Infrastructure Procurement Options Guide

Transcription

1 November 2010 Infrastructure Procurement Options Guide Sharing knowledge, developing leading practice and driving innovation to improve government infrastructure planning, delivery and management.

2 Acknowledgements The Infrastructure Procurement Options Guide (the Guide) was prepared with the assistance of the Centre for Excellence and Innovation in Infrastructure Delivery (CEIID) Alternative Delivery Mechanisms Project Reference Group. The CEIID would like to thank the following Alternative Delivery Mechanisms Project Reference Group members for their contributions: Mike Somerville-Brown (Chair), Manager Infrastructure Assets, Public Transport Authority Lyle Banks, Manager Planning & Development, Fremantle Ports Bruce Cunningham, Director Infrastructure Delivery Services, Main Roads Western Australia Clare Dobb, Senior Project Manager, Building Management and Works (BMW), Department of Treasury and Finance (DTF) Graeme McLean, Director Standards and Practice, Strategic Projects, BMW, DTF Sam Mileti, Program Leader Strategic Sourcing, CEIID Program Management Office (PMO), BMW, DTF Margaret Sharpe, Manager Professional Services, Construction Services, Department of Housing and Works Noel Souness, A/Assistant Director Energy, Infrastructure and Finance, DTF. A further acknowledgement is extended to Lucy Monte, Program Leader Communications and Governance, CEIID PMO, for final editing and layout of the Guide. The Guide aligns with and contains information, diagrams and charts adapted from the National Public Private Partnership Policy and Guidelines, in particular Volume 1 Procurement Options Analysis. An electronic version of the Guide can be accessed via the CEIID website at Further information on this project is available from Sam Mileti, who can be contacted via sam.mileti@dtf.wa.gov.au or phone: (08) All other enquiries can be directed to the CEIID PMO which can be contacted via ceiid@dtf.wa.gov.au or phone: (08) For additional CEIID information, visit COPYRIGHT STATEMENT Centre for Excellence and Innovation in Infrastructure Delivery, Government of Western Australia (2010). Excerpts from this publication may be reproduced, with appropriate acknowledgement, as permitted under the Copyright Act. Important Disclaimer: All information and content in this material is provided in good faith by the Centre for Excellence and Innovation in Infrastructure Delivery, and is based on sources believed to be reliable and accurate at the time of development. The Government of Western Australia, the Centre for Excellence and Innovation in Infrastructure Delivery and their respective officers, employees and agents, do not accept legal liability or responsibility for the material, or any consequences arising from its use.

3 T a b l e o f C o n t e n t s, G l o s s a r y & F o r e w o r d Table of Contents 1.0 Introduction Context Purpose of the Guide Who will benefit from the Guide Scope of the Guide Structure of the Guide Infrastructure Procurement Purpose of a Procurement Strategy Key Elements of a Procurement Strategy When to Develop the Procurement Strategy Considerations and Timing of Procurement Decisions Procurement Methodology Decisions Market Engagement and Analysis Engaging in Preliminary Dialogue with Industry and Market Analysis Tendering and Related Engagement Processes Procurement Delivery Model Selection Procurement Delivery Model Usage in Government Agencies Agency Capacity and Capabilities Agency Strategic Fit Contract Management Procurement Delivery Model Options Construct Only (Lump Sum or Fixed Price) Design and Construct Design, Construct and Maintain Construction Management Public Private Partnership Models Alliance Contracting Early Contractor Involvement Managing Contractor Direct Managed Selecting a Procurement Delivery Model The Expert Panel Briefing the Panel Preliminary Procurement Options Analysis Detailed Procurement Options Analysis Determine the Models to be Assessed Review the Considerations Identify the Key Criteria Assess the Models Against Each Criteria Identify the Preferred Model Scrutinising the Preferred Model Documenting Findings in the Procurement Strategy Contract Forms... 63

4 T a b l e o f C o n t e n t s, G l o s s a r y & F o r e w o r d Glossary Procurement Methodology Procurement Strategy Public Construction The methods and guidelines used for the selection of the most appropriate procurement methodology allowing for a range of management, delivery and contract system options and project types as part of the procurement strategy (including ancillary maintenance and operation where applicable) for infrastructure works market engagement. The high level plan to achieve procurement objectives through a structured program of activity, which usually includes: a statement of objectives a description of the requirements an analysis of project and procurement risks an analysis of market and agency capability an analysis of procurement methodology options to identify the preferred methodology other elements. Any matter relating to the construction, maintenance, rehabilitation, alteration, extension, demolition or improvements to land or property owned by, or on behalf of, Government departments or public bodies and includes: design and construction practices tendering processes project delivery contract administration. The above definition is based on that contained in the Victorian Project Development and Construction Management Act Value for Money The optimum combination of whole-life cost and quality (or fitness for purpose) to meet the user s requirements. This includes value for money drivers such as: improved risk management use of competition for innovative solutions reduced cost through more efficient design and use of asset by others single contact points for long-term service delivery efficiency through up-front integration of operations and asset management with design and construction. Value for money decisions include the evaluation of a number of procurement options and other factors including: Construct Only (CO), Lump Sum or Fixed Price contract Design and Construct (D&C) Design, Construct and Maintain (DCM) Construction Management (CM) Public Private Partnership (PPP) Models Design, Build and Operate (DBO) Design, Build, Finance and Operate (DBFO) Design, Build, Finance and Maintain (DBFM) Design, Build, Operate and Maintain (DBOM) Alliance Contracting (AC) Early Contractor Involvement (ECI) Managing Contractor (MC) Direct Managed (DM) Key Project Criteria (KPC) Key Performance Indicators (KPI) Target Out-turn Cost (TOC).

