January 16, 2012

Government owners need to work with contractors to reduce construction project risk

Procurement Perspectives | Stephen Bauld

Risk transfer in Government procurement documents is an area that we need to look at for the future.

Perhaps, as important to securing best value for money in confirming that the internal decision-making and project-management process are up to the challenges presented by major capital projects, is the process of making sure that all qualified bidders are properly briefed and put in a position to submit a competitive bid in relation to that project. Their ability to do so should not be assumed as a matter of course.

Few things are as embarrassing to a municipal council as when only one (or no) bid or proposal is submitted for a high profile public project. Such a situation allows no opportunity for cost comparison. It is virtually impossible to decide weather the bid is attractive or not.

In the private sector, relationship development is a critical aspect of the procurement process, it is obviously critical to the success of relationship based procurement, in which the contractor and owner are given access to each other’s strategic plans, relevant cost information and forecasts; so that they can work out a joint procurement/supply strategy under which risks and rewards are addressed openly, and divided fairly between them. The open, transparent, and fair competitive process for the award of municipal contracts qualifies the extent to which municipal contracting can be conducted on a relationship basis.

Municipalities need to become familiar with the concerns that influence the pricing of the goods and services that they are likely to buy. The tender and RFP process allow municipalities considerable control over the terms in which they conduct trade, but since terms adjust the risk allocated to a contractor under the contract, the price paid will inevitably be affected by the terms that the municipality sets.

An informed and constructive dialogue between the municipal customer and its private sector suppliers can lead to a better understanding on the part of the municipality of the cost implications of addressing certain of its contracting concerns.

On the other hand, if suppliers are familiarized with those concerns, they may well be able to bring forward less expensive alternatives for addressing them, then those that have been chosen by the municipality.

Most business people are probably wise enough to understand that the local municipality can be and should be one of their prized customers in view of potential volume of business it offers to the market. For this reason, the businesses that they operate should be prepared to accommodate the municipality where this can be done without taking on excessive risk.

An improved contractor/owner relationship can also lead to improved levels of service. Often, the senior management of a supplier has little immediate knowledge of the dealings between the municipality and the contractor.

Therefore, if a municipality is having difficulty with its supplier or requires an improvement in service, making contact with those managers, not in a hostile way, but so as to discuss how service might be improved, can lead to significant progress. Clearly, it is the purchasing manager who has the critical role to play in this area, as the natural interface between the client and the contractor.

As important as government contracts are to the overall economy, they make up a minority of the total work available to the private sector.

The open, competitive system of contract award is a process with which many private sector companies are only barely familiar. As a result, many bidders make simple mistakes in preparing their bids, not realizing those mistakes constitute deal-breakers between the construction industry, and the municipal owners.

Stephen Bauld, Canada’s leading expert on government procurement, is president and CEO of Purchasing Consultants International Inc. He is also the co-author of the Municipal Procurement Handbook, published by LexisNexis Canada. He can be reached at stephenbauld@bell.blackberry.net.

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