Like runners in a relay, water and wastewater utilities across England and Wales are hot off the starting block on a $30-billion, five-year construction sprint. This is the fourth round of environmental infrastructure upgrades since utilities were privatized in 1989, but it will now be a showcase for new procurement and  management strategies to reduce burdens on capital budgets—and on ratepayers.

Utilities must cope with new regulatory imperatives, aging facilities and changes in capacity demand. The current five-year program, known as Asset Management Plan 4 (AMP4), has a big mission through 2010. It specifies 1,000 projects to upgrade effluent quality at wastewater treatment plants, 2,000 to cope with intermittent waste spills and nearly 230 to upgrade water treatment and pumping. The program’s total pricetag will add about $1,300 in costs per household, according to the U.K. regulating agency, the Office of Water Services (OFWAT).

“There are many, many projects to do. That brings with it a different type of challenge,” says Ian McAulay, managing director of MWH U.K. Ltd., the Warrington, England-based unit of MWH, the Broomfield, Colo., giant. Utilities will again rely on integrated teams, working with their design and construction providers to handle workload, says Nick Harney, director for water-wastewater projects at WS Atkins, Epsom, England.

Private Entities

Britain’s unusual infrastructure investment stems directly from when the 10 large water and wastewater entities in England and Wales were sold on the stock market. But lacking real competition, utilities are still heavily regulated by OFWAT. In Scotland and Northern Ireland, water-wastewater sectors are much smaller, still publicly owned and regulated differently.

Since 1989, large English and Welsh utilities and OFWAT have engaged in intense negotiation every five years over infrastructure investment needed because costs are financed from customer bills. OFWAT sets corresponding price hike limits for each utility. The review for AMP4 began in 2002 but only concluded early last year. The agency agreed to approve about $30 billion of investment, about $7 billion less than the utility firms sought.

OFWAT’s investment figures assume ever-increasing efficiency in utility construction. If companies can improve on OFWAT’s cost assumptions, they keep the savings. “But we will account for that [improved] efficiency in the next pricing period,” says Kevin Ridout, an OFWAT principal engineer.

With each successive five-year spending program, OFWAT extracts ever more efficiency from utility construction by squeezing allowable rate hikes. “That forces our clients to think outside the box and look at other methods,” says Ian Kirkaldy, regional director of client services at Black & Veatch Ltd., the Redhill-based unit of the U.S. firm based in Kansas City. When the first AMP began in 1990, utilities “all effectively started at the same place,” he says. “The challenge...was all about delivery after years of underinvestment...with a small resource base to do it.”

As time passed, however, utilities' ownership and goals both diverged. Some firms are still listed on the U.K. stock exchange, while a few have been acquired by corporations. As a result, approaches to project management in various AMP periods have changed. While working more collaboratively with the construction industry, has produced efficiencies, two utilities with big building missions are bucking that trend. The firms are wresting more program management control from construction providers than ever before, in the cost-saving drive.

Changing Priorities

Thames Water Utilities Ltd., which serves the London area, is one. Its $5.4-billion AMP4 program includes spending about $200 million each to upgrade several large treatment plants, and $180 million a year to replace pipes in its Victorian-era water supply network.

Under more pressure, Thames is shifting toward a command-and-control approach. “In AMP3, we appointed people we called alliances. Thames Water and contractors worked together looking after projects from birth to death,” says James Hazelton, a Thames partner for procurement business. But “we felt we lost a bit of control and were getting a contractor’s view...of what should be done.” The utility’s decision to now tackle front-end design is “a big change,” adds Chris Tyerman, a regional director of Costain Construction Ltd., London.

Thames now has 13 project management teams that handle different aspects of its program, drawing from a pool of nine “performance partner” contractors. Three firms handle treatment plant projects and six do water system work. Under five-year contracts extendable to 10 years, contractors recover project costs plus a fee, and share overruns and savings with the owner.

In the last construction go-round under AMP3, Thames assigned contractors to separate geographical areas, in which they handled all construction. This time, their workload is less secure. Utility project managers select contractors from the pools, depending on available capacity and performance. Thames of-fers a selected contractor the project scope and target cost. “It’s take it or leave it, [but] nine times out of 10 there’s a meeting of minds,” says Hazelton.

Thames’ managers each have access to two design firms to develop projects. The utility may assign “a small amount of design” to contractors to obtain their input, but it limits construction firms’ role in project development. Hazelton admits that in a country where early contractor involvement is still favored, “we are bucking the trend.”

This approach covers Thames’ process plant projects worth at least $25 million and system construction jobs worth about half that. Bigger projects are bid separately, but Thames has the option to offer 5% of small packages on the open market. “We want to retain some benchmarking capability,” explains Hazelton.

Growth Mode

United Utilities plc, serving northwest England, has also regained more control  but still requires project and risk management skills,” says McAulay.

 United teamed in 1994 with Bechtel Corp., San Francisco, which brought in its 500-person engineering unit a year later. The U.S. firm also took charge of United’s remaining work in AMP2, until MWH displaced it in 1999.

