4.1
Concerns about how risk is managed and how value is assessed for government-funded infrastructure projects were recurring themes in evidence to the inquiry. These were identified as priority areas for reform.
Overview of government procurement
Commonwealth procurement
4.2
The Australian Government’s Commonwealth Procurement Framework outlines the principles and rules guiding officials’ use of public funds to procure the goods and services required to support its policies and programs. It is a subset of the broader Commonwealth resource management framework.
4.3
The Commonwealth Procurement Rules (CPRs), issued under the Public Governance, Performance and Accountability Act 2013, are the key component of the Commonwealth Procurement Framework. They outline the policy requirements for relevant Commonwealth entities and articulate Australia’s international trade obligations.
4.4
Achieving value for money is the core rule of the CPRs. Significantly, it is recognised in the CPRs that price is not the only factor when assessing value for money. Officials are required to consider all relevant financial and non‑financial costs and benefits associated with a procurement. These can include quality, fitness for purpose, a potential supplier’s experience and performance history, proposal flexibility (including innovation and adaptability), environmental sustainability (including energy efficiency, environmental impact and the use of recycled products) and whole of life costs.
4.5
Under the CPRs, in considering value for money, Commonwealth officials should take account of stakeholder input; the scale and scope of the business requirement; the relevant entity’s resourcing and budget; obligations and opportunities under existing arrangements; relevant Commonwealth policies; and the market’s capacity to competitively respond to a procurement.
4.6
The CPRs on achieving value for money provide that Commonwealth officials ‘must be satisfied, after reasonable enquiries, that the procurement achieves a value for money outcome’. Procurements should: encourage competition and be non-discriminatory; use public resources in an efficient, effective, economical and ethical manner; facilitate accountable and transparent decision making; encourage appropriate engagement with risk; and be commensurate with the scale and scope of the business requirement.
State, territory and local government procurement
4.7
States and territories each have their own procurement frameworks. Given that many jointly government-funded infrastructure projects are administered at the state or territory level, the Australian Government will need to collaborate with those governments to influence and drive procurement best practice.
4.8
How state and territory procurement policies to facilitate and support Australian industry engagement interact with applicable international obligations is explored in Chapter 6.
4.9
Local government procurement is governed by various local legislation and supporting policies. Since the Australian Capital Territory (ACT) does not have a separate system of local government, functions are usually handled directly by the ACT Government.
4.10
The Department of Infrastructure, Transport, Regional Development and Communications noted that with additional funding in the 2019-20 and 2020-21 Federal Budgets, $2.5 billion in total has been allocated to the Local Roads and Community Infrastructure Program. It will be delivered in three phases, and the third phase will allow local government to pursue larger, more complex projects.
Recent developments
4.11
The Department of Infrastructure, Transport, Regional Development and Communications observed the recent trend of states and territories using ‘methods involving earlier engagement with industry and greater investment of preparatory work in the scoping and planning phases of projects’. The department outlined that work underway has included:
…consideration of packaging of works – either bundled to enable faster procurement processes or unbundled into smaller packages or projects to allow smaller contractors to participate and take on more manageable risks. There have also been efforts to encourage collaborative contracting to increase participation of tier two and three contractors, reduce inefficient pricing, improve risk allocation and reduce adversarial outcomes and engage earlier with the sector on projects to ensure contractors can collaborate with government to solve problems.
4.12
There have also been developments in relation to tender practices, with the establishment of digital tender and procurement processes panels and prequalification registers. The Northern Territory Government, for instance, is now using an online tendering system and a prequalification process. It has also developed processes to improve Aboriginal business enterprise, employment and training.
4.13
Alliance contracting, which better supports collaboration between parties, has also been adopted. The Department of Infrastructure, Transport, Regional Development and Communications provided Victoria’s Level Crossing Removal Project as a successful example in which the Victorian Government adapted a form of alliance contracting to ‘break mega projects into smaller, more manageable packages on a fully allocated and staged basis across five alliances’.
4.14
The New South Wales (NSW) Government has similarly moved to a more partner-based approach to risk allocation, has streamlined bid processes, and has established a ten-point commitment to the construction sector in the NSW Government Action Plan, which outlines improved procurement processes and requirements.
4.15
The Department of Infrastructure, Transport, Regional Development and Communications noted that for the Sydney Metro Northwest project—the first fully automated metro rail system in Australia—the state used a two‑stage procurement process consisting of an expression of interest, then an interactive request for tender. Three packages of work were awarded, one as a joint venture. The department submitted that this approach has ‘allowed for improved economies of scale, risk allocation and increased participation’.
4.16
Infrastructure NSW submitted that state government procurement policies and competition limits have ‘demonstrated value for money through direct dealings with industry’.
Addressing bid costs as a barrier to participation
4.17
For some businesses, the cost of bidding for a project can act as a barrier for larger projects. To help address this issue some states are ‘reimbursing bid costs to improve tendering certainty and reduce the impost of tendering on contractors’.
4.18
The Victorian Government’s Bid Cost Reimbursement for Major Construction Projects policy provides that a partial bid cost reimbursement may be considered if certain criteria are met. It applies to public-private partnerships, alliance arrangements and high value high risk projects, as identified under the Victorian Government’s framework. Potential bid reimbursements are considered on a case-by-case basis, with consideration given to the project criteria, broader market criteria and conditions, and if there were changes in the tender circumstances.
