The Challenges of PF2
An initial market information day, held in March 2014, indicated a reasonable level of interest with five major contractor teams being represented but, when the scheme was formally launched in the summer of 2014, the trust received only two PQQ responses – from Carillion and Laing O’Rourke.
The PF2 process places a challenging timescale on trusts and bidders, with a requirement to achieve preferred bidder within 18 months of launching the bid. To meet the opening date of autumn 2018, the Midland Metropolitan scheme had to shorten this further and set a very challenging 16 month period. Initially, both bidders approached the bid positively but it soon became clear that one had a greater appetite for the scheme than the other and, when it came to the interim bid in December 2014, only Carillion made a submission.
The various organisations will have their own reasons for not wanting to bid for the project but it must be a concern for the PF2 process that there has been such a poor response from the market. The shift in market conditions, making other bidding opportunities more favourable to contractors, was no doubt a factor but the lack of a pipeline of other health PF2 projects and the costs associated with two bidders having to develop detailed proposals and fully costed schemes (and therefore a significant loss to the unsuccessful bidder) is something which the PF2 process is going to have to address if it is to be successful going forward.
Working with a Single Bidder
With only one interim bid, the project was at a significant crossroads. The option of restarting the process under a ‘traditional’ procurement route (most likely, P21+) was evaluated but it was concluded that, subject to certain control protocols being enacted, proceeding with a single bidder was the preferred route. Sweett Group played a key role in proposing and agreeing with the trust, the Department of Health and the Treasury, a protocol to control costs going forward and to demonstrate value for money.
The protocol was included within a formal agreement with Carillion and contained the following main features:
• Fixing the key aspects of the interim bid price (for example, preliminaries, risk/contingency, fees, overheads and profit and inflation provisions );
• Greater transparency and joint working to develop the design and the detailed costing process within the elemental cost plan from the interim bid, with an overall commitment not to exceed the trust’s affordability cap;
• An open-book approach to market testing of packages to demonstrate value for money (with a commitment to achieve comparable levels of market testing to P21+);
• Benchmarking the resultant costs against the public sector comparator, other PFI projects (including the Royal Liverpool Hospital PFI which Carillion had recently won in ‘full’ competition), P21+ benchmark data and the Government Construction report from the Cabinet Office dated July 2014.
These control mechanisms were underpinned by the bidder continuing to carry the risk of achieving an acceptable outcome. There was no commitment from the trust to pay any bid costs and therefore Carillion was highly incentivised to keep to the agreed process and deliver a compliant design within the affordability cap.
A draft final bid was submitted in April 2015 and a final bid in July 2015. The control protocols have been successfully applied and the final bid is within the trust’s affordability cap. Carillion has developed an innovative design solution and Sweett Group has been able to confirm value for money has been achieved.
Over 80% has been market-tested in accordance with the agreed protocols and the cost per square metre compares favourably against all of the benchmark data noted above. The costs have been subject to close scrutiny by NHS England and the Department of Health and have passed all of the review processes, resulting in a successful approval business case submission.
The project is now proceeding towards financial close at the end of this year, with a projected start on site for the main contract in January 2016 and completion by the scheduled date of autumn 2018.
The process shows that, with the right control mechanism and joint working, a single bidder approach can work. It would not be a panacea for all cases and it would not have been possible without the starting point of the interim bid being favourable, but working with a single bidder has certainly streamlined the process of design development and has been successful in this case.
The positive and collaborative attitude of Carillion must also be recognised. Unlike the experience many clients may be having with a two-stage approach in the current market, Carillion has kept to the agreed control protocols and has not sought to take advantage of the single bidder scenario.