Legal Briefing

Number 35

20 August 1997



Commonwealth agencies have long been substantial users of services supplied by private contractors in relation to ancillary or operational functions of government agencies. This is increasing.

In addition, increasing consideration is being given to outsourcing the provision of core government services to the public.

Recent Developments

Recent developments in government policy, in the Parliament and in the courts have highlighted the need for continuing review, development and improvement in the management of, and legal documentation for, competitive tendering and contracting. These developments include:

  • the publication of the Industry Commission report, Competitive Tendering and Contracting by Public Sector Agencies, the Commonwealth Ombudsman Annual Report 1995-6, and the Administrative Review Council issues paper, The Contracting Out of Government Services
  • the Senate Finance and Public Administration References Committee Inquiry on Public Accountability of Government Services Provided by Private Contractors
  • the decisions of the Federal Court in Hughes Aircraft Systems International v Airservices Australia(1) and in the McMillan(2) case.


Guidance to Commonwealth agencies on policy, strategic and operational issues relating to competitive tendering and contracting is available in a number of Commonwealth publications, including:

  • the Commonwealth Procurement Guidelines, issued by Purchasing Australia
  • Competitive Tendering and Contracting: Guidance for Managers, issued by the Minister for Finance
  • The Performance Improvement Cycle: Guidance for Managers, issued by the Minister for Finance
  • the MAB/MIAC report: Before You Sign the Dotted Line - Ensuring Contracts Can be Managed
  • Managing Risk in Procurement - a Handbook, issued by Purchasing Australia
  • the MAB/MIAC report: Guidelines for Managing Risk in the Australian Public Service.

The goals and strategies set out in these publications include:

  • good, careful planning in the tender and contract process
  • clear objectives
  • risk management
  • achieving value for money
  • open and effective competition
  • selection of the 'right' tenderer, including one who will perform
  • use of appropriate tender and contract conditions
  • a cooperative relationship with the contractor
  • careful contract management, including monitoring of performance, and
  • development of contract managers' skills.

While the decision whether or not to outsource in each case is primarily a policy or business decision, legal issues arise at all stages of the tender and contract process, including the early planning stages. The way in which contract managers deal with those legal issues may have a direct impact on whether the outcomes are achieved in accordance with the agency's specifications and quality standards, on time, within budget, without disputes, and on the basis of value for money.

Implementing the Tender and Contract Process

Proper planning, project structuring and consideration of strategic issues are essential to successful tendering and contracting. They assist the contract manager to set reasonable and appropriate boundaries in securing the supply of services by a contractor. There is often an inverse relationship between the amount of time spent in preparing tender and contract conditions and the resources required to deal with problems in contract administration and disputes after the contract has been formed.

One of the central principles of Commonwealth procurement, as expressed in the Commonwealth Procurement Guidelines, is that there be open and effective competition. Open and effective competition does not require open tenders in all cases.

Staged Procurement

Staged procurement, which is one of the methods endorsed by the Guidelines, is a proven method which has many advantages for purchasers and suppliers of services. This method may involve:

  • a publicly notified invitation to express interest in tendering to provide the services
  • preparation of a shortlist from those who have expressed interest
  • an invitation to tender, issued to those on the shortlist, and
  • formation of a contract with the tenderer who best meets the selection criteria.

This procedure meets the requirement for open and effective competition by public notification of the invitation to express interest. After that initial public notification, it is not necessary to publicly notify the subsequent stages of the tender process other than the final outcome.

The cost of preparing tenders is substantial. Staged procurement avoids the waste of resources that would be involved in an open invitation to service providers to tender. It also allows the acquiring agency to reassess its requirements and how these are best met in the light of information obtained during the preliminary stages of the tender process.

The Hughes Decision

The Federal Court's decision in Hughes Aircraft Systems International v Air Services Australia has extended the law relating to tender processes. The Court held that in that tender process, a preliminary contract was formed which was binding on the Principal and the tenderers.

The decision has implications for the conduct of all tender processes, and in particular where the contract to be let involves the expenditure of 'publicly owned' funds. There are also implications for individuals who are evaluating tenders, as in some cases the decision to award a contract to a tenderer will be taken in discharge of a contractual obligation to each tenderer.

