Framework Agreements Between Contractors And Subcontractors Construction Essay

Framework is required for the construction of standard building units or office space in various locations over a four-year period. Following OJEC and the selection process, based on financial and economic standing and technical capacity, a framework is awarded to a number of prime contractors on “the most economically advantageous tender” basis

Sir Michael Latham in his report constructing the team (Latham, 1994)promoted framework agreements between contractors and subcontractors, saying that” such arrangements should have the principle objectives of improving performance and reducing costs for clients” adding that good relationship based on trust benefits the client.

This coursework will present a critique of the decision made by the chief executive of BAA Plc, Steven Morgan of cancelling all newly signed framework agreements with their construction supply chain. This course work will also evaluate the potential consequences of these decisions upon BAA as client and upon and the construction industry.

Framework Agreement Cancellation Critique

After the opening of BAA terminal 5 it became one of the largest construction project in Europe. It has a capacity of catering 30 million passengers a year and this represented an investment to BAA of £ 4.2 billion. Along this project BAA had to consider a novel contracting and procurement strategy. BAA had an agreement that dealt with an adaptable and dynamic approach to deal with uncertainty and embracing integrated teams.

In 2009 the BAA Plc chief executive, Steven Morgan cancelled all newly signed framework agreement due to lack of competition.

Before he joined BAA he was commercial director of British Nuclear Fuels, where he was given the job of cutting cost by £225m over five years at the Sellafield reprocessing plant. Which he did. “BAA is like Sellafield five years ago,” he says. “People say, ‘you’re doing all the same stuff you did then’, and I think that’s right. I’m adapting my methods to an airport company. And there is no doubt that this will give me more from my contractors.

Steven Morgan believes in the bracing effects of competition. He said “I want the best, I want the A-team, not the reserves. I want the best talent contractors can offer. I want people to have to work to get my business. To earn my business. And I want them to give me the best work they can for the best value once they have won the contract. I will not be taken for granted.”

Steven Morgan is also trying to gather many of BAA’s smaller projects on the grounds that this will save the company money, spread BAA’s money among more suppliers and attract more of the “best, bigger international companies out there”. Competition will raise standards and get better value for money (Wright, BAA appoints new construction boss, 2009). He continued by explaining his plans to achive a traditional client contractor relationships with fewer frameworks alliances and partnerships and more emphasis on good contract, intelligent clients and contractor accountability, so the BAA frameworks was used for work that was values £25m or less, and where possible, and when the contract value is between £10mand £25m he introduced some competition between the framework companies (Oliver, 2009). This move was highly criticized because it ignores the efforts of the firms who had bid and made it into the frameworks in january2008, after a year-long bidding process, and according to a subcontractor in a report (Gardiner, 2009) stated that it caused fear among the framework members as the client will ask for the framework members to consider reducing the price, even when fee structure have been agreed apart of the framework, and if the price isn’t right the client will threat to look outside the framework.

Steven Morgan was convinced that he was doing the right decision as he had meetings with each of the directors of the companies on the frame work before coming to a decision, and they certainly saw the change in the strategy, and he said that “none of them were afraid of a bit of competition. He also thought that the directors can see the opportunities because they have the option to bid for any part of the BAA construction programme they like. He continued by explaining that he wants to encourage bids from firms outside the construction industry (Wright, 2009). Steven Morgan continued that having a 5 or 10 years contract is a luxury a company would aspire to have, he was against giving companies long contracts because he thought that a company needs to earn its business which explains the questioning of the suitability of framework in major capital construction projects.

In my opinion that even though that the choice that was taken by the chief executive hasn’t been accepted well with the industry because of the fear among industry figures that this sort of behaviour could kill collaborative working, the choice was a wise one because from the BAA point of view It was difficult to fully compare the prices and services that was provided since there were no competing tenders to provide specific information that enables BAA to evaluate the price, experience and scope of services required for the project.

Consequences upon BAA:

After BAA’s decision of cancelling frameworks agreements, BAA would be looked upon as a company that is more concerned about maximizing profits through its retail activities than in running efficient airports. This would affect the reputation that BAA has built as a client in the past (Stewart, 2008). However I believe that BAA has worked hard to get to where they are now as they have done a great job towards their brand; consumer and employer. And the proof of that what have they done with Heathrow airport terminal 5 where it revolutionised subcontracting arrangements and pioneered new approaches to collaborative working in the UK construction industry. It also represented one of the few ‘mega projects’ in the UK to have been delivered successfully in management terms. However issues and lawsuits could have risen between the prime contractor and the subcontractor over the frame work cancellation when the payment from the BAA is not forthcoming which could affect the BAA gradually, most clients are asking now if BAA is going to manage getting the best value for their projects without damaging the delivery of the project.

Consequences upon the construction industry:

The recent decision that BAA took to cancel all framework agreements has caused a stir in the world of procurement. This decision wasn’t accepted very well especially with the prime contractors who were already awarded places on BAA complex projects framework. The contractors were chosen after a fierce competition but after BAA’s decision these contractors are disturbed because of the time and money spent getting on the framework – according to one contractor, the process can cost up to £200,000.

