SECTION 3 — Contractor consultation

SECTION 3 — Contractor consultation

Part 1 — Review of current management and maintenance arrangements

Framework, Duties and Auditing
The current third generation of term contracts has seen the Scottish trunk road network continue to be separated into four geographical units (see here). Four successful bidders have each established an Operating Company to run one of the four units for five years, each extendable to seven years at the discretion of Scottish Ministers.

Question 1

Summary of responses to — Question 1

The consensus was that the four geographical units are well established, provide sufficient size to enable sustainable business and therefore there would be no significant benefit in changing the current arrangements.

Two options were proposed if changes were to be made. It was suggested that the central motorway belt could form one Unit and the other four Units be reduced in scope to accommodate the new Unit. Alternatively it was suggested that the southern Units could be combined to give economies of scale.

Question 2

Summary of responses to — Question 2

The general opinion of respondents was that the current term was adequate but that mutual benefit would be realised through an increased term of 7-10 years with contract extensions awarded based on performance and continuous improvement. Benefits suggested included;

• Providing Operating Companies with the opportunity to develop and innovate. It was noted that existing resources are more effective during the later years of a 5 year period
• Better continuity of resources and greater stability in terms of the workforce
• Reduction in the time lost due to demobilisation, mobilisation and re-bidding
• Reductions in the costs and efforts associated with tendering
• Reductions in tendering costs could be passed on to the client
• A longer term would be more efficient for writing off initial capital expenditure
• Continuous improvement
• Allow partnerships to reach full potential

Question 3

Summary of responses to — Question 3

Responses varied from a reduction in the two year extension (coupled with longer base contract) to increasing the extensions available for good performance to over five years. The common theme was that the award of extensions should be based on good performance and continuous improvement measured through clear outcomes-based Key Performance Indicators (KPIs).

Typical key benchmarks suggested for granting extensions included:

• achievement of all KPIs
• percentage and absolute levels of savings realised
• number of schemes delivered in line with programme expectation
• dealing with Category 1 defects
• winter service
• increase in asset value
• value for money

Question 4

Please provide your opinion of the third generation contracts currently in operation, stating what, in your opinion, are the principal strengths and weaknesses of the contractual arrangements and the changes, if any, that you would wish to see in the fourth generation of term contracts.

Summary of responses to — Question 4

The main strengths / weaknesses raised were:

Strengths:

• Well constructed and comprehensive contracts
• Delivers cost certainty for the client in terms of lump sum activities and scheme costs
• Identifies Key Staff who are immediately available and focused on key functions, i.e. Ministerial Correspondence, Liaison and Media Relations
• The specification has improved from the 2G contract and is beginning to recognise innovation and performance although there are still improvements to be made
• The introduction of the Trunk Road Incident Support Services
• Strongly specified on emergency and winter services, defect response and professional service provision including the design and implementation of schemes with a value above £250k, schemes including the value engineering regime

Weaknesses:

• Lump sum payment for cyclic works based on input specification does not encourage delivery (rates are paid for inputs, not the results delivered)
• Premium is placed on budget certainty at the expense of engineering decision-making and achieving value for money
• Large schedule of rates leads to strategic pricing. This is not conducive to a successful outcome. The schedule has far too many items and does not encourage innovation or drive the Operating Companies to continually improve service delivery techniques
• The level of risk passed on to the Contractor reduces the number of tenderers and therefore is not delivering best value for the client
• No formal structure to encourage partnering and innovation - in contrast with the 2G Contract when some excellent initiatives were taken forward through joint forums
• No link to easing congestion on the Network
• The Contract is too vague on the subject of litter
• The short duration, the Operating Companies’ exposure to risk and constant budget uncertainty
• Over-auditing, poor performance measurement and lack of shared ownership of schemes

Question 5

Summary of responses to - Question 5

It was suggested that the NEC 3rd Edition Term Service Contract, with the partnering option engaged and suitably amended for highways maintenance, would encourage the introduction of new techniques and innovation with flexibility to deliver appropriate engineering-led solutions. The true cost of works could be understood and balanced against other factors such as sustainability, safety and journey time. Parties would be encouraged to work together and planning would become the key factor. This form could also offer some protection to both parties on the inflationary element, which is greater with longer term contracts.