4.19
However, global engineering company the Jacobs Group questioned the extent of government reimbursements. It commented that while some reimbursements are made, ‘it is not comprehensive, nor does it cover the opportunity cost of investing talent and time in lost projects’.
4.20
The Georgiou Group, an Australian construction company, emphasised that ‘reimbursement of a substantial proportion of bid costs is essential’ to enable mid-tier contractors to participate and compete, particularly for Design and Construct or Early Contractor Involvement phases with substantial tender design costs. The Australian Institute of Quantity Surveyors went further in suggesting that even some tier one contracts ‘favour tendering where there is tender cost reimbursement’.
4.21
While acknowledging that governments have acted to ‘ensure internally consistent approaches to bid cost reimbursement’, Infrastructure Partnerships Australia stressed that governments should continually focus on minimising bidding costs overall, through efficiencies such as minimising tender requirements.
Security of payments
4.22
Infrastructure Australia, in its 2021 Australian Infrastructure Plan, identified payment certainty as an industry ‘pinch point’—along with access to insurance, contract complexity and market deliverability—that governments should seek to address. It noted that delayed and disputed payments throughout the infrastructure supply chain are an issue for industry, particularly for businesses further down the chain that are not paid by government through a direct contractual relationship.
4.23
Security of payments refers to a contractor’s right to receive the payments due under the contract, and on time. The Australian Building and Construction Commission monitors the security of payment requirements in the Code for the Tendering and Performance of Building Work 2016 (the Code).
4.24
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) highlighted work on the security of payments legislation in Western Australia and South Australia, noting that it is an important issue to address. For some small and medium enterprises (SMEs) these payment issues can seriously impact their ability to continue in business.
4.25
The Civil Contractors Federation (CCF) is another group advocating for a ‘robust security of payments regime to ensure fair and equitable terms of payments for subcontractors’. The NSW Government’s ten-point commitment to the construction sector also includes a commitment to improve the security and timeliness of contract payments.
Leveraging procurement to drive reform
4.26
Infrastructure Australia noted that the increasing complexity of procurement processes for public infrastructure is having a direct effect in potentially driving businesses ‘away from public infrastructure construction to industries that have less arduous procurement processes’. The Infrastructure Market Capacity report outlined industry consultation that:
…identified multiple incidences of individuals leaving the sector because of the long hours required to respond to requirements in designated timeframes. Industry consultation also identified excessive information and documentation requirements (Australian bid costs are 25 to 45 per cent higher than Canadian equivalents, largely driven by increased design focus and purchaser requests), and an emphasis on architectural design and design innovation increasing the required workforce for large projects.
4.27
Evidence to the inquiry supported the view that the Australian Government is well positioned to ‘drive beneficial change and use its purchasing power to leverage procurement expectations’.
4.28
The Business Council of Australia (BCA) described the industry as ‘unified’ in recognising that improving the performance of government procurement practices is the way to enable delivery of Australia’s infrastructure pipeline. Roads Australia encouraged the Australian Government to use:
…its procurement of the Inland Rail, Snowy Hydro 2.0 and Western Sydney Airport projects to leverage best practice in infrastructure procurement and that the lessons learnt are taken into future projects delivered by all Australian jurisdictions.
Standardisation
4.29
In the construction industry, standardisation is the extensive use of processes or procedures, products or components, in which there is regularity, repetition and a record of successful practice. In the context of this inquiry, the committee is regarding standardisation broadly as opportunities to achieve efficiencies through proven products and processes that can be applied to similar projects.
4.30
Engineers Australia saw the potential for standardised infrastructure across states and territories to make ‘longer-term integration and connectivity easier and saves money through high-volume procurement activities’.
4.31
Industrialised or manufactured construction aims to improve productivity through mechanisation and automation, and commonly involves prefabricated or modular approaches. Standardised designs can be ‘repeatedly applied and executed in a controlled environment’. This shifts certain activities away from the construction site to a factory, where prefabricated building components are made and then shipped to sites. While this is not a new concept, recently there has been increased global interest in industrialised construction, which EY attributes to ‘a heightened focus on efficiency due to skilled labour shortages and tighter margins’.
4.32
The committee explored this approach and its potential for application in Australia with Engineers Australia, who explained that:
…industrialised construction seeks to collect building information modelling to mine processes and data in search of efficiencies, and prefabrication reduces the on-site construction time. Project designs will necessarily differ according to the geographical location and other requirements. Materials applicable to a dry interior climate may not work in a wet coastal environment. You'd need to look at where efficiency can be improved and where you can process and manufacture structural components and make them automated in particular areas and perhaps create a hub. We recommend nominating specific processes or products to be purchased across the project pipeline, while providing mechanisms for implementation of customised solutions. That would require development of a clear set of specifications, including guidelines on the development of specifications, quality control and purchasing.
4.33
However, Engineers Australia also cautioned that a small number of companies could dominate prefabrication in Australia, as a comparatively small market, potentially leading to uncompetitive pricing. Further, it outlined that industrialised construction:
…would be relatively easy to achieve through a pipeline framework by nominating specific processes or products or delivery time frames that require offsite manufacturing. But, even if…[it] is achieved to a beneficial level, it's only one cost component of a project—and the increase in transport costs might offset the savings...
4.34
In relation to harmonising and standardising technical specifications, Roads Australia maintained that national consistency ‘would reduce the risk for clients and industry in compliance’, however, noted that work on this has been ‘very slow with no real timeline’.