What Hughes underlines is that more than ever before, there is a need for departments and other Commonwealth bodies to arrange and conduct
their tender processes with maximum care and supervision, bearing in mind that the tender process might be treated by a court as contractual in nature.

For more information on the Hughes case see Legal Briefing No. 33.

Tender Documents

The tender documents - comprising the invitation to tender, the conditions of tender and the contract conditions - should set out all relevant information which tenderers need for the purpose of preparing, pricing and lodging their tenders. The tender documents should include the statement of requirement, which should be set out as comprehensively as possible.

The conditions of tender should set out the rules by which the tender process is to be conducted, and those rules must then be followed meticulously.

The proposed contract conditions which will be applicable to performance of the services should be attached to the tender documents. Unless tenderers know what the contract conditions will be, they will have difficulty in pricing their tenders. The contract conditions not only include particulars of the services required, but also allocate the risks between the purchaser and the service provider.

The tender documents should set out the criteria which are to be taken into account in assessing tenders, and should require all tenderers to provide relevant information which addresses those criteria.

For example:

  • value for money
  • the tender price break-up and contract sum
  • a schedule of rates applicable to pricing of variations to the services
  • the tenderer's performance in supplying services of a similar nature, complexity and duration
  • evidence of the tenderer's financial capacity
  • the tenderer's project delivery team, including key personnel and consultants
  • an outline of the tenderer's proposal
  • a preliminary project control program, and
  • a quality assurance plan.

Value for money does not mean selecting a tender on the basis of the lowest price. If a bid is significantly below industry standards or the purchaser's own cost estimates, that should be treated as an early warning signal.

There are cases where a service provider is able to tender a low price due to innovative cost efficiencies or as a strategic loss leader for the purpose of gaining entry into the specific market. Sometimes, however, a tenderer bids low for the purpose of gaining the contract, but after it is in place, seeks to claw back their margin by compromising quality standards or timeliness, by making claims for 'variations', or by seeking to renegotiate the contract price with a threat of withdrawal from the contract.

The conditions of tender should include specific provisions which regulate acceptance or otherwise of the tender, the time and procedures for contract formation, deposit, collusive tendering, conflict of interest etc.

By including appropriate express provisions on all relevant issues, the purchaser is able to consider all tenders on a level playing field and then move efficiently to put the contract in place once they have selected the preferred tenderer.

The Australian Government Solicitor has numerous tender document forms which include model provisions on the matters referred to above, and which have been customised for use in tender processes for contracting out a wide range of services. These provisions reflect the experience of Commonwealth agencies in tender processes, and are designed to avoid a recurrence of problems which have occurred.

A particular problem which recurs when agencies use incomplete tender documents is that at the stage when a contract is submitted to the preferred tenderer for execution, the tenderer seeks to renegotiate the contract conditions or price. This can be avoided by including the contract conditions as part of the tender documents, with an express provision that a contract is formed upon acceptance of the tender.

Risk Management Strategy

By contracting out services rather than using in-house service providers, an agency does not have direct control over the performance of the services. A risk management strategy should be developed at an early stage under which risks are identified, assessed, and taken into account in the tender and contract conditions. The project documentation is one method of managing these risks.

Risk management measures in contract conditions are taken into account by tenderers in pricing their bids. Contract conditions which shift risk from the purchaser to the contractor generally increase the contract price (for example, conditions which minimise the purchaser's exposure to claims for contract price increases or which require the contractor to accept liability for matters outside the contractor's control). However, such provisions promote certainty as to the purchaser's obligations and minimise the risk of escalation of the project budget. In addition, they are offset to some degree by the need for tenderers to ensure that their bids
are competitive.

A critical factor in risk management is selection of the right provider. Tenders should be assessed not only in terms of price but also in terms of other key factors such as the skills and experience of personnel as demonstrated in previous projects, the tenderer's organisational and financial base, their quality assurance plan and corporate track record in performing similar services.

Contract Conditions

The contract conditions should not only deal with the intrinsic commercial issues but should be customised to take advantage of the unique position that the Commonwealth has in the marketplace and special conditions which reflect Government policy and accountability requirements. Experience across Commonwealth agencies has resulted in the development of a considerable body of contract precedents and model clauses, which have evolved with the changing focus of government contracting, and which can be used or readily adapted for the special requirements of each project. This corporate resource of the AGS is available to be drawn on by Commonwealth departments and agencies.

