ASSOCIATION OF INDEPENDENT SCHOOLS OF NSW BLOCK GRANT AUTHORITY GUIDE TO PROCUREMENT PROCESSES

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1 ASSOCIATION OF INDEPENDENT SCHOOLS OF NSW BLOCK GRANT AUTHORITY GUIDE TO PROCUREMENT PROCESSES CAPITAL GRANTS PROGRAM / BUILDING GRANTS ASSISTANCE SCHEME Background Non government schools accepting the offer of a grant from the Commonwealth or State government must comply with the Commonwealth s requirements and expectations with regard to the procurement processes used by schools. These include the following: For schools 1. Schools must not accept tenders nor enter into commitments in relation to recommended projects until advised by the BGA of the formal approval of the project and an agreement with the BGA has been finalised. 2. The procedures should be in line with sound tendering practices (in accordance with Australian Code of Tendering AS4120) and support the principle of value for money. 3. There should be effective competition to the greatest extent practical for all major elements of a project. This is to ensure that value for money can be demonstrated for public funding. Schools are advised that recent changes to both BOSTES and Section 83C (NSW Education Act) prohibit related party transactions and place the onus on the school governing body to ensure conflicts of interest have been identified and avoided. 4. Where the school intends to enter into a contract for the construction of a project which is other than a standard lump sum contract, the BGA must be advised prior to the school entering into the contract. (In these circumstances, a formal submission with supporting documentation addressing certain points must be provided to the BGA, for consideration and approval prior to the school proceeding with the construction process or entering into any contract.) For BGAs 1. BGAs must approve all procurement and tendering processes used by schools (whether by traditional procurement, design and construct, project management or construction management). 2. BGAs must ensure that schools obtain value for money from a tender process (and not just the lowest price offered). Value for Money Value for money is usually assessed by a combination of qualitative criteria and price. This should include assessment of the quality of the proposed service, costs over the life of the project and risks relating to time and budget. Factors may include such aspects such as fitness for purpose, performance history of each prospective supplier, relative risk of each proposal, flexibility to adapt to possible change over the life of the service, financial considerations including direct and indirect benefits and costs over the whole procurement cycle and evaluation of contract options. Choosing a tenderer based solely on price may result in a contractor who performs poorly and doesn t have the financial capacity to carry the risks. The impact of this may be an adversarial relationship with increased

2 contract variations or other disputes. This may lead to delays, increased costs and increased risk of project failure. What is Procurement? Procurement is a process that typically includes the following: Determining the criteria for the project Setting the contractual framework Setting the tender and selection process Inviting tenders, Evaluating tenders against the criteria and applying due diligence, and Awarding a contract Most Common Procurement Methods A. Traditional Procurement (Lump Sum Tender) The most common form of procurement and the Commonwealth s preferred method is traditional or conventional procurement in which the design process is kept separate from the construction process. Full documentation ideally needs to be in place before inviting contractors to tender to construct what the consultants have designed, usually for a fixed price (Lump Sum Contract). The successful contractor normally directly employs both subcontractors and suppliers of services, goods and equipment. The majority of construction work will fall under the contract with the contractor. Once the contract is signed the contractor proceeds with managing the construction and any savings he can make without reducing the specified quality may then offset any unexpected additional costs. Provided the contract does not allow him to charge for any additional costs, he gains or loses depending on the accuracy of his initial assessment of the cost of works. This assessment will be dependent upon the quality/detail of the drawings and bill of quantities. Gains or losses are not usually divulged to the school but it should be noted that variations do often occur and though the more detailed the tender and contract documents generally result in less variations, some may be caused by factors beyond the control of the contractor or the school. Architects, engineers, a project manager or other external consultants (if appointed), will have no direct contract with the contractor but will have their own contract with the school. Typical Contractual Matrix for Traditional Procurement School Head Contractor Head Consultant Sub Contractor Sub Consultant B. Design and Construct The design and build procurement approach is used where the contractor is to be responsible for undertaking both the design and the construction of the required work in return for a lump sum price. Typically the school will commission a consultant (architect) to produce conceptual or schematic designs to at least reflect the type of facility required and to confirm the budget. The school s design is then given to the contractor, who completes the design (either using a consultant commissioned by them or taking over those used by the

