Review of Scottish public sector procurement in construction

Executive summary

Terms of reference

1.1.1 In October 2012, Scottish Ministers set the terms of reference for this report, which in summary are:

"To review the entire public sector and affordable housing sector construction procurement arrangements in Scotland and make recommendations to support improvements in efficiency, delivery and sustainability of construction procurement projects across the Scottish public sector…"

1.1.2 We have structured the report to reflect the issues raised with us and the actions we believe are required to achieve better procurement in public sector construction, but running throughout the report are a number of recurring themes which we believe, if adopted, will support better procurement. These themes are design-led outcome-focussed procurement, consideration of whole life cost at all stages, proportionality of the process to the size and risk of the contract, collaboration, simplification, sustainability and the balancing of risk between client and contractor.

Construction procurement in the public sector today

1.1.3 In this report, we look at the whole process of construction from inception, including feasibility, design, construction, occupation and deconstruction, and - to the extent that it is affected by the original works - the ongoing management of the asset.

1.1.4 Many bodies are involved in construction using public monies. In formulating our recommendations, we have met with around 120 different stakeholders, and have convened consultative groups. We believe that most of our recommendations should be applicable to all, but where there are sector‑specific considerations, we will make this clear.

Governance, accountability and leadership

1.1.5 We believe that there is a need for clearer leadership to ensure that construction is properly planned using a design-led, whole of life cost approach.

1.1.6 There is significant potential to make construction more efficient by maximising opportunities for contracting authorities to collaborate and share best practice - particularly in the local government and social housing sectors.

1.1.7 We recommend a strengthening of the construction procurement policy function within the Scottish Government. We also believe that there is a role for a "Chief Construction Adviser". With direct access to Ministers, this individual will champion the reform programme, work with industry and the public sector and act as a conduit between industry and Ministers.

1.1.8 Allocating lead responsibility for the implementation of each of our recommendations will be key to their success. We believe in broad terms that those which relate to policy should be the preserve of government, but that there is scope for those recommendations which relate more to the delivery of construction projects to be taken forward by other parties with relevant experience. Following the formal response to the report one of the immediate tasks for the Scottish Government will be to work with all key parties to determine a suitable division of responsibilities.

1.1.9 To make rapid progress we see a need for a mechanism to bring together the main spending authorities and industry. We envisage that this should report to the Public Procurement Reform Board within the existing governance structures for procurement reform, and would be led by the Chief Construction Adviser, or by some other independent figure with strong experience in construction or procurement, and credibility with industry and the public sector, until such time as the Chief Construction Adviser is appointed.

1.1.10 The existing Public Procurement Reform Programme, focussed mainly on goods and services, has made significant progress in improving procurement, driving efficiency, increasing transparency and standardisation of processes. We regard it as important to ensure that the implementation of our recommendations is carried out in a manner consistent with the existing programme.

Prioritisation and co-ordination of spending

1.1.11 Public bodies use different methods of arriving at the prioritisation of their capital spend. We recommend that there should be a review of the methods of strategic prioritisation of construction spending across the public sector in Scotland to identify best practice.

1.1.12 There is also a need for better co-ordination of construction spending and consideration of potential synergies between projects and programmes.

Pipeline

1.1.13 A consistent message from industry throughout this process is that having a firm idea of anticipated workloads is key to business confidence, and our recommendation is that each public body should annually publish a rolling forward pipeline of anticipated spending on construction. These pipelines should be collated and held together centrally.

Approach to market and importance of design

1.1.14 How a procurement exercise is carried out has a direct link to the quality of the end product. Critical to this is getting the design thinking and the project brief right at the outset.

1.1.15 Comprehensive business planning, focusing on outcomes, should take place and will require earlier engagement among clients, users, designers and contractors.

1.1.16 From project conception to contract award, there should be a focus on the design quality and whole life cost of an asset.

1.1.17 Framework agreements are a key part of the procurement landscape and can be more efficient and encourage more productive longer-term relationships with suppliers. However, where possible, SMEs should always be given the opportunity to participate.

1.1.18 We have met all five hubCos, their Territory Partnering Boards and the Scottish Futures Trust ( SFT). The hubCo model has clear potential; however we recommend that further guidelines should be developed about certain aspects of their operation, including continuation of the work to develop a solution to the delay in payment of design fees until financial close.

1.1.19 The UK Government is currently trialling three models of construction procurement - Two Stage Open Book, Cost Led Procurement; and Integrated Project Insurance and we recommend that the Scottish Government should monitor developments in these trials.

