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From minor safety improvements to major new motorways, Transit New Zealand’s goal in the construction of any state highway project is to achieve value for money. But while it’s important to consider cost and quality factors such as safety, community and environmental outcomes for any project, at the heart of value-creation and best-practice procurement is the principle of risk allocation. Some New Zealand commentators have advocated a one-size-fits-all approach. But in Transit’s experience, risk allocation, project complexity and project timing demands mean that a more “horses for courses” type of approach to procurement is needed to create the best value for money over our portfolio. Transit’s approach is to take into account the complexity of individual projects and to pursue value for money through a range of procurement models. This allows risk to be allocated effectively, offering benefits both for Transit as a client, and for contractors in terms of their commercial objectives. For small, less complicated projects, the traditional measure-and-value procurement model still offers the best value for money in terms of risk allocation. When the design phase has been completed and there is little risk of major scope changes being required in the construction phase, it is appropriate for Transit to effectively retain that risk. This model provides security for contractors, and with quality standards assured through Transit’s pre-qualification system, promotes strong competitive bidding and a lowest-cost solution. For more complex projects, Transit uses the design-construct procurement model. This model transfers the risk associated with the increased potential for complications to a contractor or consortium, by tendering a lump sum contract. This is only appropriate where the contractor is able to manage the forecast complications. The design-construct model encourages value-for-money outcomes by encouraging innovation and creating an incentive for this to happen. This is a result of the collaboration that takes place in bringing the design and construction phases of the project together, and the inherent incentive for contractors to achieve cost savings under the lump-sum contract. In such models the non-price attributes described by each tenderer are an important differentiator between bidders, as they outline the competencies and methodologies deployed to manage the allocated risk, and therefore give Transit confidence in delivering the wider project outcomes. For high-risk, highly complex projects, we also consider the alliance procurement model. This is where Transit, as the client, partners with contractors and consultants to deliver the project, based on agreed project outcomes. As part of an alliance agreement, a target cost estimate, including a profit margin, is agreed, and all under- and over-runs are shared. This collective ‘ownership’ further encourages innovation, and by merging the project phases promotes value-for-money in terms of quality, cost and an ability to achieve fast track project delivery. Of course, each individual procurement model has advantages and disadvantages when compared to the others. Apart from offering varying incentives for innovation, each approach involves different levels of administration for Transit, and varying costs to contractors and consultants tendering for the work. Our goal is to make competing for any project as attractive as possible to as many bidders as possible, to achieve an outcome that offers real value for Transit as a client, as well as a viable commercial proposition to the contracting industry. To achieve these win-win results, Transit is continuing to innovate with its approach to procurement. One way that we are doing this is through Early Contractor Involvement (ECI), which sees contractors involved at the investigation phase of projects. This achieves some of the advantages offered by the alliancing and design-construct models, including increased scope for innovation, and resulting cost-savings. We are also investigating the potential to procure block programme projects in groups. A trial in the Auckland-Northland region next quarter will test this approach by tendering a set of similar projects at the same time. For Transit, this is expected to be more efficient than tendering projects on a project-by-project or a phase-by-phase basis. For contractors, this model also offers an opportunity to grow in a graduated way, helping to bridge the gap between very small and very large industry players. Alongside Transit’s commitment to introducing increasingly effective procurement models, we recognise the vital importance of integrity in the procurement process. This is a different kind of risk management: having fair and transparent procurement processes encourages competition, and discourages contractors from building in a premium to account for the risk of unfair processes. Transit promotes transparency and integrity in the procurement process through probity auditors. For high risk projects, probity auditors are employed full-time. A sample of medium-risk projects receive probity audits, while on smaller projects a process-audit takes place. Small-to-medium projects also benefit from the pre-qualification system, which promotes a level playing field by enabling tenders to be compared purely on price, as minimum quality standards are assured. All of these checks and balances are designed to achieve value for money. Transit’s procurement practices will continue to evolve, but this will remain our key focus. In determining value for money, cost will always be an important factor, but every project is different and it is simplistic to always judge value for money at the tender box. True value accounts for every measure of success, and begins with sound risk management.
BY COLIN CRAMPTON, general manager capital projects, Transit New Zealand
Contractor Vol.31 No.4 May 2007 All articles on this website are copyright to Contrafed Publishing Co. Ltd. |