16 January 2018 category: strategy & business planning
As everybody knows, procuring goods or services (for individuals, large or small organisations) is a vital function which requires some effort, commensurate with the scale of complexity of the purchase.
Since the 1980s, UK Governments of all parties have become increasingly lazy about how they procure, and one consequence of this policy has been an announcement today (Monday, 15 January 2018) that Carillion, one of the largest Contractors has gone into administration.
Carillion, was founded in 1999 and incorporated the traditional names of Tarmac Construction, Wimpey, Cubitts, Alfred McAlpine and Mowlems. Even at the point of collapse, the company was still receiving contracts from Government, even though they had a very large pension deficit, significant debt and had announced several profit warnings.
Government, of course, has inadvertently colluded in a situation where hundreds of small and medium-size enterprises will be caught out by Carillion’s collapse and it is likely that many of them will go out of business.
The reason for this is the rules of procurement in which only large, often expensive companies, act as so-called Tier 1 Contractors and smaller companies are forced to contract through them, rather than having a direct contractual relationship with the client. This results in:
- A dramatic reduction in the amount of competition for a period of 5 years (the average duration of a Framework Agreement).
- The total exclusion of start-up companies because they cannot produce 3 years of accounts whilst being apparently acceptable for large Contractors to publish poor accounts because they are better than none!
- Poor value for money – the prices of Tier 2 and Tier 3 contractors are often given a substantial markup by Tier 1, thus preventing the tax payer from getting the benefit of competitive pricing.
- Poor cash flow for Tier 2 and Tier 3 Contractors – even though the construction industry has always had a problem with slow payment for small companies as described by many Government Studies (e.g. “Constructing the Team”, by the late Sir Michael Latham published in 1994), but never acted upon.
- Complacency and price inflation because the Tier 1 Contractors also become lazy about providing value for money and realise that they have a “captive” Client.
- People operating framework agreements appear to be terrified of appointing anybody “off framework”, thereby ensuring that it is virtually impossible to test existing incumbents or introduce innovation.
It doesn’t have to be this way!
Government Departments used to have considerable skills in procurement and had the benefit of services from the centralised Property Services Agency, which operated from 1972 to 1993. While it was often criticised at the time, the PSA now looks like a paragon of virtue compared with the system that now operates.
People that worked in the PSA were invariably professionally qualified in the disciplines which they procured and were more interested in the intellectual challenge of getting the right result than they were in the “box ticking” mentality that now exists in Government Procurement. Many of them were directly concerned with value for money and cost management. Target costs were always the first item for discussion on any project and it is difficult to imagine them letting through a fiasco such as Building Schools for the Future in which the cost per square metre of schools increased dramatically even though the government provided a full programme of works and gave repeat business to those involved.
It might be a time for Government to stop being lazy about procurement and put in controls that will ensure that the three vital component parts of any project – time, cost and quality – are given equal and urgent attention.