Up your street

What should councils think about when renewing existing highways maintenance agreements? Martin Howe looks at the top ten considerations to be borne in mind.

During the next five years, over 30 existing highways maintenance arrangements are due for renewal. Some of the existing arrangements are with Direct Labour Organisations, some with first generation outsourced council staff. Most already involve arrangements with private sector providers.

For most councils who are Highways Authorities, their highways networks are likely to be their most valuable asset. From April, new CIPFA guidelines require the annual valuation of highways networks to include a calculation of the cost for repairs necessary to maintain the highways network in a steady state condition.

Most councils already face a backlog of highways maintenance, particularly after the adverse effects of the last two winters and, in an era of public spending cuts, the renewal of existing highways maintenance arrangements is likely to become more high profile. The fundamental difficulty will be how to address critical highways maintenance from reducing budgets.

Our recent experience in this area raises ten key issues that highways authorities should consider:

1.     What are your objectives?

One of the main objectives of most councils will be to provide an adequate highways maintenance service from annual budgets that are likely to reduce before they increase. Councils need to consider whether they can achieve improved performance by continuing existing arrangements. If the in-house highways team is to continue managing a direct labour organisation or a private sector contractor, where are the greater efficiencies likely to come in order to be able to demonstrate greater value for money? If this is unlikely to be a solution, what alternative arrangements might offer a better solution and why?

2.     Demonstrating value for money

Present highways maintenance arrangements are carried out on a variety of different bases: some are referenced to pre-agreed rates and prices which are either applied to units of work carried out or else are developed into lump sum prices based on anticipated activities. Alternatively, arrangements may be based on paying actual costs subject probably to a target cost and a guaranteed maximum (above which the relevant provider will not recover any additional costs). If a target cost approach is adopted, it may be more efficient to agree target costs on an annual basis (perhaps sub-divided into revenue funded and capitally funded works, for ease of internal accounting) rather than administering target costs for each individual piece of work.

The potential advantage of an actual cost approach is that a council can develop a more accurate picture of where the bulk of actual (rather than estimated) costs are incurred and seek to target efficiencies in these areas. Under any target cost arrangement, agreement needs to be reached before any contract is entered into as to the level of information of actual costs to be provided on a monthly or other basis (recognising that a complete print out of all costs incurred may provide too much detail to be properly digested on a monthly basis).

The council also needs to preserve the "nuclear remedy" of being able to send in its auditors to go through the provider’s books in the event of any suspected irregularities or simply on a sample audit basis. Actual costs may provide better evidence of what it is getting for its money and allow the benefit of any cost saving improvements/innovations in service delivery to be reflected in future actual costs.

With an approach based on agreed rates, although it is possible to agree relatively low rates for individual activities, keeping the rate static over the period of the proposed arrangement (usually at least five years) creates problems both for the provider and the council in relation to the different effects of inflation on labour and cost of materials over time. It is likely that one party will be suffering if the rates turn out to be incorrect – either the provider will be making a higher than expected return or the council will be getting a bargain. Unfortunately, in the latter situation it is unlikely that the provider will continue to provide services at a loss and underperformance and/or adversarial behaviour are likely to result. Payment by reference to rates will also not reflect any underlying improvements in the efficiency in carrying out specific tasks, for example due to technological and process improvements, which is one of the main drivers for contracting with the private sector.

3.     Scope of the services

Each council needs to consider carefully what services are within the scope of the proposed arrangements and which are to remain the council‘s responsibility.  Considerations are likely to include whether larger highways improvement schemes are within the scope of a long-term highways maintenance arrangement and whether transport parking and planning, network management and regulatory functions are also included.

4.     Incentivising improved performance over a long term contract

Careful thought needs to be given to the performance management system that will underpin any Highways Maintenance Contract, particularly where operational control is vested in the provider. We have come across a range of positive and negative incentives, ranging from shares in cost savings below a target cost, extensions to the term of the contract being linked to performance against targets and negative incentives such as deductions for underperformance against performance targets.

Great care needs to be taken in developing performance management systems to ensure they are relatively simple to operate and encourage performance on the part of the provider that will meet with the council's requirements so that "good performance" works for the benefit of both the provider and the council.

5.     What resources does the council presently have in-house and what resources does the council need going forward?

Many existing highways maintenance arrangements are based on providers carrying out works and services in response to a council "command and control" via the in-house highways team. Whilst this approach provides the council with greater control over the works carried out, it loses the potential benefit of a provider being able to plan more efficiently the delivery of an agreed programme of highways works. Any outsourcing approach is likely to involve a TUPE transfer of relevant staff from any existing subcontractors, if not also from the council.

In any of these potential scenarios, it will be vital for the council to ensure it identifies the resource it will need to retain in order to successfully manage the contractual arrangements it sets up and seeks to ensure that staff who may not be retained are not placed in a position of having a conflict of interest by being asked to evaluate individual bidders for whom they may end up being directly employed.

6.     Managing the procurement

For the renewal of anything other than the most simple term contract for the provision of highways maintenance services, it is likely that the competitive dialogue will be the most appropriate form of procurement to enable the council to articulate what it is seeking to achieve and really understand what bidders are offering. A successful procurement needs to be carefully planned in advance to decide the selection and award criteria and also what is to be dialogued and what is not to be dialogued – in the present market conditions, private sector bidders look for the comfort of a council that has a good idea of what it is looking for so that they are not faced with open ended bid costs in trying to tie down what is required.

From our extensive experience of managing procurements, it is essential that the contractual documentation is developed during, not after, the competitive dialogue so as to focus on the detail of bidders' proposals and avoid protracted negotiation of contractual documents after selection of a preferred bidder.

7.     Employment and pensions

Any TUPE transfer of staff is likely to raise the thorny issue of providing comparable pension cover for transferring employees. The council needs to consider how to deal with pensions risk transfer as pensions costs will eat into any annual budget. "Cap and collar" or "pass through" mechanisms may leave more risk with the council but are likely to provide better value for money. Apart from the cost to a private sector provider of providing equivalent final salary pensions schemes to existing Local Government Pension Funds, there is the practical problem of managing a potential two tier workforce, part enjoying these pension benefits, part not.

8.     The form of contract

There is no standard form of Highways Maintenance Contract that will fit councils' requirements exactly. The NEC Term Service Contract or the Highways Agency Managing Agent Contract are probably the closest starting points which can be most easily developed into term contract arrangements. However, even relatively simple term maintenance arrangements will require amendment to reflect the particular council's requirements and/or method of operation.

9.     Building long term relationships

Most Highways Maintenance Contracts tend to be for a minimum of five years to make it worthwhile for private sector bidders to invest in the contract. Because the exact nature of the works and services to be provided during each financial will not be known in advance, the success of the contract will depend in large part on the success of building a long term relationship with the provider. The underlying behavioural traits will be the creation of trust, honesty and openness in all dealings and looking for solutions that provide returns for both parties.

10.     Preparation, preparation, preparation

As with many things, time spent in preparation is rarely wasted. Thinking through the council's objectives and how these might be met will provide handsome dividends when it comes to discussing these issues during a procurement process.

Martin Howe is a partner in the construction and engineering team at Bevan Brittan. He can be contacted on 0870 194 8975 or via This email address is being protected from spambots. You need JavaScript enabled to view it.