For a contract to design a public facility worth $320,000, one architectural firm reports spending $9,000 simply to prepare their bid.
Given that 102 firms submitted proposals, designers in total may have spent around $918,000 on bid preparation ($9,000 times 102 firms) – more than three times the value of the contract.
This is one example of what consulting bodies say is a common occurrence of poor contracting within public sector agencies when delivering government building and infrastructure projects. From sorting out poor documentation to spending thousands getting legal advice on bespoke contracts to being asked to assume liability beyond their capacity to control risk, architects, engineers and other consultants are being forced to wear costs associated with poor practices across numerous areas when bidding for state, federal and local government work.
Accordingly, the sector is calling on governments to lift their game. In June, Consult Australia called on state, federal and local governments to adopt a 12-point plan to become ‘model clients’. The plan outlined calls for departments and agencies to:
- act fairly and in good faith
- undertake appropriate risk assessment, management and allocation
- adopt fair contracting through proportionate liability and limits on liability
- use standard contracts
- be clear and transparent
- engage with parties in a constructive way
- recognise the role of each party within the supply chain
- plan and priorities projects
- minimise documentation requirements and tendering costs
- provide clear, well-structured briefs with reasonable review and response times
- settle invoices and payments in a timely manner
- engage in procurement skills and training.
The benefits of such a proposal are significant. In 2015, a report commissioned by Consult Australia and undertaken by Deloitte Access Economics found that better contracting by government departments and agencies could save 5.4 per cent in direct project costs, reduce delays by seven per cent and deliver a quality dividend to the tune of seven per cent.
Overall, better buying in 2015 alone could have saved around $2.5 billion over the 15-year period to 2030, it said.
The Deloitte report comes on top of a 2009 report from the Cooperative Research Centre for Construction Innovation, which found the construction industry overall was spending around $7 billion each year dealing with disputes. This adds to project price tags.
“What that really represents is a loss of taxpayer dollars, ”Consult Australia chief executive officer Megan Motto said.
“That $7 billion dollars does not fall from the sky. We are all paying for it through increased prices right across the supply chain.”
According to Motto, the biggest concern for consultants is the allocation of project risk. On this score, she says consultants are being presented with contracts which require them to assume responsibility not only for their own errors or emissions but also the decisions, actions, workmanship and advice of others over whom they may not exercise control. These others could include contractors, subcontractors, other consultants or even clients themselves.
This, Motto says, is problematic.
First, it misrepresents the role of consultants on projects. Consultants, Motto said, provide advice. They often do not supervise contractors, subcontractors or others. Whilst consultants may understand risks from a technical perspective, they usually have little if any contractual ability to manage any risks which depend upon other parties.
Next, requiring consultants to assume responsibility beyond their ability to control risks adds unduly to their cost associated with obtaining professional indemnity (PI) insurance and thus to their cost of bidding for projects. This is unfair.
Moreover, insurance may not be effective. In many cases, PI insurance covers consultants only for liability to which they would be exposed under common law (i.e. that which arises out of the consultant’s own errors or omissions). These policies usually do not cover any contractually assumed liability where consultants agree by virtue of the contract to assume liability over and above what would be the case under their common law position. Indeed, the 2015 Deloitte report revealed that only 20 per cent of all consultants have policies which cover contractually assumed liability. A further 38 per cent are unsure whether their policies cover them for contractually assumed liability.
For consultants, this may mean that they are being asked to assume responsibility for risks in regard to which they are uninsured. Where the liability to which the exposure pertains does materialise, they could face financial ruin.
For government clients, it means the protection they believed they were obtaining by transferring risk to consultants through the contract may be illusory. Protection obtained through consultant indemnities is only as good as the combined effect of the financial capacity of the consultant to cover those risks and the cover afforded by their insurance. Where PI insurance policies fail to respond to contractually assumed liability, government clients remain financially exposed to that risk to any extent over and above the net assets of the consultancy.
Finally, effective risk management relies on risk being allocated to the parties who are best positioned to control the risk in question. As well as consultants, this could include contractors, subcontractors and clients themselves. Where this does not happen, the parties who exercise control over risk may have little incentive to ensure that the risk in question is mitigated or avoided.
Aside from risk allocation, Motto would also like to see an end to non-standard contracts. Consultants and government clients alike, she said, spend millions of dollars each year on legal fees pertaining to special, one-off or non-standard terms and conditions which are inserted into client/consultant agreements. This is wasteful on both sides.
Instead, she says governments should adopt standardised contracts across projects and operations. Ideally, this would take place through the adoption of Australian standard AS4122-2010, a form of contract developed through collaboration between industry and government representatives. These should be adopted without amendment or special condition.
Other leaders also want change, although priorities and areas of emphasis differ.
Speaking from an architectural viewpoint, Clare Cousins, national president if the Australian Institute of Architects (AIA), said procurement process often place undue emphasis on lowest fees and costs. Where this happens, such processes fail to recognise the value which architects and design consultants can add.
Often, Cousins said, there is a perception that the value of architects is limited to the look of the building and the materials used. In contrast, she says skilled designers can explore optimal outcomes in terms of sustainability, building and asset function, how buildings work as a civil piece of architecture, how they work for occupants and how buildings connect with surrounding buildings, spaces and infrastructure.
