How to get value for money from service providers on major projects

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1 How to get value for money from service providers on major projects

2 Session Focus Contracting as a relationship Identifying win/win arrangements Procurement & Planning on major projects Understanding the nature of consultants and service providers Key Stages and Key Contract Clauses Summary

3 Getting Value for Money from Service Providers? It s about understanding that contracting is just another relationship Its also understanding their business models and how they make money

4 What normally happens Master / Servant approach Focus on self- protection, not outcomes Short term relationship high cost of re-tendering and contract administration Excessive internal processes in place to manage perceived versus actual risk Pricing of risk and contingency in to contract In the end, both parties pay a price

5 Costs of a master / servant approach Direct Costs Legal Disputes + Contract Disputes Hidden Costs Contract Administration Tender Costs Consultants, Probity etc. Quality of Work Defects, Rework, Preventable landmines Contractors pricing in hidden margins and over-recoveries within contract price Contracts pricing in contingency and risk within contract price Opportunity Costs Time to market and responsiveness Internal Labour Costs Cost creep on contract supervision Internal labour growth

6 Benefits of a win / win approach Service Providers Greater profit certainty Reduced contracting costs Reduced risk and certainty Repeat work and long term opportunities Purchaser Greater value for money Reduced contracting costs Reduced risk Achievement of outcomes for stakeholders and value for money

7 Key stages of procurement Scope development Conditions of contract and RFT Commercial alignment Contract management 80% 20% Procurement planning - selecting procurement method Risk & Cost Allocation Tables Defining KRAs and KPIs and evaluation criteria Designing Contract Pricing Approach, Tender Forms + Conditions of Contract Commercial Alignment

8 Procurement planning Method Fixed Lump Sum Fixed Price Design & Construct Variable Schedule of Rates Time + Materials Outcome Based Performance orientated contract Pain / Gain Bonus or Retention Major Project Procurement When Scope, responsibilities, risk allocation, and cost allocation is clear, and there is a competitive market for these services Scope is unclear i.e. feasibility work, consulting reviews, etc. Service is low value, low risk i.e. painting, administration Service is complex, and there is an absence of the skills required to supervise contractor. Pay based on measurable outcomes Service has high value to community i.e. waste, major infrastructure, health etc.

9 Procurement Models Traditional - Design-Bid-Build D&B - Design and Build D&C Design and Construct CM - Construction Management ECI - Early Contractor Involvement EPC - Engineering, Procurement and Construction DBOM Design, Build, Operate, Maintain GMP - Guaranteed Maximum Price PPP Public Private Partnership Partnering DBFM Design, Build, Finance, Maintain BLT Build Lease Transfer BOO - Build, Own, Operate BOOT - Build, Own, Operate, Transfer BOT - Build, Operate, Transfer BOL Build, Operate, Lease DBB - Design, Bid, Build EPCM - Engineering, Procurement and Construction Management DBO - Design, Build, Operate ECM Engineering and Construction Management PFI - Private Finance Initiatives Alliancing Target Cost MC Management Contracting

10 Major Project Delivery Considerations Factors which are relevant to the selection of a major project delivery model include: Client needs and project requirements Key major project risks and drivers Characteristics and culture of the client and service providers Internal and external constraints Knowledge of available procurement systems and the market conditions

11 The project delivery model should fit with the needs of the particular project Risk should be allocated between parties appropriately from the start The delivery model should elicit a commercially acceptable response from the market Adopting the wrong structure carries cost and risk

12 Is this model right for my project? Are speed, managing out or flexibility in design control more important than price certainty? Is the client willing to assume a greater degree of risk? Is the model acceptable to stakeholders / bankable for the organisation? Key issues are aligned and managed according to the procurement method Link back to the evaluation table and multi-criteria analysis

13 Key Lessons Learnt Major Projects* Projects that develop from long-term plans and which have robust business cases are likely to be most successful Strong project governance arrangements mean strong project delivery Procurement model should be chosen on the basis of project specifics and should rigorously follow established guidelines Transfer risk appropriately in order to maintain value for money Careful management of local and environmental impacts assists project delivery Be open to learning the lessons from previous projects * Taken from Infrastructure Planning and Delivery Strategy Best Practice Case Studies December 2010

