Time to break ranks

2 December, 2016  

The ranking of tenders in framework agreements for architectural and engineering and consultants is destroying the industry. The purchaser is the big loser. Now when the Public Procurement Act is being reformed, there is a possibility to engage consultants in a better way. John Hane hopes that purchasers make use of the opportunity.

For some years, the Swedish public works industry has been experiencing the biggest economic boom since the 1960s. Sweden’s infrastructure needs to be rebuilt in tandem with a major increase in migration to the cities. Seven of ten investments are made by public sector customers who must navigate their purchases through the Public Procurement Act and the Public Procurement (Utilities Sector) Act.

Fifteen per cent of investment costs are spent on and engineering services (technical consultancy services). This is an independent branch within the construction industry which is itself a multi-billion-dollar industry.

For a long time, the industry has been drained of qualified professionals. The baby boomers born in the 40s have retired and re-growth in later generations has been limited for several decades. Young tech-interested people have opted for IT over social infrastructure. Consequently, one could believe that technical consultancy firms are very successful. In fact, according to many, the reality is just the opposite and many believe that the root of the evil is the Public Procurement Act.

Until the mid-1990s, all technical consultancy services were, in principle, purchased through projects specified in consultation between the parties. This means that the consultant with their professional skill and experience knew best what the customer needed in consultancy services. In consultation with the customer, the consultant determined what needed to be done on a project. All compensation was payable at a variable fee (hourly rate).

When the Public Procurement Act was adopted in the middle of the 1990s, a new way to enter into consultancy agreements was introduced based on procurement stipulated in tender documents. The standard agreement in the industry, the General Terms and Conditions of Contract for Consulting Agreements for Architectural and Engineering Projects, 2009 (ABK 09), presumes that the service will be performed based on a fixed fee. It was understood that this would be required under the Public Procurement Act.

Most of the consultancy services under the Public Procurement Act were also purchased based on variable fees pursuant to orders placed under framework agreements. The customer could freely choose the most suitable consultancy firm for each project. It was evident, if one scratched the surface, that rather sophisticated business considerations were made regarding who was chosen for a particular project. The decision was based on previously exhibited skill and suitability for a particular type of project. Factors which played a role were appropriateness of resource allocation with respect to larger projects, geographic proximity for response times for urgent matters, security of supply in previously performed projects and value for money (quality as compared with costs).

After the latest reform of the Public Procurement Act and the Public Procurement (Utilities Sector) Act in January 2008, technical consultancy services have primarily been ordered under framework agreements based on the ranking received by consultants in the award announcement. The ranking is often determined based on the size of the hourly fees tendered by the consultancy firm. This has hardly benefited the quality of the projects or the way these are staffed and prioritized by the consultancy firms.

The big loser is the purchaser, who does not receive the quality and delivery assurance required to plan and carry out construction projects with cost-efficient and long-term sustainable engineering solutions. Attempts to mitigate a strict ranking based on a percentual allocation have not proved successful in practice. For a consultant, it has been better business to be number two or number three in a framework agreement and obtain a lower volume but at a higher gross margin.

The ranking rule has been applicable to the Public Procurement Act but not to the Public Procurement (Utilities Sector) Act. However, thanks to statements in the preparatory works to the Public Procurement (Utilities Sector) Act, many have also chosen to apply the same strict ranking of tenders under the Public Procurement (Utilities Sector) Act. A large number of cases regarding liability and damages for violation of the ranking rule have also been brought in the courts of general jurisdiction.

In the legislative bills proposed thus far, the legislature has assumed that the ranking of tenders in framework agreements should be removed. This is a commercially sound and important change. Orders should instead take place based on an objective allocation formula. This is the wording of the EU directive and the only limitation which the EU established when it commenced regulation of framework agreements in its directive of 2004. This was incorporated into Swedish law in 2008.

Percentual allocation is often referred to as an objective allocation formula during discussions with a customer. However, the allocation will once again deal with the lowest possible hourly fee for the greatest possible allocation.

The industry needs to do a radical rethink and return to how it purchased technical consultancy services based on framework agreements before the ranking of tenders took hold. Even then orders were placed, for the most part, based on objective allocation formulas linked to the quality of the delivery from a relative perspective. The only difference was that the criteria on which the order was placed were not transparent.

To the extent one can objectively define good performance and proper staffing of projects, it should be possible to use orders based on framework agreements to find the right consultant for the project in a completely different way than today. Then, hopefully, the hourly fees for technical consultants will come in line with what technical consultancy firms can charge the private sector, in order to avoid the “brain drain” which is a consequence of the most sought after and experienced consultants choosing not to work in the public sector. This is one of the most important changes for the construction industry in the new Public Procurement Act, but it also entails a challenge for procurement authorities and divisions. It remains to be seen whether they dare to accept it.

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John Hane, Partner at Foyen

The article is also published in Swedish on inkopsradet.se