Question 6

Summary of responses to — Question 6

Where an opinion was expressed, it was universally stated that too much risk is placed on the Operating Company to deliver consistent performance and profit. This was felt to result in either a premium price tag or claims based approach if under priced. It was suggested that an agreed shared Risk and Opportunities schedule be used, with a pain/gain share mechanism, to ensure that decisions are made with the common objective of delivering a better service to the travelling public and achieving value for money.

Question 7

Summary of responses to - Question 7

Respondents were split between the advantages of Transport Scotland seeking to purchase or lease strategic depots and plants or the Operating Companies providing the depots and plants. A slight majority favoured allowing Operating Companies to acquire depots and equipment.

Advantages stated in support of Transport Scotland providing depots were that it would allow for better control of contingency and emergency planning, more effective management of the depots and plants with better servicing plans, improve write-off costs , "level the playing field", improve mobilisation, and reduce overall costs through long term agreements and whole life costing opportunities.

Advantages stated for the Operating Companies providing depots included comment that depots would suit individual operational requirements and create an incentive to seek innovative solutions. It was also noted that equipment purchase by Transport Scotland obliges Operating Companies to use that equipment regardless of whether it is most appropriate or the Operating Company has staff trained to use it and that longer term contracts improve Operating Company investment levels.

Question 8

Summary of responses to — Question 8

The predominant response was that the current limit of £250,000 should be increased. Respondents stated that an increase would create more scope for innovation and efficiency savings and it would reduce the cost burden on Transport Scotland for tender preparation and evaluation. Two respondents suggested that thresholds should vary dependant on the type of work as a way of delivering value for money.

Question 9

Summary of responses to — Question 9

Most respondents were of the opinion that the level of resources involved in monitoring and auditing the Operating Companies’ services could be significantly reduced and that less frequent audits, more robustly based on processes, would provide better value for money. Although appropriate for previous generations of the contract, the current arrangements were thought now to be excessive and overly subjective.

It was generally felt that the level of auditing is too high and that it should be more in proportion to risk. Respondents accepted that financial accountability and lump sum delivery should be verified, but felt that audits should be scaled back in terms of administration, reporting and consultancy delivery.

Question 10

Summary of responses to — Question 10

The common theme in the suggested alternatives was to target audits at outcomes, and high risk and high cost areas and to allow the Operating Companies to self certify their quality systems with third party auditors on process.

There was consensus that there should be less checking of work and more focus on audits of processes. It was also suggested by two respondents that the results of audits could be linked to pain/gain mechanisms.

It was felt that a more collaborative contract approach would reduce the need for extensive checking and auditing.

Question 11

Summary of responses to — Question 11

All respondents expressed the opinion that the current large schedule of rates was unwieldy and counter productive, demanding a high level of administration from both parties due to the variability of works carried out on the Network. It was estimated that 95% of the work actually undertaken has been carried out using less than 15% of the schedule of rates. All respondents agreed that the number of items in the schedule of rates can be significantly reduced. Three of the respondents stated that they would like to see some form of derived pricing based on target cost used to develop scheme prices.

Question 12

Summary of responses to — Question 12

There was consensus that the use of lump sums for core services and activities was beneficial. It was suggested that under the lump sum, payments should be linked to performance and that there should be greater transparency of costs with joint working toward efficiencies.

There was also consensus that target price schemes were appropriate for discreet schemes and would encourage Operating Companies to develop more efficient ways of working with the benefits passed on to the client. The twin track approach allows clients to gain the benefit as resource efficiency will be key to compiling a competitive price.

Question 13

Summary of responses to — Question 13

None of the respondents felt that the current payment mechanisms give best value to Transport Scotland. There was consensus that incentive payments, based on clearly defined performance requirements, would provide a better level of service for the travelling public and continuous improvement in efficiencies for Transport Scotland.