5 "...if Government is to ensure that community service delivery expectations are to be satisfied in a way that maximises value for all Western Australians, then:...government will [need to] deliver infrastructure projects efficiently and effectively, with the specific circumstances of each project determining the most relevant delivery option. Economic Audit Committee Final Report, 2009, p 79.

6 T a b l e o f C o n t e n t s, G l o s s a r y & F o r e w o r d Foreword The State Asset Investment Program for is worth an estimated $25 billion. This substantial commitment of public resources is focused on providing the infrastructure necessary for the State s ongoing economic development and meeting the service delivery requirements of a growing population over the coming decades. Delivering the government s asset investment program and maximising value for money requires asset delivery agencies to consider a wide range of infrastructure delivery methods. A comprehensive exploration of infrastructure delivery models ensures that opportunities for achieving increased value for money and improved infrastructure outcomes are readily identified and capitalised to the benefit of Western Australian taxpayers. In 2009 the Centre for Excellence and Innovation in Infrastructure Delivery (CEIID) formed a multi-agency project team to collaborate in the development of a leading practice guide on infrastructure procurement options. The aim was to develop a guide that would improve agency understanding of a range of procurement methodologies and assist with the selection of the most appropriate model to achieve project outcomes. The Infrastructure Procurement Options Guide (the Guide) is the culmination of the project team s work and reflects the CEIID s ongoing commitment to sharing knowledge, developing leading practice and driving innovation to improve infrastructure planning, delivery and management. The CEIID Chief Executive Officer Group is pleased to endorse the Guide and encourages all government agencies to use it as a reference source and decision support tool when planning and evaluating asset procurements. The CEIID alliance comprises of the following participating organisations:

7 1.0 Introduction 1.1 Context 1.2 Purpose of the Guide 1.3 Who will benefit from the Guide 1.4 Scope of the Guide 1.5 Structure of the Guide page 7

8 " Procurement strategy decisions made at the beginning of an asset investment process will affect asset performance, service delivery, cost and value for money throughout the life of the asset.

9 I n t r o d u c t i o n 1.0 Introduction 1.1 Context The social and economic value of infrastructure cannot be underestimated. Well planned and managed investment in public infrastructure plays a vital role in supporting economic growth and providing capacity to meet the increasing demand for services that accompany strong population growth. It is essential for business development and the improvement of productivity and industry competitiveness through investment in roads, rail and ports. It underpins the delivery of community services such as education, health, law and order, public transport and housing. It is also fundamental to social wellbeing and maintaining high standards of living into the future through water supply and waste management systems, power generation, sporting facilities, entertainment venues and liveability initiatives in our cities and regions. The government s capacity to invest in public infrastructure is ultimately constrained by finite funding resources and the need to responsibly manage the balance between competing budget priorities. Investing in the right mix of infrastructure assets and managing them well throughout their life-cycle is important in enabling the government to meet current and future service delivery demands and maximise value for money from the funding available. In addition to determining the mix of infrastructure investments that will most effectively meet the government s objectives, a key factor in optimising value for money outcomes from infrastructure investments is the procurement strategy. Procurement strategy decisions made at the beginning of an asset investment process will affect asset performance, service delivery, cost and value for money throughout the life of the asset. Soundly based decisions involve a comprehensive exploration of a range of procurement models to determine the approach that is best suited for each infrastructure project. This ensures that opportunities for achieving increased value for money and improved infrastructure investment outcomes are readily identified and capitalised to benefit the State of Western Australia and its people. Soundly based decisions involve a comprehensive exploration of a range of procurement models to determine the approach that is best suited for each infrastructure project. 1.2 Purpose of the Guide The Guide provides an overview in the selection and development of an infrastructure procurement strategy. The purpose of the Guide is to: improve the level of understanding of a range of infrastructure procurement models provide supplementary guidance to be used in conjunction with the Western Australian Government s Strategic Asset Management (SAM) Framework, a WA Government policy document for WA public sector agencies assist public sector executives and managers with making decisions related to infrastructure asset investment. page 9

