stuart cosgriff - clayton utz - evaluating the merits of differing contract, procurement and...
DESCRIPTION
Stuart Cosgriff delivered the presentation at the 2014 National Hospital Procurement Conference. The 2014 National Hospital Procurement Conference explored a number of cost-saving measures in the hospital procurement ecosystem. Highlights included sessions on improving efficiency, savings and patient safety within Australian Hospitals. For more information about the event, please visit: http://bit.ly/hosprocurement14TRANSCRIPT
© Clayton Utz
CONTRACT, PROCUREMENT AND DELIVERY MODELS
Stuart Cosgriff
24 July 2014
INTRODUCTION
Procurement objectives over the project
lifecycle
Selecting the delivery model
ECI, Managing Contractor and PPP
Developing the design brief
New trends in delivery models
VALUE FOR MONEY
VFM is the fundamental criterion for all public sector
procurement processes and typically requires
risks to be allocated appropriately (to party best able to
manage the risk)
competitive pricing - for finance, design, construction,
maintenance and operation (depending on the delivery
model)
productivity improvements and efficiencies to be
realised
demonstrable net benefits to Government and/or users
PROJECT OBJECTIVES
achievement of the service delivery and commercial
objectives for the project
cost-effective project delivery for Government
minimising unnecessary transaction costs (public and
private)
project delivery risks are well managed
clarity and certainty to public and private sector
stakeholders
timely procurement processes
a value for money outcome
PROJECT LIFECYCLE
Project initiation and development
• Business case and feasibility
• Procurement model
• Market sounding
• Functional brief
• User groups and other stakeholders
• Approval processes
Market engagement and tendering
• Confirm design standards, outputs and mandated design
• Confirm procurement model, develop contract, performance requirements and risk allocation
• Tendering, competitive dialogue
• Preferred tenderer and financing
Design, construct and commission
•Concept design/ ECI engagement
•Planning approvals
•Detailed design
•Construction
•Variations
•Potentially financing
•Completion and commissioning
Operate, maintain and hand over
• Clinical services
• Clinical support services
• Planned and reactive maintenance
• Planned refurbishment
• Planned and unplanned upgrades/expansion
PROCUREMENT 'TOOLS'
Traditional: 'lump sum' and 'fixed time'
Design & Construct: lump sum and fixed time
Early Contractor Involvement
Managing Contractor Model
Design, Construct and Maintain/Operate
Privately Financed Projects/ PPPs
Fully Outsourced Services
Not an exhaustive list - models can be 'tailored' to suit
project objectives and constraints
EARLY CONTRACTOR INVOLVEMENT (ECI)
Leverage a Contractor's specialist knowledge of
construction processes to the benefit of the Principal's
concept design process
Less more emphasis on non-price criteria (e.g.
capability of the proposed team). Although some
margins and rates assessed
Staged contracting model » Stage 1: Contractor proceeds with design development up to concept
design phase on a reimbursable cost basis. Principal has discretion to
transition the Contractor from Stage 1 to Stage 2 or tender Stage 2
» Stage 2: Usually a "typical" design and construction contract utilising the
concept design prepared at Stage 1
ECI - WHAT IS IT?
MANAGING CONTRACTOR
Manages delivery 'on behalf of' the Principal
Manages the project from 'feasibility' through to
commissioning for a lump sum (for the
management component)
Provides management and advisory services and
engages design/construct subcontractors
Not exposed to time/cost risk as is reimbursed for
subcontractor costs (costs plus)
MANAGING CONTRACTOR STRUCTURE
Owner
Managing
Contractor
Sub-Contractor SupplierSub-Contractor
Design Consultants
(preparing and
documenting
design)
THE ECI MODEL - STRENGTHS AND WEAKNESSES
Strengths Weaknesses
• Early input into scope, cost plan,
program (build-ability / innovation) at
a stage where most value can be
added
• Greater control over design/scope
development
• Collaborative design - time/cost
tensions removed
• Procurement efficiency (and less
adversarial) with lower tendering
costs as only one design process is
undertaken
• more effective risk identification,
mitigation and allocation in the Stage
2 contract
• Less competitive pricing at Stage 1
• Uncertainty of final cost at time of
initial award
• Risk of cost and time overruns
(depending on 'enhancements' made
to the model)
• Potential for higher overheads
• As the process is collaborative,
success is dependent on all parties:
• having the right culture
• understanding the delivery
method
THE ESSENCE OF THE PPP MODEL
A PPP is:
a long-term contract (generally over 20 years)
between the public and private sectors
to deliver public infrastructure and services
(typically) an arrangement where the assets are
delivered using private sector finance
PPP CATEGORIES
Just some of variants
Build, Own, Operate, Transfer PPP (“BOOT”) Economic infrastructure projects that are fully financed. Demand risk is transferred to the private sector
Availability Payment PPP (“Availability PPP”) Social infrastructure projects that are fully financed. Government pays the private sector facility availability and services
Design, Construct, Maintain, Operate (“DCMO”) The private sector is obliged to provide construction and comprehensive service delivery. Private finance is not required. Government retains control over the life of the project.