3 school) and produces the documentation required for construction. Completion of design is often in parallel with construction. This may allow construction to commence prior to design being finalised. Typical Contractual Matrix for Design and Construct Project School Head Contractor Head Consultant Sub Contractor Sub Consultant Sub Consultant C. Project Management For many schools this means the process of managing a building project through all of its stages (from initial request from a school for a building, appointment of design consultants, authority approvals, contractor selection, budget preparation (and occasionally finance arrangements), to the final completion of all accounts). In most cases the school governing body will engage a project manager for a fee at an early stage to actively manage the project. The project manager undertakes the administration and the carrying out of the work through works contractors who are contractually accountable to the project manager. Overall design is the responsibility of the consultants engaged by the school but the project manager is usually responsible for defining packages of work and then managing the carrying out of those works through separate trades or works contracts. The project manager does not undertake the work but is employed to manage the process. Subcontractors are directly employed by the project manager although the school should have the opportunity to approve the terms and conditions of the works. The project management contract may include both the pre construction and the construction phase. Documentation derived from project drawings, project specifications and a cost plan will provide the package with which the project manager will go to tender for the works. Typical Contractual Matrix for Project Management School Project Manager Consultant Trade contractors

4 D. Construction Management This method is similar to Project Management with the major difference being that the Construction Manager only manages the physical construction (carrying out the work through specialist trade contractors) and not the lead up work. Additionally, under this method, subcontractors are directly employed by the school.. The construction manager is paid a fee similar to other consultants to cover his staff costs, overheads etc. Although the construction manager administers and coordinates the individual trade contracts, contractually these are the school s risk and responsibility. The construction manager does not necessarily undertake the work but is employed to manage the construction process. Overall design is still the responsibility of the consultants engaged by the school. This method is often used on complex projects that may not be able to be fully detailed before construction starts. The success or otherwise of this method, relies on a highly developed program for construction and coordination between the contractors for each package as well as continuous vigilance in relation to the developing budget. Typical Contractual Matrix for Construction Management School Construction Manager Consultant Trade contractors Some schools are opting to engage a Project or Construction Manager for their Government funded infrastructure projects, as it is possible to realise savings and other benefits on some project elements. Some school Governing Bodies occasionally feel they have the required expertise and undertake the Project Management themselves however due to the added risks of this the BGA does not recommend it. [NB: The following comments about Construction Management/Managers are also applicable to Project Management/Managers.] If the school does not already have some expertise in these matters, the traditional procurement process of calling tenders for a fixed price contract with its well known safeguards is to be preferred. One very real danger of Construction Management is that if adequate skills are not available to properly contract and control a project, costs can escalate and the whole project (and possibly the school) may be placed in financial jeopardy. Construction Management may provide more flexible control over final costs and may shorten construction time. However, this can only be assured if effective means are used to monitor the project closely on a regular basis by using weekly Project Control Group meetings. Another advantage of Construction Management is that design changes which can occur during construction can be accommodated at a reduced cost. Experience shows that such changes (variations to the contract) in

5 the context of a lump sum contract often result in additional costs to the school. Construction Management can reduce these costs or at least allow the flexibility to offset them. This does not mean that the school should assume that it can take short cuts in the planning process. A successful project using Construction Management depends on the ability of the Construction Manager to provide accurate estimates of final prices and to keep tight control on costs as the project proceeds. The estimates need to take into account the tendering climate in the region and the monitoring needs to be done methodically and regularly. Engaging a Construction Manager The employment of the Construction Manager should be predicated on proven ability in addressing the above requirements. It is not considered appropriate that this work be undertaken on a volunteer basis (except for very small projects) or by school personnel. The work, if done in an appropriate manner, will require regular attention, and unique skills. It will be obvious that if time is not spent in this area then the expected cost savings will not be forthcoming and indeed the resultant project may be more expensive than what may have been achieved under a lump sum contract. For the employment of the Construction Manager, it is preferable that candidates be selected after public advertising for registration of interested parties even in those cases where a preferred person or firm is already known. Contract Documents and Delegated Authority The Construction Manager will need to prepare suitable contract documents for the various packages of work. Proven ability in this area is essential. There are two basic contract documents. A copy of each of the proposed contract documents must be supplied to the BGA before approval can be given. The first of these documents (and there may be more than one) will set out the responsibilities of the various suppliers and trades and describe in detail the extent of the work. In addition the relationship to the various contractors and the school and the role of the Construction Manager in these will need to be defined in a separate document. The second document will set out the relationship between the Construction Manager and the school governing body. Items such as fees, responsibility for cost control and the degree to which he can commit the school (delegations) are all aspects that will need to be dealt with in such a document. Sometimes in these arrangements the Construction Manager will be entering into contracts on behalf of the school. If this is the case then the school will want to be very sure that there are effective limits on what the Construction Manager can commit them to. On the other hand it may be that the Construction Manager only recommends the contractors and the client enters into contracts directly with the various contractors. BGA Requirements for approval of a Construction (Project) Management approach Should you wish to request Construction Management or Project Management as the preferred delivery method for your project, you must prepare a submission to the BGA addressing all the following points: 1. A detailed description of the exceptional circumstances which the school considers warrants Construction Management (CM) rather that traditional Lump Sum tender. Include an outline of the benefits/risks of the approach and any particular building circumstances in the district which inform the request for CM approval. 2. Organisational Chart for the proposed CM which clearly defines the relationship which exist between all parties including role definitions, delegated authority for signing of contracts and contract limits of each element.