10 I n t r o d u c t i o n 1.3 Who will benefit from the Guide The Guide has been prepared as a decision support tool to assist senior executives and managers responsible for the planning, evaluation, definition, delivery and management of infrastructure asset investments. The Guide will also assist practitioners as well as others involved in supporting senior executives to meet such responsibilities. 1.4 Scope of the Guide The Guide is primarily intended to apply to government owned infrastructure where government has a direct or indirect responsibility to provide services to the community of Western Australia. Such infrastructure includes roads, rail, ports, public utilities and buildings. The Guide can be used to assess individual projects as well as a bundle of projects or program of works. There are no minimum or maximum project costs in relation to using the Guide, which can be applied to any capital works project. The Guide is to be used in conjunction with the principles, policies and standards outlined in the SAM Framework. 1.5 Structure of the Guide In using the Guide: Section 1.0 Section 2.0 Section 3.0 Section 4.0 Section 5.0 Introduction Establishes the significance of sound public infrastructure procurement strategy decisions and provides a broad overview of the Guide. Infrastructure Procurement Explains the purpose and key elements of a procurement strategy and considerations and timing of procurement decisions. Procurement Methodology Decisions Explains the key considerations and activities agencies need to undertake to support the procurement and delivery model selection process. Procurement Delivery Model Options Outlines a range of procurement delivery models including the advantages, disadvantages and best use scenarios for each model. Selecting a Procurement Delivery Model Details a step-by-step process for selecting a procurement delivery option which includes a prescriptive assessment tool to support the decision. page 10

11 2.0 Infrastructure Procurement 2.1 Purpose of a Procurement Strategy 2.2 Key Elements of a Procurement Strategy 2.3 When to Develop the Procurement Strategy 2.4 Considerations and Timing of Procurement Decisions page 11

12 " Major infrastructure projects require detailed planning and a robust value for money assessment of each procurement option available.

13 I n f r a s t r u c t u r e P r o c u r e m e n t 2.0 Infrastructure Procurement An effective procurement methodology is essential to the success of any project delivery process. Major infrastructure projects require detailed planning and a robust value for money assessment of each procurement option available. The key issue is determining which type of procurement delivery model provides the best value for money in meeting the government s service objectives. When developing a procurement strategy, it is important to consider the individual project circumstances and whether the advantages and disadvantages of the delivery methods described in this Guide are relevant to the particular project. When applying the Guide s methodology, considerations should include investigating any other delivery methods used in Western Australia. 2.1 Purpose of a Procurement Strategy A procurement strategy is a high level plan for achieving procurement objectives through a structured program of activity. It is developed during the Evaluation phase of the Project Management Framework (as outlined in Figure 1 below) and forms part of the business case. Its main purpose is to help identify the most appropriate procurement methodology for the particular project based on budget, value for money, government priorities, project requirements and industry capability. The key purpose of a procurement strategy is to help identify the most appropriate procurement methodology for the particular project based on budget, value for money, government priorities, project requirements and industry capability. Figure 1: Project Management Framework Procurement Delivery Model Selection,Timing and Interface to other Project Phases PROJECT MANAGEMENT FRAMEWORK Establish Business Needs Evaluation Definition Delivery Transition to Operation Project Review Preliminary Procurement Delivery Model Selection Final Confirmation The procurement strategy also encourages government agencies to consider procurement options early in the project s development through the preparation of a Preliminary Procurement Options Analysis (POA), as per Section 5.2 of the Guide. This analysis, a component of the business case, helps identify a suitable procurement model for the project which is then tested, detailed and confirmed (as part of the project definition plan) for timing and sequence (see Figure 2, page 14). In keeping with the Infrastructure Australia Guidelines, when considering the provision of government infrastructure during the Evaluation phase of the Project Management Framework, a desktop analysis of Public Private Partnership (PPP) Value Drivers (see Section 5.2, page 55) should be undertaken for projects that meet the capital expenditure threshold of $50 million. This should be followed by a Detailed POA, as outlined in Section 5.3, page 56, for funded projects with sufficient PPP value drivers. page 13

