The Tendering And Contracting Environment

Published Date: 02 Nov 2017

EXECUTIVE SUMMARY

Generally no organisation will have all the skills required to deliver complex projects and thus additional skills required for the successful completion of some projects must be bought in from external sources. The policy of tendering and contracting for the provision of equipment and services has been widely adopted by Australian government in recent times and provides advantages such as increased flexibility in service delivery, greater focus on outputs and outcomes rather than inputs, freeing public sector management to focus on higher priorities, encouraging suppliers to provide innovative solutions, and cost savings in providing services.

It has been widely acknowledged that one mechanism for generating these cost savings is contestability or competition and tendering is a mechanism for introducing such contestability into publicly funded services and as long as competition is maintained, efficient outcomes should be attainable.

Whilst contracting brings new opportunities, there are considerable risks and disadvantages associated with it also. Most notably outsourcing does not equate to contracting out the responsibility for the delivery of a successful project, it simply places considerable focus and emphasis on project and contract management, which require employees to develop new approaches and skills. If employees don’t have the appropriate skills to achieve this it can lead to poor quality and there may be concerns of accountability in terms of trying to decide who is actually at fault.

In addition to the immediate impact of outsourcing on public accountability the transition to an outsourcing arrangement can create long term impacts, including the loss of information flows, skills and the associated knowledge in government sectors, higher fixed and continued costs of retaining staff and he potential for lack of competitive interest in markets and thus a contractor may become a monopoly and eventually charge monopoly prices. Other concerns also include the view that a poorly managed outsourcing approach can result in higher costs, wasted resources, impaired performance and increased levels of stakeholder and public concern.

Selecting the appropriate process is therefore important, but this is often not easy though, as the project manager needs to consider many variables including which contract types to use, the user requirements brief for each contract, the evaluation criteria that will be used to judge each proposal and how they will approach the market. These choices will ultimately determine the quality of services provided and the level of control the project manager will have during delivery of the project.

Having a process in place to follow once the evaluation process begins is also important. If sufficient thought has gone into planning this area then efficiencies can be achieved and a lot of time and money saved. These cost savings may be achieved through detailing a more efficient process or by ensuring a user requirement brief is adequate and allows for the appropriate company to be chosen in order to achieve value for money.

THE TENDERING AND CONTRACTING ENVIRONMENT

Generally no organisation will have all the skills required to deliver complex projects and thus additional skills required for the successful completion of some projects must be bought in from external sources (Turner, 2003). The policy of tendering and contracting for the provision of equipment and services has been widely adopted by Australian government in recent times, with the Industry Commission estimating the total value of services contracted by the Australian Public Sector is $13.3 billion (Industry Commission, 1996).

The contracting of public sector services provides advantages such as increased flexibility in service delivery, greater focus on outputs and outcomes rather than inputs, freeing public sector management to focus on higher priorities, encouraging suppliers to provide innovative solutions, and cost savings in providing services (Barrett, 1999).

It is important to recognise however that Public Sector contracting is not just about the lowest price or concepts of profit or shareholder value, it is about maximising overall value for money for the taxpayer (Molenaar & Yakowenko, 2006). This requires consideration of issues other than production costs, such as client satisfaction, the public interest, fair play, honesty, justice, equity and also requires proper accountability for the stewardship of public resources (Barrett, 1999).

The development of best value for money procurement concepts in the public sector have to some extent been borrowed from the ideas and approaches used to procure products and services in the private sector, who have long sought to get the best value for money (VFM) expended (Molenaar & Yakowenko, 2006). There is strong evidence that competitive tendering and contracting can lead to cost savings for Governments Departments in the vicinity of 20 per cent, without sacrificing quality (Domberger & Jensen, 1997).

It has been widely acknowledged that one mechanism for generating these cost savings is contestability or competition (Fraser & Quiggin, 1999). Contestability occurs when the sole supplier does not have a permanent hold on the market and could be displaced by a more efficient producer, charging lower prices (Pancharatnam, 1999). The lower the market entry and exist costs, the more contestable or competitive a market will be and consequently the greater its static and dynamic efficiency (Webster & Harding, 2000). Entry and exit costs include high minimum levels of capital required before production can begin, restricted access to best practice technologies and information, and legal prohibitions (Webster & Harding, 2000).

