Contracting Strategies – A Client’s Perspective

Anin NamaGeneral Manager, Asset Management and InvestmentsM t tMetrowater

About Metrowater

Metrowater owns and manages the water and gwastewater networks for Auckland City

Population 420,000

Customers served 165 000165,000

Approx 1/3 of the population of the regionpopulation of the region

Approx ½ of the water supplied in the region

2

supplied in the region

Proposed New Regional Boundary

Population: Approximately 1.2 millionApproximately 1.2 million

3

No Bull Story

4

Only Alliance

5

Contracting Strategies

Why look at various contracting strategiesT l fTo ensure value for moneyBetter management of internal and external resources

Why some choose not to look at various contracting strategiescontracting strategiesRisk adverse Continue with what has been done in the past

6

What Contracting Strategy Will You Choose?

You are required to construct a desalination plant which i l d 2k i f th Th i th hincludes a 2km pipe from the sea. The pipe goes through the CBD and areas of unstable land. The budget for this project is $2 billion.

7

Where Did We Come From?

Metrowater Annual Capex

80.0

90.0

40 0

50.0

60.0

70.0

EX ($

M)

10.0

20.0

30.0

40.0

CA

P

0.0

2002

/03

2004

/05

2006

/07

2008

/09

2010

/11

2012

/13

2014

/15

2016

/17

2018

/19

2020

/21

2022

/23

2024

/25

2026

/27

8Water Supply Wastewater Business Systems

Why Change?

2004 Halcrow review– Inefficient procurement processes – Many small projects– Poor management/allocation of risk– Better ways of project and programme deliveryBetter ways of project and programme delivery

9

Understand Your Business Strategy

Our Vision:“We are passionate about delivering quality water services and value to our customers, and we aspire to be the role model for other water companies”model for other water companies

Role Model in:Role Model in:- how we deal with our customers - the quality of serviceM f l “ l f ”- More for less “value for money”

- how we manage our people- how we procure and deliver services

10

Understand your Business Strategy

We will know we have reached our vision ifwe achieve the following strategic goals:we achieve the following strategic goals:

1. To be trusted by our customersy2. To be known by our stakeholders as the utility which achieves more

and better outcomes for the most efficient investment“More for less”More for less

3. To be known as a Company which delivers on its promises4. To be known by our employees as a Company which values their

development and rewards performancedevelopment and rewards performance5. To be known as a Company which values the health and safety of its

people, the public and the environment

1111

The Road To Being Trusted

To achieve our goals we need toTo achieve our goals we need to behave in line with our values:

Th l h ld b

Improve talent gap in procurement and project management – Value for company

GrowthLeadership

These values should be evident in how we work with our

p j g p y

Need to be a better client – including reducing contractors’ unnecessary costs –p

RespectCan do/ Will do

with our partners/contractors

g yValue for contractor

Get on with it and make thingsCan do/ Will doGet on with it and make things happen – Value for customer

12

Business Strategy - Key areas of focus required:

Service, not justasset management Optimising our Capital

I t t POur Customers

Our Capital

Investment

Investment ProgrammeManage risk as Capexgrows

OurEnvironment

Optimising leakage and wastewater pollution

13

Procurement In Line With Business Strategy

When selecting the procurement approachWhen selecting the procurement approach (Contracting Strategy) consider the wider capital investment programme not separatecapital investment programme, not separate projects in isolation. Consider a portfolio approach to manage your investmentapproach to manage your investment programme.

14

Procurement in line with business strategy

Strategic Alignment Value Management Procurement Approach Delivery

•Vision

Goals (more for less)•Optimised Decision Making More for Less

•Rationalise suppliers

•Partnering

•Construction Methodology•Goals (more for less)

•Values

Making More for Less

•Bundling of projects

•Term Contracts

•Partnering

•Traditional

•Alliance

gy

•Review Design

•Coordinate works

•Customer Service•Customer Service

•Innovation

Focus enough attention on getting alignment right, understandingg g g g g , gwhere value comes from and selecting the procurement approach.

“We May Pay More” to get added value

15Investigate

DesignTender

Build

Where Are We Today?

Six consultantsFive contractorsBundle projects into programmes of works

16

p j p gTake a portfolio approach to riskImplemented alternative contracting strategies

Types Of Contracts

Build Own Operatees

Relationship basedBuild Own Operate

Build Own Operate Transfer

Prin

cipl

e

of

Alliancing

ract

ing

P

ease

use

o

Partnering

Design and Construct

hip

Con

tr

Incr

e

Construction Management

Traditional Lump Sum Contracts

Increase use of

elat

ions

h

17

Traditional Lump Sum ContractsRelationship Contracting Principles

Re

Adversarial based

The Panel

More aligned to our valuesMore aligned to our valuesLess transactional cost for both partiesC t i t f k b tt lCertainty of work – better value

18

Approach selected for major capital works

Sewer separation for wastewater overflow preduction:

– Traditionally many small projects ($1m to 5m)Bundled into two $50m projects– Bundled into two $50m projects

– One started in 2007 through alliance method

Water main and wastewater renewals– $30m of work over 3 years (too small for alliance)

Separated in 2 roughly equal parts– Separated in 2 roughly equal parts– Managed through a performance incentivised / risk

sharing method.