14 I n f r a s t r u c t u r e P r o c u r e m e n t Regardless of the selected procurement model, the POA document should always detail all assumptions, exclusions and the recommended procurement strategy. Figure 2: Timing of Procurement Options Analysis in Project Management Framework PROJECT MANAGEMENT FRAMEWORK Establish Business Needs Evaluation Definition Delivery If proposal has the potential for delivery as a PPP If delivery as a PPP is justified Preliminary POA see Section 5.2 of the Guide for PPP as part of business case development. Detailed PPP POA as per Infrastructure Australia Guidelines. Move to Definition Phase and commence PPP establishment If not suitable for delivery as a PPP or if indicative project cost is less than $50 million Detailed POA as per Section 5.3 of the Guide. Develop Contract In order to select the most appropriate procurement option, it is important to: understand project drivers and constraints including budget, time-lines, stakeholder commitments and market capacity rigorously investigate alternative procurement delivery models before project options are finalised in the 'Evaluation' stage involve key stakeholders and experts as early as possible in the planning and development of projects challenge assumptions in order to better achieve desired outcomes use practical analytical techniques in the decision making process. The Guide can be applied across all government agencies and is recommended for Government Trading Enterprises (GTE) 1 and other public Statutory organisations. The guidelines relate to all government infrastructure projects and are consistent with the Government s SAM Framework policies and guidelines and the Project Management Framework (Figure 1, page 13). Application must be in accordance with all relevant legislation, Treasurer s instructions and related government policies, as specified by the Department of Treasury and Finance. 1. A Government Trading Enterprise is a government agency that finances the bulk of their operation from their own sources, revenues and borrowings, i.e. Water Corporation, Fremantle Ports, Western Power and Telstra. GTEs operate in markets that range from monopolistic through to totally competitive. page 14

15 I n f r a s t r u c t u r e P r o c u r e m e n t 2.2 Key Elements of a Procurement Strategy Designed to identify and recommend a preferred procurement methodology, the procurement strategy usually contains: a statement of objectives a description of the requirements an analysis of project and procurement risks an analysis of market and agency capability an analysis of procurement methodology options to identify the preferred methodology A key element of the procurement strategy is the procurement methodology, which includes decisions about market engagement, the procurement delivery model and ongoing contract management. other elements A key element of the procurement strategy is the procurement methodology, which includes decisions about market engagement, the procurement delivery model and ongoing contract management. The data gathered for the procurement strategy forms the basis and justification for the procurement methodology decisions made. Figure 3 shows the key elements of a procurement strategy. Much of the data comes from information prepared for the business case (or feasibility study/scoping study). page 15

16 INFRASTRUCTURE PROCUREMENT OPTIONS GUIDE I n f r a s t r u c t u r e P r o c u r e m e n t Figure 3: Procurement Strategy Elements Information prepared for the business case flows into the Procurement Strategy Objectives Risk Analysis Cost Analysis Procurement Methodology Funding Market Engagement Procurement Model: Construct Only Design & Construct Public Private Partnerships Early Contractor Involvement Other Policy Context Project Characteristics Contract Management Market Analysis Agency Capability 2.3 When to Develop the Procurement Strategy The final version of the procurement strategy is detailed in the business case, the platform used for project justification and funding approval. The procurement strategy is developed as part of the business case which is prepared during the Evaluation phase in the Project Management Framework (Figure 1, page 13). Before work can commence on the procurement strategy, a decision regarding the project s initial investment must be made (in line with the government s financial targets) accompanied by a completed and thorough risk assessment for the project. The final version of the procurement strategy is detailed in the business case, the platform used for project justification and funding approval. The project information gathered as part of the POA is a key element of the procurement strategy. The information can be used to develop initial high level procurement strategies and later, more fully developed options for inclusion in the final business case. As part of this process, the documenting of value drivers (such as those presented in Section 5, page 55) for projects will enable project teams and agencies to develop procurement strategies for all projects including those that are not considered for PPP development. A complete analysis of the value drivers, an evaluation of the procurement strategy elements in Figure 3 above as well as assessing the criteria contained in Table 1: Procurement Delivery Model Assessment Tool, pages will best ensure the full procurement strategy is finalised before preparation for tendering begins. The procurement strategy should be regularly reviewed throughout the various planning phases to ensure its ongoing relevance and accuracy. page 16

17 I n f r a s t r u c t u r e P r o c u r e m e n t 2.4 Considerations and Timing of Procurement Decisions Procurement decisions made by government agencies are pivotal and directly linked to their ability and capability of delivering service obligations to the community. The basis of procurement decisions should be incorporated and driven by the agency s Strategic Asset Plan (SAP). Agency SAP s must also be consistent with the Government's SAM Framework guidelines. Procurement decisions will form a part of a procurement strategy that is to be developed by the agency. The procurement strategy is the document that will summarise the decisions and provides a recommendation to government as to the most appropriate procurement methodology available. The procurement strategy forms part of the business case which is commenced during the Evaluation phase and finalised prior to commencement of the Delivery phase within the Project Management Framework in Figure 1, page 13. The Project Management Framework has been developed to align and support the SAM Framework. Agencies must also comply with all other government policies, practices and guidelines related to infrastructure procurement, such as Gateway Reviews 2. While a significant portion of asset investment in the WA public services will continue to be procured through traditional means, there is an increasing trend towards alternative approaches such as Alliance Contracting and PPP (see Section 4) for delivering some of Australia s most complex and significant public sector infrastructure projects. 2. Gateway Reviews is a process developed by the Office of Government Commerce in the United Kingdom that examines a program or a project at critical stages in its life-cycle to provide assurance that it can progress successfully to the next stage. The reviews are carried out at key decision points in the project s life-cycle by experienced people, independent of the project team. page 17

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19 3.0 Procurement Methodology Decisions 3.1 Market Engagement and Analysis 3.2 Procurement Delivery Model Selection 3.3 Agency Capacity and Capabilities 3.4 Agency Strategic Fit 3.5 Contract Management page 19

20 " Procurement methodology decisions must be based on a thorough analysis of relevant facts including procurement objectives and requirements, risks, supplier markets, agency capability and strategic fit, project precedents and so on.