In AMP3, “we took the projects from start to commissioning,” says McAulay. “We are now in close-down, ahead of schedule and under budget.” MWH’s workforce in AMP3 peaked at about 900 but is now under 100. MWH is building up its AMP4 team, which may reach 400 for the firm’s smaller role. For United’s $5.3-billion mission under AMP4, “we revised the role of MWH,” says Colin Maloney, utility investment director. The design firm is now “our solutions partner,” he says. United itself now manages its infrastructure investments.

Maloney says that AMP3 “was very successful. We delivered the biggest program of all the water companies. Now we have tried to build on some of the lessons.”

Outside firms had substantial project control. “We were more of a client organization,” says Maloney. United “wanted better management and delivery and being more involved,” he says, noting that closer control of management now “allows us to develop our own intellectual property.”

For the current program,United recruited two contractors as partners to deliver around $1.8 billion of water network upgrades. Two design-build teams were also appointed last May to handle about $1.6 billion of water-wastewater treatment plant work. “The main difference between AMP3 and AMP4 is that all stakeholders are involved,” notes Harney of Atkins. The firm is the design partner of contractors Costain and Galliford Try plc, Cowley, in one of United’s process plant frameworks.

“Because we work in a seamless way, the design-build guys are part of the project team in early stages,” says Maloney. United’s more central role “brings in  client expertise and asset knowledge,” adds Costain’s Tyerman. United and Thames have regained more program control to retain their role as “intelligent clients,” says Nick Daines, a director of AMEC plc, London. But other utilities still rely heavily on contractors.

Utility Southern Water Services Ltd., Worthing, has chosen to maximize risk transfer to contractors and design firms for its $3.2-billion AMP4 construction program. It has awarded a contract to implement nearly half of its investment plan, about 270 projects, to a consortium of United Utilities, Costain and MWH. The group “is responsible for everything from the point of defining the need,” says Niall Mills, Southern’s program director. The consortium stands to share savings or overruns equally with the utility, says Mills. “I’m very optimistic we’ll be making payments,” he claims. “The contractor is performing extremely well.” Mills denies the possibility that the target cost may have been generous. In the bidding, the last two competitors “fought tooth and nail to get the job,” he adds.

Welsh Water goes further with having contractors perform all tasks, even hiring United  Utilities to run its utility operations. AMEC has one of six 10-year deals with Welsh Water on a cost-plus-fee basis. Its contract covers about $36 million in annual investment in wastewater projects.

Contractors take projects from a “line on [Welsh Water’s] business plan” to commissioning, says Daines. Welsh’s cost consultants keep track of budgets, but contractors are trusted to perform. Depending on the work, one contractor takes the lead with others becoming subcontractors, says Tyerman of Costain, another of Southern’s contractors.

Still Risky

AMP work provides bonanzas to Costain and other firms, but not always. Workloads lurch from feast to famine. “At the moment, the program is not going as fast as we would like,” says Atkins’ Harney. “It took a long time to get off the ground and we had to redeploy resources from elsewhere.” With 60% of its 550-person water engineering staff working on AMP4, Atkins is heavily exposed to the feast-famine cycle.

During work famines, the environmental sector loses skilled staff, creating shortages later. “There is a tremendous resource crisis in the U.K.,” says Harney. As one of Europe’s largest design firms, Atkins can more easily mobilize internal resources than others. But it also must tap design centers in India, the Middle East and China.

“I have a feeling that the industry will start overheating seriously this summer,” suspects Black & Veatch’s Kirkaldy.  The firm already uses its office in Mumbai, India, as a design resource for U.K. water work. He knows of firms already training pipelayers in Estonia for British projects.

“AMP3 was very back-end loaded,” acknowledges Southern Water’s Hazelton. “We are being forced by OFWAT not to do that any more [because] there there so many screams from the supply side.” The agency is now smoothing the work load. For contractor Costain, the cycle is “not a bad problem,” says Tyerman. The firm’s $2-billion workload will provide half its profits for five to 10 years. “Returns are higher [than for normal jobs] because you spread good and bad ones over a number of projects, and we have almost 100% use of staff time,” Tyerman says.

Creating today’s investment approach “has been a 15-year learning process” for the U.K. water-wastewater sector, says MWH’s McAulay. Utilities “are a much more mature and intelligent client base,” he notes.

Black & Veatch and Balfour Beatty Construction Ltd., London, are both increasing their roles in the current AMP round, despite the upped ante. “From a contractor’s perspective [alliancing] certainly feels the right way,” says Alistair Hodgson, Balfour Beatty’s associate director for utilities. “There’s a lot of risk involved so it’s a case of making sure the utility makes an attractive proposition. We are selective about the people we work with.”

Kirkaldy considers owner and supplier relationships in AMP4 to be “business to business,” no longer casting design firms in a servile role, he says. But Hodgson is still weighing the merits of the new management approaches. “Let’s wait and see who’s done the best job at beating the efficiency targets,” he says.