4.35
The Australasian Railway Association raised standardisation in the context of technology standards and regulatory requirements that differ between jurisdictions, noting that:
…the challenge of differing standards, requirements and type approvals between jurisdictions leads to technologies being implemented inconsistently across Australia. Streamlining regulatory testing processes for new technologies, so that type approval by one network operator provides ‘trust markers’ for others, would greatly enhance the prospects for inter-jurisdictional standardisation.
4.36
The Victorian Government’s Level Cross Removal Crossing project has been raised by a number of groups as a good example of successfully breaking a mega project into more accessible smaller packages and in alliance contracting to take more of a risk sharing and collaborative approach with contractors on the delivery of various parts of the project. The Department of Infrastructure, Transport, Regional Development and Communications also noted that this project approach ‘incentivised shared information and standardisation improving efficiency in design and delivery and even implemented a set menu of materials and products’.
4.37
Opportunities for standardisation of contracts for infrastructure projects are explored in Chapter 5.
Risk management
Allocating risk
4.38
Concerns about how risk is allocated on government-funded infrastructure projects was a recurring theme in evidence to the inquiry. The Department of Infrastructure, Transport, Regional Development and Communications acknowledged the need ‘to ensure risks are allocated to the appropriate party to optimise procurement outcomes’. The Department of Finance also recognised that the approach to risk sharing must be considered as part of getting best value in infrastructure projects.
4.39
Evidence indicated a tendency of risk shifting from clients and procurers to head contractors and, in turn, subcontractors, resulting in an adversarial culture, marked by disputes. The BCA submitted that:
Contractors have increasingly been expected to take an unreasonable level of risk on projects, creating adversarial relationships during delivery and missed opportunities for communities. This has been seen through high-profile projects such as Sydney’s CBD and South-East Light Rail, the New Royal Adelaide Hospital and the Westgate Tunnel.
A reasonable and collaborative approach looks closely at where unknown risks are allocated. Failure to do so makes the market less attractive to tier one contractors and to new entrants, increases the number of disputes and puts at risk delivery timeframes, resulting in poor value for money outcomes.
4.40
Consult Australia noted claims that data suggested—at least in the Design and Construct procurement method—that the ‘level of risk transfer is breeding a culture of disputation rather than collaboration’.
4.41
The BCA recommended that government agencies should allocate risks to the party best able to manage them or share the risk, an approach which can be supported by early engagement with the market to foster more collaborative relationships. In its submission, the BCA provided the North‑East Link primary package in Victoria as a positive example of the government adopting a risk sharing approach. It commented that in response to market feedback, the Victorian Government showed a willingness to ‘engage with the private sector early and work through the particular risks inherent in the project’.
4.42
The Jacobs Group stressed the importance of defining and quantifying risks to attract competition in procurement processes. It explained that:
Inappropriate risk allocation causes low supply chain appetite to design and construct large complex projects and can result in significant risk premiums being priced into tender costs.
4.43
Infrastructure Australia told the committee that:
What we need to really see is government as a more mature procurer of infrastructure choose appropriately the risks to transfer with a view of the party best placed to manage them, and selection of a procurement model which allows risks to be effectively transferred or shared.
Scoping and understanding risk
4.44
For risks to be appropriately allocated on infrastructure projects, procurers and industry must have done sufficient early work to garner a sound understanding of the broader prevailing, and project specific, risks.
4.45
The Jacobs Group outlined that early works could go a long way to de‑risking a project, such as covering utility relocations, land acquisition, contamination or ground conditions, which could be performed either by government or the contractor. Beyond that, a collaborative approach can be used to address remaining uncertainties and determine the best risk treatment where risk is jointly shared.
4.46
Similarly, the Department of Infrastructure, Transport, Regional Development and Communications acknowledged that irrespective of the procurement model, early engagement with contractors is important and outlined that:
…sufficient upfront planning and preparatory work will assist with improving relationships between proponent and contractor, balance risk allocation, manage and appropriately price risk.
4.47
The more complex a project, the greater the likelihood of interconnected risks that, due to optimism bias in costing, ‘are often ignored and missed’. This can then lead to time and cost extensions that have ripple effects and consequent large impacts on the project. This is a particular challenge for mega projects, in contrast to smaller projects, where, with reasonable scoping, risks can be more readily understood.
Improving risk management
4.48
In the 2021 Australian Infrastructure Plan, Infrastructure Australia recognised that poor risk management and the assumption of adversarial relationships between government and industry ‘foreshadow project failure and undermine collaboration’.
4.49
As part of improving industry productivity and value for money by having a coordinated project pipeline, the 2021 Australian Infrastructure Plan identified the need for a mature approach to procurement and risk management. Recommendation 3.2a.1 to support enhanced project outcomes was to:
Ensure a strategic view of risk is appropriately translated to project procurement by developing and applying mature risk allocation processes that comprehensively assess and validate risk and uncertainty and fairly apportion them to the parties best placed to manage them.
4.50
There is already recognition in the Commonwealth Procurement Rules (CPRs) of the need to engage appropriately on risk. Paragraph 4.4(d) encourages ‘appropriate engagement with risk’ by procurers, as part of officials’ responsibilities for ensuring that a procurement achieves a value for money outcome.
4.51
However, the committee notes that as has been the case in the many areas identified for procurement reform, early scoping and appropriate engagement with risk is not necessarily happening in practice with government procurements.
4.52
Roads Australia observed that equating value for money ‘to lowest price may be suitable for smaller, lower value, straightforward projects where risk is well known and understood’. However, it is inadequate when faced with larger, more complex projects and programs of works.