21 P r o c u r e m e n t M e t h o d o l o g y D e c i s i o n s 3.0 Procurement Methodology Decisions For the purpose of this Guide, there are five primary procurement methodology decisions to consider: 1. Market Engagement and Analysis 2. Procurement Delivery Model Selection 3. Agency Capacity and Capabilities 4. Agency Strategic Fit 5. Contract Management. Procurement methodology decisions must be based on a thorough analysis of relevant facts including procurement objectives and requirements, risks, supplier markets, agency capability and strategic fit, project precedents and so on. To properly manage risks presented to government, it is important that procurement methodology decisions are justifiable on the basis of documented facts and analysis. The procurement strategy should justify the recommended approach on a value for money basis. Justification should show how project or program outcomes can be optimised, and how the methodology selected may facilitate aspects of risk management. The procurement strategy should justify the recommended approach on a value for money basis. Justification should show how project or program outcomes can be optimised, and how the methodology selected may facilitate aspects of risk management. 3.1 Market Engagement and Analysis Market engagement broadly refers to two distinct activities that are important in developing a procurement strategy: 1. Market Soundings accessing current information and intelligence (via a range of activities including industry forums and market surveys) on the potential capacity of industry to deliver the Government s annual Capital Works Program. 2. Industry Briefings collecting project-specific information during the planning phase to facilitate preliminary dialogue with industry and market analysis to help with preparing tender documentation prior to commencement of the tender process. This step also helps ensure that competitive processes are in place prior to inviting tenders and selecting suppliers Engaging in Preliminary Dialogue with Industry and Market Analysis Market soundings in the project s early planning stages can benefit both government and industry. Government can learn about markets, trends and the potential impact of its intended procurement approach; while industry can prepare to respond to government requirements. A sound understanding of relevant industry markets is vital before making any procurement strategy decisions. Consideration should be given as to whether there is merit in consulting with industry on a draft specification. Irrespective of whether the draft specification is released for industry comment, it is often beneficial to request input from subject matter experts outside the tender preparation team. It may also be appropriate to seek advice about strategies to influence or develop the market. To ensure the probity of the imminent contractual engagement process, early dialogue should be carefully planned and documented. Irrespective of whether the draft specification is released for industry comment, it is often beneficial to request input from subject matter experts outside the tender preparation team. It may also be appropriate to seek advice about strategies to influence or develop the market. page 21

22 P r o c u r e m e n t M e t h o d o l o g y D e c i s i o n s Tendering and Related Engagement Processes The procurement strategy should address issues about tendering processes and how best to engage the market. Such issues may include: single or multi-stage tendering tendering or sole source invitation from a register of pre-qualified suppliers or public invitation public market approach (Registration of Interest, Requests for Tender, Request for Proposal) pre-invitation proposals and/or pre-tender meetings open, selective or limited tendering advertising arrangements (such as Internet and newspapers) a tender evaluation strategy a negotiation strategy. It is important that communication about a particular project is consistent with the actions of the project team. The market is particularly interested in the efficiency of the processes, their predictability and probity. 3.2 Procurement Delivery Model Selection Procurement delivery models can be combined to create a hybrid procurement delivery model to better meet specific project needs. Infrastructure projects are delivered through a variety of procurement delivery models which include: Construct Only (CO) Lump Sum or Fixed Price contract Design and Construct (D&C) Design, Construct and Maintain (DC&M) Construction Management (CM) Public Private Partnerships (PPP) Alliance Contracting (AC) Early Contractor Involvement (ECI) Managing Contractor (MC) Direct Managed (DM). These procurement delivery models can be combined to create a hybrid procurement delivery model to better meet specific project needs. On a large project, there may be a number of different contracts and procurement delivery models, all of which is reflected in the procurement strategy. Where appropriate, agencies are encouraged to consider other models in addition to those described in the Guide. Section 4 of this Guide contains a brief description of the procurement models listed above. Section 5 of this Guide provides more detail on the procurement model selection process. page 22

