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Manage your risk in contractor procurement

18 February 2020

#Procurement

Scott Alden

Published by Scott Alden, Victoria Gordon

Manage your risk in contractor procurement

During the life of a contract there are a number of key stages with many components. It is critical that everyone involved in these stages understands where the pressure points are and how to manage these points so that opportunities are maximised. The important stages, and those that this article will address are:

  1. Pre-award – during procurement
  2. At award – during negotiation and execution
  3. During delivery – during the life of the contract
  4. Post completion – after the contract is complete.

Risks throughout the procurement lifecycle

Pre-award – during procurement (before contract execution)

  • right procurement method and engagement process – choose the right procurement and engagement method which may include:
    • open tender – usually an advertisement in the newspaper and/or online tendering platform
    • select tender – usually to a select number of entities shortlisted through a public Expression of Interest (EOI) or Request For Interest (RFI) (which is usually open), or from a pre-qualified list, or advised by an industry expert or consultant
    • direct engagement or direct negotiation – where one entity is chosen. This clearly reduces the competition and potential value for money benefits of a public tender but this is offset by the process being less costly to run
    • a two-stage process – usually a public EOI followed by a select Request For Tender or direct negotiation
    • panel – a procurement from a pre-established panel
    • an innovative process – an innovative process such as a ‘market led proposal’ (which is a direct negotiation under certain conditions) or ‘Early Contractor Involvement’ (ECI, sometimes called Competitive Dialogue – a two stage process that begins with a wide EOI and followed by a direct negotiation).
  • right contract – choose the right form of contract. This will mean ensuring you use a set of conditions and requirements designed for the procurement you are undertaking. For example, there are significant consequences if you choose a ‘Construct Only’ form of contract (e.g. AS2124 or AS4000) when you should have chosen a ‘Design and Construct’ form (such as AS4300, AS4902, GC21 or FIDC Silver Book EPC). In addition, you should not use a simple purchase order for a contract that may require specific considerations and complex considerations such as intellectual property or special insurance. Finally, it is not just the form of contract to consider, but also the contracting philosophy. All of the contracts listed here are based on an ‘adversarial’ philosophy, but sophisticated buyers are considering more sophisticated frameworks and philosophies such as ‘alliancing’ or ‘collaborative’ forms of contracting (such as the UK’s NEC4 suite of contracts)
  • invite the right people – take the time and use the right resources to find prospective respondents with the required capabilities and financial standing. This may include:
    • a market scan using up to date internet searches and databases
    • market sounding either with prospective project participants or amongst industry experts
    • engagement of an expert who can make informed recommendations in a report (the expert itself must be covered by insurance should the report not be accurate or comprehensive).
  • help proponents respond – take the time to:
    • establish a data room – making sure that you are both careful with what you choose to upload, that you do not breach confidential information, and that you protect yourself in case of errors in information and only provide it on an ‘all care and no responsibility’ basis
    • consider a pre-tender briefing to ensure the respondents understand the project and the rules around responding, this will assist in ensuring you are not left with ‘non-compliant’ proposals that you have to set aside prior to considering
    • consider a site visit so proponents can visit the site and get a real picture of physical and other issues and constraints.
  • rush assessment – once the proposals are received make sure you don’t rush the assessment. This means taking the time to choose the right people to undertake the project and undertake a thorough assessment so that the correct entity is ultimately recommended
  • project budget – ensure you obtain a rigorous pre-tender budget to compare the preferred tenderer against
  • consider your risk – undertake a thorough Liability and Risk Assessment (LRA), at the pre-procurement stage as well as at the other critical stages, adopting the ISO 31000:2018 risk management methodology and approach
  • level playing field – when providing information, such as through a RFI process, ensure all participants are given the same information
  • quality specification – a defective specification is one of the highest risks in the procurement process. This can lead to contract variations and disputes with the contractor. A specification should clearly specify:
    • what is being done
    • by whom
    • by when
    • to what standard.
  • probity and corruption risks – probity risks need to be understood and minimised. This includes taking practical steps such as by ensuring:
    • a single point of contact in the procurement process so that all information passing between tenderers and the procurer goes through one person
    • tenderers execute a Tender Schedule as a deed to state that they have not colluded with any other tenderer or prospective supplier
    • internal separation of powers so that no single person approves their own contract, variation or other matter
    • key processes are protected by being undertaken by more than one person. For example, tenders should be delivered to a box or mailbox which can only be accessed by two people at the same time.
  • supplier due diligence – perform financial and other due diligence on prospective contractors. Seek a clear history of recent successful projects backed up by enough capital and get permission to speak to those previous clients
  • Liquidated Damages (LDs) – determine LDs by making a genuine pre-estimate of the loss (ensuring the amount is not punitive) and ensure that the LD amount is clearly stated in the tender documents, and then form part of the contract. 

