages to project requiremets, fial cost agaist iitial estimate, ad ed user satisfactio; ad tertiary measures which are project specific ad cover the achievemet of targets to improve the performace of the project for example buildig cost reductios, ad lower maiteace ad operatig costs, (further detail is provided i Appedix 6). Requiremet 6. Cotractors should be remuerated i a way that icetivises them to deliver good quality costructio o time ad to budget. How cotractors are remuerated will ifluece their performace. Careful judgemet is eeded to esure that cotractors have sufficiet fiacial icetives to perform well while departmets eed to be cofidet that value for moey is beig achieved. Illustrated by Agreeig a target price - The Eviromet Agecy Beach Maagemet Project The Eviromet Agecy has cotracted with three major dredgig compaies to provide all its beach defece works o the south ad east coasts for five years. Istead of settig a fixed price for the work, the Eviromet Agecy, after detailed egotiatios o costs, agreed a target price for each package of work icorporatig year o year improvemets. The cotractor is icetivised to perform better tha the target price by receivig a equitable share of ay savigs or by payig part of ay costs over the target price. The five year cotract is ot yet complete but the Agecy has see substatial cost improvemets o historic bechmark costs ad is o target to make the plaed savigs of 15 per cet withi the five years (further detail is provided i Appedix 8). executive summary 11

11 Recommedatios part oe 13 We make the followig recommedatios to four key groups: the Departmet of the Eviromet, Trasport ad the Regios, the Office of Govermet Commerce, lie departmets commissioig costructio projects ad the Costructio Idustry itself: The Departmet of the Eviromet, Trasport ad the Regios Provide more co-ordiated directio to iitiatives to promote better performace by the costructio idustry. The Departmet has promoted several iitiatives, icludig dissemiatig good practice, which have bee successful i wiig the support of the costructio idustry to chage their workig practices to improve their performace. There is, however, evidece of some duplicatio i these iitiatives ad those of the may idustry bodies promotig improvemets. It may be that it is ecessary to commuicate with such a large, diverse idustry i may ways but some members of the costructio idustry reported to us a sese of cofusio about the best source of assistace ad where to devote their time to facilitate the most improvemet i their compay or orgaisatio. It is essetial that all the sectors of idustry kow what they eed to do to improve ad how ad where to get advice to do so. The Costructio Idustry Board ow has resposibility for providig strategic leadership to the improvemet programme as part of its expaded remit ad i workig with the Departmet it should as a priority give more coordiated directio to the idustry improvemet programme. Uses it s ifluece as a member of the Movemet for Iovatio Board to esure that demostratio projects are truly iovative. Demostratio projects as part of the Movemet for Iovatio programme have bee a efficiet way of alertig the costructio idustry to good practice ad iovatio. To promote widespread iterest the Movemet for Iovatio team iitially accepted all suggestios for demostratio projects put forward by the idustry. Not all projects however were truly iovative. The Movemet for Iovatio Board is tighteig the criteria but i the future should esure that ot oly are the projects truly iovative but that they ca also measure their performace. Develop more sophisticated performace measures. The Departmet workig with the costructio idustry has developed ad promoted key performace idicators to measure costructio performace. These measures have bee geerally successful i raisig firms' awareess of the eed to assess their performace i deliverig costructio services to cliets ad to bechmark their performace agaist other suppliers. These measures are a importat first step but ow require further developmet. For example, idicators are eeded to measure: the operatioal through life ruig costs of completed buildigs to determie whether efficiecy improvemets which the origial desig was iteded to deliver were achieved ad to lear lessos for the future; the cost effectiveess of the costructio process such as labour productivity o site, extet of wasted materials, ad the amout of costructio work that has to be redoe; quality of the completed costructio ad whether it is truly fit for the purpose desiged ad if ot what are the lessos for the future; ad health ad safety idicators that are measures of success rather tha just failure. The Office of Govermet Commerce Dissemiate good practice more widely. The large purchasers of costructio such as NHS Estates, the Miistry of Defece ad the Highways Agecy accept the eed to improve their procuremet ad maagemet of costructio ad have actio uderway. Other departmets ad agecies may oly have a costructio project every few years but most will have a o-goig repair ad maiteace programme. May departmets also fud buildig projects idirectly through grats, for example, the Departmet for Culture, Media ad Sport covers a umber of bodies which distribute fuds for capital projects such as the Sports Coucil ad Arts Coucil. The extet to which these smaller orgaisatios ad those receivig fudig idirectly uderstad ad apply good costructio practice is variable. It is importat that the Office of Govermet Commerce's iitiatives to promote good practice reach these bodies. 12