23 P r o c u r e m e n t M e t h o d o l o g y D e c i s i o n s Procurement Delivery Model Usage in Government Agencies The chart below relates to feedback provided by CEIID's Alternative Delivery Mechanisms Project Reference Group late Agency / Procurement Delivery Model DTF/SP DTF/ BMW MRWA PTA FP Construct Only Design and Construct Design, Construct and Maintain Construction Management Public Private Partnerships Alliance Contracting Early Contractor Involvement Managing Contractor Direct Managed Legend DTF SP BMW MRWA PTA FP Indicates usage of various procurement delivery models by WA Government agencies and the availability of advice and support to assist other CEIID agencies in selecting the right procurement delivery model Department of Treasury and Finance Strategic Projects Building Management and Works Main Roads Western Australia Public Transport Authority Fremantle Ports 3.3 Agency Capacity and Capabilities An important factor to consider when making decisions about a procurement delivery model is the capacity and capabilities of the agency. The agency must question if it has sufficient people to perform the various roles and tasks required for the different procurement delivery models, especially the required knowledge and experience in the type of procurement strategy contemplated. Different delivery methods and project sizes require specific levels of knowledge, skill, experience and resource requirements. If additional resources are needed and approved, such as consultants, these resources will need to be managed by the agency. An important factor to consider when making decisions about a procurement delivery model is the capacity and capabilities of the agency. page 23

24 P r o c u r e m e n t M e t h o d o l o g y D e c i s i o n s It is also worth considering the possibility of increasing internal resource capability through training opportunities and career planning. In some cases, it might be viable to separate a project into components which are then spread over a number of years to enable continuity of work and ongoing training opportunities for existing staff. When analysing agency capability, consider the following issues before making a decision on the procurement model and its resourcing requirements: the availability and capability of human resources. For example, if there are inadequate resources within the agency to manage the preferred procurement model, consideration may need to be given to recruiting an experienced external consultant or employing other personnel from within government (e.g. secondment) how well the agency s existing capabilities and experience align to project risks the level of oversight the agency is able to provide if a design and construct procurement delivery model is chosen the ability to take on a new form of contract not previously used. 3.4 Agency Strategic Fit The key objective of a contracting strategy is to structure the provision of design, engineering, procurement, construction and management services to deliver a project that effectively addresses project objectives, issues, stakeholder requirements and risk. In much the same way that the individual contracting strategy allocates risk to the party best able to manage it, the overall portfolio of contracting strategies should seek to achieve a balance of risk allocation across the various procurement methods. In other words, the procurement methods used across the whole capital works program of an agency should be viewed in much the same way as a portfolio of investments. This allows risk to be managed across the works program by taking a portfolio approach to procurement decisions. The procurement delivery model and its context will determine the contract management requirements. For example, the resources and expertise necessary for an agency to manage an Alliance Contract would be different from those needed to manage a Construct Only contract. In some instances, this may require the use of a procurement method in which an agency has less experience. If this is the case, the agency may need to source the required skills externally. For larger agencies, individual contracting strategies should form part of an overall strategic approach to procurement in which diversification plays an important role to achieving a balance of risks and rewards (in terms of cost, time to delivery, reputation and other unquantifiable costs and benefits) across the program. 3.5 Contract Management Arrangements for ongoing contract management should be considered and provided for within the procurement strategy. The procurement delivery model and its context will determine the contract management requirements. For example, the resources and expertise necessary for an agency to manage an Alliance Contract would be different from those needed to manage a Construct Only contract. page 24

25 4.0 Procurement Delivery Model Options 4.1 Construct Only (Lump Sum or Fixed Price) 4.2 Design and Construct 4.3 Design, Construct and Maintain 4.4 Construction Management 4.5 Public Private Partnership Models 4.6 Alliance Contracting 4.7 Early Contractor Involvement 4.8 Managing Contractor 4.9 Direct Managed page 25

26 " Each procurement delivery model has its own strengths, weaknesses and characteristics that suit different conditions and circumstances.

27 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s 4.0 Procurement Delivery Model Options The decision on which procurement delivery model to select for each project is one of the most critical steps in determining the project s success. Each procurement delivery model has its own strengths, weaknesses and characteristics that suit different conditions and circumstances. High level strategic analysis will help determine the procurement delivery model that best suits each project. While the analysis may point to several different procurement delivery models, the general thrust will be towards selecting a value for money model that suits the agency at the time. As projects move away from traditional procurement approaches towards partnering, the assessment and management of risk and the types of relationships that are promoted change significantly. The emphasis on risk management and the allocation of risk increases from risk being primarily carried by the client, through to risk sharing and/ or risk being primarily carried by the developer. Figure 4 on page 28 depicts a range of responsibilities of the various parties based on risk factors that impact on payment methods and decision making for the listed procurement delivery models. The following section outlines various procurement delivery models (including their advantages and disadvantages, suitability criteria and value for money drivers) to assist agencies to make informed infrastructure procurement decisions. page 27

