29/05/2013

Risk and Accountability in Utility Network Contracts - A Case Study in the Water Industry

Mike Levery
Managing Director, MCL Consultancy Ltd

 

 

ABSTRACT

This case study will examine the practicalities of applying NEC contracts to water supply networks, including a structured approach to identifying activities, development of resource and financial plans, and the application of key performance indicators (KPIs).  KPI is a much used and abused acronym.  In performance contracts of this nature, there should be no more than five KPIs, and they are contractually linked to the financial reward mechanisms; all other performance indicators either inform against a KPI or are service level indicators.  Also identified are information reporting requirements on a monthly, quarterly and annual basis, showing who sees what, and at what level. 

WATER SUPPLY NETWORKS

Water supply networks are arguably the most complex of all utility networks.  They transport treated water from treatment works to customers' properties and commercial premises. They are made up of a variety of different pipe sizes and composition, from traditional cast iron through to modern plastics.  Service reservoirs provide in-network storage with flow and pressure control achieved through measurement and valving.

The transition from schedule of rates to volume based performance contracts requires the consolidation of schedule of rates activities, the development of a resource plan and financial plan, and the establishment of key performance indicators and target setting as described in the previous article.

Main activities and definitions

The scope of the contract covers the complete network up to and including the customer's boundary box.  There are eight main activity areas, which are defined as follows:

1. Bursts:   Customer reported visible bursts or loss of water supply.

2. Leaks:   Leakage detection identifying leakage of water.

3. New Connections:  Developers requiring connection to the water supply network

4. Boundary Boxes:  Installation of new customer boundary boxes and stop taps.

5. Renewals:   Replacement of pipes and fittings.

6. S81 Highway Covers:  Repair/replacement of highway covers reportable under NRSWA S81.

7. Planned Network Cleaning: Cleaning and scouring of tanks and pipework.

8. Network Maintenance:  Repair and maintenance of network equipment, together with investigation of pressure and quality issues.

Mapping sub-activities to main activities

Each main area of activity must contain a number of sub-activities which accurately reflect and encapsulate the full scope of work carried out on the water supply network. 

The volume of work by sub-activity in the previous contract year is built up by activity to generate the target volume for the current year. Figure 1 maps the sub-activities to the eight identified main activities. 

Figure 1      Activities and sub-activities

 

 

 

 

 

 

 

 

 

 

Construction of target cost

Once the volume of work by activity has been developed for the contract year the contractor is invited to prepare their management plan in a structured format.  The first task is to complete a resource plan by activity and volume which clearly demonstrates how the contractor intends to deploy directly assigned resources. 

Figure 2  Resource plan by activity and volume

 

 

 

 

 The financial plan can now be prepared by activity in order to establish the contract year's target cost. 

Figure 3    Financial plan by activity and volume

 

 

 

 

The financial plan includes overhead and declared profit.  The total cost equates to the target costs for the contract year.

The total cost for each activity is spread across each sub-activity area, and then divided by the sub-activity volume to generate a unit rate for each sub-activity in the contract year.  The contractor is paid monthly the actual cost of the work carried out.  Efficiency initiatives developed by the contractor in the contract year provide the opportunity to deliver the contracted volume at a reduced cost and generate gainshare.  Activity volumes are profiled and operate within a tolerance band.  Adjustments to target cost can only be made if the volume of work by activity moves outside the tolerance band. 

Performance objectives and measures

Regulated utilities have performance measures and targets established by the regulator on an annual basis across all areas of their business.  For water supply networks the regulatory measures cover loss of water supply and customer complaints.  Both these measures are incorporated in a water supply network contract, together with turn-round time on high priority work, and the achievement of a service level agreement (SLA) and Balanced Scorecard.

The key performance indicator (KPI) definitions for a water supply contract are:

1. DG3: Ofwat measure for the number of properties in a contract year that have been without a continuous supply of water for more than six hours. 

2. DG7: Ofwat measure for the number of written complaints made against the water company.  For a water supply contract these will be written complaints specific to the Water Distribution Network.  

3. High priority work turn-round time:  This is a customer service measure based on ensuring that customer reported bursts are repaired within three days of notification. 

4. Service Level Agreement (SLA):  This usually incorporates a balanced scorecard approach to determine overall contract performance against agreed targets.

No matter how efficient the contractor is in beating target cost, no gainshare can be awarded unless all four KPI targets have been achieved.

Meeting structure and hierarchy

The key elements of monthly and quarterly meetings are shown as follows:

Monthly Formal performance review of contractor performance

• Actual cost vs. target cost profile vs. feedback work order value.
• KPIs vs. monthly target and year end projection.
• SLA and balanced scorecard vs. monthly target and year end projection.
• Low service damages outturn.
• Volumes by activity against annual cyclical profile.
• Risk register review.
• Compensation event review.
• Early warning.
• Health and Safety performance.

All measures to be based on both contractor and depot performance.

Quarterly Monthly performance review +

• Risk and compensation event sign-off.
• Identification of initiatives/efficiencies impacting on management plan.
• Target cost review.
• End of year financial profile.

Production of quarterly reports to Contract Board.

Period 7 Monthly performance review + quarterly review +

• Cost audit.
• First draft following year management plan, resource build-up, target cost build-up, KPI targets, SLA and balanced scorecard.

Presentation of half year report to Contract Board.

Period 10 Monthly performance review + quarterly review +

• Final agreed following year management plan, resource build-up, target cost build-up, KPI targets, SLA and balanced scorecard.

Period 13 Monthly performance review + quarterly review +

• Cost audit.
• Formal review of previous year’s performance.
• Determination of gain/pain share.
• Approval of outcomes from the incentive scheme.

Presentation of full year report to Contract Board

The meeting hierarchy and information flow is shown in Figure 4.

Figure 4    Meeting hierarchy and information flow