6 3. A detailed description demonstrating the capacity of the school governing body to manage the project in the way being proposed, including risk mitigation processes in place. Include details of the Risk Management Plan showing elements such as the creation of a Project Control Group (PCG) with members comprised of the school Board, School Executive, Architect, Project or Construction Manager and the Builder. Provide details of the frequency of the meetings of the PCG and the standing agenda items. 4. The school provides details on how it intends to engage a suitable Construction Manager with appropriate qualifications. There must be assurance that a public invitation for registration of interest is to be called from CM s. Schools are reminded of the need to avoid Conflicts of Interest and Related Party Transactions. 5. Assurance must be provided that public tenders will be called for all major elements of the project above $75,000 and at least three quotes obtained for all other aspects of the project. 6. Details of the fees to be paid to the Construction Manager and of his responsibilities and duties (including the limits within which the Construction Manager must operate to what extent he may commit the school's governing body) 7. A detailed costing of the project prepared by a qualified cost consultant (or quantity surveyor) and approved by the school governing body is to be submitted to the BGA for review and approval. Each proposed package or contract is to be costed in detail meaning the trades should be broken up into packages. For instance Concrete should be broken up into packages such as Formwork, Ground Treatment, Reinforcement Supply, Reinforcement Fixing, Concrete Supply, Concrete Placing and Curing. Furthermore the individual "packages" will need careful definition to ensure that there are no gaps. For example "formwork" will have to be defined to include removal and stripping and cooperation with other trades for penetrations and the like. 8. Suitable software be obtained for regular review of the variations, additional work, contract price against budget, inflation (if any contracts are let with an inflation clause), payments made and balance to be paid, all compared package by package to the original budget. This can be provided by most simple spreadsheets. A copy of the proposed spreadsheet is to be provided to the BGA before approval of Construction Management can be recommended. 9. Assurance that: a. No work will commence until the budget is prepared and approved by the school governing body and the BGA b. Regular monthly reports including a copy of the updated cost spreadsheet will be given to the school governing body and made available to the BGA if requested c. The school will complete and submit regular monthly progress reports or expenditure reports required by the BGA 10. The school provides details on how it will review builders contracts and other legal documents relevant to the project. Many standard builders' contracts are biased towards the builders and compliance is particularly onerous and could be financially detrimental to the school if an element of the contract is breached. Schools should seek legal counsel before signing any contract. (A copy of the contract between the CM and the school governing body should be made available to the BGA at the time that the project commences). Schools, with appropriate legal assistance, should consider drafting their own contract based on a Standard contract available from SAI Global. 11. Regardless of the method chosen, the BGA will regard the school governing body as responsible for the costs of the whole project. There should be evidence that administrative aspects of the contractual process have been carefully analysed and allowed for in the costing (eg additional insurances, Council approvals and those from other relevant authorities). A similar budget and cost control mechanism, probably best provided in the form of computer software, should be prepared for those aspects of insurances, Council and other fees and approvals.

