Relationship contracting for civil construction by standing offer panel arrangements under the Local Government Regulation 2012

22 November 2016

Co-authored by Simon Malouf – Program Leader, Road Delivery Management Logan City Council

Abstract

Paul Muscat and his team worked with Simon Malouf, Program Leader for Road Delivery Management at Logan City Council, to take advantage of the contracting provisions of the Local Government Regulation 2012 to streamline contracting processes and provide enhanced support to the delivery of their rapidly growing capital road and drainage infrastructure program.

The legal and road delivery management teams designed and structured contracting arrangements to establish a contracting environment that is equally attractive to both industry and Council as a foundation for developing strong working relationships with small groups of contractors over a three to five year period of operation.

In this recent procurement, three panels of contractors were established under Standing Offer instruments for the procurement of construction only, and design and construction services through a fast, low document, closed quotation process.

The arrangements have successfully increased capacity for project delivery, reduced procurement time frames and resourcing requirements whilst also enhancing project outcomes through favourable longer term working relationships with contractors.

Introduction

The 2012 amendment of the Local Government Regulation was introduced in the context of empowering local government through streamlining unnecessary regulation, prescription and red tape imposed by statutory requirements.

Specific amendments were made to the provisions for the way Councils can undertake their procurement and contracting. The amendments introduced the term “contracting arrangement” in lieu of “contract” in reference to medium and large sized procurements. Although the term was not expressly defined, when considered in context with the objectives of the regulatory changes, this new terminology has specifically removed the regulated consideration of a procurement on the basis of individual contracts only and has afforded the opportunity for a single procurement to be considered as an aggregation of numerous individual contracts.

Buoyed by regulatory empowerment, Councils have been provided broader scope in procurement to be more effective in the delivery of their services to the community and to strategically match procurement arrangements and practises to the specific operational needs and circumstances of their organisation.

These changes to the procurement regulations came with opportune timing for Logan City Council’s Road Infrastructure Delivery Branch. Rapid ongoing growth in Logan’s road and drainage infrastructure capital program in the years after amalgamation (where Logan doubled the size of it’s road network overnight) saw the annual program grow from approximately $27M to over $70M in only a few years. The largest area of growth within the program was the civil construction contracting element, growing from approximately $9M to over $40M in the same period.

In addition to the increased demand on contract procurement for road and drainage infrastructure construction, the rapid growth in the capital program had left road infrastructure planning and design functions stretched to establish a new, prioritised infrastructure management plan for the new city. Design availability for prioritised projects did not align with budgeted capital expenditure timeframes and high volumes of contract construction were required to be procured with very short lead times.

A new contracting strategy was designed to meet the ongoing civil construction needs of the capital delivery program within a lean administrative resourcing structure.

In addition to meeting the Sound Contracting Principles of the Regulation, Logan’s new civil construction contracting strategy needed:

  • Short project procurement timeframes that could achieve periods of less than one month from the release of project documentation to award of contract when required
  • Design & Construct capacity to offer support to the design program
  • Capability to address projects ranging in size from approximately $100k to $10M+
  • Capacity to deliver between $40M and $50M annually spread across 30 – 40 individual projects
  • Stable contractor performance and commercial conduct to enable works to be administered by a relatively small, young engineering team.

Supported by the broadened procurement provisions of the Local Government Regulation, Logan set about establishing a number of panels for providers of construction and design and construct services.

The Panel Mechanism

The basic operational structure of Logan’s panel arrangements was established as follows:

  • Three individual panels were established to cover the following categories of project delivery:
    • Tier 1 Construction Services (Projects <$1.5M[1])
    • Tier 2 Construction Services (Projects >$1.5M)
    • Design and Construct Services.
  • Three Contractors to be appointed to each panel
  • Each panel to be established with Standing Offer Deeds to bind the panel contractors to common standard contracting arrangements and panel processes
  • Individual projects to be procured by closed quotation issued to the appropriate panel
  • Past contractor performance and conduct to be used in the assessment of quotations
  • Stand-alone contracts to be awarded from each quotation (AS2124 or AS4300). Road Infrastructure Delivery Manager delegated authority to enter into Contracts of any value established under the panel arrangements
  • Panel duration of 3 to 5 years (3+1+1).

The Standing Offer Deed

The basis for the general operation of the panel arrangement is the Standing Offer Deed (Standing Offer).

The Standing Offer itself sets out the mechanisms by which the panel operates, and in particular, how contract work will be procured by quotation and the obligations and entitlements of each party. Importantly the Standing Offer binds the Contractors to the provision of service through closed, competitive quotation processes.

