Frameworks take off for BAA

The news that BAA's sophisticated supply chain arrangements are to continue will come as a relief to the construction industry. Many were concerned that BAA's new Spanish owner Ferrovial might take the axe not just to the investment programme, but to BAA's enlightened approach to procurement.

Not so, according to Mick Temple, head of BAA's Capital Projects team, who told Contract Journal last week: "Ferrovial has reaffirmed its commitment to not only the scale of the capital investment of £9.5bn that we have planned over the next 10 years, but also its direction and intent."

There are a number of reasons why the frameworks are being renewed now. The principal one being that many of the second generation frameworks are approaching the end of their life.

Another is that BAA is under pressure to achieve even greater capital efficiencies, as Andrew Wolstenholme, BAA construction director for T5, explains: "It's all about getting the best value. We are a regulated industry and we are driven by commercial results. There are many stakeholders in the airline business who are demanding value and we've got to demonstrate it."

BAA also feels that the construction industry's capability has evolved in the 10 years since the first frameworks were launched and it wants to take advantage of those advances.

In addition, BAA is now at a stage where it is confident it can transfer the learning derived from T5 to other projects. It is keenly aware that while the current frameworks and T5 are providing good results, these will inevitably plateau without further stimulus.

That said, the airports operator did not want to simply impose a revised framework arrangement on the industry without any consultation. Instead, it has spent 18 months talking to its suppliers about how it could improve the existing frameworks and finding best practice examples from other large public sector clients such as water and electricity companies.

Core principles
As a result of this BAA has drawn up six core principles for its capital engagement strategy, which underpin the third generation frameworks:

• Long-term framework relationships - project awards based on performance.
• Progressive dependence on and trust in supplier capability.
• Pre-agree commercial model with incentives to beat targets.
• Collaborative working with real time transparency to drive value.
• Active management of risk and opportunity.
• Relationship driven by ali- gned objectives, behaviours and values.

Temple says: "It's about achieving a better balance between commercial tension and supplier collaboration.

"Commercial tension is a polite way of describing some of the better aspects of the adversarial relationships that can take place between supplier and client.

"There are some benefits in that friction."

So what's different about the new Value in Partnership (VIP) third-generation frameworks?

Wolstenholme says: "It is not a U-turn, it is not a revolution, it is a logical evolution and development."

Different approach
Perhaps the key change is that BAA is no longer taking a one size fits all approach.

Instead it has segmented the frameworks into four types (see panel, opposite): complex projects commodity, or simpler projects technical and business critical systems and consultants.

Wolstenholme explains: "There are simple risks and business critical risks, so we've segmented the risk profile. What we've tried to do is understand better the capability of our supply chain and match that capability against the set of risks. With the third-generation frameworks we will get a much better fit between the risks we are asking them to manage and the capabilities they bring."

Complex projects comprise not just schemes such as the £1.7bn Heathrow East project (the consolidation of Terminals 1 and 2), but also, say, a £20m refurbishment in a complex environment, where if it went wrong there could be significant operational disruption.

Contracts will be incentivised using a variety of options according to the size, scope and amount of risk on the project. For example, on smaller projects there will be gains for contractors where savings are made to the mutual benefit of both parties. BAA has also introduced payment by intelligent milestones that are sympathetic to the cashflow of suppliers.

Best value
As before, margins will be agreed up front, so all parties can then focus their attention on getting the best value. These may be agreed on a framework basis or on a project-by-project basis.

"There might be different profit margins for projects with difficult risks to stimulate innovative solutions among suppliers," says BAA commercial director Ken Owen.

Another key difference on the complex projects is that Tier One suppliers will now be asked to directly manage some of the Tier Two suppliers.

"Tier One suppliers have convinced us that they are in a better position to manage them than we are," says Owen, "but that said, there are some critical Tier Two suppliers, whose impact, especially in the early stages of projects is vital, that we will continue to manage directly. It is very important that we get the right cultural fit between them all."

On the face of it, that news might not be especially welcome to Tier Two suppliers, but Owen is emphatic that BAA will ensure they are treated well. "We can reassure Tier Two suppliers that we have the kind of business agreements in place over things like payment that we expect to see continued all the way down the supply chain."

The commodity projects, which will account for approximately £1bn of the £9.5bn spend, will tend to be of short duration and be relatively simple to carry out for example, a three-month office refurbishment. Shorter frameworks of three to five years, and simpler commercial arrangements will be used, probably fixed-price. More suppliers will be appointed than before and BAA will introduce an element of competition among them. BAA will also be a more hands-off presence.

Wolstenholme explains: "When we asked our suppliers for feedback on the second generation frameworks, they said to us that we tended to have one process and one procurement route that fitted all types of project and that at times BAA got involved too much in all the processes. So where there is a very simple project, where we know the brief isn't going to change and the interfaces are very clear, they will manage it."

Rigorous process
The complex projects framework is out to tender shortly and suppliers can expect a very rigorous tender process over the nine months it will take to appoint the winners.

Technical capability and track record will of course play a part, but training and health and safety record will also be paramount too, along with environmental and sustainability issues. More than that, suppliers will be expected to show they have the kind of business culture that will fit in with BAA's.

Temple sums up: "Capital Projects is made up of three aspects - design, construction and commercial - and as the client, I want to see one team there. I need a cohesive approach. There is no route to certainty, but I have absolutely no doubt that there will be a fourth-, fifth- and probably sixth-generation framework."

Existing BAA suppliers may well have the advantage, but there is still plenty of opportunity for any forward-thinking supplier to aim at here. n

BAA's Value in Partnership Framework model

Commodity Projects

■ Three- to five-year framework

■ Competition to drive value

■ BAA will transfer the risk (where applicable)

■ Commercial model - simple, fixed price

■ Contractual framework (NEC)

■ Greater number of suppliers than current

■ BAA focus pre-tender - mitigation of operational constraints

■ OJEU Notice - early 2007

Technical/Business Critical Systems

■ Up to 10-year frameworks to promote joint investment in advanced technology solutions

■ Joint ventures/special purpose vehicles may be formed to promote innovation

■ Technology, innovation and system integration capabilities will form the basis of selection

■ Lifecycle consideration

■ Partners will form part of complex project alliance structure

■ Commercial structure as per complex category

■ OJEU Notice - end October 2006

Consultants

■ Existing frameworks in place

■ Emphasis on deployment

Concept > Scheme > Production

■ Simple commercial models

■ Closely examine how value is generated

Complex Projects

■ 10-year framework

■ Collaboration to drive value

■ BAA will own and manage the risk

■ Commercial model - variety, best for project

■ Incentivisation to beat targets

■ Emphasis on Design for Manufacture (DfMa)

■ BAA, 1st and critical 2nd tier suppliers will form integrated alliance to deliver portfolio of work (10 yrs)

■ Alliance will include design consultants and system suppliers

■ Enhanced T5 agreement

■ Fewer key suppliers (1st and critical 2nd tiers)

■ Reduced level of direct interfaces with BAA

■ OJEU Notices

- Construction Integrators: now

- Critical 2nd tier suppliers: end of October 2006

[Contract Journal, 13 September 2006, p 8-9]