Precedents and Standard Clauses

The many precedents which have been developed for Commonwealth agencies relevant to outsourcing include the following:

  • the Commonwealth's standard consultancy contract conditions
  • precedent service level agreements in many different areas of service delivery
  • the Government Information Technology Conditions (GITC)
  • various IT outsourcing agreements
  • DEFPUR, for major Defence procurement
  • standard form contracts for construction of major, medium and minor works, and associated project management and consultancy contracts
  • pre-commitment contracts for design, construction and leasing of accommodation, and
  • contracts for sale and lease-back of assets.

The essential matters that need to be dealt with in a contract are:

  • who the parties are
  • the specification of the services to be provided
  • the fees and allowances to be paid, and
  • the date of commencement and the time frame within which the services are to be provided.

Standard form contracts and standard clauses in Commonwealth contracts are very useful to managers and assist them to achieve:

  • consistency, predictability and certainty as to the Commonwealth's terms and conditions, and
  • efficiency in contract administration.

There are important standard clauses which are designed to protect the interests of the Commonwealth as the purchaser, including those which provide for:

  • retention of ownership of contract material and intellectual property rights
  • access to premises where the services are being provided, and
  • inspection of the performance of the services and any material or records in the possession of the provider relating to the services.

Standard form contracts and standard clauses must, however, be treated with great care. The contract should be adapted for the purpose of achieving the objective, not vice versa.

Contract disputes often arise in circumstances where a client has prepared their own contract, even if based on a precedent or several precedents which may have originally been prepared by a lawyer. Those precedents may have been overtaken in some respects by more recent developments in case law or legislation. Alternatively, the client may seek to apply a precedent to circumstances for which it was not intended and for which it would be inappropriate. For example, it would generally not be appropriate to use the standard form consultancy contract for specialised matters such as engaging a project manager for a construction project, or for specialised work in relation to information technology.

Risk Management Clauses

The following are examples of standard clauses which focus particularly on risk management issues.

  • Clauses which set out clear procedures for dealing in advance with proposals for work subject to claims for variations. They avoid the risk of retrospective claims.
  • The risk of failure by the provider to perform the services to the purchaser's specifications and quality standards. This should be dealt with by contract provisions for monitoring performance and for certification as to compliance with
    quality standards.
  • The risk of bankruptcy or insolvency of the provider before they have performed all of their obligations under the contract. This should be dealt with in the conditions of tender, with a requirement for the provider to deliver information in their tender which enables an assessment of their financial position, and in the conditions of contract, through a requirement for a performance security.
  • The risk of failure by the provider to perform the services on time. This should be dealt with by provisions for monitoring of the timely performance of the service (e.g. a project control program which sets out timelines and a critical path, regular reporting by the provider, and regular inspection of performance).
  • The risk of negligence by the provider that may cause financial loss or damage to the purchaser or a third party. This should be dealt with by provisions which hold the provider responsible for their actions and actions of their employees, subcontractors and agent. That liability should be underwritten by a requirement to maintain insurance for professional indemnity, loss of or damage to property, public liability and workers' compensation. The Commonwealth does not usually accept a cap on the contractor's liability.
  • If provision of the services involves substantial numbers of staff, and there is a significant risk that the provider may be prone to industrial disputes, the conditions of tender should require tenderers to submit information about their industrial disputes record in recent contracts.
  • If the risk is that the provider may fail to perform their obligations, there should be provisions for progress payments to be made upon satisfactory performance of each part of the services, security for performance (e.g. an unconditional bank guarantee), termination for default and liquidated damages.

Termination for Convenience

Commonwealth contracts usually include a right to terminate by the giving of a certain period of notice in the absence of default by the contractor. This right to 'terminate for convenience' is rarely exercised, but the provision gives the Government sufficient flexibility to implement policy changes which may result in the services no longer being required.

Compliance with Government Policies

There are standard clauses designed to require compliance with standards that apply to Commonwealth agencies, but would not otherwise apply to private contractors. Such clauses ensure that the same standards apply whether the service is provided in-house by a Commonwealth agency or by outsourcing to a private contractor. Examples of such provisions are those relating to protection of privacy, occupational health, safety and security, and obligations under the Affirmative Action (Equal Employment Opportunity for Women) Act 1986.