It was noted that, under the current contract, Operating Companies that achieve what was required in terms of time, cost and quality will have fulfilled contractual obligations and have the right to expect to be paid, regardless of whether Transport Scotland is happy with the result.

It was a common view that if best value is to be achieved then incentive payments are needed. Respondents stated that the incentives considered will lead to improved performance and the benefits can be shared between Transport Scotland and the Operating Companies. This will increase the level of service and ultimately reduce costs year on year. This will only be achievable if a different form of contract with a KPI related pain / gain / sharing mechanism is introduced.

Question 14

Which payment mechanisms are most appropriate and why? (In your response, please address each of the main types of service, i.e. routine and cyclic, structural maintenance and professional services.)

Summary of responses to — Question 14

A range of suggestions for payment mechanisms were given by the respondents. The suggested payments aim to allocate risk through various mechanisms. Typically, it was suggested that well-defined core services be paid as lump sum, scheme costs as target price and professional services a mixture of time charge and target cost.

A typical respondent response being:

• Routine & cyclic; monthly sum or rates
• Fees (procurement) — time charged
• Fees (supervision) - Target cost
• Design — value engineering and concept designs time charged and detailed design target costs
• Damage to Crown Property - Cost reimbursable, amount recovered invested in Network
• Planned Schemes (Minor Improvements, Bridges, Structural Maintenance, Revenue) — target cost
• Reactive works - cost reimbursable (benchmarked)

Question 15

Summary of responses to - Question 15

Generally a performance based contract was seen by the respondents as one that uses performance as a reward mechanism and drives continuous improvement, ensuring that contracts are not only carried out at a level to ensure contract compliance but consistently promote enhanced service delivery.

Performance based contracts were seen as a positive development although there was concern expressed about the measures of performance and whether sufficient objectivity and accuracy would be possible.

Question 16

Summary of responses to — Question 16

Respondents generally welcomed these forms of contracts and have found that they benefit both parties. They were in favour, in principle, of the inclusion of performance results as part of a contract payment mechanism, with the proviso that the identification and transparency of appropriate measures is essential and risk allocation is compatible.

Question 17

Summary of responses to — Question 17

All respondents could see advantages in linking contractor performance to payment, contract extensions and auditing regimes.

Question 18

What advantages would the increased use of performance specifications bring to service providers and to Transport Scotland?

Summary of responses to — Question 18

Respondents identified several advantages in using performance specifications, including:

• Moves focus from maintenance alone to improved service to the travelling public
• Improved efficiencies relating to outcomes and added value service
• Reduction in documentation and management overheads
• Enables suppliers to gain efficiencies in resource management

Question 19

Summary of responses to — Question 19

Respondents generally felt that a performance based specification would have a positive impact on the bidding process as bidders would have to offer contractual commitments that would form the basis of their quality management plan incorporated into the contract. This was seen as offering the ability to openly state not only base targets of performance but also the levels of continuous improvement that would be achieved and the methods and processes for obtaining them. Sufficient time would be needed to compile more complex bids.

Part 2 — Potential future delivery strategies

Three possible long-term strategies for future service delivery were identified, taking consideration of the McClelland Report. It is recognised that Driving Improvements may conclude with a hybrid strategy, or indeed an entirely different strategy, being identified as most desirable.
Other options were not identified in the consultation paper but respondents were encouraged to detail alternatives to those described.

Strategy 1 — Developed Operating Company Contracts
This strategy would seek to continue with the principles employed for the third generation term contracts whilst taking into account the experiences learned and also seeking to establish greater partnership working between the new Operating Companies and Local Roads Authorities.

Question 20

Summary of responses to — Question 20

Most respondents saw no difficulties in implementing Strategy 1.

Question 21

Summary of responses to — Question 21

The majority of contractors have expressed a willingness to tender under Strategy 1.