4.53
In its submission, the Department of Infrastructure, Transport, Regional Development and Communications noted the work being undertaken by states in considering how works are packaged. This has included some cases of unbundling into smaller packages or projects ‘to allow smaller contractors to participate and take on more manageable risks’. The department also noted the recent examples of changes to procurement practices, where in:
Western Australia: This year the state replaced its procurement act, with accompanying new procurement rules that encourage collaboration, efficient risk allocation, earlier industry engagement and reduced documentation requirements. Work is also underway to harmonise and improve practices and capability within government.
New South Wales: The state has adapted a partner-based approach to risk allocation which has helped to remove some of the disproportionate level of risk felt by contractors.
4.54
The Jacobs Group emphasised that risk sharing ‘needs to be far more balanced than it has been on recent mega projects’. The Australian Constructors Association stressed the need to focus on ‘high value activities like optimising designs and de-risking projects rather than undertaking repetitive tasks associated with procurement processes’.
4.55
The committee heard that the Department of Defence has prioritised de‑risking activities in the pre-approval stage, following the 2015 First Principles Review in the design of the Capability Life Cycle and the One Defence capability model. Now, risk is fully scoped by the time Defence projects go to market, and the department enters into contracts and the projects start.
4.56
One of the features of the United Kingdom’s renowned Project 13 model is that part of this shift to an enterprise model for infrastructure delivery is that risk is allocated to align with capability, and not transferred through the tiers of the supply chain.
4.57
Opportunities for harnessing international best practice collaboration and contract models are covered in Chapter 5 while supporting technology and innovation is explored in Chapter 7.
Risk and insurance
4.58
While insurance issues are impacting businesses of all sizes, evidence to the committee suggested that SMEs are disproportionately affected. The current insurance requirements and the nature of the insurance market can act as a barrier to SME participation in large infrastructure projects. This undermines the aim that the benefits of the investment injection into Australia’s pipeline of infrastructure projects will make their way through tier one companies down to tier two and tier three companies through joint venture or subcontracting arrangements.
4.59
Consult Australia submitted that ‘some of the most onerous contract terms’ relate to consulting businesses’ professional indemnity (PI) insurance, with the insertion of such clauses bearing ‘little or no relation to genuine risk identification and assessment’. To help address this challenge, Consult Australia proposed an education campaign for government officials on the impacts of risk averse approaches on project outcomes and relationships with the industry.
4.60
The implications of insurance challenges for SMEs are explored in more detail in Chapter 6.
Civil liability reform
4.61
Consult Australia also recommended amending civil liability laws across Australia to ‘explicitly prohibit the contracting out of proportionate liability in professional services contracts (in-line with the civil liability law in [Queensland] which already has such a provision)’.
4.62
In general terms, the objective of proportionate liability is to ensure that liability rests with a party only to the proportion that the suffered loss is attributable to that party. However, Consult Australia submitted that the proportionate liability scheme is ‘often excluded in government contracts, in addition to arbitration being mandated as the dispute resolution forum’. Further, it described government clients as ‘amongst the worst in insisting that consultant businesses contract out of this statutory right if they want to win the job and enter into the contract’.
4.63
Consult Australia argued that placing the entire liability on one party encourages less desirable risk management practices, and observed that:
Amending the legislation to expressly prohibit contracting out of this provision in the law would realise the original policy intention of the civil liability reforms, which were introduced to de-risk the market the last time the PI insurance severely contracted in Australia.
4.64
In Queensland’s Civil Liability Act 2003, section 7(3) contains an express prohibition against contracting out of the proportionate liability regime, with the effect that a defendant cannot rely on a contractual indemnity to reduce the extent to which they are proportionately liable for a suffered loss. Consult Australia noted that Queensland is the only state with the express prohibition, with NSW, Tasmania and Western Australia allowing parties to contract out, and the remaining state and territory laws not specifying their positions either way.
4.65
In response to committee questioning on whether there have been any differences in outcomes observed in Queensland resulting from this provision being in place, Consult Australia commented that:
Certainly, when we look across the country, we do experience a very good relationship with the Queensland Government. They are very good at industry consultation. They listen and they are actively working towards creating a more collaborative culture. I think that stems partly from the fact that when the tort and liability reforms happened, they were prepared to say, 'No, we shouldn't allow parties to contract out if we're serious about ensuring that each party bears responsibility for their own cause of loss rather than seeking for another party to bear the loss that they weren't actually responsible for.' It almost feels like there's a cultural difference there.
4.66
Consult Australia observed that in contrast, in NSW, which allows contracting out of proportionate liability, this tends to happen in every contract rather than by exception. Consult Australia noted a difference in terms of culture in NSW when looking at contract development and ‘where the risks should lie in contract terms’.
4.67
Consult Australia also stressed that Australian governments need to send a powerful message to the insurance industry that they are ‘prepared to make sure risk is genuinely being allocated to the party best able to manage it’. Instead, by allowing (or indeed requiring) parties to contract out proportionate liability, governments are sending the wrong—or at least, a mixed—message about their commitment to de-risking the insurance market.
Best value over lowest cost
4.68
Achieving value for money is core to the Commonwealth Procurement Rules, which clearly provide for the consideration of financial and non‑financial costs and benefits associated with procurement. However, evidence to the committee indicated that in practice lowest possible cost can still win over best value in government procurement.