19

Contracting Strategies

TraditionalTraditionalPartneringAlliAlliance

20

Traditional

Well defined scope low riskWell defined scope, low riskLimited ability for innovationRi k d li tRisk adverse clientsClients wanting to retain control

21

Partnering (NEC)

Risk share Promote innovationPromote innovation

“A process where parties work towards mutually acceptableA process where parties work towards mutually acceptable outcomes through”

Relationship Contract

22

Partnering (Cont…)

Term renewals for:– Watermain renewalsWatermain renewals – Wastewater renewals

23

Alliance

Traditional Alliance“Trust is Good, Control is better”

“Control is Good, Trust is better”

24

Different From Traditional Contractingg

Drives Culture-One team philosophy-Transparency, early

Promotes Innovation

involvement of a contractor

-Through KPI’s

Delivers Value-Exceeding performance targets

25

Why Alliance?

Value for money both tangible & non - tangibleAbility to accelerate rate of investment Desire to become a better clientThe need to grow internal capabilityMajor environmental improvement (reduce j p (wastewater overflows)Manage works in a densely-populated area near Eden ParkLooming Rugby World Cup

26

Need for improved customer perception

Clear Harbour Alliance

New Zealand’s first wastewater allianceMetrowater’s first allianceMetrowater s first alliance

27

Construction and environment challenges

2828

Clear Harbour Alliance – Value to date

Progressing well compared to programmeTOC 10% below original budgetSubcontract and some materials cost 10% below TOCImproved customer service through integrated customer databaseImproved customer service through integrated customer databaseSatisfied customers, numerous compliments receivedLimited customer and traffic inconveniences in high density commercial and strategic transport corridor leading to Aucklandcommercial and strategic transport corridor leading to Auckland CBDComplaints received but satisfactory resolution through dedicated customer teams in Alliance with support from Metrowatercustomer teams in Alliance with support from Metrowater

2929

The Value for Money Debate

"We knocked the bastard off."

30

How do you Value “Value”

Two elements to value for moneyTwo elements to value for money1. Tangible2 In tangible2. In tangible

1. Tangible – easy e.g. competitive tender, independent estimate etcindependent estimate etc.

2. In tangible – Hard e.g. Customer Service, reliability of service, improvements to the e ab ty o se ce, p o e e ts to t eenvironment etc.

31

Demonstrating Value for Money

F ti l P fValue for Money =

Functional Performance

Whole Life Cost

Value for Money

Tangible Benefits of Outputs

Functional PerformanceWhole Life Costs

Resources Consumed

In-tangible Benefits of Outputs

Achievement of Desired Outcomes

32

What Delivery Model Drive Value For Money

Alliance – Pain/Gain drive value+ Innovation

- Rework

Traditional – Client pays all – either through p y gvariations or risk transfer

33

What delivery model drive value for money

Non competitive allianceNon competitive alliance1. Monte carlo analysis on estimate2. Independent estimate3. Establishment audit4. Commercial alignment - $3m less5. Mid audit for compliance6. Competitive tenders for sub contract works and materials

C titi lliCompetitive alliance - drives innovation and many go someway to satisfying the Client on the VFM debate. However !!

34

How do you score relative to “Value”

Criteria Traditional Alliance Design & Build

1 Ability to promote innovation

1 3 3

2 Cost certainty 1 2 33 Delivery ahead of

programme1 3 3

4 Community Engagement d M t

1 3 2and Management

5 Build in-house knowledge and skills

1 3 2

Likert Scale: 1 = Sometimes, 2 = Most of the time,3 = All the time

Trade-off: criteria vs. cost of establishing alliance All things being equal other methods may deliver same outcomes

35

Criteria 5 could tip balance if building in house knowledge is important to Client

Conclusion

Long term relationships with a contract strategy g p gythat drives the right behavioursProvide excellence to our customers through

Service right investment and the right time– Service – right investment and the right time– Safety - No harm– Quality – Do it once do it rightQuality Do it once, do it right

Contract Strategy that promotes innovationContract Strategy that promotes best solution

Value what Value is to demonstrate “Value for money”

36

money

Conclusion

Not always easy to value “value”

Only the client will know whether they got value for money

Metrowater is learning about better risk allocation and gmanagement

– Portfolio approach– Risk allocation

Balance between empowering the alliance and client responsibility

Demonstrating competitiveness – not an issue

Cost and time taken to select partners – resource & t i t i t th i d t

37

& cost intensive to the industry