In many instances, Cousins says government departments are siloed so you have sports ministers procuring sports stadiums as well as arts ministers procuring arts venues. It is important, she said to collaborate and ensure these things work together.
Cousins acknowledges fees need to be appropriately set. Nevertheless, she argues that adequate budgets need to be allowed for these and that fees should not be the only factor in design consultant selection. In design competitions approved by the AIA, for instance, fee proposals are kept sealed until the design capabilities of the bidders have been demonstrated to meet a certain standard.
Timelines need to be adequate as well. Often, Cousins said, excessive time constraints in early project phases fail to allow for potential options to be adequately explored. On public projects, timelines which are unduly restrictive will fail to allow for adequate levels of genuine community consultation. In the case of government projects, Cousins says the ultimate clients are taxpayers and the community.
Governments could also use their position as a client to help expand and develop the skill base of the industry, Cousins said. In this regard, she applauds the City of Sydney, where several large projects have involved a head architect but have been forced to work with emerging architects (not raw graduates, but many of those of whom may have had two decades or so of experience). This she says, helps to engender a valuable mentoring role within the profession. As well, she applauds the City’s practice whereby smaller projects such as amenity buildings are appointed to smaller and medium sized practices.
Too often, she said, government agencies adopt a rigid perspective and require those who design police stations, for example, to have worked on multiple stations previously.
Finally, Cousins agrees with Motto about the need for standard contracts. Consultants and government agencies alike, she said, spend large amounts of time and money on legal issues because contracts being offered are not Australian standard contracts.
Speaking on behalf of engineers, meanwhile, Engineers Australia national manager, public affairs Johnathan Russell said EA would like action in two areas.
First, governments need a long-term plan for infrastructure with a clear pipeline of projects.
On this score, Russell applauds the setting up of independent infrastructure bodies in states such as NSW, Victoria, South Australia and Tasmania as well as moves to look at setting up a similar body in Western Australia. That said, he stresses the importance of governments observing the priority list of Infrastructure Australia in project selection.
Having a clear forward pipeline of projects, Russell said, would deliver several advantages. Governments themselves would be able to better plan and assess their borrowing and financial capacity to meet the requirements which these projects deliver. Industry, meanwhile, would be better able to plan and manage its own capacity and capability to deliver on these projects. Finally, having a clear plan would enable governments to spread out their projects over a long-term timeframe.
This final point is critical, Russell said. Too often, he says, infrastructure spending goes through a ‘boom-bust’ cycle whereby many projects come online simultaneously followed by periods of quiet activity. Where this happens, periods of intense competition for resources, skills and materials (and thus intense pricing pressures) are followed by quiet periods during which a large number of consultants leave the industry. When the next upturn begins, further resource and skill constraints emerge.
Even more important, Russell talks about governments beefing up their informed buyer capabilities. In particular, from EA’s point of view, he talks of informed buyer capabilities in engineering services.
Granted, Russell says, skilled consultants can provide solutions which deliver on a vision. Nevertheless, he says informed buyer capabilities are needed for several reasons.
First, governments with informed buyer capabilities are better able to identify and articulate the precise outcomes which are needed on projects. This enables consultants to work toward solutions without having to second-guess what the overall vision needs to be. It also enables agencies and departments themselves to better assess competing proposals with a stronger vision about what outcomes should be.
Next, departments and agencies with have informed buyer capabilities are better able to asses the merits or otherwise of competing bids and proposals. Where they lack engineering capability, agencies and departments are compromised in their ability to analyse the various proposals and make informed decisions about which best match project needs. By contrast, those with sound engineering skills are better able to subject proposals to rigorous assessment and to interrogate what is on offer.
Finally, departments and agencies with strong in-house skills are better positioned to collaborate with consultants and take corrective action where the consultant in strays off track.
Motto has called for immediate action in several areas.
First, governments should adopt the Consult Australia model client policy and afford this the same standing to the model litigant policy which governments have adopted in terms of managing legal issues and disputes on government projects and in government operations.
Governments should also work with the private sector to establish a centre of excellence for procurement. Co-owned by the private and public sectors, the centre would see the government and private sector working together to find better ways of working.
Finally, as mentioned above, governments should adopt standardised contracts across their projects.
The 12 hallmarks of a model government client
According to the Consult Australia plan, to be a ‘Model Client’, a government should:
- Operate in good faith and act ethically, fairly, and honestly in all dealings
- Never use status, power or authority to gain unfair benefit or advantage
- Undertake appropriate risk assessment, management, and allocation, which allows for innovation and collaboration
- Avoid undermining the stability of the professional indemnity insurance market through inappropriate risk allocation
- Adopt fairness in contracting through proportionate liability and limits on liability
- Avoid use of non-standard contracts, and variations to standard contracts without clear reasoning; Be clear, consistent, transparent, and focused on best for project outcomes in procurement and delivery methodology
- Engage early and maintain open and constructive communication between all parties, dealing with them equally
- Foster productive and healthy working relationships throughout the supply chain, recognising the roles of each party
- Plan and prioritise projects, avoid making assumptions about industry capacity or capability
- Keep costs of tendering and documentation requirements to a minimum
- Provide clear, well structured, accurate briefs, and allow reasonable review and response times
- Settle invoice payments and payment claims on time
- Foster a culture of continuous improvement and innovation, through the recognition of procurement skills and training.