Commercial Notes No. 4

No. 4
28 November 2001

New Commonwealth Procurement Guidelines

The Minister for Finance and Administration issued revised
Commonwealth Procurement Guidelines (CPGs) in September 2001.
The CPGs are accompanied by Best Practice Guidance that offers
guidance on specific aspects of procurement and a section on
Additional Legislation Policies and Resources that sets out
legislation and policies that impact on procurement decisions.
The publication is available through the Finance CTC website
The CPGs apply to the procurement of all property and services.
The core principle is value for money which is underpinned
by four supporting principles:

  • efficiency and effectiveness
  • accountability and transparency
  • ethics, and
  • industry development.

Value for money is not necessarily indicated by lowest price
but must be analysed by taking into account all relevant costs
and benefits over the whole of the procurement cycle. It should
be noted that the new CPGs no longer refer to open and effective
competition. Some clients view this as an acknowledgment that
CTC processes are not always called for to establish value
for money and that consideration may be given to establishing
strategic alliances or other non-competitive methods of procurement
provided accountability and transparency requirements can be
satisfied. This is supported by comments in the Best Practice
Guidance. Procurement officials are also reminded of the cost
to suppliers in participating in government procurement. Other
changes include:

  • the inclusion in the CPGs of the ANAO request that contracts
    include a provision to enable ANAO access to carry out appropriate
  • agencies are required to publish a list of their contracts
    exceeding $100,000 in value including whether confidentiality
    provisions are in the contracts and the reasons for confidentiality
  • changes to the consideration of limitation on liability
  • a commitment to electronic payment of suppliers
  • model industry development criteria to apply to major procurements
    of $5m or more
  • guidance notes for setting model industry development criteria
    for projects below $5m.

In relation to limitation on liability the CPGs continue to
recommend that liability be assessed on the basis of common
law principles and so most contracts should not contain a limitation
on liability. If it is necessary to negotiate a limitation,
a risk assessment and risk management plan should be prepared
and legal advice should be sought. The CPGs no longer mandate
that there be no limitation on liability for personal injury
and death, damage to tangible property and liability under
an indemnity, however, they continue to recommend that any
limitation be applied only on a per event basis.

Contact for further information:

Linda Richardson
Deputy Government Solicitor

Tel: (02) 6253 7207
Fax: (02) 6253 7301

Nature of the Legal Relationship under
a Grant

The usual construction of the legal relationship under a grant
is primarily that of a conditional gift, rather than a contract
or trust, but this will depend on the particular circumstances.

It has been said that a grant is, in theory, a gift from the
Crown. Subject to the approval of Parliament, it can be made
upon conditions. A grant may therefore be a conditional gift
and the conditions may be either precedent or subsequent. If
a condition precedent is not fulfilled, then the gift does
not take effect and property does not pass to the grantee.
If a condition subsequent is not fulfilled, then the grantee
loses the gift and property reverts to the grantor, or, in
the case of money, a right of action to recover a similar amount
arises. It will be a matter for interpretation in each case
as to whether a particular condition is in effect a condition
precedent or subsequent.

A grant (in the sense of a gift) and a contract are mutually
exclusive legal concepts which have different legal consequences.
A grant does not involve an agreement between the parties,
whereas a contract does. A grant is a payment of money to a
grantee upon conditions unilaterally imposed by the grantor.
In some cases (that is, unless conditions are statutory obligations
and enforceable as such) the Commonwealth is left with limited
rights to enforce the conditions of a grant, which could have
been fully enforced if they were conditions under a contract
(for example, by specific performance of the contract).

Accordingly, the only cases in which funding by way of grants
should be used for projects are cases where such funding is
provided to a grantee under conditions imposed by legislation,
or in cases where the Commonwealth will only want to recover
all or part of the grant money if the grantee does not comply
with the conditions on which the grant is given. (For example,
a grant to an orchestra to provide a number of performances
on the condition that the orchestra repays some or all of the
grant money if it does not provide the agreed number of performances.)

Funding of projects by way of grants in cases where the conditions
of the grant cannot be enforced under legislation and where
the agency wishes to enforce a number of conditions, such as
repayment of grant money with interest or provision of reports
and audited statements relating to expenditure of grant money,
puts the agency in an unsatisfactory position in that the conditions
may be unenforceable by remedies, such as specific performance,
even if the grant document is in the form of a deed.
In all other cases funding should be provided by way of contract, so that all
the obligations imposed on the person receiving the funding can be enforced,
including, for example, performance standards. The contract should not be called
a 'grant contract' nor 'grant agreement', should not include any reference
to a 'grant' or a 'grantee' and should include all the normal provisions of
a contract, such as termination and applicable law provisions. This is the
nature of the standard 'funding' deed used in most agencies now, as the intention
is that all the obligations in the document be enforceable.

AGS is currently working with a number of agencies in the
Standardising Information and Online Access Consortium (part
of the More Accessible Government initiative) to develop a
standard form of funding deed and accompanying guidelines.
This work is also assisting the Australian National Audit Office
to revise its best practice guide on grants.

