Have they hijacked the industry and reduced competition?
From the early 1990s to 2008, there was an intense and sustained boom around the world in the construction industry. For an archetypal boom and bust industry, this has been a real treat. It began to look as though it would never end, even though we knew it must. We had seen recessions in each of the decades from the 60s onwards and it was only the beginning of this century that was the exception. We were 8 years into the decade before this recession struck.
In a conversation with a group of journalists recently, I found that very few of them had ever experienced a recession before. They will now. The next few years will be a big learning curve for them and I believe that a few attitudes will be changed. What works in the boom years simply does not work in the lean years and vice versa. So what may change?
When the industry first began to over-heat, quality suffered. Clients drove the initiative to improve this by promoting the benefits of partnering, saying that they valued people who would learn about their needs and deliver a good quality service. If they delivered, they would be rewarded with repeat orders.
The contracts which put these arrangements together became known as Framework Agreements. They involved lengthy bidding processes, which were very expensive to the bidders, taking lots of money out of the industry. They were also, no doubt, expensive for Clients.
The end result of a Framework Agreement is that each Client has a small group of people to choose from in every discipline. They are pre-qualified with regard to their capability and rates are usually agreed in advance. Sounds good, doesn’t it?
There may be a few problems though. First, in lean times (or even good times), is it wise to rule out some 95% of the industry? It is not unusual for Contractors and Consultants to allow their less able people to gravitate to work on frameworks after the initial settling in period, because they do not have to fight hard to win the work. The go-getters will be required on winning work from new Clients, where there is much more to prove.
Rates set in the good times are inevitably generous, but they do not represent value for money in a recession. In 2008, I was working for a developer in the Middle East. There was a significant drive from some of the in-house staff to appoint Contractors and Consultants on preferential rates and exclusivity, “otherwise we will not be able to secure their services and we will not be able to build our projects”. I resisted this movement and 3 months later their drive for a framework looked absurd, as 80% of the projects in the UAE were put on hold and Consultants were begging for work, with rates plummeting. The Client was rescued from a financial disaster.
Clients should always be aware that the construction industry is very flexible about pricing and is very quick to react to both downturns and upturns. It is wise for you to be locked into this cycle, rather than bucking it. If you are locked into a framework with rates which are too high, you will be paying through the nose for your service. If you try and lock somebody in to providing a service at rates which are too low, quality is the first thing to suffer.
Am I advocating the end of partnering? Of course not, but we should just remember that partnering and repeat business are concepts which go back many thousands of years in all types of industry and were not invented as a result of Framework Agreements.
Sensible Clients will do what BAA have announced recently. They aim to save £200m by using frameworks where they think it is right, stepping outside the framework where they feel that it is advantageous to them. Result? Everybody is kept on their toes, new talent will be introduced, the Client will get greater value for money and common sense will prevail.