1.1.20 Apart from the selective addition of clauses to take account of the particulars of a project, any variations to standard forms of contract should be kept to a minimum.

1.1.21 The issue of prompt and fair payment to contractors and sub-contractors is one we feel very strongly about. Our early recommendation of a trial of Project Bank Accounts has already been accepted by Ministers. Our other recommendations include that contractual terms between client and main contractor should consistently outline fair payment terms for supply chain participants and that clients should ensure that appropriate resources are allocated to contract management and enforcement of terms and conditions of contract.

Capability and capacity - people and skills

1.1.22 Many public sector organisations in Scotland have tremendous experience and expertise. A problem, however, is that this experience and expertise appears to vary significantly from one organisation to the next. We recommend that public bodies involved in construction must have access to the right mix of professionalism in procurement and construction. This can be achieved in different ways.

1.1.23 Some amendments are needed to the existing system of Procurement Capability Assessments ( PCAs) to ensure they adequately cover the procurement and construction elements associated with infrastructure investment projects. All organisations procuring construction projects with public funding should be subject to PCAs.

1.1.24 We recommend that a baseline of current and required skills in construction procurement should be established, and a strategy developed to ensure those needs are met.

Capability and capacity - tools, systems and guidance

1.1.25 Fear of challenge has in part led to procurement processes and costs which can be wholly disproportionate to the planned spend.

1.1.26 We recommend that new guidelines setting out best practice on the end‑to‑end construction procurement process are developed and maintained. These should be in an accessible digitised form akin to the "Procurement Journey" for goods and services and the existing Scottish Procurement Construction Manual should form the basis for this work. Specific issues on which further guidance should be developed include:

• Public bodies rightly assuring themselves of the competence and skills of bidders, but doing so in a proportionate and sensible way.
• To the extent possible within the full scope of the law, contracting authorities taking the prior performance and behaviour of bidders into account when awarding contracts.
• Restatement and development of existing guidance to the public sector on how to deal with abnormally low tenders.
• Design guidance - ensuring that design requirements and quality are considered early and followed through to the finished outcome.
• Always making feedback available to both successful and unsuccessful bidders.

Access to contracting opportunities

1.1.27 If not already established, public sector procuring authorities should work together to develop forums with locally operating construction firms which would meet on a regular basis to discuss the pipeline of work, issues and opportunities, with a view to building greater understanding, transparency and improved outcomes.

1.1.28 We recognise the importance of ensuring appropriate access for SMEs to public construction contracts. We recommend that a support mechanism should be developed to help SME contractors and consultants understand how to compete for public contracts.

1.1.29 To ensure consistent sight of publicly funded construction contracts we believe that all projects which are advertised should be advertised on the Public Contracts Scotland ( PCS) portal and the Scottish Government's proposed Procurement Reform Bill would require all works contracts worth at least £2 million and all supplies and services contracts worth at least £50,000 to be advertised on PCS. Contractors on major projects should also be encouraged to advertise sub-contracts on PCS where supply chains are not fully identified.

1.1.30 The Scottish Government should develop additional guidance for the public sector to ensure that the recently introduced standard pre-qualification questionnaire ( PQQ) is used in a way which is proportionate and relevant to the needs of construction procurement, and monitor practices to ensure that this principle is achieved. The standard PQQ should continue to be refined and, where a pre-qualification stage is being used, its use should be mandated. The use of PCS Tender should be made mandatory for issuing Invitation to Tender ( ITT) notices and awarding contracts - whether individual contracts or the establishment of frameworks.

1.1.31 Quick Quote currently operates as part of PCS Tender to allow the procurer to select a smaller number of suppliers to price the work they require. We recommend that public bodies should consider using Quick Quote for contracts under the amounts specified in the Procurement Reform Bill as requiring to be advertised on PCS. Public contracting authorities should, however, still satisfy themselves that they are being transparent and fair.

Sustainable procurement, innovation and emerging technologies

1.1.32 Economic, environmental and social sustainability are interlinked and we see a future where these are systematically afforded appropriate priority in construction procurement decisions.

Social benefits

1.1.33 Social benefits are commonly referred to as community benefits. We recommend that contracting authorities should have a clear strategic understanding of what they want community benefits to deliver through their public procurement; and that there should be guidance for contractors on how to design and deliver appropriate community benefit clauses.

Environmental sustainability

1.1.34 Industry has a key role to play in improving on-site waste management practices, as have clients in demanding good performance.