The Standing Offer also tables the standard form of contract that will be used in contracts quoted and awarded under that panel. This includes the Conditions of Contract, Operations Specifications, Technical Specifications and Standard Drawings. By including these documents in the Standing Offer, it enables quotation and contract documentation to be simplified as all of these documents can simply be included by reference only and not reproduced for each individual contract.

Shortened Project Procurement Time

The main avenues for reducing project procurement timeframes through the Standing Offer as compared to individual project tenders include:

    • Simplified project procurement and contract documentation:
      • All Conditions of Contract, Specifications and Standard Drawings are part of the Standing Offer and need only be referenced in quotation / contract documentation.
    • Reduced assessment criteria for individual projects:
      • Open market tenders would typically cover some fairly extensive non-price assessment criteria such as local supplier, relevant experience, operational and management capability, work health and safety performance, quality assurance performance and environmental management performance
      • Under the panel arrangements, these non-price assessments (and others as required) can be undertaken once only during the procurement of the Panel itself. Subsequent quotations released under the Standing Offer need only have project specific assessment criteria and contractor past performance considerations to enable an effective review of submissions.
    • Reduced number of contractor submissions:
      • With only three contractors on each panel, the time taken to undertake a thorough review of quotations is significantly less than open market tenders (which could attract more than 30 respondents in current market conditions). The reduced volume of submissions for review also lends itself to more thorough and targeted assessment of responses.
    • Reduced approvals processes:
      • Part of Logan’s establishment of the Panel arrangements was to ensure that there was empowerment at operational level for the Road Infrastructure Delivery Manager to be able to directly enter into contracts of any size procured under the panel without further resolution of Council. This has dramatically reduced the amount of reporting to Council required, with the only ongoing Council reporting requirements being a Quarterly Contract Award Activity information report detailing what contracts the Road Infrastructure Delivery Manager has executed on behalf of Council in the last financial quarter.

The outcome of the simplifications detailed above has been a notable reduction in project procurement timeframes over past experiences with open market tenders. In general, projects can be procured in less than one month, making it possible to have contractors on site in less than six weeks from the time of calling the quotation. This period can be shortened to less than four weeks if given priority expedition.

Design and Construct Panel

An important aspect of establishing the panels for Logan was to include a design and construct panel to provide additional delivery support to Council’s road infrastructure design program. Establishing the design and construct panel separately to the construction only panels enabled a targeted procurement of contractors best suited to managing design processes in addition to project construction.

A beneficial inclusion into the standard design and construct arrangements was to incorporate a mechanism to tie down the majority of project costs at time of quotation without a completed design and without panel contractors having to incorporate substantial scope risk allowances.

Under this mechanism, design and construct projects are established with the design and construction phases as two different separable portions for delivery under the contract. Quotations called for design and construct projects include the requirement for contractors to provide an indicative valuation of the works at time of quotation by way of a generalised Schedule of Rates. This schedule is established without a completed design based on estimated quantities of expected scope items. This indicative valuation forms part of the competitive quotation assessment. Upon award of a project, the successful contractor would be given authorisation to undertake the design separable portion only. Once the contractor completes the design, they are required to lodge a lump sum price for the works in a Bill of Quantities. If the Bill of Quantities price is able to be reconciled within reason to the quotation Schedule of Rates valuation, the contractor is given permission to proceed with the construction separable portion at the established fixed price. If the post design Bill of Quantities project price cannot be reconciled with the quotation Schedule of Rates valuation, the Principal can take the design and re-quote its delivery under the appropriate construction-only panel. In this circumstance, the design and construct contract is brought to a close with only the design having been delivered and clear contractual provisions limit the Principal’s liability to the design fee only.

The design and construct panel has been successful in lending capacity to Council’s road and drainage infrastructure design program. Although some senior design resources are required to assist in the administration of the design phase of contracts, the overall outcome has been a notable increase in design delivery capacity when required.

Range of Project Sizes

To enable the panel arrangement to respond to road and drainage infrastructure projects between $100k and $10M+ (largest procured to date is ~$18M), the construction-only capability of the panel arrangement was split into two tiers of service as previously mentioned. Tier 1 construction responds to projects with an expected delivered value of less than $1.5M whilst Tier 2 construction responds to projects larger than $1.5M. This separation allowed targeted procurement of contractors who represented best value in the respective project scales.

The threshold of $1.5M which separates the functions of the two tiers was established by reviewing forward programs of work and identifying a project value which would give a reasonable balance of project flows to each of the Panels. Although the actual flow of work is dependent on the delivery of designs, in general the $1.5M threshold has worked reasonably well for Logan’s delivery program.

