Good-practice procurement

By - , Build 175

The government has released comprehensive procurement guidelines for agencies to use when procuring construction works. The aim is to ensure good practice for government agencies in an industry with a variable record.

IN RESPONSE TO well publicised industry problems, the Construction Sector Accord was signed in April 2019 with the intent to transform New Zealand’s construction industry into a high-performing sector.

One of the priority work areas identified by the Accord was for the government to improve its procurement practices.

Procurement guidelines now in place

In June 2019, the 4th edition of the Government Procurement Rules was published, and New Zealand Government Procurement released the 2nd edition of the Construction Procurement Guidelines on 1 October 2019.

Rule 69 of the rules requires mandated government agencies to apply the standards of good practice set out in the guidelines when procuring construction works.

The guidelines consist of 12 sections, each covering specific topics. Here, we focus on three sections of interest.

Developing agencies’ construction procurement strategy

Where a standard form of contract exists for the selected delivery model, government agencies must adopt it. This recognises that the use of standard form contracts can help reduce procurement and contract administration costs, as they are generally well understood by users.

The guidelines then provide that government agencies must limit the use of special conditions to such contracts. Excessive special conditions can result in risk pricing by the contractor or can put the project at risk if the contractor cannot adequately manage that risk.

The guidelines also include directions on risk assessments and the use of a risk allocation table. These set out which party bears certain risks, whether special conditions change that risk allocation and why and any costs associated with that change in risk allocation.

Finally, the guidelines provide quick reference guides on construction tendering and contract clauses that agencies must adopt. For example, practical guidance is offered on clauses dealing with indemnities and limitation of liability (for instance, no liability for indirect or consequential losses), risk allocation (allocating risk to the party best able to manage it), site conditions (detailing which party is responsible for which site conditions) and time management (the contractor should own the float).

Addresses common complaint

Overall, this guidance is clearly directed at addressing a common complaint of contractors, namely the use of overly complicated contracts with lengthy special conditions that transfer – expressly or by stealth – all risks to the contractor, with neither party to the contract really understanding how the contract works.

The test now will be the extent to which this guidance is adhered to and agencies are held to account if they continue to use these heavily amended standard form contracts.

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Focus on whole-of-life cost

The new rules and the guidelines have a focus on the whole-of-life cost of a project. Agencies must describe, through their business case and project brief, how they will define whole-of-life outcomes for the project. Consultant scopes must incorporate wholeof- life outcomes.

Whole-of-life thinking focuses on the long-term value over the life of the asset instead of obtaining the lowest upfront price. An asset’s long-term value can be assessed from:

  • its through-life cost of management and disposal costs over its intended life
  • the benefits that the asset will result in and how well the asset meets the required functionality
  • how the asset performs in terms of minimising its costs to the environment by way of Green Star ratings, energy efficiency and reduction of carbon emissions.

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No longer just lowest upfront cost

This aspect is part of a drive to discourage a race to the bottom, where the focus is on continually reducing the price at the expense of everything else.

This has been a complaint by industry commentators – that the pressure in procurement has been on reducing the upfront cost, leading to suboptimal outcomes on projects and for the industry generally.

Construction skills and training in contracts

In line with the Accord’s priority of using the procurement process to address the shortage of capability and capacity in New Zealand’s construction sector, depending on the contract value and length, government agencies must create specific project skills and training development plans or strategies for a construction contract or programme. These requirements apply to construction contracts worth over NZ$50 million or construction programmes of 3 or more years.

Government agencies must ask questions about what suppliers could do over the course of the contract to improve or build construction skills. They must then monitor contracts to ensure that skills development and training commitments are delivered and reported on in compliance with any reporting framework published by the Ministry of Business, Innovation and Employment (MBIE). MBIE intends to use this information to monitor and report on the construction sector’s overall capacity and capability.

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Questions on meeting these costs

This requirement is certainly laudable, but there is a cost to contractors to develop and improve skills. Will the margins on projects be enough to meet these costs? Will agencies pay higher prices to meet the same?

Industry commentators indicate that prices need to increase to accommodate the training required to improve the capacity and skills in the industry.

Guidelines a positive shift

The guidelines mark a positive shift in government procurement practices. A move away from a lowest price model to a broader outcome model will hopefully help address some of the industry’s issues. However, for that to occur, the industry needs to be aware of and promote compliance with the guidelines.

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Note

This article is not intended as legal advice. For specific advice, contact your legal advisor or Kensington Swan on (09) 379 4196.

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Articles are correct at the time of publication but may have since become outdated.

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