28 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s Figure 4: Responsibilities based on risk factors Procurement delivery models detailing responsibilities based on risk factors Predominant Payment Method Main Decision Maker Concept Design Construct Maintain Operate Concept Design Construct Maintain Operate Public Private Partnership Fixed Fixed Fixed Fixed Fixed Contractor Contractor Contractor Contractor Contractor Design, Construct & Maintain Actual Fixed Fixed Fixed Actual Client Contractor Contractor Contractor Client Design & Construct Actual Fixed Fixed Actual Actual Client Contractor Contractor Client Client Early Contractor Involvement Actual Fixed Fixed Actual Actual Shared Contractor Contractor Client Client Managing Contractor Actual Fixed Actual Actual Actual Client Contractor Contractor Client Client Construct Only Actual Actual Fixed Actual Actual Client Client Contractor Client Client Construction Management Actual Actual Actual Actual Actual Client Client Contractor Client Client Alliance Contracting Actual Actual Actual Actual Actual Client Shared Shared Client Client Direct Managed Actual Actual Actual Actual Actual Client Client Client Client Client Legend Fixed Contract costs are fixed prior to proceeding Actual Contract costs are incurred as they arise Contractor Contractor makes the main decisions Client Client makes the main decisions Shared Main decisions are shared page 28

29 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s 4.1 Construct Only (Lump Sum or Fixed Price) In this commonly used form of contract the government has full responsibility for the project s design and documentation, but engages a design team to develop the design documentation that forms part of the tender for the works. The works relate to the construction component only. The following figure illustrates the contractual relationship of the principal with the design team and the contractor in a Construct Only (CO) model. Figure 5: Typical Construct Only structure Principal Consultants (Design Team) Contractor Subcontractors The contractor tenders a price for the works subject to any necessary adjustments, such as variations, which are provided for in the contract. Irrespective of the actual cost of the works, the contractor is entitled to be paid the contract sum (as agreed between the parties) at the commencement of the project with adjustments made for all approved variations. In practice, the CO contract may exceed the original contract sum if not properly planned and managed. The following table lists features of the Construct Only model. Advantages Highest level of agency control and certainty regarding scope because the principal engages design consultants and scope is well defined prior to works commencing. Contract value is known before construction commences because: the full design is prepared and endorsed prior to tendering design complexities are resolved before the contract is awarded lower cost of tendering for tenderers and agencies (although design costs and risks are borne by agencies) larger pool of potential tenderers, increasing competition greater scope for competitive prices because of design certainty Government can control stakeholder management processes. Disadvantages (and issues that may need managing) Separate design and construction contracts mean no single point of responsibility for the project. Potential claims and delays due to design deficiencies and separation of design from construction. Minimal opportunity for cost value management, build-ability or innovation input from contractor. The government retains the risk of constructability of design, designconstruction coordination, fitness for purpose and design generally. Inability to fast track long lead times to prepare design documentation results in longer overall project duration. Government acts as project manager requiring skills and resources. Adversarial contract environment, potentially higher costs from claims. Potential lack of focus on life-cycle costs and considerations. Irrespective of the actual cost of the works, the contractor is entitled to be paid the contract sum (as agreed between the parties) at the commencement of the project with adjustments made for all approved variations. page 29

30 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s When to use Construct Only This procurement delivery model is advisable for use when: the scope is defined and there is little likelihood of scope creep or wholesale changes to requirements there is little incentive or need for innovation from the contractor there is sufficient time and desire to complete design documentation prior to tendering the work is repetitive, such as standard designs for schools or police stations there is limited opportunity for bundling services/maintenance and creating whole-of-life efficiencies the project is small to medium sized and of relatively short duration there is a large pool of potential tenderers which leads to increased competition there is greater scope for competitive prices because of design certainty the contract value is set before construction commences. Suitable Characteristics of Construct Only The Construct Only procurement delivery model is the most prominently used and best understood contracting strategy in government and the private sector across Australia. When considering this procurement delivery model against project needs, the following typical characteristics will indicate a suitable scenario for the selection panel: high levels of certainty with regard to cost and quality project risks that are well defined, clearly understood and easily allocated to an appropriate party a high level of client involvement and control during the design phase a clear-cut division between design and construction. The CO procurement delivery model is the most prominently used and best understood contracting strategy in government and the private sector across Australia. Knowledge and experience by clients, professional practitioners and the construction industry is high and skills in this procurement delivery model are readily available in the local marketplace. page 30

