The procurers of large capital projects now have to contend with two recent introductions in the Irish marketplace, namely competitive dialogue and cost benefit analysis, this article examines both.
Competitive Dialogue
Competitive Dialogue was introduced by Article 29 (1) of EU Directive 2004/18/EC to complement the existing open, restricted and negotiated procedures used by contracting authorities. It is particularly suited to large complex projects, for example those in the Public Private Partnership arena. The negotiated procedure continues to be available as a fall back procedure in circumstances where the other procedures are not workable.
In the United Kingdom, there has been significant debate about the extended procurement times and tender costs to both bidders and contracting authorities where projects were procured using competitive dialogue. It is our opinion that with the passage of time and benefit of experience, contracting authorities will become more efficient in the use of this new procurement method and that the benefits will soon outweigh any criticisms. If competitive dialogue results in contracting authorities receiving a project that better meets its requirements, while of course retaining the fundamentals of value for money and affordability, then this must be seen as a positive in the marketplace.
Similar to other procedures, competitive dialogue commences with publication of an OJEU notice and issuance of a pre-qualification questionnaire. Short-listed bidders are then invited to participate in the dialogue process. The dialogue process facilitates parallel discussion between the contracting authority and each bidder with the objective of identifying the precise proposal which best meets the contracting authority’s requirements. It also allows the contracting authority to understand each bidder’s appetite for risk.
The successive stages of the dialogue are usually published in advance. The contracting authority typically opens the dialogue by setting out what it wants to achieve from the project. The dialogue then focuses on key project issues and points of clarification. Thereafter, through a series of dialogue meetings, the contracting authority and each bidder develop technical, financial and contractual proposals for delivering the project. The number of bidders is reduced as the dialogue progresses so as to ensure a more focused discussion on fewer proposals. Recent experience suggests that contracting authorities should enter into extensive dialogue with no more than three or four bidders. Once in extensive dialogue, bidders will have the opportunity to put forward their innovative solutions for delivering the project. It is critical that these discussions are confidential to each bidder unless they result in any amendments to project documents in which case all bidders will have to be advised.
Once each bidder’s proposal has been identified and developed to a sufficient degree of detail, the contracting authority can declare the dialogue closed and invite final tenders from all remaining bidders. Final tenders must not deviate significantly from the proposals outlined during the dialogue phase.
The contracting authority will then evaluate the tender proposals and identify a preferred bidder. In theory, the contracting authority should be able to achieve an accelerated financial close on the basis that the bidders will have confirmed their acceptance of the project documents and risks inherent, they will have set out their technical proposals and how these satisfy the Output Specifications for the project, and they will have demonstrated availability and deliverability of an appropriate funding package for the project. Similar to the restricted procedure process, substantial changes to the tender proposal or project documents are not permitted prior to financial close. The contracting authority itself can only confirm commitments or issue clarifications. Hence, it is very important that the contracting authority is careful in determining when the dialogue should close and final tenders be called.
Cost Benefit Analysis
The Department of Finance’s Guidelines for the appraisal and management of Capital Expenditure Proposals in the Public Sector requires that all capital expenditure proposals involving projects of over €30 million should be subject to a Cost Benefit Analysis. While the Exchequer provides funding for appropriate priority capital projects it is often the case that proposals for public sector investment often exceed the resources available and that a choice between projects, or prioritisation of projects, has to be made.
The key steps undertaken in the preparation of a Cost Benefit Analysis include a review of the strategic rationale for the project, the identification of alternative options, the specification and quantification of all direct and indirect benefits and costs, a comprehensive financial appraisal, and consideration of other qualitative factors.
The Cost Benefit Analysis should provide a detailed identification and comparison, in monetary terms, of the direct and indirect costs and benefits of the proposed investment. The direct costs of a project not only include capital costs, but also the ongoing operational costs which will arise as a result of implementing the investment. These categories include amongst others, ongoing utility, hard and soft facility management, lifecycle and periodic refurbishment. The opportunity cost foregone of any alternative proposals also needs to be considered. The benefits generated by a project include the income streams directly attributable to it but also the net gain to the Exchequer as specifically targeted infrastructure developments can have significant social and economic benefits.
To derive maximum benefit from a Cost Benefit Analysis, it is our opinion that the exercise should be undertaken at an early stage in the procurement process, particularly before detailed designs are developed. This should ensure confirmation of funding to develop the project prior to incurring significant cost.
The Department's radical plan to control infrastructure expenditure - has the pendulum swung too far?