Strategy 2 — Developed Operating Company Contracts (including Collaboration Framework Contracts)

This strategy would, similarly to Strategy 1, seek to develop the Operating Company Contract but in addition it would make contractual provision for participating Local Roads Authorities to procure services through it.

Question 22

Summary of responses to — Question 22

Respondents were split on the possible advantages and disadvantages of implementing Strategy 2.

The following advantages and disadvantages were noted:

Advantages

• Savings generated by closer working and sharing data with local authorities
• Sharing work with the supply chain would result in reduced rates and better efficiencies
• Benefits from enhanced economies of scale
• Closer working and co-operation between the Operating Companies and the local authorities
• Both clients will benefit from reduced costs through best use of resource utilisation if all parties can jointly programme activities to avoid date conflicts

Disadvantages:

• Lack of certainty of budget and commitment of resource (mitigated by specific contractual agreements to deliver)
• Specification of Local Authority works is not always the same as that for the trunk road contracts
• Resource planning
• Potential for serious problems in governance and prioritisation
• A separate schedule of rates would be required and would increase tendering costs for no guaranteed return

Strategy 3 — Maintain, Finance and Operate Contracts
Under this type of contract, the service provider would fully take over the management and maintenance of the trunk road network within a Unit, maintain the network to a pre-determined standard and return the network at the end of the contract in a pre-determined condition. The service provider would have real ownership of the network for the duration of the contract and might receive payments purely in terms of continuing availability and traffic use, and incur liabilities in relation to levels of service, road safety and quality of contract compliance.

Question 23

Summary of responses to — Question 23

Respondents could see advantages in pursuing Strategy 3 but highlighted contract terms that would be needed to successfully implement the Strategy. These included a minimum contract period of fifteen years (and preferably greater than twenty). In general it was felt that this strategy would be difficult to implement, particularly within the timescale available for procuring the 4G contracts. The following advantages and disadvantages were noted:

Advantages:

• The Strategy would deliver an outcome based contract, with the appropriate payment mechanism and risk management profile delivering better value for money
• Similar to Design, Build, Finance and Operate (DBFO), most providers have expertise in this field and are comfortable to deliver it providing that the contract duration is sufficiently long
• Strategy would require less auditing, and allow greater focus on providing engineering based solutions to enhance the trunk road network asset
• The strategy would enable route based strategies to be developed and implemented

Disadvantages:

• The present financial environment could make it difficult to secure adequate funding to allow this strategy to go ahead
• It would be extremely difficult to implement this strategy into the 4G tender process within the time restraints that exist
• As this type of Contract would have to have a long contract term, prediction of inflation would be difficult
• Payment systems will be complex on the Transport Scotland network given that traffic volumes vary considerably and as such modeling will be complicated
• The Strategy would require a higher level of inventory information than currently held

Question 24

Summary of responses to — Question 24

Strategy 1 was considered to be the best option by half of respondents.

Question 25

Summary of responses to — Question 25

Possible options not already considered in the consultation included:

• A mechanism to link in with other services that Transport Scotland delivers e.g. Rail and other Roads operations
• A Maintain and Operate Public Private Partnership (PPP) contract with no ‘Finance’ such as North Lanarkshire PPP
• Lump sum for delivering complete service to client. Advantages would include cost certainty and reduced client supervision costs
• Return responsibility for the trunk road network to local authorities

Part 3 — Information on existing or possible future collaboration / partnering arrangements

Benchmarking
"In any environment, understanding an activity’s performance and results compared to those of other undertakings is not only interesting, it provides the opportunity to recognise success or otherwise relative to peer operations. It also provides the stimulus for positive action and also potentially information which through additional analysis and understanding can drive improvement through the spread of best practice. In the private sector although companies do rely on benchmarking internal efficiency and external results there is often, for obvious reasons, a reluctance to share best practice with outsiders, particularly competitors. This inhibitor should not exist in the public sector."
McClelland Report 2006

Question 26

Do you have any knowledge of existing benchmarking mechanisms which Transport Scotland should explore with other organisations? Please provide any relevant details.

