Are Low-Ball Fees Cannibalising the Engineering Sector? 5

Tuesday, April 28th, 2015
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In a tightening market, competition is fierce and fees are getting lower and lower. What does this mean for the sector and how can better procurement processes improve outcomes for not only providers of consultancy services but for clients and their projects?

Adam Shaw, national manager – PPP at WT Partnership said there is a fine line between offering the lowest price and “undercutting.”

“If it’s about someone having a better price then that’s just competition. If it’s about someone being a large established company and feeling like they aren’t getting their fair share, then maybe it’s because they aren’t nimble enough to respond to the market in the way than new foreign owned start-ups can in a new market,” he said.

Shaw added that undercutting can only occur under limited but probable circumstances being (in order of likelihood):

  1. Lack of pipeline
  2. Lax procurement and contracting procedures
  3. Incompetent advisors
  4. Uninformed project sponsors
  5. Corruption

“Driving market competitiveness, productivity and best value will only occur when each of these areas are addressed,” he said.

There has been a wave of attention, interest and investment in the Australian market because it is a viable place to do business and there are high value projects. According to Shaw, however, there is a particular disconnect between the opportunity to drive better value for money, which he says is huge, and the appetite of an indolent domestic market to do so.

Consult Australia, the industry association for consulting companies in the built environment sector, believes addressing the apparent lax procurement and contracting procedures could provide the quickest and best solution to getting the industry back on track while also offering the opportunity for clients to deliver better projects for less.

The recent report, Economic Benefits of Better Procurement, commissioned by the association and written by Deloitte Access Economics, found that better procurement could achieve savings of around 5.4 per cent.

Specific procurement issues that present opportunities for improvement, according to the report, include:

  • Project briefs with unclear project objectives. The report found this to be a problem in 37 per cent of all projects, leading to higher costs.
  • Unverified brief information (for example, containing a background survey but stating that bidders cannot rely on that information) results in additional costs of around $41,800 per firm, per bid.
  • A range of onerous contract terms. As well as leading to higher prices, these present significant risks to both firms and clients, as insurance generally won’t respond to a claim if the risk allocation is inappropriate, and that risk isn’t properly managed.
  • Bid costs can be significant, and while industry understands that it’s a necessary part of winning work, clients need to appreciate the cost to industry and not request bids from firms where they’re unlikely to be seriously considered.
  • Project delivery mechanisms should be selected based on a project’s specific needs, rather than through a “one size fits all” approach. Some helpful guidelines already exist to assist clients make this decision.

“Many clients talk about achieving value for money, but in reality select the winning bid based on price rather than value,” said Robin Schuck, senior advisor, policy and government relations at Consult Australia. “That’s because quality isn’t always easy to quantify, whereas the price is.”

“Furthermore, clients should be careful selecting a bid that is substantially lower than all other bids, as there is a significant possibility they may have not accounted for a particular project condition or risk. In this case, the client will be presented with a costly variation when that issue is discovered, once the project is already under way.”

Schuck said the challenge for procurement officers in both cases is to understand their project to a sufficient extent that they are able to make determinations about optimal project cost, site risks and achieving value for money.

It is an issue that other industry bodies have also been battling with. Last year, Engineers Australia senior policy analyst Andre Kaspura gave evidence at an inquiry by the House of Representatives, Standing Committee on Infrastructure and Communications showing that the cost of some infrastructure projects was linked to the fact that the tendering process is so expensive.

One of the reasons, suggested by the inquiry, that the tendering process is so expensive is that governments are asking the submitters to do all the design work as part of the tender, and if the government, or the purchaser, had done the design work first then the tendering process would be a lot less expensive and the project would be less expensive.

The opposing view is that by inviting tenderers to come up with the design you are getting, perhaps, a more innovative and better range of what is available out there that you might not already know about.

“In the case of some projects you are talking about fairly standard approaches to construction and the scope for innovation is not that great — you can use one model,” said Kaspura.

“However, in other areas — for example, electricity generation — technology does move on. You have an asset that is going to last for 40 or 50 years and you have to make sure that you have the best technology available. If you have not got the right technical expertise, be it engineers or architects, in government agencies to undertake the design — where design before tender is the most appropriate model — what you are going to get is a gamble, because the private sector often does not understand what the procurement is about. “

“They will take a shot at it and they will put forward a proposal which assumes that some of the blurry bits are answered in a particular way. If that proves wrong, or if they win the contract and down the line something goes wrong, that is where your cost blowouts occur.”

When asked about the school of thought that perhaps contracts could be split so that you have a design contract first, Kaspura said that although in some cases it may be appropriate, what is really necessary is that the people who are making the basic decision at the outset have enough experience and competence to make that call.

“We think that it is time Engineers Australia went that next step and did some hard yards in this area, because we feel that question deserves a more precise answer,” Kaspura told the inquiry.

Shaw argued that decoupling the design from government is a great idea.

“Government should have little or no interest in design but complete focus on outcome,” he said. “Arguably the people who have to do the construction should drive design as this brings innovation, safety and commerciality which evades most government sponsored projects.”

As for the principles of lowering industry costs of tendering, Shaw said most design consultants get paid for their time on large infrastructure bids and if unsuccessful only miss out on the cream (success fees).

“It’s a complex argument,” said Shaw. “And it could do with delineation of the stand point for consulting engineers, engineering contractors and government agencies respectively.”

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  1. Tobin

    The exorbitant cost of tendering processes in this country is an albatross around the neck of its productivity.

  2. Edward

    In the face of off-shoring of design function and a lack of enforcement from Government; then what do you expect.

  3. Dale

    People do not care what is in their food – they buy the cheapest on the shelf. Governments and infrastructure – ditto.

  4. James Trevelyan

    The underlying issue here is that engineers, particularly in Australia, could greatly improve the commercial value offered by their services and thereby secure plenty of work with high remuneration. Our research on engineering practice has shown that there is plenty of room for engineers to improve their understanding about what creates commercial value for clients. For example, consulting engineers in Australia have been consistently rated from independent surveys (not ours) as being the least reliable of professionals hired by major firms and also as providing the lowest level of service quality.

    • Edward Gilmour

      James Trevelyan; that is just so tragicly true. It is unfortunate when we meet engineers working out how they can rip more out of a project instead of adding value for money. Government projects a permanently circled by red and white circles!