Contact for further information:

Russell Wilson
Senior Executive Lawyer

Tel: (02) 6253 7148
Fax: (02) 6253 7316

Relationship and Alliance Contracting
by Government

Alliance contracts are a recent form of relationship contracting.
It is sometimes argued that alliance contracting is inconsistent
with the obligations of government. This note examines some
of those arguments.

Problem Areas

Possible areas where problems could arise are:

  • evaluation of alliancing capacity/compatibility
  • no fixed price before selection
  • participation of principal in alliance board/alliance teams/Integrated
    Process Teams (IPTs).

Each of these is a significant topic in itself and we have
space here only to raise them as issues and to consider them
very briefly.


Since the changes to the Audit Act and Regulations in 1989,
Commonwealth agencies have been free to pursue in their procurement
'value for money' by the most effective means. Accordingly,
considerations such as quality, fitness for purpose and capacity
to deliver can be considered as well as price. Even so, the
focus has generally been very much on the item (or service)
to be delivered.

Now, with the advent of alliancing, one of the criteria for
selection is a bidder's ability to operate successfully within
an alliance relationship. If it is considered that the project
demands an alliancing process, then it is reasonable that the
bidder's ability to deliver through that process should be
the subject of assessment. However, besides making it clear
that this ability is a selection criterion, the method of making
the assessment must be reasonable and conducted fairly.

Alliance workshops are a usual part of the assessment process
and, as these will involve more interaction than normal between
principals and bidders, particular care must be taken to ensure
fairness. To ensure equality of opportunity and consistency
of assessments, considerable preparation is required, including
rehearsal, planning of the positions to be taken and training
of participants. It is inadvisable to include actual output
from the workshops in the evaluation as it will be difficult
to distinguish the bidder's input from that of the principal.

No Fixed Price

One of the fundamental elements of an alliance project is
that contractor participants will be paid on a cost plus basis.
Although their fee will be at risk if key performance indicators
(including coming in at or below the target costs) are not
met, it is true to say that costs are in fact not fixed. There
will therefore be no definite price fixed when the preferred
tenderer is chosen. Although this has been criticised, in our
opinion it is not necessarily contrary to the requirement to
seek best value for money.

The Commonwealth Procurement Guidelines (September 2001) set
the test of value for money as whether 'the best possible outcome
has been achieved taking into account all relevant costs and
benefits over the whole of the procurement cycle.' The justification
for using a cost plus payment method must be tested exhaustively
against this, including an assessment of the real advantage
a so called 'fixed price' would have in the context of the
variations to price likely to be necessary during the particular
project if a fixed price were used.

Alliance Board, Alliance Teams and IPTs

The principal normally will be involved with other alliance
participants on the Alliance Board, the Alliance Management
Team and Integrated Process Teams (IPTs). A number of important
issues arise from this involvement. First, it will be necessary
to ensure that each representative has the necessary (actual)
authority from their respective organisations to do what is
required of them. It will also be necessary to state clearly
what the limits of that authority are, and to make sure that
any financial functions allocated to a contractor comply with
the requirements of the Financial Management and Accountability
Act 1997.

Secondly, there is a risk that the close cooperative relationships
on the board and those teams could be regarded as giving rise
to a 'fiduciary relationship'. This would introduce considerable
problems for government representatives as it would raise questions
about whether they could use their position or knowledge to
the disadvantage of another alliance participant. That is,
there could be a conflict between their obligations as representatives
(employees) of the Commonwealth and their personal obligations
as members of the board or team. While in principle, a fiduciary
relationship could be expressly excluded, there is still the
danger that a court would see such a relationship as arising
in the particular circumstances or from actions of the parties.

Thirdly, IPTs are increasingly widely used in relationship
contracts (that is, not only in those considered to be 'alliance
projects'). The difficulty here is in establishing precisely
where the dividing line between the responsibilities of the
principal and contractors lies. The involvement of a principal's
representative in the work of an IPT could well result in the
principal being unable (that is, 'estopped') from holding the
contractor responsible for the consequences of a joint decision.
Even in projects governed by traditional contracts, where there
is little involvement of the principal in detailed management
of the project, it has often been difficult to establish who
was properly responsible for defects, because of some action
by the principal. Where the principal is involved in everyday
decision making through being represented on IPTs, that difficulty
will be magnified. At the very least, it will be important
to spell out carefully what the respective responsibilities
are and to keep a careful record of the deliberations of IPTs.
(There will of course be less need to identify clearly who
decided what where the contractor is largely relieved of direct
liability for breach of contract, as is the case in many alliance

In a typical alliance contract, both parties are taking on
unusual liabilities - the principal, for cost overruns and
lack of precise specifications and the contractors in respect
of their profit (and corporate overhead) being at risk, as
well as sharing management of the contract with the principal.

Alliancing is neither suitable nor necessary for many projects
and involves considerable expense for the principal both in
the selection process and ongoing. These matters merit careful
consideration before a decision is made to proceed with alliancing.

ISSN 1443-9549 (Print)
ISSN 2204-6550 (Online)

The material in these notes is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact
AGS before any action or decision is taken on the basis of any of the material
in these notes.

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