14 Multi Criteria Analysis Designed to help identify the most suitable procurement models for a project based on its individual circumstances Involves the development of relevant selection criteria and appropriate weightings for each criterion. Determine procurement models to be assessed Identify project specific circumstances that may affect procurement model selection Identify and select review criteria Assess Procurement Models against criteria Identify preferred model

15 Sample Review Criteria Link to future operations of asset and knowledge management Public Profile and Policy Environment Other risk factors and opportunities not previously considered

16 KEY PROJECT CRITERIA (KPC) (H High, M Medium, L Low) Construct-Only (CO) after full design Design and Construct (D&C) Design and Construct, Operate and Maintain (DC&OM) Construction Management (CM) Public Private Partnerships (PPP) Alliance Contracting (AC) Early Contractor Involvement (ECI) Based on/recreated from Centre for Excellence and Innovation in Infrastructure Delivery (CEIID) model, Government of Western Australia (2010) Managing Contractor (MC) Direct Managed (DM) Scoring Options 0 to 6: 6 = Best ; 3 = Acceptable ; 0 = Unacceptable Procurement Delivery Model Assessment > Client > June 2012 Comments: Scoring is Relative 6 = Best 3 = Acceptable 0 = Unacceptable Criteria (and considerations) 1. Scale, Complexity and Flexibility to Refine Scope > Is master planning or a business case in place, are environment approvals simple and are risks understood? > Opportunity or need for contractor input into innovation in design, construction, operation or maintenance (routing or non-routing) > Management capability/ability to retain competent resources for duration of contract > Opportunities to bundle or unbundle including ongoing property services > Likelihood of changes to the project scope through the life of the project including the ability to accommodate scope trimming to meet budget

17 Designing contracts for performance Incentivising contractor behaviours Allocation of risk between parties Alignment of contract price with service provider s cost structure

18 Commercial alignment Getting aligned up front on commercials builds rapport, trust and respect for the rest of the project. Open and honest. Focus on what is important to you and understand what is important to the contractor

19 Incentivising contractor behaviour Alignment of mutual interests = win / win approach What do you want? What do service providers want? Outcomes KRAS KPIs Commercial incentives Mutual interest Profits Remuneration and Sustainable Work

20 Risk allocations Risks and Outcomes Are you getting the right balance between risk and reward?

21 Risk Allocation Table Assists the consultant in being clear about responsibilities Ensures the contractor doesn t build any contingency into the price or at least minimises this occurring Ensures expectations are clear Risk Description Client Service Provider Budget over runs Schedule over-runs Failure to complete works to required specification or acceptable working standard Defects liability- 12 months post construction Injury claim or workers compensation claim from employee, sub-contractor or consultant Non-compliance with legislative and appropriate standards Damage the reputation or relationship with key stakeholders Inadequate insurance or lack of coverage available Litigation from sub-contractor during construction from the start minimises Litigation from private citizen due accident, damage or incident during construction variations and frustrations Litigation from private citizen due accident, damage or incident post construction due to defect or design fault Loss of key personnel Failure of key systems Others

22 Contract price value for money Variable costs Recovered Contract price Fixed costs Profit Recovered but not overrecovered Fair and reasonable Commercial Efficiency & value for money Recognise contractors need to make a profit Link contract price and variations to contractors cost structure - Reduces risk + contingency for contractor - Removes hidden margins - Openness and transparency

23 Common qualifiers & assumptions Risks silent on who owns areas of risk Areas excluded due to lack of definition e.g. consultation on projects Silent on different charge out rates (Employees, Contractors, Casual) One off project costs Number of meetings, Number of site inspections etc. Variation clauses how they are managed Lack of accountability on locking in key personnel you are engaging Market increases to salaries, fuel Mark-ups on disbursements, project costs etc.

24 Some key contract clauses Key Personnel Regular Project Reporting Direct Project Expenses Approved Personnel Subcontractors Good Faith Insurances Force Majeure Right to audit

25 Summary Contracting needs to be a relationship based upon openness and transparency Mutually beneficial, win/win arrangements are achievable and should be the objective on major projects Focus on the risks, outcomes and results you are looking to achieve Requires good planning up front and selection of appropriate procurement and delivery models Genuine alignment with provider will increase the probability of success A proactive approach is critical, with issues discussed and designed into the contract up front

26 Thank you Any questions?

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