Both the Tier 1 and Tier 2 construction panels have demonstrated good ability to achieve value for money across the project spectrum within each Tier. It has been observed however that even within each of the tiers, there are some patterns emerging with particular contractors demonstrating better value at the small end of project scale and different contractors demonstrating better value at the larger end of the project scale.

Capacity

The component of Logan’s road and drainage capital program required to be addressed by the civil construction services panels (including D&C) is typically in the order of $40M to $50M of works each year, spread across 30 to 40 individual projects.

The reduced procurement timeframes as outlined previously have inherently provided additional capacity with more project procurements being able to be undertaken by the contract administration team within a given period of time. However a further aspect of panel capacity that needs to be carefully considered is the number of contractors appointed to each panel.

Although increasing the number of contractors on each panel will inherently increase the overall capacity of the panel, diluting the “project density” with too many contractors can undermine the effectiveness of the panel by making the arrangement less attractive to industry and potentially undermining the arrangement’s ability to foster strong contractor relationships. However if too few contractors are selected there may be neither sufficient competitive forces at play to drive value, nor sufficient mitigation of counter-party risk to support longer term stability of the Panel.

In the context of Logan’s road and drainage civil construction contracts program, the final determination to use three contractors on each panel was felt to be the appropriate balance of the above considerations, having due regard also to the outcomes of  submission evaluations.

In practise, the panels of three have operated effectively and have demonstrated ample capacity to meet the delivery needs of the program whilst still returning effective competition for the available work. The panel arrangements have been a key element in Logan achieving record levels of delivery for road infrastructure.

It is worth discussing that Logan’s in-house road infrastructure planning and design functions have made substantial progress in meeting delivery targets to provide the necessary support to the construction program. This has resulted in reduced utilisation of the design and construct panel. If the timely availability of project designs is sustained, the structure of the design and construct panel may warrant reconsideration.

Contractor Performance & Conduct – The Contractor Relationship

One of the notable benefits of establishing a small, closed panel of contractors is that it provides an environment that can naturally foster strong, genuine working relationships between the Principal, Superintendent and the contractors.

When considering open market procurements undertaken on a project by project basis in a Local Government context, the extent of the working relationship boundaries is realistically limited to the current project alone. Whilst parties can use a stand-alone contract to demonstrate capabilities and leave a positive impression in hope of supporting the likelihood of further working opportunities, it can be difficult to acknowledge and incorporate prior performance in assessment criteria for stand-alone procurements whilst still upholding probity principles.

With this consideration, when the extent of the working relationship is limited to a single contract, parties may move more rapidly and tenaciously to protect their interests when difficult circumstances arise. It is also fair to say that parties may more readily move to exploit opportunities too.

With the Panel arrangements, the boundaries of the working relationship can be extended to far longer durations. Logan’s civil construction panel arrangements have been established with an initial period of three years, with the option to extend the arrangement by a further two, one year periods. Coupled with a panel size that is also supportive of maintaining working relationships through a “project density” that is attractive for contractors, the panel arrangements provide a contracting environment that can maintain relationships that are more resilient and resistant to “win – lose” or “win at all cost” commercial behaviours. It is also worth noting that once the panel is established, contractor performance (within the context of the panel) can be readily incorporated into quotation assessment criteria for consideration in the award of future contracts under the panel, providing further support for favourable contractor performance and conduct.

Although the panel arrangement naturally lends itself to better working relationships with contractors, the benefits of the Panel can be greatly enhanced if Contractor relationships are actively managed. Under Logan’s panel arrangements, regular relationship review meetings are held with senior personnel from the Contractor, Principal and Superintendent. These meetings openly explore the performance and behaviours of all parties, with a view to identifying and actioning any improvement opportunities that are apparent.

Another important aspect of maintaining strong working relationships with panel contractors has been establishing a supportive culture within the road infrastructure contract administration team. It is regularly espoused to contract administration personnel that Council’s contractors should be considered as an extension of Council. To a certain extent, the successes and failures of Council’s contractors are in fact successes and failures of Council. Whilst it is always necessary to operate within the bounds of the established contracts and agreements, the actions of the contract administration team should always be supportive of the common objective that exists between Council and its contractors, which is ‘getting high quality infrastructure built’.

It is particularly important that this supportive culture is consistently demonstrated in the actions of the Principal and Superintendent and not just given lip service. There needs to be a genuine and demonstrated intent at all levels to contract openly, honestly and fairly.

Application of a Panel Contracting Model

Although the panel contracting arrangements implemented by Logan have been of notable benefit to the delivery of the road and drainage infrastructure capital program, it is noted that similar arrangements may not necessarily be the most appropriate contracting strategy in all situations.