‘To improve cost certainty, value for money and cost effective delivery of infrastructure projects, the Government has decided that all future construction projects will be on the basis of fixed price lump sum contracts with optimum risk transfer tendered on a competitive basis’
This extract from a circular issued by the Department summarises the logic behind what could be considered to be, the radical plan which will be implemented from February 2007 to address concerns that have existed in Government and Press circles for some time now. These concerns revolve around the perception sometimes warranted, sometimes not, and often misunderstood that infrastructure projects are rarely completed on time, are consistently over budget and thus do not represent value for money for the state and thus the taxpayer. Recent experiences indicate that much had been done to address these concerns within the existing contractual framework.
The cornerstone of the measures introduced to address these concerns is a new suite of main contract forms. As recently confirmed by Mr. Brian Cowan TD, Minister for Finance, the new forms are intended to replace the Institution of Engineers of Ireland 3rd Edition (IEI) contract, the Government Departments Local Authorities (GDLA) contracts and the FIDIC Conditions of Contract for Plant and Design-Build 1999 (FIDIC D&B contract) all of which are currently in use by the various state agencies and authorities involved in the procurement of buildings and infrastructure. These contracts are generally heavily amended with the effect of these amendments being to shift the balance of risk transfer inherent in the unamended forms so as to transfer more risk from the Employer to the Contractor. It is worth noting that with the correct amendments, the use of these same forms by the private sector has facilitated the level of risk transfer and cost certainty sought by the Government. It should also be noted that many of the state agencies and authorities obliged to date to use the standard forms as described above, were obliged to use standard amendments and were unable to implement lessons learned due to restrictions imposed by Government.
The suite of documents consists of five forms. These are:
- Building Works – Employer Designed
- Building Works – Contractor Designed (Design and Build)
- Civil Engineering Works – Employer Designed
- Civil Engineering Works – Contractor Designed (Design and Build)
- Minor Works Form – for Employer Designed works of less than €5m in value
In order to achieve the stated aims, the new forms seek to transfer much of the Employer risk within the forms currently in use to the Contractor. Much of the risk historically placed with the Employer was arguably that which could not accurately be quantified and thus costed. In such circumstances and on the basis that the works carried out were a necessity, the manner in which the Contract was administered and the Contractor carried out the works dictated whether or not the Employer obtained value for money. The philosophy behind the new suite of documents appears to be that transferring such risks whether quantifiable or not will improve value for money. It is more likely that the effect will be to improve cost certainty….but at a cost.
Whether or not value for money has been obtained cannot be judged by the avoidance of budget overruns – this could simply be indicative of an inadequate estimate or mission creep during the lifetime of a project. Thus risk previously bourne by Employers on a programme wide basis is now to be transferred to Contractors to provide for same on a project by project basis. Additionally, in order for Contractors to secure payment in relation to risks remaining with the Employer, they must comply with extremely onerous conditions in terms of notices and submission of supporting documentation. Whilst fundamentally this may be a sound practice, Employers must realise that for this regime to work, they too must play their part by ensuring that Contractors are provided with comprehensive and detailed design information at tender stage if appropriately priced tenders and value for money are to be obtained.
Those Contractors already contractually aware will no doubt recognise what is needed to comply with these terms while those who are not face new challenges. Employers should recognise that dealing with Contractor’s notices on a contemporaneous basis could prove a similar challenge!
The key features of the new forms through which the increased risk transfer is effected are
- The use of Fixed Price Lump Sum Contracts
- Full compliance with strict procedures is required if additional payment for compensation events and claims is to be secured
- Definition of the extent of Employer risk
- Limited transfer of delay risk to the Contractor irrespective of the cause or responsible party
- Competitive pricing of delay cost within tender submissions
- Strict requirements for the submission of programmes and progress reporting documentation
- Increased responsibility for legal and statutory risks
There are undoubtedly many positive and innovative aspects to the new contracts and those working on the preparation of contract documents in the private sector should make it their business to be aware of these aspects.
In addition to the new suite of main contract forms, the Department has also introduced new consultancy agreements, which similarly seek to transfer greater risk to the Consultant. Whilst the industry is sceptical as to the workability of these new consultancy agreements particularly with regard to the implications for Professional Indemnity insurers and the reliance on Employer information as the basis on which much of the Consultants duties are discharged, these new agreements have been mandatory since January 1st, 2007.
While it is likely that the new contracts will lead to improved cost certainty; the question is whether or not the economic necessity for Contractors to reflect the increased risk burden and administrative costs imposed on them within their tender prices will improve value for money, unfortunately only time will tell.
