Weighing up the procurement process

By Malcolm Abernethy

Executive officer, NZ Contractors' Federation

It is timely that councils consider their procurement practices and ensure they have processes that are robust, transparent and provide real value for money while maintaining integrity through the tender process.

A recent article in LG magazine, “Council and Contracts – the Ins and Outs” by Howard Johnston and Chris Paterson of Brookfields Lawyers, explains the current, highly competitive environment, where if the process and/or contract documents are wrong, then contractors may hold councils accountable for how the tender process is conducted. They say documents for low value projects may be subject to greater scrutiny as larger contracting firms tender for smaller projects.

As a result of greater scrutiny councils need to ensure that bias and conflicts of interest do not enter into the tender process.

When to tender out?

Johnston and Paterson suggest tendering small contracts is time consuming and expensive and that council officials be given discretion to negotiate directly with a preferred contractor for small value contracts.

However, councils already have the opportunity to use many methods of procurement for contract works from direct negotiation, quotes for well-defined contracts, through to requests for tender and contract. Some councils are moving toward preferred contractor lists similar to prequalification. I believe this trend is acceptable provided that contractors wanting to do council work but who are not prequalified have the opportunity to gain prequalification status – similar to NZ Transport Agency. Small and start up contracting companies need to have the same opportunity to gain council contracts as the established firms.

Direct negotiation for contracts may not necessarily provide best value for money – the tender process allows contractors to develop innovative solutions that may lead to greater savings and best whole of life costs for the project.

In addition, councils need to have a mix of contract sizes and types that will create a healthy, vibrant contracting industry. Such an industry will be highly skilled and competitive resulting in high quality works at a reasonable price.

Contract forms

The form of contract should be chosen to suit the project requirements. Large contracts may be suitable for an alliance form of contract with the vast majority being suitable for the standard form of contract NZS 3910.

For smaller contracts NZS 3915 may be appropriate where there is no engineer to the contract – that is, the client manages the work directly. There are also short forms of contract for small and relatively simple works produced by industry associations.

Most standard forms of contract have been developed over time, using a group of industry peers, and resulting in balanced documents that should not require significant modification.

Modification and extensive amendment to stand forms of contract can create uncertainty as to the risk associated with the contract.

Using contracts from other projects may also place irrelevant obligations for the contracting parties. This occurs mainly in the area of technical specifications where they are copied from one contract to another.

The contract document must be written specifically for the project with regards to technical requirements, including testing and inspection requirements. The standard contract form should remain unchanged except for those items that are specific to the contract recorded in the special conditions. The special conditions are identified in the first schedule of NZS 3910.

Preparing contract documents correctly at the project’s inception can save considerable costs once construction starts. Investigation design and documentation should be thorough, as these aspects affect constructability of the project. Using early contractor involvement can assist in the constructability of a project.

Getting the form of contract right will influence relationships between the contracting parties. It is worthwhile spending a bit more at this stage of the project as it can result in considerable savings in the whole of life costs.

Tender evaluation

Many tenders are awarded based on lowest price conforming tenders. Johnston and Paterson’s article suggests that this is acceptable for projects of less than $100,000, but for larger value contracts, a quality-price trade off is preferable, typically weighted 70 percent on price and 30 percent on non-price attributes, such as the contractor’s track record.

I believe a lesser cost weighting may lead to better outcomes where the non price attributes are used to determine the ability of the contractor to construct the works. This applies particularly to the methodology attribute, where considerable project gains can be achieved by the contractor when adopting innovative construction methods and/or alternative materials.

Running the tender process

The tender process can be expensive for both clients and contractors in terms of cost and time and this is acknowledged by the industry.

Johnston and Paterson suggest that where errors become evident then councils should retain some flexibility to reject all tenders and start again.

But I think the time and cost involved with this approach can be prohibitive for all parties and can be overcome by thorough investigations of the site, comprehensive designs and complete documentation before the tendering process starts.

Many negative issues associated with tendering and contracting can be avoided by councils adopting a process that is fair, equitable and transparent, with this being the ultimate aim of any procurement strategy.