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Not all water firms are thirsty for frameworks

WATER

Work started flowing in the water sector again this year when the tap was turned on for AMP4, the new round of asset management plans for water utility companies. But how will the approach differ from the past five years?

David Taylor asks the industry what it learned from AMP3

THE CONSTRUCTION indust ry has much to be thankful to Ofwat for. The water regulator's continued pressure on the 10 regional water companies to deliver better value and achieve greater efficiency means the next five-year asset management plan ? AMP4 ? will guarantee healthy workloads up to 2010.

This pattern of five-yearly spending plans provides a helpful focus for contractors, as they know when the work is going to be tendered. But it also means competition is keen and, as several contractors have discovered in recent months, there is no guarantee that clients will automatically return to the same suppliers.

During the previous five-year period ? AMP3 ran from 2000-01 to 2004-05 ? a large proportion of the work was carried out by contractors, often working in joint venture with each other or with consultants under framework agreements negotiated with the water companies.

Framework agreements have the benefit of providing continuity from one project to the next and encourage the elements of collaboration, efficiency and continuous improvement that are so highly valued in today's industry. Some water companies have embraced the concept wholeheartedly in both AMP3 and AMP4, but some have decided to reduce the amount of work procu red this way.

Wessex Water is conspicuous for hav ing completely abandoned the use of frameworks for AMP4, preferring instead to put work out to traditional competitive tender.

The company had frameworks with Gleeson, Costain, Brents (now owned by May Gurney), Dean & Dyball and Bath-based Walter Lawrence (acquired in February by Land & Marine) for its AMP3 workload. But now the company has n See page 28 allowed all of these agreements to lapse, having built up its own direct contracting division and taken a lot of the work back in-house.

Wessex is at pains to reassu re cont ractors that it still has a body of work to put out to tender.

'You have to remember that we've st ill only got 350 staff in our direct labour force, so we will still be using these contractors, ' says Matt Wheeldon, strategic planning manager for Wessex Water. All the former framework partners are automatically prequalified for AMP4 projects, he adds, but this time they will be bidding against each other for every contract.

Wessex seems to have rejected the received wisdom that strategic alliances between client and contractor will guarantee optimum cost-efficiency.

'It's all about risk, ' says Mr Wheeldon. 'In AMP3 we looked to our framework partners to take more of the risk, but at a price. Now, with tighter and tighter budget controls, we have to be able to get the best price for each piece of work.

If you're paying someone to accept the risk of something happening and it doesn't happen, that's not efficient. So we're taking back some of the risks and we will be managing projects ou rselves.' Wessex will therefore be looking for some very keen pr icing. 'Procu r ing work this way will enable us to benchmark ourselves and test the real market value, ' says Mr Wheeldon. 'It's all about seeing where the risks are and managing them. If we cock it up it'll cost us more in the long run. Time will tell if we've got the balance right or not.' While Wessex is turning its back on framework agreements, other water companies are doing the opposite. Southern Water, for example, is outsourcing all of its AMP4 work to a thirdparty consortium comprising United Utilities, consultant MWH and contractor Costain.

The Southern Water framework is just one of six framework agreements Costain has secured for AMP4. The company's other alliance partners include Thames Water, Welsh Water, Bristol Water and Yorkshire Water.

Outgoing Costain chief executive Stuart Doughty is a passionate advocate of this method of work ing and looks askance at the logic behind Wessex Water's decision to return to competitive tendering: 'There's a general move away from commodity contracting. It isn't efficient and a strategic alliance delivers benefits for both partners. We've got a five-year order book and a harmonious relat ionship with ou r client. A lso we can go to the City and explain that we've got a guaranteed £300 million turnover for the next five years.

'With commodity contracting you can bid a £20 million job and get the cost down to £19.5 m illion. But if you're work ing in alliance with your client, you might end up with an entirely different scheme for just £10.5 million.' Mr Doughty believes the Wessex Water approach is merely a ref lection of the business preferences of its Malaysian parent company, YTL.'Not that I've got anything against Malaysians, of cou rse, ' he says (Costain is rough ly onethird owned by Malaysian shareholders).

Most water companies still recognise the benefits of working in alliance with framework partners, but Mr Doughty sees some companies' partial reabsorption of the work load as an at tempt to tighten control over their projects.