4.69
JNT Consulting, an Australian owned and operated independent management consulting firm, stated emphatically that the ‘traditional low‑bid award procurement process is broken’. It observed that in practice:
…many buying organisations think they are not doing a price‑based award for their contracts, since they are checking various things besides cost. But in reality, they do not realise that the cost is unintentionally affecting their decision, way more than…intended.
4.70
From an international perspective, the Organisation for Economic Co‑operation and Development (OECD) in its report Government at a Glance 2021 noted that the vast majority (28 out of 30) of OECD countries surveyed used a combination of financial and qualitative criteria to assess project proposals. However, it also recognised that there was room for improvement in the use of life cycle costs. The OECD stated that:
Procurement processes that exclusively focus on costs or fail to consider the whole of the project’s lifetime, may not support the delivery of an optimal combination of quality, technical features (e.g. resilience, environmental sustainability) and price.
4.71
Evidence provided for this inquiry strongly reflected the need to prioritise overall best value over lowest cost in government procurement. The Australian Constructors Association highlighted that:
…the current focus on lowest price inhibits innovation, reduces local content, slows adoption of productivity-enhancing digital technologies and fails to maximise project community benefits.
4.72
In discussion at a public hearing of the inquiry, consulting firm Simplar Sourcing Solutions likened a low bid to a Trojan horse that is ‘rarely what it promises to be’.
4.73
Similarly, the Australian Industry Group (Ai Group) cautioned that selecting a low price bid may only be the starting price, not the finishing price. The project may end up costing a lot more by the time it is built, and for its future maintenance. The Ai Group contended that:
Making decisions on price alone is really a recipe for disaster because, if bidders bid low and they win a project—effectively buying that project—the first thing that they would look at…is how they can claw back from somebody sufficient funds to meet their internal rate of return that they would expect out of that specific project. So that puts pressure on all the people involved, from the designers through to the subcontractors through to the providers of materials and goods…It might be the best cost from the client's perspective but downstream it is going to run into difficulties, and that process also creates disputes because everybody is looking to protect their commercial interest. Once you're in dispute, that's the end of the project, in the sense of cost, and we see that regularly.
4.74
Roads Australia suggested that the current model and definition of value for money ‘is not serving governments or industry well’, as it equates value for money with lowest price. It contended that while this may be acceptable for smaller, lower value projects where risk is well understood, it does not meet the needs of the larger, more complex infrastructure projects being delivered in Australia.
4.75
Roads Australia stressed that the current model is ‘unsustainable and results in an adversarial contract environment and poor financial outcomes for both supplier and client’. Roads Australia called for the Australian Government to work with states and territories to develop a more contemporary definition of value for money in infrastructure procurement.
4.76
State and territory government policies and frameworks clearly reflect that lowest cost does not necessarily equate with value for money:
New South Wales: The NSW Government Procurement Policy Framework states that ‘value for money is not necessarily the lowest price, nor the highest quality good or service. It requires a balanced assessment of a range of financial and non-financial factors, such as: quality, cost, fitness for purpose, capability, capacity, risk, total cost of ownership or other relevant factors’.
Victoria: The Achieving value for money – goods and services procurement guide describes value for money as ‘the achievement of a desired procurement outcome at the best possible price—not necessarily the lowest price—based on a balanced judgement of financial and non‑financial factors relevant to the procurement’. It also considers the total cost of procurement from planning to disposal and everything in between.
Queensland: The Queensland Procurement Policy states that ‘value for money is more than price paid’ and requires that in measuring value for money, the bid ‘must also advance the government’s economic, environmental and social objectives for the long-term wellbeing’ of the Queensland community. Further, best practice principles must be applied to all major projects valued at $100 million and above, and for declared projects.
Western Australia: The Western Australian Procurement Rules require that state agencies ‘must consider value for money outcomes at all stages of the procurement life cycle, especially during planning and decision making’. The Western Australian Social Procurement Framework goes further in seeking to elevate considering relevant social, economic and environmental outcomes to the ‘forefront of procurement related decision-making’.
South Australia: The Procurement Governance Policy describes achieving value for money in procurement by ‘finding the optimum balance between whole of life cost and quality’. In addition, public authorities must consider the economic benefit of the procurement to the South Australian economy, in line with the South Australian Industry Participation Policy.
Tasmania: The Procurement Better Practice Guidelines (Principles and Policies) describes value for money as ‘achieving the desired outcome at the best possible price by weighing up the benefits of the purchase against the cost of the purchase’, and notes that it ‘does not necessarily mean purchasing the cheapest product or at the lowest price’.
Australian Capital Territory: The ACT’s Government Procurement Act 2001 describes value for money as the ‘best available procurement outcome’—delivering the ‘optimum combination’ of: probity and ethical behaviour, risk management, open and competitive competition, optimising whole of life costs, and other applicable regulatory requirements.
Northern Territory: The NT Government has ‘value for Territory’ as one of its five procurement principles that guides the way it undertakes and assesses tenders. The value for Territory principle aims to deliver procurement outcomes while meeting the government’s economic, social, environmental and cultural objectives. It recognises that best value for Territory is ‘not necessarily the cheapest price,’ and that the government ‘wants more for its contract delivery than just the best price’.
4.77
Notwithstanding government procurers’ best intentions for achieving value in procurement, the Jacobs Group submitted that a combination of factors can lead government procurers to selecting a lowest cost bid:
Inadequate project development and scoping results in unrealistic cost estimates and insufficient budgets. Inaccurate cost estimates are often discovered during procurement when tenderers’ costs exceed the funding envelope leaving the government entity selecting the lowest cost submission due to having the smallest gap between cost and budget.
