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Wednesday, July 10, 2013

Published benchmark costs bring procurement savings

Rigorous transparency is a two-way mirror. It not only reveals what the government is doing, it also reveals what the private contractors are doing. Too often we make the assumption that a transparent system just reveals the government action. And then we scratch our heads trying to understand how two different agencies buying the same thing end up with sometimes grossly divergent costs.

In an attempt to capture that low cost to government, big companies have championed cooperative purchasing, a method of source selection where everyone buys from the one seller at the one price. Good for big business, bad for small business and a widened tax base.  It increases efficiency, arguably, at the expense of fostering competition.

The UK government has thought outside that box and achieved the low cost benefit without (directly anyway) bestowing a monopoly on one supplier. 

How?    By disclosing actual costs paid to its contractors.

Construction procurement reform saves £447 million
Cabinet Office minister Chloe Smith announced the latest set of benchmarked government construction costs, which are designed to give public sector customers an indication of how much they should pay. She described the benchmarking system as a “key” efficiency reform and said its ability to deliver projects 15 to 20 per cent cheaper meant the public sector would reinvest £1.2 billion in projects by 2015. This would equate to around 60 new secondary schools, she added.

The new benchmarking figures provide more granular department cost benchmarks and data direct from local authorities, according to Smith. “We have now published department cost reduction trajectories and construction cost benchmarks, which help inform central government and wider public sector clients as to what they currently pay for construction and what their construction should therefore cost,” said Smith.

Changes to public sector procurement to benefit SMEs were also underway, she said, to raise the amount of government business to SMEs by 2015 to 25 per cent. “These reforms are starting to pay off. Overall government has increased its direct spend with SMEs from 6.5 per cent in 2009-10 to 10 per cent in 2011-12,” said Smith. “And in 2011-12 figures from government’s top suppliers shows SMES had benefitted from a further 6.6 per cent of spend in the supply chain.”

She identified prompt payment down the supply chain as “critical to the survival of many SMEs” and said all central government contracts were now contractually obliged to pay to tier three suppliers within 30 days. The government was also trying to roll out Project Bank Accounts, a project which aims to pay prime suppliers at the same time as subcontractors down to tier three, across government construction projects.

- See more at: http://www.supplymanagement.com/news/2013/construction-procurement-reform-saves-447-million/#sthash.0Md2Tt0e.dpuf
So far, the cost disclosure has apparently been limited to the construction sector, but there is no reason in my mind why it should not be at least tried in the services and supply sectors.

The Government have issued a series of reports on the subject. One of the papers describes Cost Benchmarking Principles and Expectations:
This document sets out for the first time the principles of construction related cost benchmarking standards. This publication therefore supports the new procurement models being trialled as part of the delivery of the Government Construction Strategy and the achievement of the overarching target of a sustainable1 reduction in construction costs of 15-20% by the end of this Parliament.

This document should also provide a helpful point of reference for the wider public sector – for example Health Trusts and Local Authorities – in determining a standard approach to construction cost benchmarking.
Another paper discusses progress and other aspects:
Effective cost benchmarking is central to the successful delivery of the Government Construction Strategy (GCS) and the Infrastructure Cost Review. It provides the “should cost” capability1 that is an essential component of the new procurement models being trialled as part of the delivery of the GCS.

The key to this program is uniformity of standards and data integration and integrity. The notion of transparent costing and the papers raise very interesting concepts, and it will be worth evaluating the deliverables that this approach experiments with.



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