Industry Insight No. 22: Facilities management contracting
This article was first published on Lexis®PSL Construction on 4 January 2018.
Construction analysis: Sarah Schütte of Schutte Consulting Limited explores the use of facilities management (FM) contracting, including the pros and cons of using it, how it links in with project funding and what the future holds for FM.
What is FM?
FM is a professional services discipline. FM services are any services which are outsourced by the original owner. For example, a hospital is likely to outsource its cleaning to a cleaning services provider. The cleaning services provider employs or engages individual cleaners who perform the required (contracted) services. Other FM services commonly outsourced include meals, repairs, security, street lighting/ highways, caretaking and delivery/postal services.
In the UK there are several big FM services providers including Interserve, Carillion, Mitie and Amey.
Both public and private sector organisations buy in FM services. Public sector clients include hospital trusts, prisons, schools, central government departments and local authorities.
How is FM organised?
An FM services contract is entered into between the client and the FM provider. The contract ought to contain detailed information on the services to be provided, the levels and frequency, the locations and the standards of output, as well as complaints and escalation procedures. There may also be carve-outs, ie exceptions to the services provided, either in full or after a certain magnitude of work.
FM can form part of PFI or PF2 arrangements, where the private partner then outsources its wide-ranging obligations to more specialist providers. The actual provision of services can be three or four or even more contractual tiers below the client. This is a risk management as well as a practical challenge.
Local authorities should spend time thinking about how they wish to package up services for tender. Some have experienced success with a total package, others prefer to split by expertise. A strategic team of individuals who have varied expertise, including legal support, is more likely to obtain the best results, because they will consider all the possible options.
What is the public sector view?
There are pros and cons. The pros are:
transfer of risk, so the FM provider is responsible (provided the risks are allocated properly)
fewer employees, so a leaner organisation (any existing staff move across to the new provider)
more efficient delivery of services on a bigger scale, and so better value for the taxpayer
resource is more effectively used across a portfolio of properties/locations, eg for call-outs
protection against inflation (a risk item usually borne by the FM provider)
‘shared services’ are becoming more popular, ie where local authorities partner to deliver value through their buying power/volume of potential FM services outsourced
The cons are:
as far as the services user is concerned, the client is still the user’s provider notwithstanding the contractual structure, eg a patient in hospital wants a nice meal, irrespective of whether the cook is employed by the hospital or the FM provider
public relations issues:
clients can be perceived to be hands-off as not directly responsible
FM providers can be perceived as ‘doing the minimum’ to achieve the specification, thereby maximising private sector profit at the expense of a public sector service
if the FM services provider falls away (eg insolvency, breach of contract) then the client is left with a urgent practical problem which can only be solved by expensive emergency cover
the client needs to retain a team to monitor contract performance and manage the provider (its efficiency depends on delegated authority and experience, and being more than a ‘post box’)
ultimate legal responsibility cannot be divested, and lies with the client
What is the private sector view?
In my experience the private sector is less tolerant of problems or complaints. Perhaps because there tend to be fewer contractual tiers, or because there are plenty of small services providers, and a poor one can be replaced quickly (with no public procurement hurdles or headaches).
How does FM link in with funding options for projects? There are a few ways in which FM and project funding options are connected:
a contract which has post-build obligations via a DBFO (design, build, finance and operate) or DBO arrangement—there are commonly bespoke but since June 2017 the NEC has published a DBO contract
a PFI/ PF2 structure might have one or more FM contracts underneath the main long-term leasing arrangements
project funding needs to take into account guarantees of work (ie repairs at no cost to the client during the period of X years). The more extensive they are, the bigger the potential short-term return on investment, and so, for in-out funders, such arrangements make investment in the project more attractive
scaling up of an FM service and rolling out across a portfolio derives value, eg producing 100,000 school meals per day is cheaper per meal than producing 10,000 due to the buying power of ingredients, meal boxes etc
the more automated or process-driven the service is the more efficient it should be, ie time per task reduces
repetitive work should result in fewer mistakes or deviations, which are costly and time-sapping
contracts such as the NEC Term Service Contract are a good basis on which to procure FM services, and provide the parties with creative ways to calculate payment for work done
industry-specific standards facilitate consistency of output and quality assurance, and therefore a stable basis for investment, eg the Memorandum of Contract Documents for Highways Works
The professional body for individuals in the role of Facilities Manager is the Chartered Institute of Procurement and Supply. It promotes Supply Chain Relationship Management and Collaborative Business Relations as being keys to success. These concepts certainly help to effect steady relations, and reduce likelihood of disputes.