PUBLIC PRIVATE PARTNERSHIPS
Government
Agency
Project
Company
Equity
investors
Builder Services
provider/s
Lenders
KEY ELEMENTS
Some key characteristics: Private sector bears the design, construction, operation
and “whole of life” risks (responsible for condition and performance over the life of the concession)
Government provides land and shares some financial risks
Private sector finances the infrastructure
Private sector receives payment from Government (a service charge) or end users (demand risk)
Driver of innovation, efficiency and better productivity
THE PPP MODEL - STRENGTHS AND WEAKNESSES
Strengths Weaknesses
• A source of external finance
• Private sector motivated -
time and cost
• Time and cost certainty
• Innovation
• Whole of life cost and risk
• Alignment of interest/long
term relationship
• Complex contract structure
• Transaction costs
• Retained risks are costly
• Obtaining finance
• Loss of flexibility to change
• Higher costs of change
IS PPP THE RIGHT DELIVERY MODEL?
First understand the project’s key drivers and
constraints:
objectives
budget
timeframes
stakeholder commitments
regulatory constraints
project/agency specific constraints
market capacity
THE BRIEF
Standardised approaches versus innovation
Input based: specifications such as specific room
requirements and Health Facility Guidelines
Output based: models of care (functional
relationships)
Bearing the fitness for purpose risk - identifying a
purpose?
Managing the outcomes of stakeholder
consultation, interaction and review during the
design phase
KEY DESIGN CONSIDERATIONS
Develop a clear outputs/ functional brief
Driver of the development of the specifications and
design for the lifecycle of the project
» What clinical services will be provided from the facility
» What is the expected ‘catchment’ of the facility, and what
functional areas are needed to provide the services
» How should the facility respond to changes the preferred
models of care
» how should functional areas interact, what are the
requirements for durability, flexibility, expandability
» Have key user groups been consulted?
DESIGN RISK
Allocating design risk
Who will bear the financial consequences of the design
being incapable of delivering the required outputs?
Delivering on the design requirements
When and how should government intervene?
Inappropriate intervention impacts design risk.
OTHER PROCUREMENT TRENDS
Full service outsourcing
Unsolicited Proposals
FULL SERVICE OUTSOURCING
Traditionally Government retains core service delivery (clinical and clinical support services)
The private sector has provided non-core services (maintenance, cleaning and security)
Governments expanded the scope of private sector provision, include services closer to core services (catering, distribution)
Fully outsourced models are being explored (Midland Hospital, Northern Beaches)
FULL SERVICE OUTSOURCING
“Operational PPPs” - private sector provision of
operational services
The benefits
» operator led solutions
» further optimisation of quality and cost of service
delivery
» furthers innovation and responsibility for design
outcomes
» efficiencies from a private sector labour force
THE ROLE OF UNSOLICITED PROPOSALS?
Ideas and solutions from the private sector
Greater level of private sector investment and
participation in projects
Consistency and certainty to private sector participants
as to how their unsolicited proposals will be assessed
A beneficial or innovative solution is generally not
sufficient, the proposal must be unique
Uniqueness
» is there no other provider in the market?
» what is offered that could not be obtained through a tender
process?
A SUCCESSFUL PROCUREMENT
The key indicators of success are that the project ultimately:
addresses the problems that the Government seeks to solve
ensures that the investment in infrastructure and service delivery is delivered as planned
achieves the best possible value for money for Government and/or users
achieves the key benefits Government set out to achieve
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