Highways England has outlined key information about its Smart Motorways Alliance (SMA) plans – potentially worth up to £6bn over 10 years – which it says reflects a radical new direction for contractual arrangements on the strategic road network.
Prior to publishing the contract notice in late September and following a market engagement exercise in July 2018, Highways England has prepared a supplier engagement outputs report, which outlines the objectives of the new model, the budget setting process and the way payments to suppliers will be arranged.
It has also published a prior information notice, which reveals the contract notice is expected to be published on 25 September.
The SMA will be contracted to deliver the entire Smart Motorway Programme (SMP) for the balance of RIS 1, RIS 2 and RIS 3, using a single multi-party Alliance contract for Highways England and all Alliance partners.
The main aim of the SMA contract is to ‘create a delivery environment with shared ownership of the programme budget and a risk profile which links the Alliance Partner fee recovery (overhead and profit) to collective delivery performance’.
The key objectives of the commercial model are to:
- Drive collaboration through shared objectives and key performance indicators that aggregate performance and reward individual partners at Alliance collective level.
- Provide for partner returns to be improved by delivering solutions that drive down cost below the programme budget.
- Incentivise suppliers to collaborate effectively with Highways England and each other to mitigate underperformance by sharing knowledge and resources in an open-book environment.
- Provide an incentive model which provides confidence in the contractual programme budget, and provides additional opportunity for reward. A sustainable risk profile for the Alliance partners.
The budget setting
The budget will be established through a settlement agreed with Department for Transport (DfT) based on the following steps:
- The Alliance scope of works will be costed utilising historic cost data with supporting quantities for those schemes with a preliminary design. Works that do not have a preliminary design developed will utilise historical costs for a typical scheme adjusted through a quantitative risk assessment for elements which are seen as ‘abnormal’
- An assumption of future work expected to be delivered within RIS 3 will be included in the Alliance budget with provision for efficiency that will be required to secure funding settlement from DfT. Should the forecast scope change for RIS 3 then an adjustment via change control will be applied to the Alliance budget when the settlement is reached.
- The smart motorway programme budget will be subject to efficient commitments embedded within the funding baseline (post efficient) and carried forward into the Alliance budget.
- The budget will include all Alliance costs, partners, supply chain and Highways England (including Highways England Alliance resources) including Alliance Partner fees.
- Inflation will be allowed for within the budget, aligned to RIS 2 settlement agreed with DfT, and a defined inflation index for RIS 3. The RIS 3 inflation allowance can be adjusted via change control when the settlement is reached.
- All foreseeable delivery risks will be included within the budget. Adjustment to the budget is only envisaged with changes to high level client requirements.
The Incentive Model
The Highways England report states that partners will recover a ‘guaranteed’ proportion of a tendered fee awhile additional payments will be performance based.
Alliance partners must submit at tender stage a fee percentage based upon their forecast works scope, which will be aggregated for all partners into a lump sum fee and paid on a regular basis ‘in accordance with the terms of payment for each proportion of the fee and earned value achieved’.
The Alliance lump sum fee will be apportioned into three elements:
Base fee proportion – Paid regardless of performance but set set at a level such that the goals proportion of fee and budget fee will be required in order to achieve satisfactory overhead and profit recovery to their business .
Alliance goals fee proportion – Paid on the basis that the Alliance collectively achieves performance targets or made available for reinvestment by the Alliance in initiatives to address areas of underperformance.
Alliance budget fee proportion – Paid to incentivise investment in innovation and productivity to ensure delivery against the programme budget. The Alliance will secure payment of this fee proportion in full in the event that programme out-turn is equal to the post efficient Alliance budget. The budget fee element however cannot be earned from any savings achieved due to amounts being forfeited from the goals fee element.
All three proportions of the fee will be assessed and payable against earned value on a monthly basis.
Alliance Budget surplus/deficit:
Alliance partners can earn additional payments through a proportion of gain share against the budget, over and above the budget share, in circumstances of budget outperformance (underspend). A liability cap to the Alliance Partners for overall budget performance (overspend) will be set at the same level as the budget fee proportion.
Highways England is seeking feedback on the updated commercial arrangements ‘specifically any key matters that would influence the participants appetite to tender or impact the structure of their future tender submission’.
Please send feedback by Wednesday 5 September to: RTMYourQuestions@highwaysengland.co.uk