12 Lie Departmets Actively measure improvemets i costructio performace. Successive idepedet reviews have emphasised the cosiderable potetial to improve the quality of costructio ad to reduce costs. Sir Joh Ega's Report Rethikig Costructio estimated that a reductio of 10 per cet per year i costructio costs was achievable. Based o departmets ad agecies' expediture o costructio i this is some 750 millio. These are, however, oly costructio cost savigs - the savigs i the cost of ruig a buildig over its whole life are likely to be greater if desigs placed more emphasis o improvig the operatioal efficiecy of completed costructios. Improvemets will be achieved oly if (i) the good practice iitiatives promoted by the Departmet of the Eviromet, Trasport ad the Regios ad the Office of Govermet Commerce are actively ad widely implemeted by departmets; (ii) departmets have reliable systems for moitorig ad measurig the achievemet of these beefits ad i particular costs savigs. I the Aex to this executive summary we have set out some key questios which departmets eed to cosider i order to quatify improvemets i costructio performace; ad (iii) departmets ad agecies also have a role to play i esurig that good practice iitiatives are dissemiated iterally ad implemeted. The Costructio Idustry Make greater use of iovatio to improve public sector costructio. The costructio idustry icludig cosultat architects, egieers, quality surveyors ad project maagers, has much to gai from the iitiatives uderway to improve how departmets procure ad maage costructio. Remueratio o the basis of a target price with opportuities to share i efficiecy gais; greater resposibility for buildig desig; loger term relatioships; ad parterig with a commitmet to cotiuous improvemet if implemeted widely by govermet departmets will provide cotractors with opportuities to ear a reasoable retur from govermet costructio projects ad should make it easier for them to estimate fial costs. The costructio idustry for its part should cotiue to support ad promote iitiatives to improve its performace. Ad i particular make greater use of iovatio drawig o their private sector experiece to improve the quality ad cost effectiveess of public sector buildigs. Trai more staff to be effective costructio cliets. Procurig ad maagig costructio requires expert ad specialist skills as reflected i the Treasury's Procuremet Guidace umber 1 which sets out the role ad skills requiremets of project sposors. The Office of Govermet Commerce has developed a traiig programme for project sposors - those who represet the departmet as cliet i all relatios with cotractors. By Jauary 2000, 100 out of approximately 950 project sposors had atteded the traiig. Departmets should esure that all staff ivolved i procurig ad maagig costructio atted appropriate traiig. part oe 13

13 Aex Key questios for lie departmets ad agecies to cosider i quatifyig improvemets i costructio performace 1 A umber of idepedet reviews have emphasised the cosiderable potetial to improve the performace of govermet departmets' costructio projects ad to reduce costructio costs by 10 per cet. For this to be achieved departmets eed to cosider cost savigs ad quality improvemets at a very early stage i a costructio project ad to moitor ad measure their achievemet. To do so departmets eed to cosider the followig questios: I assessig the eed for costructio Is there a eed for the project at all? How should the eed be fulfilled, for example a ew costructio, refurbishmet of a existig structure or retig? How does the cost of the proposed buildig compare with the cost of other buildigs costructed for a similar purpose? If the cost of the proposal is more, how is this justified? I assessig the procuremet strategy Has the most appropriate procuremet strategy bee chose - public private partership, desig ad build, prime cotractig or traditioal? I assessig the likely operatioal ruig costs of the proposed costructio What are the likely - whole life - ruig, maiteace ad other support costs of operatig the proposed buildig icludig disposal costs (a quatified estimate should be prepared)? How do the proposed ruig costs compare with costs for existig buildigs ad other comparable costructios. If costs are higher how are they justified? Has the whole desig ad costructio team bee assembled before the desig is well developed? Is supply chai itegratio beig achieved from the outset of the desig process? Has the desig give sufficiet cosideratio to optimisig the operatioal efficiecy ad effectiveess of the completed costructio ad have these improvemets bee quatified? I assessig the cotract strategy executive summary Have efficiecy ad cost improvemet targets bee agreed with the cotractor ad quatified? Have icetives bee icluded i the cotract to ecourage cotractors to perform well? Have the beefits to be delivered bee quatified before icetive paymets will be paid? 14

14 I assessig the proposed method of costructio Have appropriate techiques bee used such as value maagemet ad value egieerig 5 to determie whether the potetial for waste ad iefficiecy has bee miimised i the method of costructio? Have efficiecy improvemets, to be delivered by the costructio process, bee quatified? A baselie is eeded agaist which to measure achieved performace 2 I demostratig the achievemet of improvemets i costructio, performace at baselie cost should be set for the followig: Total ivestmet required to complete costructio - fit for purpose. Cost of the costructio - the buildig process. Whole life ruig costs of the completed buildig. Baselie costs should be validated through comparisos with exteral bechmarks 3 Buildig costs should be justified, through bechmarkig with some exteral comparator o historic data o existig buildig costs ad performace, to demostrate the value for moey which the ew project will deliver. Achievemet of improvemets should be carefully moitored, measured ad publicised 4 Havig set cost reductio, efficiecy ad quality improvemet targets, these eed to be moitored regularly. If progress i meetig these targets is ot as plaed remedial actio should be take. Performace i achievig the targets should be quatified ad reported to seior maagemet. Summary Baselie costs Total ivestmet required to complete the buildig fit for purpose. Actio eeded to validate them Bechmarkig with existig ad comparable buildigs. Whe to measure Baselie cost should be set whe the eed for costructio is agreed ad revised oce a firm cotract is i place. Fial cost should be compared with baselie. The cost of the costructio process. Assurace that techiques such as value egieerig have bee used to drive out waste ad iefficiecy. Baselie should be agreed before costructio begis, moitored ad fial cost compared with baselie ad reported to seior maagemet. Whole life ruig cost of the completed buildig. Comparisos with performace of existig buildigs ad idustry orms. Baselie should be set i agreeig the buildig desig ad moitored oce the buildig is operatioal to esure the improvemets are realised. executive summary 5 Value maagemet or egieerig - The assessmet of the cotributio or 'value' of each part of the costructio process ad cosiderig how it ca be improved to drive out waste ad iefficiecy from costructio. 15