1.1.35 Greater linkage of capital and revenue funding considerations, in the context of the whole-life cost of a project, would provide better information on the true overall cost of sustainable approaches by focussing on the subsequent savings in revenue expenditure as well as the upfront capital costs. Designing for environmental sustainability can reduce whole life costs.

Innovation and Design

1.1.36 We would like to see the construction sector in Scotland coming together on a collaborative basis to promote design thinking, innovation and technological change, and we recommend that industry should work with the Scottish Government to promote modern methods of construction.

Building information modelling

1.1.37 We recommend that the use of Building Information Modelling ( BIM) should be introduced in central government with a view to encouraging its adoption across the entire public sector. The objective should be that, where appropriate, construction projects across the public sector in Scotland should adopt a BIM level 2 approach by April 2017.

Data as an enabler of reform

1.1.38 There is currently a lack of comprehensive collated data for public sector construction spend in Scotland. Good quality data should be used as an enabler of reform both at a strategic and local delivery level.

1.1.39 This would be achieved through development of a comprehensive baseline position covering investment decisions, delivery parameters and contract spend in which the development of benchmarks and key metrics and the use of improved data to monitor, manage and improve performance can enable better-informed decision making and improved value for money. That learning can then be used across public sector construction to improve practice, out-turn and outcomes and reap full value from public investment.

What industry needs to do

1.1.40 We believe that some of the problems and issues raised with us as we have spoken to stakeholders are, at least in part, of the industry's own making.

1.1.41 We believe that the newly formed Construction Scotland Industry Leadership Group has a role to play in addressing the challenges we envisage for industry.

1.1.42 We have made suggestions as to some of the steps which the public sector can take to improve payment down the supply chain but we recommend that the Fair Payment Charter should be promoted more widely as the "norm" within the construction industry and that the industry considers how it can collectively make late payment of suppliers an unacceptable practice.

1.1.43 There are a number of other areas for focus by industry which include:

• consideration of what is prompting 'suicide bids', and how to arrest them, so that the customer and the contractor get a fair deal;
• working with the public sector to develop best practice models for the delivery of community benefits, and a shared apprenticeship model;
• embracing a design-led approach, modern methods of construction and new and emerging technologies such as Building Information Modelling; and
• considering what industry-led training programmes currently exist for those bidding for public sector work, and whether there is scope for these to be co‑ordinated and developed further.

Resource implications and potential savings

1.1.44 Although we recommend that existing resources be used to the extent possible, more expert leadership in construction procurement will have cost implications as will, in the shorter term, the need for a change management team.

1.1.45 Audit Scotland attributed £327 million of savings, or four per cent of annual procurement spending, to the first two years of the procurement reform programme following John McClelland's 2006 report. It may be reasonable to expect that a proportionately similar level of saving should be achievable from the implementation of our recommendations as were achieved in the first stages of the wider Public Procurement Reform Programme, principally relating to goods and services. Assuming an identifiable annual construction spend of some £3.2 billion, as outlined in chapter 3, this would indicate savings of at least £120 million over the same timeframe.

1.1.46 Construction spending is different, however, and in addition, many of our recommendations speak to consideration of whole life costs. Taking account of the opportunities for savings in the initial capital spend set out in this report and the opportunities for savings over the whole life of the project, we hope that it will be possible to set targets for savings considerably in excess of the figure of £120 million, not just over the first stage of the construction procurement reform programme, but annually.

1.1.47 In the report we detail the areas in which savings should be sought. Further work is needed to understand and gather information on current spending and therefore the precise scope for savings. We recommend elsewhere that a baseline position be established for the current categories of spend and one of the early tasks should be to promote targets for savings following the gathering of this information. We have considered whether we should ourselves set a target, but the evidential base is currently lacking.

1.1.48 Whatever targets are set, it will be important for contracting authorities to report their spending and savings in a consistent manner in order that progress can be accurately measured.

1.1.49 For industry, we hope that the implementation of the recommendations of the report will lead to a better, more efficient approach which should allow a reduction in the initial costs of procurement of a project and the potential for savings in its delivery.

1.1.50 In appendix 4 we set out a summary of our recommendations, an implementation plan and timescales. We have sought to be detailed in our approach in order that due weight can be given to the many representations which we have received. We hope that the detail given in the report and the level of consensus which we believe we have achieved in the wide consultation preceding it will allow a rapid deployment of the necessary resources for its implementation. In the implementation of our recommendations, a guiding principle should be to seek to reduce costs by removing unnecessary procedures and simplifying the procurement process.