Tendering is a mechanism for introducing such contestability into publicly funded services and as long as competition is maintained, efficient outcomes should be attainable (Turner, 2003). It was once held that a large number of buyers and sellers were required to fuel this process (Webster & Harding, 2000). Recently however it has been acknowledged that an active threat of entry, known as potential competition, may simply be enough to force incumbents to conform to desirable competitive behaviour (Domberger & Jensen, 1997).

Whilst contracting brings new opportunities, there are considerable risks and disadvantages associated with it also. Most notably outsourcing does not equate to contracting out the responsibility for the delivery of a successful project, it simply places considerable focus and emphasis on project and contract management, which require employees to develop new approaches and skills (Barrett, 1999). Although accountability is increased during the evaluation and procurement stage, accountability in terms of identifying who is responsible if there is a service failure can cause problems (Webster & Harding, 2000). Barrett (1999) also raises concerns that a poorly managed outsourcing approach can result in higher costs, wasted resources, impaired performance and increased levels of stakeholder and public concern.

Both of these points are of relevant concern in the CFI Branch where projects similar to P0004 are being delivered. As Barrett (1999) suggests one of the key reasons for outsourcing services is that the private sector has specialised skills and can therefore undertake these more efficiently. The CFI Branch acknowledges this and as such procure specialist skills in the form of external project manager/contract administrators (PM/CAs). In doing so they acknowledge that employees within the branch are not specialists in these fields, however employees are then required to not only write the user requirement briefs for the PM/CAs, but then manage the contracts and ensure quality services are provided. This creates problems as the briefs are usually inadequate and as such the Branch fails to get the level of service they were ultimately looking for and are forced into varying contract values when they request the PM/CAs to do work that weren’t in the original briefs. Likewise if the user requirement briefs are not accurate and monitored properly, then issues and risks may not be addressed early and appropriately and if they eventuate the issue of responsibility for the problems cannot be determined.

In addition to the immediate impact of outsourcing on public accountability the transition to an outsourcing arrangement can create long term impacts (Barrett, 1999). The Industry Commission (1996) highlighted the following concerns:

The loss of information flows, skills and the associated knowledge in government sector can reduce the government’s longer-term ability to devise policy;

The fixed and continued costs of retaining staff in government to oversee the process of tendering, monitoring and evaluation can be quite high; and

The potential for lack of competitive interest in markets and thus a contractor may become a monopoly and eventually charge monopoly prices.

Steane & Walker (2000) also have concerns that tendering and contracting can limit the growth of networks at community levels and thus is open to regulatory capture by powerful monopolist providers. This concern increases as the number of operators diminishes with global purchasing (Hensher & Wallis, 2005). Webster & Harding (2000) concur and add that emerging markets or services, including Defence activities, which have high privacy or national security implications may not be suitable for contracting out.

The P0004 project team deliver works packages of a very unique nature and are starting to notice the limiting amount of competitiveness in the market. The project recently tendered three large packages and although the prices were relatively close to the pre-tender estimate the number of companies bidding for the work has decreased significantly over the last few years.

In addition all the tendered works packages eventually went to the same company, which further impacts the lack of experience gained by other companies and could point to the start of a monopoly.

THE TENDERING AND CONTRACTING PROCESS

A sound tendering process and effective management of the resulting contract are critical for the efficient, effective and sustainable delivery of programs (Barrett, 1999). Turner (2003) states that the selection of the most effective procurement strategy could produce cost savings in the vicinity of 8 per cent.

Selecting the appropriate process is often not easy though, as the project manager needs to consider many variables including which contract types to use, the user requirements brief for each contract, the evaluation criteria that will be used to judge each proposal and how they will approach the market (Turner, 2003). The choice of contract type, together with the development of the user requirements brief is extremely important as it will ultimately determine the quality of services provided and the level of control the project manager will have during delivery of the project (Barrett, 1999).

Project P0004 is being delivered by a Government Agency and as such the process of contracting and tendering is subject to a number of strict policies and procedures. The CFI Branch policy dictates that only the following types of contracts should be used:

Design Services Contract (DSC) – consultant is contracted to deliver specific design documents and then carry out onsite monitoring of the construction contractor for quality insurance (Ward, 2008).

