© Clayton Utz

CONTRACT, PROCUREMENT AND DELIVERY MODELS

Stuart Cosgriff

24 July 2014

INTRODUCTION

Procurement objectives over the project

lifecycle

Selecting the delivery model

ECI, Managing Contractor and PPP

Developing the design brief

New trends in delivery models

VALUE FOR MONEY

VFM is the fundamental criterion for all public sector

procurement processes and typically requires

risks to be allocated appropriately (to party best able to

manage the risk)

competitive pricing - for finance, design, construction,

maintenance and operation (depending on the delivery

model)

productivity improvements and efficiencies to be

realised

demonstrable net benefits to Government and/or users

PROJECT OBJECTIVES

achievement of the service delivery and commercial

objectives for the project

cost-effective project delivery for Government

minimising unnecessary transaction costs (public and

private)

project delivery risks are well managed

clarity and certainty to public and private sector

stakeholders

timely procurement processes

a value for money outcome

PROJECT LIFECYCLE

Project initiation and development

• Business case and feasibility

• Procurement model

• Market sounding

• Functional brief

• User groups and other stakeholders

• Approval processes

Market engagement and tendering

• Confirm design standards, outputs and mandated design

• Confirm procurement model, develop contract, performance requirements and risk allocation

• Tendering, competitive dialogue

• Preferred tenderer and financing

Design, construct and commission

•Concept design/ ECI engagement

•Planning approvals

•Detailed design

•Construction

•Variations

•Potentially financing

•Completion and commissioning

Operate, maintain and hand over

• Clinical services

• Clinical support services

• Planned and reactive maintenance

• Planned refurbishment

• Planned and unplanned upgrades/expansion

PROCUREMENT 'TOOLS'

Traditional: 'lump sum' and 'fixed time'

Design & Construct: lump sum and fixed time

Early Contractor Involvement

Managing Contractor Model

Design, Construct and Maintain/Operate

Privately Financed Projects/ PPPs

Fully Outsourced Services

Not an exhaustive list - models can be 'tailored' to suit

project objectives and constraints

EARLY CONTRACTOR INVOLVEMENT (ECI)

Leverage a Contractor's specialist knowledge of

construction processes to the benefit of the Principal's

concept design process

Less more emphasis on non-price criteria (e.g.

capability of the proposed team). Although some

margins and rates assessed

Staged contracting model » Stage 1: Contractor proceeds with design development up to concept

design phase on a reimbursable cost basis. Principal has discretion to

transition the Contractor from Stage 1 to Stage 2 or tender Stage 2

» Stage 2: Usually a "typical" design and construction contract utilising the

concept design prepared at Stage 1

ECI - WHAT IS IT?

MANAGING CONTRACTOR

Manages delivery 'on behalf of' the Principal

Manages the project from 'feasibility' through to

commissioning for a lump sum (for the

management component)

Provides management and advisory services and

engages design/construct subcontractors

Not exposed to time/cost risk as is reimbursed for

subcontractor costs (costs plus)

MANAGING CONTRACTOR STRUCTURE

Owner

Managing

Contractor

Sub-Contractor SupplierSub-Contractor

Design Consultants

(preparing and

documenting

design)

THE ECI MODEL - STRENGTHS AND WEAKNESSES

Strengths Weaknesses

• Early input into scope, cost plan,

program (build-ability / innovation) at

a stage where most value can be

added

• Greater control over design/scope

development

• Collaborative design - time/cost

tensions removed

• Procurement efficiency (and less

adversarial) with lower tendering

costs as only one design process is

undertaken

• more effective risk identification,

mitigation and allocation in the Stage

2 contract

• Less competitive pricing at Stage 1

• Uncertainty of final cost at time of

initial award

• Risk of cost and time overruns

(depending on 'enhancements' made

to the model)

• Potential for higher overheads

• As the process is collaborative,

success is dependent on all parties:

• having the right culture

• understanding the delivery

method

THE ESSENCE OF THE PPP MODEL

A PPP is:

a long-term contract (generally over 20 years)

between the public and private sectors

to deliver public infrastructure and services

(typically) an arrangement where the assets are

delivered using private sector finance

PPP CATEGORIES

Just some of variants

Build, Own, Operate, Transfer PPP (“BOOT”) Economic infrastructure projects that are fully financed. Demand risk is transferred to the private sector

Availability Payment PPP (“Availability PPP”) Social infrastructure projects that are fully financed. Government pays the private sector facility availability and services

Design, Construct, Maintain, Operate (“DCMO”) The private sector is obliged to provide construction and comprehensive service delivery. Private finance is not required. Government retains control over the life of the project.