Conflict of Interest

There is a Commonwealth standard clause which requires a contractor to warrant that there is no conflict with the interests of the Commonwealth. The clause also requires the contractor to make full disclosure if a conflict arises during the performance of the services and to take steps to resolve the conflict.

Objectives and Deliverables

The contract should specify the standards of service required of the service provider so that there are performance criteria which set out:

  • objectives and deliverables
  • quality standards.

The standards of service should be specified in a way that enables an objective determination as to whether the standards have been met. Where there are relevant quality assurance standards, the specifications should specify that those standards are applicable. Unless this is done, it is difficult to assess whether the contractor has performed their obligations.

Dispute Resolution

The risk of disputes can be minimised by selecting the right contractor and by ensuring that the contract clearly and explicitly states the requirements and obligations of both parties. However, no matter how carefully the contract is prepared, disputes may still occur over unanticipated events, a misinterpretation of the contract by one or both parties, or the failure of a party to perform their obligations.

The Commonwealth's standard dispute resolution clauses are structured in a multi-tiered form to facilitate resolution of disputes by negotiation between the parties in the first instance, or by alternative dispute resolution, with recourse to litigation as a last resort.

Privacy and Confidentiality

When services are contracted out, the Commonwealth does not have the day-to-day control of information relating to performance of the services. Standard form privacy clauses have been developed by the AGS in consultation with the Privacy Commissioner.

There are standard Commonwealth confidentiality clauses, which provide that the contractor shall not disclose any confidential information relating to the contract or the services without prior approval from the Commonwealth.

Complaints Mechanisms

If the contract is for provision of services to members of the public, it is desirable to include complaints mechanisms.

Performance Incentives

There can be benefits in using incentive provisions in relation to contracts. For example, the purchaser and the contractor might agree that if the contractor initiates project improvements which are approved by the purchaser and which result in savings without compromising the quality standards, time for performance and specifications, then the savings will be shared in agreed proportions.

Incentive schemes may be structured so that they are either a part of the contract or separate from
the contract.

Suppliers' Contracts

There is no reason why a Commonwealth agency need accept the terms and conditions of a supplier's contract. Acceptance of a supplier's contract may be a symptom of failure of proper planning and strategic thinking, and failure to achieve the objective of value for money for the organisation. The conditions in suppliers' contracts often are 'user unfriendly' and focus on protecting the interests of suppliers rather than the client.

Suppliers may be in a position to dictate terms and conditions when supplying services to 'one-shot players'. However, Commonwealth agencies are 'repeat players' and are able to take advantage of the Commonwealth's strong bargaining position in the marketplace. The greater risk in services contracts is always borne by the customer and this is rarely reflected in suppliers' documentation.

Cooperative Relationships

A cooperative relationship with the contractor is important in successful contracting. Relationship agreements such as 'partnering' are being used by public and private sector principals. Their objective is to foster a cooperative working relationship with the service provider. The results have been variable.

If partnering is used, a prudent approach would be to use it in conjunction with a fully documented contract, with an express provision that it does not affect the parties' rights and obligations under the contract. The use of a fully documented contract which makes clear to the parties what is expected of them, should help, not hinder, the development of a cooperative relationship. The parties are then able to work cooperatively with the knowledge that their legal obligations are clear.

Contract Administration

The contract manager should ensure that at all times during the course of the contract, both parties act in accordance with their rights and obligations. Failure to do so may undermine the parties' rights and obligations under the contract.

Commonwealth contracts usually include standard clauses to ensure that:

  • if a party does not exercise any of their rights, that failure does not operate as a waiver of those rights, and
  • the contract may not be varied except by agreement in writing signed by both parties.

Despite such provisions, circumstances may arise in which a contractor may be able to argue that an amendment of the contract has arisen by the communications or conduct of the parties. In particular, the principles established by the courts concerning estoppel and waiver may be applicable.

1 30 June 1997, No. 558/97. See also Legal Briefing No. 33.

2 15 July 1997, No. 619/97.

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

The material in this briefing 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 this briefing.

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