4.78
Inadequate project development and scoping results in unrealistic cost estimates and insufficient budgets. Inaccurate cost estimates are often discovered during procurement when tenderers’ costs exceed the funding envelope leaving the government entity selecting the lowest cost submission due to having the smallest gap between cost and budget. It is also clear that the lowest cost approach to project bidding is not sustainable for individual businesses or the construction sector. The Australasian BIM Advisory Board encapsulated the sentiment well in its comments to the committee that:
The last thing we want to see is companies cutting their throats in order to win work. As a number of presenters have said today, that leads to stress for individuals; it leads to a whole lot of poor social outcomes; and it reduces the desire to cover work in the construction sector, which is so important for the future of Australia.
4.79
The committee notes that slowing the adoption of productivity enhancing digital technologies—such as digital engineering and Building Information Modelling (BIM)—is another way in which the focus on the lowest price is hindering these projects. The benefits and challenges associated with utilising digital approaches in infrastructure projects is explored in Chapter 7.
4.80
In simple terms, digital engineering and BIM costs money as it requires investment in software and skills. The Australian Constructors Association commented that companies are not pricing this kind of investment into their bids, and consequently:
We're missing out on significant opportunities there further down the track, because there's a pure focus on the lowest possible price at the tender box.
4.81
Laing O’Rourke, an international engineering and construction company, agreed that where ‘price is regarded as a proxy for value’ it is limiting innovation and productivity’. The group commented that:
Rethinking the value equation and trying to unlock innovation and longer-term economic value are what's driving better and more contemporary procurement models.
4.82
The Australian Constructors Association called on the Australian Government to support the development and adoption of a framework to ‘ensure that projects are procured based on best value not lowest cost’. Further, it also specified that tender evaluation frameworks should be prioritising ‘overall project value over lowest construction price’.
4.83
The Department of Finance noted that, conceptually, assessing value for money should involve considering a broad range of factors, including financial and non-financial factors. At a practical level, officials should also consider the tenderer’s proposed delivery and risk sharing approaches, the capabilities and expertise of the bid team, and the price and financial structure and arrangements in the contract.
4.84
The Ai Group maintained that in thinking beyond price, procurers must also consider whether they are appointing the best team to deliver the project and getting the best outcomes, now and from a whole of life perspective. The Ai Group stressed the need to go beyond up-front costs and consider the downstream implications, stating that:
If you haven't got a project that has been put together well and if there are issues of maintenance and ongoing change which are required in the life of that project—let's say over a 30-year horizon for a large infrastructure project—it is going to cost the community a lot more in real terms.
4.85
JNT Consulting and Simplar Solutions stressed the need for value-based selection and for procurers to fully understand the breadth of how, and by whom, the project is being delivered. Simplar explained that:
Where a lot of people make mistakes is, they don't go low bid on the GC [general contractor] or the prime, but that prime may only consume, on average, 10 to 20 per cent of the dollars. So, 80 per cent to 90 per cent of the other moneys out there are actually pushed out to the subtrades, the specialty contractors. They are almost exclusively lump sum fixed price and usually contractually mandated to be so by the clients. So, you are still pushing the vast majority of your money to a low bid environment through the prime and now they are forced to do a lump sum agreement with typically incomplete contract documents. This causes great havoc in the supply chain.
Expertise-Based Project Delivery best value approach
4.86
JNT Consulting’s critique of traditional procurement approaches included that they do not reward contractor innovation, and instead incentivises contractors to cut costs, but not to pre-plan for project activities or risk stages.
4.87
While stressing the importance of alternative processes to evaluating factors besides price, JNT Consulting expressed concern that this could also create issues if not approached correctly. It contended that common problems that organisations encounter when moving to alternative procurement processes are they do not know what criteria to evaluate, how to properly weigh the criteria, and how to best engage with contractors to get the required information.
4.88
JNT Consulting has partnered with US company Simplar Sourcing Solutions to deliver the Expertise-Based Project Delivery (XPD) best‑value approach in Australia. It outlined that this best-value approach has a strong track record—used in over 3,000 projects globally in a wide range of industries—and can be applied to any construction or infrastructure project in Australia, working within the existing policies and frameworks. JNT Consulting advised that the best-value approach has been used in Australia to deliver high-profile projects for the Victorian Government, including on a major asset management contract and large-scale waste clean-up projects.
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JNT Consulting claims that its XPD best‑value approach—described as a complete procurement and delivery approach—overcomes many of the potential problems with immature request for tender approaches. It is focused on helping the client select the ‘best overall team’ and does not demand excessive amounts of information from tenderers, which can act as a barrier to participation for some businesses. JNT Consulting outlined that the best-value approach allows ‘expert contractors to differentiate themselves by focusing on risk and mitigation plans…as well as value-add options that can maximise the success of the project’.
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Further, JNT Consulting noted that its XPD best-value approach has checks and balances, implemented primarily through an ‘anonymous’ proposal system. This involves a portion of the selection process where evaluators do not know whose proposal they are scoring. It is suggested that this helps to address potential bias and put focus on the merits of the proposal. Simplar Sourcing Solutions explained that:
For most infrastructure projects, it is a very boilerplate response…So you are getting generic responses. Even if it is not low bid, selection price becomes the dominant differentiator because all the marketing material looks the same. That traditional marketing is not a good way to differentiate. People will revert to their biases of what they…[know about the] companies…That is where the anonymous portion helps drive a more fair and more accurate selection process.