Head Contract (HC) Construct only – stipulates that the design responsibility is primarily that of the DSC employed by the client and the head contractor is primarily responsible for construction only (Ward, 2008). A DSC delivered in conjuction with a HC allows maximum control for the project team as they can be involved in the design process and then select the HC to deliver the works packages (Barrett, 1999).

Managing Contractor (MC) - a single firm is employed by the client to undertake the design, procurement, construction and commissioning of the entire works (Ward, 2008). As the client’s responsibilities are limited to preparation of the requirements brief, inspections, payment and ensuring that the works meet their performance guarantees of the user requirements brief, they hold minimal control over the project (Barrett, 1999).

Although these contracts have proven success helping to deliver successful projects, and it restricts the amount of training required for current staff, it does leave the door open for misuse of contracts, which has occurred previously. Past project teams have used an MC contract in order to reduce their responsibility and workload, when in fact there existed the need for them to have greater control in the design process in order to ensure stakeholder consultation was adequate to define the product required. Utilising the MC contract, and therefore restricting the lack of involvement in the design team selection and process, has also led to buildings being designed fair and above the expected requirements, and although within budget, has resulted in assets that haven’t delivered value for money.

The project team for P0004 utilised the DSC and HC contracts for the works packages across the different bases. The DSC was responsible for finalising the design documents and this was used by the project team as the basis for the HC user requirements brief.

Once a contract type has been selected and the requirements brief established, the difficult process of determining the evaluation criteria, and weightings, to be used for contractor selection must occur (Ward, 2008). Typically it is based on multiple factors that include cost, schedule, quality management, safety, and technical ability (Molenaar & Yakowenko, 2006). The subjectivity of evaluation means that most criteria can be manipulated so that the evaluator can, if they wish, choose who they want. It is therefore important that evaluation criteria are accurate recommendations and not just included for the sake of completeness rather than as recommendations (Ward, 2008).

Pancharatnam (1999) agrees with this approach and states that a good evaluation criteria should include the following:

Execution plans or method statements;

Schedules; and

Commitment of time and the experience, quality and availability of key project personnel

The process of the evaluation criteria being created after the requirements brief is one area where the CFI Branch process differs. In CFI an Evaluation Plan (EP) must be constructed as part of the Project Development and Design Plan (PDDP). The PDDP is the original document created in order to gain project and funding approval. The EP states how the evaluation process is to be managed and what criteria each contract that is tendered must be evaluated against. Generally those criteria identified above by Pancharatnam are included with the majority of weightings being placed on experience and commitment of resources. This process of early evaluation criteria establishment is often inefficient, as was evident when the P0004 project team were required to amend the EP to add additional criteria when they stipulated the HC to supply AGL equipment as part of the contract. Although it allowed for the reduction of resources for another procurement process in the future, it did provide a significant time delay due to Delegate approval being required and thus the release of the tender package was delayed.

Upon completion of the above steps the tender package is then ready to be advertised. It is usual for the project team to have undertaken a prequalification exercise prior to tender (Ward, 2008). Clients favour prequalification because it removes financially or technologically weak organisations and ensures a competitive choice of contractors, each of which is capable in their own right (Turner, 2003). Prequalification is also popular with contractors because it removes organisations without the necessary skills, experience and management expertise and allows them to compete with peer group members who will have similar costs and overheads (Ward, 2008).

The CFI Branch utilises prequalified list of providers, known as the Defence Infrastructure Panel (DIP), where contracting certain services. The list of companies on the DIP were selected by allowing any interested companies to provide a proposal detailing what their company could provide in terms of people skills and experience. All proposal were judged on these criteria and if deemed successful were placed under certain categories of the DIP. For P0004 the project team used the Airfield Pavement and Lighting specialist list to contract the design services. Although prequalification can be used when selecting head contractors, given the specialist nature of the works packages for P0004 there are only a handful of providers Australia wide who can perform the works and therefore open tender was used.

In the case of an open tender once the package has been released and the tender period has closed, the official tender evaluation process can begin. The first step in the evaluation process is to record the tenders received.

According to Turner (2003) the tender opening panel should be composed solely of project representatives. Ward (2008) disagrees however and believes that in order prevent malpractice organisations should require an employee who is independent from the project team and tender review board to open and record the tenders (Ward, 2008). The CFI Branch utilises the approach dictated by Ward, with the tender opening for P0004 being conducted by a branch administrator independent from all project teams and dedicated solely to tender coordination.