31 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s 4.2 Design and Construct For a Design and Construct (D&C) contract the principal prepares a design brief that outlines the functional and key user requirements (in performance terms) for the works, which is less detailed than the design documentation required for a Construct Only contract. The principal then seeks tenders for completion of the detailed design and construction of the works as described in the design brief. The following figure illustrates the contractual relationships in a D&C contract whereby the principal enters into a single contract with the construction contractor who is required to provide design expertise. The Design and Construct procurement delivery model is widely used in government and the private sector. In many cases, work can commence prior to finalising the design and construction documents. Figure 6: Typical Design and Construct structure Principal Contractor Subcontractors including Design Consultants The following table lists features of the Design and Construct model. Advantages Single point of accountability for design and construction. Administrative efficiency. Potential to fast track the project because construction can commence ahead of full design documentation (provided there is adequate control over design quality). Contractor has the opportunity to contribute construction experience into the design, resulting in innovation and efficiencies. Contractor normally warrants the design including fitness for purpose. Lump sum for design and construction. Disadvantages (and issues that may need managing) Longer tender period needed to allow tenderers to assess design risk. Principal may pay a premium to transfer design risks. Lack of focus on life-cycle costs and considerations. Government retains whole-of-life asset risk. Government may be liable for time and cost overruns. page 31

32 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s When to use Design and Construct This procurement delivery model is advisable for use when: the government s requirements are tightly specified before tender and do not change the contractor is better placed to manage design risks there is a requirement for a single point of accountability for design and construction there is a requirement for a fixed price contract there is a requirement to potentially reduce the overall project cost by giving the contractor the opportunity to contribute construction experience into the design, resulting in innovation and efficiencies. Suitable Characteristics of Design and Construct When considering this procurement delivery model against project needs, the following typical characteristics will indicate a suitable scenario for the selection panel: tight time-lines that require high certainty in final cost and completion date design and construction risks are best managed by the contractor client is looking for design and construction innovation the client will benefit by having a single contractual arrangement for both design and delivery. This procurement delivery model is widely used in government and the private sector. In many cases, work can commence prior to finalising the design and construction documents. 4.3 Design, Construct and Maintain The features of a Design, Construct and Maintain procurement model are the same as a Design and Construct model with the added transfer of life-cycle risk to the contractor, which encourages design efficiency and quality construction and finishes to reduce long-term costs. In this model, the contractor has ongoing maintenance obligations in addition to design and construction. Life-cycle costs can be reduced if the contractor takes into account ongoing maintenance obligations when designing and constructing the facility. The following figure illustrates the Design, Construct and Maintain (DC&M) contractual arrangement. Figure 7: Typical Design, Construct and Maintain structure Principal Contractor Building Maintenance Construction Subcontractors including Design Consultants Subcontractors and Maintenance Contracts The features of a DC&M procurement model are the same as a Design and Construct model with the added transfer of life-cycle risk to the contractor, which encourages design efficiency and quality construction and finishes to reduce long-term costs. page 32

33 P r o c u r e m e n t D e l i v e r y M o d e l O p t i o n s The following table lists features of the Design, Construct and Maintain model. Advantages Single point of accountability. Time saving because design can commence ahead of full design documentation. Contractor has the opportunity to contribute construction experience into the design, resulting in innovation and efficiencies. Full integration of design, construction and maintenance. Administrative efficiency. Contractor undertakes maintenance of the asset for an agreed fixed term. Contractor warrants design including fitness for purpose of asset. Opportunity to develop innovative solutions. Transfer of life-cycle cost and risk which encourages efficient design and quality construction and finishes therefore certainty of maintenance standards (as agreed) and cost certainty (as approved) for the long term e.g. 25 years Performance standards are in place. Disadvantages (and issues that may need managing) Longer tender period needed for tenderers to assess design and building maintenance risks. Principal may pay a premium to transfer design and maintenance risks. Success relies on well defined functional and service specifications. Significant stakeholder resources may be required if there are multiple concept designs being developed simultaneously during the bid phase. Changes to design may require contract negotiations. Ability to make variations needs to be addressed in contract. Higher agency tendering costs and resourcing costs that need to be offset against potential cost savings and efficiencies. Requires agency skills (or consultants) for financial and technical assessment, tendering and management. Need to educate stakeholders (who are likely to be unfamiliar with this procurement method) to ensure that other project success factors are not compromised. When to use Design, Construct and Maintain This procurement delivery model is suitable for use when: there is an opportunity for bundling services/maintenance and creating whole-of-life efficiencies there is a requirement for a single point of accountability for design, construction and maintenance there is a requirement for a fixed price contract the government s requirements are clearly specified before tender and do not change the contractor is better placed to manage design risks at construction and maintenance stages the building maintenance requirements can easily be determined and documented. The DC&M procurement delivery model can potentially reduce overall project life-cycle costs because the contractor has the opportunity to contribute construction experience into the design, resulting in innovation, efficiencies and lower whole-of-life maintenance costs. The Design, Construct and Maintain procurement model can potentially reduce overall project life-cycle costs because the contractor is able to contribute construction experience into the design, resulting in innovation, efficiencies and lower whole-of-life maintenance costs. page 33