The move done by the BAA was shock according to contractors in (Gardiner, £6.6bn BAA framework is ditched for major projects, 2009).However, it could offer as many opportunities as threats. One said: “We’ve got as much chance of benefitting as losing out. We’ve had some confusing signals from BAA in the past six months, so hopefully this should clear things up.”

The decision made affected the industry as this method according to contractors killed collaborative working, securing cash through simplified procurement, Encouragement of investment in project and creation of strong relationship which secure resources and continuing supplier, frameworks provide the opportunity to develop experience and best practice in collaborative working required under contractual arrangements, such as NEC. Frameworks also facilitate the capture of valuable KPI and performance data.

The decision was harsh on the prime contractors and the sub contractors for the reason that if both fulfilled the contractual obligation one of the parties will bear the risk of BAA non payments, normally the prime contractor bear the risk by paying the subcontractors for the work preformed unless stated in the contract otherwise which shift some of the risk to the subcontractors. The decision also put the contractors under the same pressure to cut cost as everyone else, construction buyers are battling against group procurement departments who are telling contractors don’t realise that it’s not the same as buying paperclips (Gardiner, Hell’s clients: whatever happened to frameworks?, 2009).

The consequences of the cancellation of the framework agreement affected the sustainability of the industries supply chains, as it is often supported by establishing relationship between the client and the contractors which is managed by open book procurement (Rawlinson, 2009). The frameworks that have been cancelled jeopardise the contractor’s greater continuity of workloads, ability to plan for retention of project team and Access to opportunities to influence project outcomes due to an earlier appointment.

Conclusion:

The decision taken by Steven Morgan to cancel framework agreement wasn’t accepted to well from the contractors but the continuing demand for BAA airports made the company striving for continuous expansion to meet customer satisfaction but with these expansions came cancellations. the cancellation was a huge set back to contractors because some of the contractors get half of their business from framework but the decision taken is understandable from BAA, as The reasons given from Steven Morgan from the references that have been collected were convincing as it showed that he wanted the best talents the contractors can offer and he wanted to distance BAA from the operational side of the construction projects. He had a vision of people working hard to get to his business and give the best work and value. But the decision BAA took could have been risky but a company with a dependable and valuable portfolio as BAA would have considered the alternatives and risks before making this step, as frameworks have been used by clients for many years and it can make a huge difference in setting improvement agenda’s and generating cash savings.

The Consequences found on the BAA that it would be looked at as a company that is more looking into maximising profit than anything else but the decision made by Steven Morgan to offer financial incentives suppliers for improved performance and outstanding behaviour and results will change that and in fact it will be beneficial for both the construction industry and the BAA.

REFERENCE:

Great Britain: Competition Commission. (2007). BAA Ltd: a report on the economic regulation of the London airports companies. Edinburgh: TSO Publishing, pp 166-168.

Michael Latham. (1994). Constructing the Team: Final Report: Joint Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry. Edinburgh: TSO Publishing.

Peter Fenn, Edward Davies, Michael O’Shea. (1998). Dispute resolution and conflict management in construction: an international review. London: Routledge, pp 114- 116.

Stephen A. Hess, Jerome V. Bales, P. Douglas Folk.(2007).Design professional and construction manager law. Chicago: ABA Publishing, pp 492- 501.

Emily Wright. (2009) BAA appoints new construction boss [online] Available at: http://www.building.co.uk/story.asp?storycode=3132804 [Accessed 15 March 2010].

Emily Wright. (2009) I will not be taken for granted’: BAA’s boss on frameworks [online] Available at: http://www.building.co.uk/story.asp?storycode=3143433 [Accessed 15 March 2010].

Antony Oliver. (2009) Steve Morgan: Keeping Them Keen [online] Available at: http://www.nce.co.uk/news/transport/steve-morgan-keeping-them-keen/5205488.article [Accessed 17 March 2010].

Joey Gardiner. (2009) Hell’s clients: whatever happened to frameworks? [online] Available at: http://www.bdonline.co.uk/story.asp?storyCode=3142466 [Accessed 19 March 2010].

Stephen Pryke. (2009) Construction Supply Chain Management: Concepts and Case Studies. Oxford: Blackwell Publishing Ltd., pp 184- 185.

Dan Stewart.(2008) BAA picks nine contractors for £9.5bn framework [online] Available at: http://www.building.co.uk/story.asp?sectioncode=284HYPERLINK “http://www.building.co.uk/story.asp?sectioncode=284&storycode=3104162″&HYPERLINK “http://www.building.co.uk/story.asp?sectioncode=284&storycode=3104162″storycode=3104162 [Accessed 21 March 2010].

Simon Rawlinson (2009) Procurement updates [online] Available at: http://www.building.co.uk/story.asp?sectioncode=661HYPERLINK “http://www.building.co.uk/story.asp?sectioncode=661&storycode=3147414″&HYPERLINK “http://www.building.co.uk/story.asp?sectioncode=661&storycode=3147414″storycode=3147414 [Accessed 22 March 2010].

Joey Gardiner (2009) £6.6bn BAA framework is ditched for major projects [online] Available at: http://www.building.co.uk/story.asp?storycode=3140935 [Accessed 22 March 2010].

Issue 47 (2007) Procurement: Frameworks [online] Available at: http://www.building.co.uk/story.asp?storycode=3100482 [Accessed 22 March 2010].