The Ministry of Defence is one of the biggest public sector construction clients and its procurement arm, Defence Estates, is a leader in modern construction practice. So, with such a prominent role, why is it that the Ministry of Defence is seen by contractors as a difficult nut to crack? In this Briefing, we explain how the MoD operates and offer some tips that might help when bidding for work
The MoD as client
The MOD is the one of the biggest clients in the construction industry, with an annual spend in excess of £1.5 billion a year on construction-related projects. It is also, arguably, the most advanced of all UK Government departments in its procurement techniques.
Almost three years ago it introduced the concept of 'smart acquisition', which means a much closer working relationship between the procurement agency and the private sector.
The MOD has also been at the forefront of partnering, with its prime contracting process piloted in 1999/2000. This has been fully developed and the process was used most recently in the award of a seven-year £460 million Regional Prime Contract to Amec Turner to provide ongoing property management services at approximately 400 Ministry of Defence establishments across Scotland. In terms of PFI and PPP the MoD continues to break new ground and is arguably the foremost department of the UK in expanding the ways in which PFI and PPP can be used.
The MoD is a powerful and influential contract procurer. Bidders need to make sure that they know which are the important contractual issues before the bid and then focus on key solutions in those areas in order to proceed.
Key contractual issues
The MoD is seen as a tough nut to crack for two main reasons:
It favours PFI/PPP and Prime Contracting methods. Both are fairly complex and expensive for bidders and hence only contractors above a certain size will be able to follow this route.
Successful prime contractors will have favoured subcontractors and therefore competition may be reduced once the prime contract is awarded.
In order to win an MoD contract, a bidder has to score highly in compliance with the MoD's contractual requirements otherwise there will be no further progression. This entails addressing three key considerations:
Specifying the output
Payment and performance
All of the MoD construction work which does not fall within PFI/PPP will be procured under prime contracting and the MoD has made it very clear that by the end of 2004 prime contracting methods will be used wherever possible.
Because prime contracting involves long-term arrangements with preferred suppliers, it is true that some contractors and subcontractors might never get a look-in. But the unlucky ones will be those that have not developed sufficient relationships with the prime contractor which receive the main contract in the first place.
It is very important the bidder gets the emphasis right on risk allocation in any tender for a defence contract. This is a very sensitive subject and it is important to go about the proposed allocation in such a way as to provide a workable solution while keeping the bidder in the tender process.
An example might be the risk of asbestos contamination and where the costs related to asbestos should fall. A tightening of the law on asbestos, together with a growing trend in litigation, mean both the MoD and private sector bidders are particularly concerned about this risk and its allocation.
One solution is to raise it at a pre-bidding meeting or a preliminary meeting with the MoD and to be open about the specific circumstances in which the bidder will not entertain accepting the risk.
It is important to be quite detailed and focused but, once the risk has been identified, you can draft a solution by either transferring it, insuring it or sharing it. In the case of asbestos risk it is unlikely that this type of risk can be transferred or insured and therefore the more likely solution would be to share it: for example any costs arising from an event after a certain date could be a risk for the contractor but any costs arising from an event before a certain date could be an MoD risk.
There is great emphasis now in all public sector capital contracts on expressing the technical requirement in output terms. For example, on MoD simulator training projects, which involve building a new simulator building and installing high-tech equipment, it is not a case simply of stating how many simulators are needed.
In recent simulator training contracts very clear output specifications detailing the number of trainee pilots the facility will be able to serve are key requirements in the contract. Bidders must be able to comply with these output requirements (or better still write both the output requirements and the more detailed input requirements) so that the contract delivers what the MoD wants.
Developing payment mechanism and performance regime This is probably the single biggest issue in negotiations between the MoD and private sector bidders.
The MoD wants to guarantee a minimum level of monthly payment which the private sector (and, most importantly, the funders) will need to see in order to ensure that fixed and other costs are covered.
The rest of the payment comprises the required demand payment - i. e. the amount related to the use by the MoD. Of vital concern to the bidder will be how much money can be deducted from the monthly payment due to poor performance. This will require an element of objectivity and the bidder will be worried that the paying authority may be arbitrary in awarding service credits (which means less money) against the contractor's performance. The MoD does recognise objectivity as a concern but also wants the private sector to recognise that only the specialist knowledge of the customer can give that confirmation.
Changes of requirement
Probably the biggest procurement problem facing the MoD is that caused by changing its requirement in the middle of a long-term contract. The MoD, on any long term contract, is concerned about being supplied from a single source that might make it pay through the nose for changes. Hence the private sector bidder needs to recognise that, even if entering into a 25 or 30-year contract, there needs to be flexibility to allow changes to be made without excessive charging to the MoD.
Bidders can do this by giving open visibility to their subcontractors' and sub-subcontractors' prices and providing open-book accounting for the bidder's own accounts. Also thresholds under which 'de minimis' changes are carried out at the contractor's expense and the recognition of the need to share any 'super profits' made from the contract are important points to consider. This will give the MoD the confidence to place its contract.
Top tips for MoD bids
If you want to pursue contracts with the MoD, then. . .
DO think in output terms when producing designs or specifications
DO accept that the MoD has special and particular concerns, principally operational capability
DO be prepared to give visibility of information and benchmarking on price.
On the other hand. . .
DON'T reject risk transfer point-blank. There will nearly always be a risk-sharing option
DON'T resist value-for-money reviews which give comfort to the MoD.
For further information
The MoD website (www. mod. uk) provides information on MoD contracts and general PPP/PFI issues. It also provides an explanatory note on Smart Acquisitions (www. mod. uk/aboutus/factfiles/ smart_acquisitions. htm)
MoD Acquisitions Management System (www. ams. mod. uk) provides an overview of the MoD's new Acquisition Processes.
About the author
Richard Dyton is a partner in the projects and construction group at Simmons & Simmons.
He specialises in contentious and noncontentious construction and engineering law.
For further information contact Richard on 020 7628 2020 or email richard. dyton@SimmonsSimmons. com. For further information about Simmons & Simmons, visit: www.Simmons-Simmons. com