PUBLIC PRIVATE PARTNERSHIPS

Government

Agency

Project

Company

Equity

investors

Builder Services

provider/s

Lenders

KEY ELEMENTS

Some key characteristics: Private sector bears the design, construction, operation

and “whole of life” risks (responsible for condition and performance over the life of the concession)

Government provides land and shares some financial risks

Private sector finances the infrastructure

Private sector receives payment from Government (a service charge) or end users (demand risk)

Driver of innovation, efficiency and better productivity

THE PPP MODEL - STRENGTHS AND WEAKNESSES

Strengths Weaknesses

• A source of external finance

• Private sector motivated -

time and cost

• Time and cost certainty

• Innovation

• Whole of life cost and risk

• Alignment of interest/long

term relationship

• Complex contract structure

• Transaction costs

• Retained risks are costly

• Obtaining finance

• Loss of flexibility to change

• Higher costs of change

IS PPP THE RIGHT DELIVERY MODEL?

First understand the project’s key drivers and

constraints:

objectives

budget

timeframes

stakeholder commitments

regulatory constraints

project/agency specific constraints

market capacity

THE BRIEF

Standardised approaches versus innovation

Input based: specifications such as specific room

requirements and Health Facility Guidelines

Output based: models of care (functional

relationships)

Bearing the fitness for purpose risk - identifying a

purpose?

Managing the outcomes of stakeholder

consultation, interaction and review during the

design phase

KEY DESIGN CONSIDERATIONS

Develop a clear outputs/ functional brief

Driver of the development of the specifications and

design for the lifecycle of the project

» What clinical services will be provided from the facility

» What is the expected ‘catchment’ of the facility, and what

functional areas are needed to provide the services

» How should the facility respond to changes the preferred

models of care

» how should functional areas interact, what are the

requirements for durability, flexibility, expandability

» Have key user groups been consulted?

DESIGN RISK

Allocating design risk

Who will bear the financial consequences of the design

being incapable of delivering the required outputs?

Delivering on the design requirements

When and how should government intervene?

Inappropriate intervention impacts design risk.

OTHER PROCUREMENT TRENDS

Full service outsourcing

Unsolicited Proposals

FULL SERVICE OUTSOURCING

Traditionally Government retains core service delivery (clinical and clinical support services)

The private sector has provided non-core services (maintenance, cleaning and security)

Governments expanded the scope of private sector provision, include services closer to core services (catering, distribution)

Fully outsourced models are being explored (Midland Hospital, Northern Beaches)

FULL SERVICE OUTSOURCING

“Operational PPPs” - private sector provision of

operational services

The benefits

» operator led solutions

» further optimisation of quality and cost of service

delivery

» furthers innovation and responsibility for design

outcomes

» efficiencies from a private sector labour force

THE ROLE OF UNSOLICITED PROPOSALS?

Ideas and solutions from the private sector

Greater level of private sector investment and

participation in projects

Consistency and certainty to private sector participants

as to how their unsolicited proposals will be assessed

A beneficial or innovative solution is generally not

sufficient, the proposal must be unique

Uniqueness

» is there no other provider in the market?

» what is offered that could not be obtained through a tender

process?

A SUCCESSFUL PROCUREMENT

The key indicators of success are that the project ultimately:

addresses the problems that the Government seeks to solve

ensures that the investment in infrastructure and service delivery is delivered as planned

achieves the best possible value for money for Government and/or users

achieves the key benefits Government set out to achieve

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