7 On completion of the project the BGA may require access to a copy of each of the signed trades contracts and a statement as to the variations that have led to the final contract amount shown in the budget control spreadsheet. At any time the BGA may require to view the current status of contract documents. E. Contract Limits Public tendering is a requirement for all works contracts over $75,000. This requirement can be met by calling for registration of firms interested in tendering for the works and giving documents for pricing only to those considered capable of doing the work based on past performance and references. Where the contract value is less than $75,000 the requirement is to obtain at least 3 quotes for each of the elements will apply. F. Record Keeping In all cases where quotes, public tenders or registrations of interested parties are called, proper documentation of the advertising, the actual quotes received and a record of the tender assessment process must be maintained. Originals of all documents must be kept for review by the AISNSW BGA at any time up until 12 months after the final grant monies have been paid out.

8 Summary of the relative advantages and disadvantages of the most common procurement processes: (Traditional) Lump Sum Contract Design and Construct Description Advantages Disadvantages Standard Form Contracts The school engages professional Roles and responsibilities are well Design must be completed before AS consultants to prepare the understood by contractors and commencement which may result AS design and documentation for consultants in extended pre tender period AS the works, undertakes a tender School retains responsibility for There may be redesign fees AS process and then enters into a design where changes required after AS contract with the preferred Quality control maintained as the tender AS contractor. The contractor is design team report directly the Potential for cost escalation due required to submit a total and school to extended design, tender and and global price to construct the Price certainty (based on construction timeframe ABIC SW 2008 whole of the works instead of completed design) No controls over contractor s ABIC BW 2008 bidding on individual items. selection of trades and methods ABIC EW 2003 Most appropriate if works are Pricing may be inflated to cover well defined and drawings are unforeseen conditions and risks completed. By agreement, the contractor provides all services and engages all trades, including design work to be carried out. All consultants are engaged, controlled and paid for by the contractor who also contracts and pays the subcontractors directly. All tenders are based on the same information: easier to analyse prices lowest price usually best value for money may use provisional sums to allow for later designed elements Single point of responsibility across all aspects Speed of delivery Acceptance of design Cost certainty and benefit of contractors experience and expertise in obtaining best prices Less school management/consultant involvement post contract lower management costs and consultant s fees Fast track potential Contractor not involved in the design process no buy in to the design Separation between design and construct may lead to disputes over responsibility for defects Contractor may price the job to win the contract but claw back profits through the use of variations later Contractor may build risk premium into price No say over which consultants (eg engineers) used Difficulty in ascertaining if built product conforms to brief Time management is critical Final cost may be higher than original estimates and/or other methods Less quality control by school over design. Architect acts for the contractor AS AS AS

9 Project Management Contract Construction Management Agreement By agreement, the Project Manager acts as the school s agent and provides management services from pre design to completion, including the engagement of contractor/s to perform the works. The school signs a separate contract with the project manager responsible for the construction works who would in turn engage and sign a contract with the subcontractors. By agreement, the Construction Manager (who must hold a building license [true for commercial projects?]) acts as the school s agent and is responsible for supervision and management of the project and the sourcing of trade contractors and ensuring their process are reasonable. The school contracts with and pays the trade contractors directly. Project can be customised to actual site conditions Novation of design (architects used for preliminary design) to represent school s interest and counterbalance contractors team Smaller packages allows participation by wider range of contractors (may be of benefit in tight economic circumstances eg in country areas) Flexibility for changes to scope Early/fast track commencement on some elements while others are being finalised Potential for greater cost control Single point contractual and payment arrangement rather than individual contractors Quality can be controlled by design team School has better cost/budgetary control project broken down into trades and direct contracts with the trades contractors Fully integrated design and construction process The CM acts on the school s behalf (traditional contractor acts primarily in own interest) Flexibility, changes may be easier to accommodate Lack of counterweight between contractor and designer could favour the contractor (professional conflicts) Delays in one package may affect others that follow No direct incentive for PM to keep costs to minimum (design team may be involved for longer than normal) Low risk strategy for the project manager as he/she has little responsibility for defaults etc. The school has overall responsibility Requires strong hands on skills from PM for coordination of multiple contracts Use of multiple contractors adds to risk of coordination problems Coordination of design and construct liability on multiple contracts needs to be managed School must have established mechanism for entering into contracts with and making payments to the individual trade contractors Only larger and more complex projects are most cost effective School undertakes the risk of operating the procurement process School retains risk of nonperformance by trade contractors School retains responsibility for design team performance AS AS Trade contract AS Construction Management AS Construction Management trade contract general conditions

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