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Public sector cuts could see return to outcome-based contracts

However it is read, the chancellor’s Spending Review and Autumn Statement continue to underline the message that infrastructure is key to building recovery.

The direction of travel is clear.

Yet with transport at the sharp end of departmental revenue cuts, the challenge will now be for the government to play its part in delivery as the number of public servants further erodes.

The Department for Transport’s drive to achieve resource savings of 37 per cent by 2019/20 may conflict with day-to-day infrastructure expenditure and have an impact on policy and procurement skills.

Given this substantial reduction in resources, exactly who in the public sector will the companies tasked with delivery be doing business with?

Are the right people with the right skills, governance and procurement tools in the right place?

After all, attention must focus on all aspects of the delivery process, including governance, procurement and ongoing asset stewardship – not just design, build and operation.

New approaches

The depletion of in-house skills within the public sector is likely to necessitate different procurement and contracting mechanisms for the construction industry.

Changes may range from smarter procurement techniques to revisiting contracting mechanisms such as outcome-based methods.

“If UK companies do not rise to this challenge, overseas contractors and operators could move into the market”

While outcome-based contracts are designed to give the supply chain more flexibility to achieve greater innovation and efficiencies, attitudes towards risk must change, particularly as the sector has traditionally survived on low margins and a risk-averse procuring environment.

It may be time to accept shorter-term value-for-money losses in order to drive acceptance of much higher but slightly longer-term, big-value gains.

The market recognises that government contracts are attractive for their long-term stability.

Construction companies may find themselves working for new ‘clients’, with departmental cuts triggering a culture change within some government entities.

A move towards more local authority trading companies and other self-funding companies is probable. Innovative new business models like these will help public sector bodies gain more commercial focus in the face of austerity.

Fishing in the same pool

Of course, bringing the UK’s much-needed infrastructure programmes to fruition will also require the development of organisational skills within the private sector.

Many schemes, from rail upgrades to the Thames Tideway Tunnel, draw on similar areas of the supply chain, so this must be recognised and planned for.

More must be done to integrate planning and create an environment that encourages the necessary delivery models, such as joint ventures, partnerships and alliances, to help accelerate delivery.

Given the critical role of infrastructure in driving the economy, new approaches to planning and delivery will surely be a positive move.

If UK companies do not rise to this challenge, overseas contractors and operators could move into the market or suck much-needed talent and capital elsewhere.

After all, the UK does not have a monopoly on infrastructure deficit.

John Hicks is director and UK head of government and public sector at Aecom

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