'There's a thing with Thames Water ? they want to keep their intellectual property inhouse. In fact they've all voiced the opinion that they want to keep the design in-house, ' he says.

Nevertheless, all of Costain's AMP4 agreements 'extend what we did in AMP3', according to Mr Doughty.

Gleeson, one of the biggest players in the water sector, has already signed framework agreements with five clients ? Thames Wa te r, Sou th We s t Water, Severn Trent, Yorkshire Water and Northumbrian Water ? for the AMP4 period.

'We had AMP3 frameworks with three of these companies [South West, Thames and Yorkshire Water] but the other two are new, ' says Alan Paxton, business development director with Gleeson Engineering. 'They are all five to 10year frameworks.' The only framework Gleeson has not carried over from AMP3 is the one it had with Wessex Water.

Mr Paxton says frameworks deliver the opportunity for continuous improvement, increased site safety and ongoing cost efficiencies. As for testing the market, Mr Paxton says: 'All our jobs are on a painshare /gain-share basis, so we score if we can make any savings for the client.' Furthermore, the alliance set-up enables the contractor to offer a more rounded service, says Mr Paxton. 'Ou r mot to is 'solut ions not st ructu res'. We look at individual jobs f rom the client point of view and discuss with them what it is they need.' In this, Mr Paxton is at one with Mr Doughty in the belief that closer liaison with the client helps the contractor see the bigger picture. 'We sometimes even eliminate jobs that can be rendered unnecessary by work done elsewhere, ' he says.

Another firm believer in the alliance approach is Jim Carew, director of water with cont ractor Galliford Try. In a joint ventu re with Costain and consultant Atkins, Galliford Try has recently signed up to a framework contract with United Utilities for a huge programme of work in north-west England.

'We are one of two consortia ? or 'process partners' ? that will deliver £900 million-worth of infrastructure work for United Utilities in the north-west, ' says Mr Carew. The Galliford-Costain-Atkins joint venture, known as GCA , will tack le the southern ter r itory of the region with the other joint venture, KMI Plus, comprising Kier Construction, J Murphy and Sons, Interserve Project Services and Mouchel Parkman, looking after the northern territory. Both agreements are for five years with potential for renewal to 10 years.

This framework represents a direct extension of Galliford-Try's AMP3 agreement with United Utilities, albeit with some signif icant changes. 'In AMP3 the workload was equally split between water supply, waste water process and sewage treatment, ' says Mr Carew. 'In AMP 4, United Utilities has taken the waste networks out of the framework ? this is being procured separately.' Another difference is that in AMP3 United Utilities did not agree a framework with Galliford Try until the third year.

'After year two there was a realisation that they were facing a failure to deliver the infrastructure so the focus became on delivery, ' says Mr Carew.

Hence the baton was handed to the contractor with the instruction to deliver the projects.

'This time the focus is on value, which means engaging the framework contractors at an earlier stage, ' he says. It also means taking the drainage networks out of the equation and testing the market price.

The type of project being planned for AMP4 includes a mix of major infrastructure new-build projects and a large proportion of improvement works. In clean water supply, the water companies are all planning to reduce the level of nitrates in drinking water (the level of wh ich is r ising as a result of agr icultu ral fertilisers entering aquifers) to meet new limits.

Phosphates f rom detergents also enter the water network and encourage algal grow th in water cou rses. These too must be reduced. Hence Wessex Water is planning a £17 million upgrade of its Maunsdown water treatment works at Wiveliscombe, Somerset, to cut nitrate levels, and is spending a similar amount on its Holes Bay works in Poole, Dorset, to reduce phosphates.

'There are still plenty of major new-build projects about, although you might expect that capital works would get fewer and smaller with each AMP, ' says Gleeson's Mr Paxton. 'But we have one or two projects in the £10 million bracket and we've had them up to £20 million or £30 million within the framework contract.' Mr Doughty sees little change in the type of work ? or the volume ? in AMP4 compared to AMP3. 'The AMP4 start has been a bit slow and that's had a bit of impact on capital f low.

But the work doesn't seem very different to the sort of project we had in AMP3. And if you look at a client like Southern Water, there's still a lot of capital works to come there.'