Stuart Cosgriff - Clayton Utz - Evaluating the Merits of Differing Contract, Procurement and Delivery Models

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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/hosprocurement14

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Stuart Cosgriff - Clayton Utz - Evaluating the Merits of Differing Contract, Procurement and Delivery Models

  1. 1. © Clayton Utz CONTRACT, PROCUREMENT AND DELIVERY MODELS Stuart Cosgriff 24 July 2014
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. ECI - WHAT IS IT?
  9. 9. 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)
  10. 10. MANAGING CONTRACTOR STRUCTURE Owner Managing Contractor Sub-Contractor SupplierSub-Contractor Design Consultants (preparing and documenting design)
  11. 11. 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
  12. 12. 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
  13. 13. 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.
  14. 14. PUBLIC PRIVATE PARTNERSHIPS Government Agency Project Company Equity investors Builder Services provider/s Lenders
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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?
  20. 20. 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.
  21. 21. OTHER PROCUREMENT TRENDS Full service outsourcing Unsolicited Proposals
  22. 22. 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)
  23. 23. 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
  24. 24. 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?
  25. 25. 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
  26. 26. www.claytonutz.com

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