Once the tenders have been recorded they can be distributed to evaluation members from the project team and individual assessment can commence (Turner, 2003). It is vital that the evaluation process is carried out as objectively as possible and confidentiality maintained (Ward, 2008).

Ward (2008) believes that in order to save time and unnecessary work a preliminary assessment by comparing the tender prices against the client’s pretender estimate should take place first as it will identify any tenders that are clearly not going to be acceptable because they are significantly in excess of the budget, or have no commercial merit (Ward, 2008). Policy within the CFI Branch states that in order to prevent malpractice and have a defensible audit trail a VFM analysis should be conducted with regards to both technical and financial scores and therefore the practice outlined by Ward is not used.

Once individual assessments have been conducted all members should meet and identify and discuss the differences between all the companies tenders (Turner, 2003). Once evaluated the members summarise their findings in a report and provide a recommendation as to what company offers best VFM (Ward, 2008). Because quite different aspects need to be compared, actually reaching a conclusion on the preferred tender is difficult. Balancing a contractor’s greater project management capability against another’s superior technical solution is not easy. The process for the evaluation of head contractors for P0004 was conducted in tis exact manner. Members evaluated tenders and scored them based on the selection criteria, the members then met and compared notes and scores and awarded scores based on comparative analysis. The members then consider the prices tendered with the technical results of the evaluation and reach a VFM assessment. The findings and recommendation of the members is then provided in a report format for the Delegate to read and approve.

Next the successful and unsuccessful tenderers should be advised of the outcome. Unsuccessfully tenderers should be offered a debriefing by the client, as it will provide a more effective or competitive tender for their next enquiry (Ward, 2008). The CFI Branch place high importance on the requirement to debrief unsuccessful tenders as it allows the companies to meet with the Branch and discuss ways to ensure they can provide a better tender next time around and ensure competitiveness is maintained in the market.

Finally post tender negotiations take place with the company who was considered to offer best VFM in order to eliminate queries, minor commercial or technical omissions or qualifications from the proposal so that a contract can be awarded (Ward, 2008). Post tender negotiations are conducted by the projects team in CFI and generally extremely useful as the P0004 project team found out recently. It gave the company an opportunity to discuss ways they could value add to the delivery of the scope items and upon approval from the design team resulted in cost savings being negotiated and a further enhancement of value for money.

CONCLUSION

Tendering and contracting is generally used by Government agencies and by companies when they have a service or product, where strong competition is expected from the market participants. Tendering is designed to make the process of procurement more efficient, allow for an advanced level of accountability for decision makers and provide for a high level of transparency required if decisions and processes are to be audited.

Although designed to be efficient, high cost implications, to both the company and those invited to tender, can often arise that render the tender process inefficient. Additionally the transition to an outsourcing arrangement can create long term impacts, including the loss of information flows, skills and the associated knowledge in government sectors, higher fixed and continued costs of retaining staff and he potential for lack of competitive interest in markets and thus a contractor may become a monopoly and eventually charge monopoly prices.

In the appropriate circumstances, the use of competitive tendering and contracting promotes open and effective competition by calling for offers which can be evaluated against clear and previously stated requirements to obtain value for money. This in turn creates the necessary framework for a defensible, accountable method of selecting a service provider. In addition a sound tendering process and effective management of the resulting contract are also critical for the efficient, effective and sustainable delivery of projects.

RECOMMENDATION

This report has provided an in depth discussion of tendering and contracting and compared the processes used by the CFI Branch with commentary from literary experts regarding to Industry best practice.

Projects delivered in a Public Sector environment are generally bound by strict policies and processes that have been designed to ensure accountability is maintained and value for money is delivered. This report has highlighted some discrepancies and therefore recommends the following change be implemented in order to improve efficiencies.

The Branch explore other contracts available for the delivery of outsourced services and provide more in depth training for employees with regards to the administration of each;

The Branch retender for positions on its Defence Infrastructure Panel to enable new companies the opportunity to become part of the Panel and gain experience working on Defence projects;

The Branch consider changing their evaluation process to enable the project team to remove tenders that are grossly above the pre-tender estimate in order to lessen the time required to assess all tenders; and

Explore and determine whether it is feasible to hire technically skilled people and deliver projects using only in house resources as opposed to outsourcing a majority of the project workload.