Summary of responses to — Question 26

The benchmarking clubs mentioned by respondents include:

• Highways Agency Contractor Assessment Toolkit
• Highways Agency Measurement Toolkit
• Network Rail Track renewals Balanced Scorecard
• Highways Term Maintenance Association benchmarking
• Achieving Excellence
• Transport for London
• Scottish Water

Co-ordination
The existing third generation contracts make provision for liaison between organisations for the co-ordination of operations.

Question 27

Summary of responses to — Question 27

Four respondents considered the existing liaison arrangements to be working, but arrangements could be strengthened and more clearly defined. It was also suggested that an improved partnering arrangement with Transport Scotland would help deliver an improved service by understanding both the client and the Operating Companies needs.

There was a suggestion for future liaison arrangements to provide for a Maintenance Community.

Collective purchasing
The McClelland Report states that substantial savings should be possible through the collective buying power of public bodies.

Question 28

Do you have any knowledge of existing collective purchasing mechanisms which you consider Transport Scotland should explore with other organisations? Please provide any relevant details.

Summary of responses to — Question 28

Several respondents stated that large Operating Companies have national purchasing agreements that can drive down prices and that most Operating Companies have significant supply discounts through their supply chain arrangements. Other purchasing mechanisms noted were:

• Network Rail single procurement policy
• Hereford Council collaborative purchasing
• All Operating Companies have significant supply discounts through their extensive international supply chain arrangements
• Surrey County Council - Proposed one contract across the county (East/West) involving two contractors
• Thames Supply Chain Utilisation Meetings. Contractors met quarterly with the Thames Buying Team
• Rochdale — All ten Authorities within Greater Manchester have a Local Authority Procurement Partnership Agreement for bitmac

Economies of scale
The McClelland Report states that substantial savings could be made possible through economies of scale with respect to service delivery.

Question 29

Do you have any knowledge of existing arrangements where services relevant to the management and maintenance of the road network are being delivered more cost effectively through economies of scale which you consider Transport Scotland should explore with organisations? Please provide any relevant details.

Summary of responses to — Question 29

Noted instances include:

• Managing Agent Contracts (MACs) where winter fleet are shared between areas
• English local authority MAC contracts Scottish Water supply chain frameworks
• Midlands Highways Alliance
• Network Rail renewal contract - balanced scorecard for technical compliance, cost, value, safety and timeliness
• Environment and water company frameworks have similar alliance mechanisms

Question 30

Are there any other existing collaborative/partnership arrangements you are aware of which you consider Transport Scotland should explore with other organisations? Please provide any relevant details.

Summary of responses to — Question 30

Collaborative arrangements noted include:

• Network Rail track renewals pain / gain share (Nationwide)
• Water Authorities creating alliances through their Asset Management Planning contracts with contractors
• Transport for London arrangements
• Highways Agency Maintenance Frameworks
• Scottish Water
• Network Rail
• BAA Heathrow Terminal 5
• Liverpool 2020
• Hertfordshire Highways
• Rochdale impact
• Stirling/Clackmannanshire/Falkirk Local Authorities

Question 31

Are there any other possible future opportunities that Transport Scotland should explore? Please provide any relevant details.

Summary of responses to —Question 31

Opportunities not already considered in the consultation include:

• 'One stop shop' Joint Venture with Transport Scotland.
• Franchise approach
• A central procurement team for all four Units
• Fewer, better quality suppliers
• Sharing frameworks within Supply Chain network of sub-contractors
• Explore the interface between the DBFO completed or planned schemes in the Strategic Project Review and maintenance Trunk Road Network
• Closer links with ferry operators (e.g. CalMac), port owners (e.g. Forth Ports, BAA, H&I Airports and CMAL) and Transport Scotland Rail Directorate

Future consultation

Question 32

Would your organisation be interested in participating in a face-to-face interview and/or workshop to supplement the outputs from this questionnaire? (YES/NO)

Summary of responses to — Question 32

All of the respondents indicated a willingness to take part in face to face interviews or workshops.