At award – during negotiation and execution

  • rigorous budget check – check the preferred tenderer’s price against the project budget. If the contractor is ‘buying the job’ this should be clear. If this is the case then there are at least three major issues that may occur to derail the project, being contractor insolvency, significant invalid variation claims, or cutting corners on the project (for example safety/quality/environment) leading to significant liability for the procurer
  • negotiate carefully – make sure you have identified any project departures, qualifications or assumptions so that they can be rejected or negotiated. If they are not identified and then an offer is accepted containing the departures then the contractor will be able to take advantage of this commercial benefit or limitation leading to serious consequences for the procurer
  • approvals – make sure you have allowed time to obtain the internal approvals needed to approve and execute the contract
  • execution – make sure that both the contractor and the procurer execute the contract properly in accordance with the requirements of s127 of the Corporations Act 2001 (Cth).

During delivery – during the life of the contract

  • check and verify all deliverables – throughout the contract there are a variety of deliverables including the main deliverable of the contract as well as regular reports, payment claims, etc. If you accept something under the contract which was not in accordance with the requirements then significant issues can arise including future estoppel claims from the contractor, contract variation, waiver, etc.
  • query variations – contractors will typically push the boundaries and may claim variations that are on the fringes. All claims should be checked and considered
  • do not allow staff to get too close to the contractor’s staff – this will compromise procurement decision making (such as selection of contractor, acceptance of variations and Extension of Time requests), however encourage good relationships. This is especially difficult to do on remote sites where the counterparties regularly mix socially
  • insolvency risk – check for signs of insolvency, such as non-payment of sub-contractors and employees. Be aware of the effect of the new ipso facto laws preventing termination of contractors for ‘near insolvency’, however termination for breach is still permitted in such circumstances
  • Extensions of Time (EOT) – when considering extensions of time, always keep in mind the hurdles to a valid EOT claim which typically involve:
    • time bars
    • notice requirements
    • is the delay a qualifying cause of delay?
    • was the delay on the ‘critical path’?
    • is the claimed delay reasonable and appropriate?
  • payment before receipt of goods – be careful not to pre-pay without a bank guarantee to manage the risk of never seeing the goods
  • key personnel/subcontracting/assignment – watch out for substitution of key personnel, engagement of subcontractors without approval or invalid assignment. Any of these factors can significantly damage the project outcomes
  • Liquidated Damages (LDs) – claim LDs if entitled to them.  

Post-contract completion

  • transition – consider contractor transition requirements and any Transition Out Schedules that may apply
  • return of property – ensure you get any project IP, keys, and confidential information that may be required under the contract
  • review contractor performance – prepare a post-contract performance report ensuring that, if the contractor performed well you put them on the ‘to use again list’, and if performed badly then put them on the ‘not to use again’ list
  • lessons learned – write and store lessons learned in a way that they can be easily retrieved and used by others, especially when performing similar projects.

Conclusion

There are many factors that can impact the success of a contract at every stage of the procurement cycle. To optimise contract success, care must be taken to identify each of these factors, manage risks, and ensure that value is not lost along each of the stages of the supply chain.

Authors: Holding Redlich partner Scott Alden, associate Victoria Gordon & The Risk Doctor’s Dr Cyril Jankoff

  • This article was originally published in Sourceable.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Scott Alden

Published by Scott Alden, Victoria Gordon

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