There are many factors to consider in establishing a contracting strategy for any organisation, however one of the central objectives that should always be considered is to formulate a strategy that best supports the prevailing needs and circumstances of the business. Whilst the Local Government context of procurement requires this to be done through a regulatory framework, the Regulation provides flexibility to Councils to be innovative in ensuring that their operations are as efficient and effective as possible  given the organisation’s particular circumstances, preferences and the commercial environment in which they operate.

The application of a particular strategy to two different businesses operating in different circumstances may very well yield two notably different risk profiles when considered in the eyes of each business. Determining which strategy best balances risk and reward will always be a very subjective assessment for each business to make.

Considerations in the Procurement of Panels

The success of a panel arrangement (particularly small panels) will be considerably dependent on the relationships that are maintained between the Principal and the contractors on the panel. Additionally there needs to be confidence in regard to the contractor’s stability, capabilities and capacities. Accordingly, the procurement of the panel arrangement should support this with considerable focus on selecting contractors who are best positioned to provide the desired stability, performance and capabilities whilst having a demonstrated ability to work collaboratively with clients.

This outcome can be supported by putting a substantial focus on relevant non-price criteria in the panel procurement assessment process. In this regard, it may be beneficial to run a two stage tender process to streamline the procurement if there are large numbers of potential respondents.

The first stage of the tender can purely focus on the relevant non-price criteria that will enable assessment of those contractors that are best suited to performing the services under procurement. It may be beneficial to have a shortlisting of the most suitable respondents so that contractors that have not demonstrated their ability to meet the non-price selection criteria are not progressed through to the second stage of the tender. This avoids these contractors unnecessarily investing resources in preparing a response to the second stage of the procurement process and reduces the overall number of stage two responses that are required to be assessed by Council.

The second stage of the tender can then focus on pricing and any other remaining selection criteria desired to finalise the assessment of the shortlisted respondents.

In the procurement of the civil construction services panels, Logan elected to effect the procurement through an Expression of Interest for the purposes of shortlisting respondents on non-price criteria, with a subsequent Tender to predominantly assess contractor pricing. This could also have been simply effected as a two stage Tender, which has been adopted on a subsequent procurement for a bituminous pavement and surfacing services panel.

Potential Panel Issues and Risks

The overall risk associated with any procurement strategy can be very subjective, however notable considerations in reviewing risks of establishing a panel arrangement (particularly small panels) include:

      • There can be skewed distributions of project awards and potential strain on relationships if one panel member is particularly competitive or uncompetitive, eg by different business / overhead structures or performance capabilities
      • Given the longer term relationship established by the panel, there needs to be certainty regarding each contractor’s capacities and capabilities
      • Counterparty Risk. A change in a contractor’s circumstances that prevents them from meeting their panel obligations on an ongoing basis (eg insolvency) may leave the viability of the panel for its remaining duration in question.  There needs to be a high degree of scrutiny into the long term stability of contractors
      • Changes in market forces. As with any contract structure, changes in the contracting market may change the effectiveness of the arrangement. This is why establishing a strong working relationship with panel contractors and actively structuring the arrangement to be attractive to industry are important aspects of the panel arrangement.

Conclusion

In the 3 years that Logan has operated its panel arrangements for civil construction services, these arrangements have substantially bolstered Council’s ability to respond to the delivery needs of the road and drainage infrastructure capital program. Notable improvements in responsiveness, capability and capacity have all been observed when compared to prior experiences with open market individual tender arrangements for project delivery.

Whilst the suitability of panel arrangements as a contracting strategy for the procurement of construction services will differ from organisation to organisation, it does provide a flexible framework within which Councils have considerable scope to customise a contracting arrangement that supports the operational needs of their business.

[1] Excluding footpath construction and other minor civil works procured under existing minor works period contracts

Author Biographies

SIMON MALOUF

Simon is the Program Leader for Road Delivery Management at Logan City Council. With stewardship of Council’s $70M capital program delivery each year, his role focuses on the coordination between planning, design and construction functions as well as setting procurement strategy and oversight of contracting operations.

Simon has been involved in the engineering and management of civil and industrial construction for 20 years in both contracting and local government roles.

Postal Address: Logan City Council, PO Box 3226 Logan City DC QLD 4114

E-mail: simonmalouf@logan.qld.gov.au

PAUL MUSCAT

Paul is a Partner in the Property and Construction Group of Gadens. Paul has over 20 years’ experience in advising government, developers, contractors and consultants on a broad range of major construction, infrastructure and engineering projects including the preparation and negotiation of contract documents, advice on the procurement, structuring and delivery of projects and the drafting and negotiation of the project documentation (including procurement and tender documentation, project deeds, head contracts, subcontracts and consultants’ appointments).

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

Get in touch