Do public procurement rules apply?
They apply only to public sector FM contracts and the thresholds differ according to type of work and procuring authority (see EU procurement thresholds). The procurement process must be a key part of the strategic thinking at an early stage, in order to achieve the ‘best value’ principle and be procedurally correct.
A challenge to a procurement process is hugely costly, time-consuming and potentially embarrassing. Several procurement processes or contracts have been challenged in recent years, eg the West Coast Main Line, East Anglia Rail Franchise, Northern Ireland Water and Transport NI.
What challenges will 2018 bring for FM providers and their clients?
For 2018, I foresee a number of short-term challenges:
Brexit and available workforce to service the contracts. This is a risk management as well as practical challenge as mentioned above. For example, in London 13% of the workforce is from the EEA (excluding the UK) or Switzerland (see Social Market Foundation press release 27 May 2016)
Refinancing/re-gearing of the big providers means their margins will continue to be squeezed for the foreseeable future (eg Carillion’s share price dropped significantly in 2017)
Actual or threatened default by a big services provider will bring the issue of privatisation and public sector contracting back into the spotlight (eg Interserve has had to secure short term funding to avoid breaching financial covenants)
A tightening of the interpretation of services specifications will bring fragility to collaboration contracts as the parties try to protect their position
EY published a report recently in which it stated that it saw no signs of the FM services market picking up.
What does the future look like for FM?
Developments in industry and in the socio-economic-political landscape generally are putting pressure on competing areas of business in the UK, but there are opportunities for growth:
The short and long-term impact of Brexit is a very real practical challenge with potential consequences at both extremes of the scale
Physical security services will become more important to both public and private sectors, particularly in big cities
Public-facing services such as hospitals, schools and prisons are over-subscribed and need huge investment, but budgets are extremely tight
I predict more audits of public sector contracts by the National Audit Office in order to be seen to ensure value for the taxpayer
IT services will come under more scrutiny as cyber risks become more prominent at board level
What can FM providers do to get ahead, and stay ahead, of the competition?
In my view and experience, providers of FM services need to be good at project management—the better they are at planning works and controlling risks, the more efficient and effective their services will be, and therefore the bigger the profit margin.
This is not really an area of focus I see in industry, but I am finding clients are becoming more interested to explore the value in project management and risk management training from the procurement perspective. A lot of responsibility falls on the individual FM manager to manage his/her portfolio and keep on top of issues reported/logged. This needs a client care element of service, as well as attending to and resolving the issue itself. Much dissatisfaction comes from an ill-managed or half-hearted remediation, and the impact is longer- lasting than the value of the problem itself. Such inefficiencies eat right into the bottom line in an almost-invisible but impactful way. In an industry where margins are squeezed, FM providers would do well to focus on this.
I am finding that clients, who are investing in portfolios of projects, or tendering for FM contracts, or taking over FM contracts, or buying shares in FM providers, want more in-depth due diligence reporting than ever. A typical mandate would be to map out the liability/risk structures, thoroughly review the contracts, guarantees, collateral warranties and insurance policies, and, more recently, give more focus to understanding the workforce pool.
In the future, FM providers, who are flexible, well-managed from top to bottom with experienced staff on the ground, and who are geared appropriately, will survive in a market which is getting tougher. The key to all this, as ever, is to understand liability and risk.
Next time, Sarah will give her predictions for construction sector trends for 2018.