Funds must be distributed appropriately for stimulus packages to be effective. Risks need to be identified and managed. And current economic and health challenges understood. We detail 7 tips for government to consider for effective management and delivery of stimulus packages of construction projects.
- maximising bang for buck
- managing price risk
- maximising local participation
- engaging experienced contractors (and avoiding dodgy ones!)
- accelerating procurement
- setting up a good contract
- training, training, training
Maximising bang for buck
For governments to get 'bang for their buck', funds should be allocated to projects that:
- create local jobs
- pay a reasonable, but not excessive, margin to contractors and consultants
- allocate risks to the party best able to manage them
- preserve long term service contestability
- deliver a sustainable, long term asset which serves the community need and is cost effective to maintain
This is a fine balancing exercise. It requires consideration of the proposed asset's whole of life costs and ensuring costs do not outweigh the benefits the asset delivers to the community and economy. Calculating an asset's whole of life cost involves a number of considerations, including the lifespan and maintenance requirements of the asset, and the impact of factors such as climate change.
Managing price escalation
History shows that the cost of delivering capital works increases when significant government funding is available. To manage price escalation, governments should maintain competitive tendering processes, 'benchmarking' costs and select the appropriate pricing model for each contract.
Competitive lump sum pricing for works typically provides the best value for money. However, it is only suitable where works can be properly and clearly scoped and packaged. Schedule of rates based pricing is usually appropriate where Government wants to get the most competitive rates from the market, yet have flexibility about the volume of work to be performed. Having contractors engaged on schedules of rates can also be a good way to manage resourcing 'ups and downs'. Use of schedules of rates may be of particular use while businesses are still impacted by COVID-19.
Cost-reimbursable pricing, which involves contractors being paid their actual costs plus a margin, can be suitable on large projects which can't be fully scoped at their outset and where Government wants high levels of flexibility and control. The 'managing contractor' approach, using a combination of fixed prices or margins for overheads and management, plus actual subcontractor costs, involves a combination of these pricing models. Consider this scenario.
Scenario
Funding has been allocated to a program of regional water and sewerage upgrades across Queensland. There are a number of major specialist contractors experienced in managing such projects. They have offices in Brisbane, the Gold Coast, Gladstone and Townsville. And they use a mix of their own managers and subcontractors such as plumbers and electricians. The State Government agency is delivering the program with support from local councils. Demand for trade subcontractors is high, due to Government stimulus packages for public works and consumer demand for residential works.
Potential Solutions
- Government could look at a regional program of capital works, where it establishes small panels of managing contractors to deliver the required upgrades.
- Template contracts, which are competitively tendered would include minimum local industry engagement and training requirements (and
- Pricing could include incentive schemes based on safety, quality, timeliness and performance against agreed budgets.
- Individual works packages could be competitively tendered to panel firms, or a system of allocating jobs based on availability, credentials and performance could be used.
- A system of 'pre-qualification' for subcontractors could be used, to enable them to work for multiple managing contractors provided they meet Government's minimum standards and have been trained in the project requirements.
While some timeframes and processes have been relaxed during COVID, overarching procurement principles have not changed. The Queensland
Procurement Process, fair tendering processes and reporting requirements are just as important now as ever.
Implementing stimulus packages effectively means tendering must be undertaken with integrity, legitimacy, and accountability to promote positive outcomes.
The Queensland Government has released specific guidelines for procuring during the COVID-19 emergency. The guidelines outline how buyers can manage procurement to maximise local suppliers and preserve life, safety and wellbeing. Overall, the message is that Government can't get caught up in red tape and bureaucracy. It needs to ensure it gives the market a fair and competitive opportunity to win work. Audit programs should be used to ensure corrupt practices don't occur, with appropriate rights included in contracts to permit this.
Local participation
A key policy focus is the desire to spend locally. This is best achieved by procuring local subcontractors or having regional based contractors managing the project. The benefits extend beyond injecting funds back into the economy and creating jobs for Queenslanders. By procuring locally, government can reduce contract delays and extensions due to lags in manufacturing and transportation timeframes. It can also create opportunities to develop local manufacturing if a pipeline of local supplies can be established.
