Driving Your Procurement Dollar Further

The current economic climate has removed room for inefficiencies in government expenditure and reaffirmed the need for Councils to achieve value for money in their procurement activities.  In addition, recent legislative changes have made Local Government increasingly accountable (consider, for instance the requirement to adopt asset management plans and long term financial plans).  These issues combined means that it is critical that Councils undertake procurement transparently, efficiently and effectively in order to achieve outcomes consistent with predetermined objectives.

Understanding legal relationships, rights and obligations with key stakeholders is crucial to achieving successful procurement outcomes.  Ultimately, if Councils consider the risks and explore alternative strategies, achieving value for money in procurement will prove far less challenging.

Sound contract management is one of the most effective risk mitigation strategies that any entity, including Councils, can use to secure outcomes which reflect value for money and which are accountable and transparent.  Critically, using appropriate contract management mechanisms will assist Councils to ensure that identified outcomes are achieved on time, on budget and in accordance with specifications.  Some practical tips in relation to some of these mechanisms and how they apply to various stages of the procurement continuum are set out below.

Project Planning

At the project planning stage, it is critical that Councils:

• Undertake a thorough due diligence and carefully review the financial capacity of each tenderer.
• Consider adjusting the weighting to be given to tenderers that demonstrate strong financial capacity and parent backing.
• Review the level and type of security offered by tenderers and assess what is appropriate in the specific circumstances.  Consider the use of:
• progress payments;
• retention of funds;
• bank guarantees;
• set off rights; and
• step in rights.

The circumstances will dictate the standard and level of security required.

Form of Contract

Councils should pay particular attention to the form of contract with their contractors.  The form of contract needs to reflect the parties’ arrangements, including the outcome of their negotiations.  In all contracts Councils should ensure that:

• They pass through all relevant obligations.
• The agreed deliverables are achieved by reference to identified milestones.
• The payment regime reflects the delivery of identified milestones and that Councils are not making significant up front payments unless absolutely necessary.
• They obtain rights to all necessary records to enable compliance with reporting obligations imposed as a consequence of any funding arrangements supporting the project.  It is critical that Councils have the necessary documentation to enable proper acquittal of any funding.
• Any exposure is properly secured.

Contract Delivery

During contract delivery, Councils can take a number of important steps to help protect their interests.  For example:

• Carefully checking payment claims from contractors and not paying on inadequate or unsubstantiated claims.  It is critical that Councils address and resolve claims in a timely way to avoid snowballing.
• If Councils are concerned that contractors further down the payment chain have not been paid, Councils should ask for more information (and have contractual rights to do so).
• Councils should ensure that their paperwork is up to date and that a proper document trail exists to support their contractual position so that the status quo can be quickly and easily ascertained if needed to back up a claim.
• Considering enforcing suspension of payment rights.  This is a critical contractual mechanism and Councils should not be afraid to utilise this if the circumstances warrant it.  For example, when a Council terminates a contract or takes over works or services due to a contractor’s default (such as insolvency), the contract should stipulate that the Council’s obligation to make payments to the contractor is suspended until the works are complete.

How To Drive Your Procurement Dollars Further – Key Points

To get the most out of their procurement dollars, Councils need to:

• Know and understand the legal relationships between themselves and their contractors.
• Know who they are doing their business with and ensure that they are solvent and, if they are not, that Councils’ have sufficient protection in place to cover any losses.
• Contract manage contracts effectively by establishing the agreed deliverables and ensuring the payment regimes reflect the relevant milestones of the agreed deliverables.
• Ensure that the contract governing the project passes through all risks which Councils do not wish to be responsible for and empowers the Council to demand all things necessary from contractors.
• Be accountable and keep records of how the project money is being paid and how it is being spent.

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