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During a public hearing, these companies told the committee that the best way to find alternative approaches that work is to test them on projects and then judge how the benefits and outcomes compare.
South Australian Industry Advocate model
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ASBFEO encouraged the Australian Government to consider emulating the South Australian Industry Advocate model at the Commonwealth level. ASBFEO saw this as a potential solution to addressing many of the problems in government procurement.
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The Industry Advocate role is an independent statutory authority established by the Industry Advocate Act 2017. The role includes facilitating economic contribution and development from public expenditure and to ensure capable businesses based in South Australia are given full, fair and reasonable opportunity to tender and participate in government projects. South Australian agencies and private parties contracting to the Government of South Australia are required to comply with the South Australian Industry Participation Policy (SAIPP) and its supporting guidelines. The Industry Advocate’s role includes acting to further the objectives in the SAIPP.
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ASBFEO outlined that the model takes a much broader and ‘wiser’ approach to assessing value for money, can deal with unnecessary bundling and aggregation, ensures that processes are designed to enable rather than impede SME participation, and can verify that contracted suppliers are the businesses that the SAIPP is seeking to nurture and support—not a wholly owned shopfront operating from a larger firm or some offshore entity simply using an Australian Business Number.
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ASBFEO suggested that the Industry Advocate could identify ‘if there are excessive conditions to participate attached to a procurement’ and work to achieve a better risk treatment. Also, when weighing key factors, the Industry Advocate model even talks about:
…the role that procurement can play in uplifting, scaling and developing expertise and capacity for that business as an influencing factor on the awarding of the contract. So, it's not purely a race for the cheapest dollar…
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The committee notes that the Joint Select Committee on government procurement, in its 2017 report Buying into our Future: Review of amendments to the Commonwealth Procurement Rules, recommended that the Australian Government establish an Australian Industry Advocate. The advocate was intended to aid Commonwealth agencies to design procurement processes to maximise benefits to the Australian economy and increase opportunities for SME participation, and to support Australian businesses to access government procurement opportunities. However, the Australian Government, in its response, did not support establishing an Australian Industry Advocate.
Government procurers
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Alliance contracting and breaking larger projects into smaller contracts do place greater time and management demands on government officials responsible for overseeing these projects. ASBFEO commented that unbundled contracts ‘would benefit from being managed by appropriately skilled procurement and contract management officials’.
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Being able to clearly articulate how to define value for money and capture specific technical requirements in contracts was identified as an important part of a procurement official’s skillset. This is particularly important in specialised projects such as developing the terms for a radioactive waste management facility where safety is paramount over lowest possible cost.
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Consult Australia called for procurement reform that is supported by developing guidance and training for procurement officials on risk assessment and management, insurance and contract management.
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The CCF stressed the importance of government procurers overcoming mindsets such as leaning towards risk shifting rather than the risk sharing opportunities available in more collaborative approaches. The CCF acknowledged that some procurers may be reluctant to adopt collaborative arrangements due to:
the need to relinquish some bargaining power to industry rather than the contractor being the price taker
prioritisation of short run outcomes like cost to deliver rather than broader benefits, and
uncertain costs of delivery and perceived track records of previous alliances.
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Consistent with evidence the committee received about the need to improve the handling of risk and innovation when procuring for government-funded infrastructure projects, Infrastructure Australia commented in relation to upskilling government officials that:
We need to ensure that the public service and, indeed, client project managers are appropriately supported in their perceptions around risk and their support for innovation. We can do that…both through exposure to industry and ensuring that there is a regular and, indeed, supported movement of skills and professions between the public and private sectors. We need to make sure that there are opportunities for on-the-job training and exposure to new projects, and that includes…from grad programs through to more senior roles. I would emphasise it's the senior roles, the senior project leadership roles, where there is a gap both in the public and private sectors.
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Infrastructure Partnerships Australia emphasised that procurement models are ‘ultimately just incentive frameworks’ and that there is an onus on government procurers to ‘look past the marketing name of a particular model and ensure the incentives and behaviours it generates will serve the long-term interests of taxpayers on each project on which it is deployed’. Infrastructure Australia agreed that:
We really need to see a mature, capable public service, well informed by industry, able to select procurement models that are most appropriate for the project.
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Further, Infrastructure Australia highlighted that while states or territories may be the procurers for many infrastructure projects, there is still the opportunity for the Australian Government to facilitate sharing best practice through fora with industry and other jurisdictions. Infrastructure Australia commented that this:
…enables visibility over what is being done and what is working in different jurisdictions. I think it's also important that there is scope to be able to adapt the setting to what works in that particular environment. It's not a one-size-fits-all approach across jurisdictions.
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In response to committee questioning, North Projects agreed that procurers’ focus on low price needs to be replaced by value, and as part of that the governments should ensure that its procurement officials have the required capacity and expertise to engage effectively and collaboratively with industry.
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The Australasian Railway Association noted that in recent years it has found departmental officials open to discussions about procurement practices that are impacting industry performance, with officials recognising where they need to review internal processes and to collaborate and engage more with industry.
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Infrastructure Australia highlighted that for increasingly complex projects, highly skilled professionals are needed in both the public and private sectors. It outlined that:
Increasing the maturity of public clients to support the delivery of next generation infrastructure, including the incorporation of a long-term project delivery capability within the Commonwealth Government. This will facilitate high value engagement between the Australian Government and its partners.
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Infrastructure Australia noted formal education avenues in Victoria through the Project Leadership Academy, and in NSW through the John Grill Centre, to improve government and industry project leadership in the sector.