Avoiding dodgy contractors
Substantial funding can attract new entrants into the industry, who are underqualified or unscrupulous. Queensland has strong licensing laws to prevent 'dodgy contractors' performing building works, electrical works and specialist trades. Yet not all work is covered by the regulations and a licensing regime isn't a 'silver bullet' (eg it doesn't prevent inexperienced or underqualified workers performing potentially dangerous works).
This is where work health and safety laws step in. They continue to be strengthened, but injuries and fatalities still occur. Queensland has introduced industrial manslaughter laws and since the fatalities at Dreamworld and Eagle Farm in 2016 the safety regulator has been focussed on hard line enforcement.
Many Queensland construction projects are struggling with how to manage an interested and active safety regulator, and how to respond to improvement and prohibition notices which can impact the delivery of work. There is also exposure for executives and boards in engaging contractors who don't have the skills or safety systems in place to meet the statutory requirements. They are obliged to exercise 'due diligence' to ensure safety, so far as is reasonably practicable, on construction projects.
Finally, pay contractors and subcontractors a reasonable but not excessive margin. Ensure they manage their contracts well. Both will help to manage safety risks, and avoid 'corners being cut' to make that bit more money.
Effective contracts
There is no 'one size fits all' for project delivery models and contract. Determine the model and form of contract on a case-by-case basis. For example, for residential and commercial building projects where risks are more easily quantifiable, design and construct methods are much more settled. With the scope for innovation much smaller, there is likely to be little appetite for departure from traditional risk allocation and lump sum contracting strategies.
However, many of the mega infrastructure projects to be delivered in the next decade will need to be delivered in a high risk environment in circumstances where the project cannot be fully scoped. For example, transport infrastructure will need to be delivered underground or through densely populated areas and with more interfaces.
If traditional models are used for these projects, without appropriate risk allocation principles, then that will likely exacerbate practices of escalated pricing, cutting corners and huge claims to preserve margins.
The strong trend in the market is to move towards more collaborative forms of contracting (e.g. alliancing and early contractor involvement models). Although they can reduce disputes and provide high levels of control and cost certainty, there is still some concern that 'no blame' contracts such as alliances involve too much risk for Government and potentially higher overall costs. This has resulted in the current trend of developing contracts with a blend of traditional hard risk allocation with relationship features. With careful drafting and tailoring, these 'blended' contracts can deliver excellent outcomes where the parties have a genuine desire to work collaboratively.
Short cuts don't work, and calling a contract 'Collaborative' and including a good faith clause is not enough!
Accelerating procurement
Infrastructure Australia recently surveyed 130 senior leaders across infrastructure (working on projects ranging from $10M to over $1bn). Two thirds of respondents indicate that the pace of government funded infrastructure projects coming to market was too slow.
Nearly 50% indicated that bringing more projects to market should be the government's primary infrastructure sector focus in its response to COVID-19.
Government needs to hear this message. Projects need to be delivered to market quickly.
There needs to be sound scoping and other procurement practices aimed at delivering value for money, effective contracts and probity. The Queensland Government's COVID-19 procurement policy updates reflect this. Agencies should continue to apply common sense to find the right balance. From a contractual perspective, focus on developing a reasonable and market acceptable form of contract, with a clear scope of works and pricing framework.
This will assist speed the bid process. Early contractor involvement arrangements, can also be used to help speed up delivery and deal with changing COVID risks through procurement and into delivery.
Training, training, training
The best written contract won't achieve its objectives if it's not well administered. Having the people who will administer the contract involved in drafting and negotiating it is ideal, but not always possible. A key factor is training. The Department of Defence uses a successful model - Just in Time Training.
This involves the lawyers and project managers providing two briefings on the contract.
The first occurs when the contract is put out to market This gives all tenderers the opportunity to ask questions about the contract. Prior to the contract being awarded, another training session is held by the lawyers for the Commonwealth. At this training, lawyers and the project managers take the selected contractor through key parts of the contract. Everyone obtains a common understanding on how key parts of the contract work, and the requirements in relation to matters such as accessing the site, sending correspondence and notices and making claims.
This 'shared training' approach, where everyone is in the room, ensures common understanding. For larger projects and longer term contracts it is helpful to have a 'refresher' session during the course of the works. This is like a dispute avoidance board. It can also be an opportunity where grievances or concerns that a contractor has 'parked' can be raised, so potential consequences (ie on program and price) don't continue to 'snowball'.
If you've got any questions or would like to workshop any of the issues we've discussed in this paper, please contact me.
