Contractors will be jointly incentivised under the £1.6bn construction deals for the Thames Tideway tunnel to benefit from an overall pain-gain share mechanism, even if they encounter problems on individual contracts, Construction News has learned.
The scheme’s commercial director told Construction News that there will be financial incentives on each of the west, central and east contracts and across the entire construction phase in the hope that contractors will work together to overcome difficulties on individual contracts.
Amar Qureshi said that if one contractor was struggling on its part of the ‘super sewer’, it would be asked to adapt its work to solve any problems, but that even if it didn’t meet targets, the contractor could still benefit from a 50:50 pain-gain share on the overall programme.
He said the client wanted to ensure contractors worked together to help the overall construction programme run smoothly.
“Through the procurement process you can really make a difference to how these types of projects are done”
Amar Qureshi, Thames Tideway commercial director
Firms will be shortlisted for the deals in November and Mr Qureshi said there had been “no surprises” in the PQQ stage.
Construction News has already reported interest from a Balfour Beatty, Bam Nuttall and Morgan Sindall partnership, a Ferrovial and Laing O’Rourke joint venture and a group comprising Bachy Soletanche, Costain and Vinci. Two other joint ventures reported to be interested by Construction News in February included a Hochtief, Murphy and Dragados team, and a Skanska and Bilfinger partnership, while FCC and Mace are also believed to have teamed up for the scheme.
Mr Qureshi declined to name bidders, but admitted there had been “very strong interest” from contractors.
He said the procurement strategy had been developed with a set of “overarching principles” to get maximum competition from the market, to make sure the scheme is completed on time and budget, but also to protect Thames Tideway from any financial weakness among its contractors.
“In a project of this scale and complexity there may need to be some contingent financial support from government”
“Through the procurement process you can really make a difference to how these types of projects are done. We have had very close liaison with our colleagues in Crossrail [and] we want to take the benefit of good practice in that project and build on it.”
However, Thames Tideway’s procurement team will not take into account contractor performance on the Crossrail project when evaluating the tenders.
PQQs will be evaluated broadly on a 70 per cent technical to 30 per cent price basis. Mr Qureshi insisted this was the appropriate way to get the best value for customers.
“I think that combination does mean good value. There is a focus on price but this is a target-cost, not a fixed-price contract,” he said.
“We need to be assured that the target price is good and strong, but it is only ever as good the technical proposal that underpins it.”
Five contractors will be shortlisted for the west (£300m to £500m) and east (£500m to £800m) contracts, while four will be brought forward for the central (£600m to £950m) deal and contractors could be shortlisted in multiple contracts.
Talks are ongoing between the government and Thames Tideway over the level of financial assistance it will provide for the project.
The government is expected to cover “exceptional and remote” financial risks for the new infrastructure provider, who will be procured by Thames Water to finance and oversee the project under the regulator Ofwat.
These risks could include providing for cover above commercial insurance limits.
Department for Environment, Food and Rural Affairs waste minister Lord de Mauley told the House of Lords in July that the government was “willing in principle to provide contingent financial support that encourages private sector investment and offers an incentive to delivery partners to manage project risks and minimise costs”.
The financial support is expected to be provided under the terms of the Water Industry (Financial Assistance Act) 2012.
Thames Water came under fire in August when it asked Ofwat for permission to raise prices by around £29 per household during 2014/15 to cover the costs of preparing for the construction of the Thames Tideway Tunnel.
The £4.1bn scheme had been tipped to benefit from a UK Guarantee, where the government uses its balance sheet to underwrite major infrastructure projects; however, a Treasury spokeswoman denied this had been agreed.
A government spokesperson said: “The Thames Tideway Tunnel is a private sector project and should be built and financed by the private sector. In a project of this scale and complexity there may need to be some contingent financial support from government and we have made it clear that we are willing to provide this where it is value for money for customers and taxpayers.”
Asked what will differentiate the bids, Mr Qureshi said that the client would be “very clear about our expectations and encourage contractors to go beyond them” in areas such as proving exemplary health and safety, sustainability and close co-operation with its stakeholders.
He said: “We expect them to engage with SMEs, set out their expectations around engagement and use of apprentices and around social objectives. We want them to be working with ex-offenders and ensure that they are a part of the workforce.”
Thames Tideway officials are already in discussion with High Speed 2 over how they can transfer knowledge and skills to the £42.6bn rail scheme, but Mr Qureshi said its experience of working on the Lee Tunnel would benefit the Thames scheme.
When completed, it will intercept 16m tonnes of untreated sewage a year from Thames Water’s largest sewer overflow point at Abbey Mills Pumping Station in Stratford, and transfer it to Beckton Sewage Treatment Works.
The Thames Tideway scheme is expected to create around 9,000 jobs. Early works are scheduled for 2015, followed by main construction in 2016 and completion by 2023.