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In discussion with the committee on recent developments in relation to supporting government procurement officials, the Department of Finance noted that in August 2020 it had issued guidance to Commonwealth procurement officials about considering broader economic benefits, particularly when assessing value for money.
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Further, the Department of Finance advised that as custodian of the Commonwealth Procurement Framework it is running outreach programs to agencies and has a senior procurement officials reference group comprising 120 agencies.
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The Centre of Procurement Excellence, hosted by the Department of Finance, is another resource designed to upskill government procurers. Its board comprises the Finance department secretary, Rosemary Huxtable PSM, other Australian Public Sector secretaries, and business leaders.
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In addition to outreach activities, the Department of Finance is focusing internally on improving procurement team capabilities, including rolling out a Diploma of Procurement and Contracting Management—partnering with a private sector party to provide this specialised training.
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ASBFEO told the committee that it was pleased to see the ‘professionalisation of procurement’ that is occurring through the Department of Finance, in which people are appreciating the role they can play in public policy execution. However, the Ombudsman observed that it will still be a ‘character-building journey’ for procurers who, even when seeking to apply best practice, can run into ‘obstacles around scale, bundling, white tape and threshold requirements’.
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The Department of Industry, Science, Energy and Resources noted a commonly held industry view that that there is an opportunity for procurement officials to be a recognised profession. In discussion with the committee, the department acknowledged the increased focus on procurement officials and their potential to contribute to the Australian economy beyond a specific procurement.
Committee comments
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Many of the issues examined during this inquiry reflect continuing challenges facing the infrastructure sector and procurement for government-funded infrastructure projects. As noted in the background in Chapter 1, in recent years parliamentary committees and the Productivity Commission have examined infrastructure procurement and highlighted areas for reform.
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While there has been procurement reform progressing across all levels of government, more work is needed to ensure these efforts are strategic, coordinated and that principles are applied in practice. One key example of this is for procurers to optimise their consideration of non-financial factors when assessing infrastructure projects, rather than defaulting to the lowest possible price option, as has too often been the case in the past.
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The committee was pleased to hear about the focus by Australian Government departments on improving government officials’ procurement capabilities. It notes the guidance documents provided by the Department of Finance, and increased engagement, to improve officials’ understanding of the requirements and scope already in the Commonwealth Procurement Rules that a range of factors must be considered beyond price.
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The committee agrees with the evidence presented about the need to replace the current tendency towards low price with a proper assessment of which project bid is offering overall best value. To support this, governments at all levels should ensure that their procurement officials have the required capacity and expertise to engage effectively and collaboratively with industry.
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Given the crucial role that procurement plays in planning, the tendering process and delivery of infrastructure projects, the committee recommends that the Australian Government review the practical application of the Commonwealth Procurement Rules, with a particular focus on the extent to which factors other than price are assessed in practice.
As part of this work, the Australian Government should explore ways to support the training of government procurement officials in procurement best practice approaches to support sophisticated assessments of value for money, and ways to maximise Australian local industry engagement.
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Given the significant amount of taxpayer money being invested in infrastructure by Australian governments it is more pressing than ever to ensure that procurement practices for government-funded projects follow best practice to ensure good project outcomes and that taxpayer money is well spent.
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The committee sees merit in a mechanism to help ensure consistency in monitoring and rating performance on these projects. Additionally, this can serve as an important tool to help inform participants for new projects or for the next phases of larger projects.
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The committee recommends that the Australian Government, in consultation with state, territory and local governments, establish a mechanism for monitoring and rating funding recipients’ performance on government-funded infrastructure projects, capturing elements of whether the project was delivered to the required standards, on time and on budget.
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The committee acknowledges that many infrastructure projects that receive funding from the Australian Government will actually be administered at the state or territory level. However, there is still a role for the Australian Government to help ensure, irrespective of the level of government undertaking the procurement, that best practice approaches are used. This should include a mature assessment process focused on project objectives and outcomes and verifying best value over lowest possible cost.
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The committee recommends that state, territory and local government infrastructure projects that receive Australian Government funding should be subject to verification of value for money by the Australian Government or a specified entity. To support this, the Australian Government should establish a mechanism for assessing state, territory and local governments’ plans and performance for proposed and delivered infrastructure projects using Australian Government funds, capturing elements of project delivery to the required standards, on time and on budget.
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The committee appreciates that there cannot be a one size fits all approach to project procurement and delivery. Projects in the infrastructure pipeline will vary significantly and government officials must ensure that the procurement and delivery approaches selected are fit for purpose for a given project. However, the committee sees considerable scope, through greater collaboration—across jurisdictions and with industry—for government planners and procurers to draw on important lessons from past and current exemplar projects.
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The development of various light rail networks around Australia is an example of an opportunity for government cooperation on consistency, interoperability and standardised requirements. The committee believes that with greater collaboration there would be less likelihood of encountering a problem such as that with the Sydney CBD’s light rail being decommissioned for up to 18 months as it does not have ready replacements for damaged trams.
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Given the scale of Australia’s infrastructure pipeline there is likely to be sufficient similarities between projects where some elements of standardisation could provide greater efficiencies. The committee believes that opportunities for standardisation on similar government-funded infrastructure projects is an area that merits further exploration.
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To improve planning, procurement and delivery efficiencies for infrastructure projects, the committee recommends the Australian Government, in consultation with state, territory and local governments, explores opportunities for standardisation on like projects.