Legal Briefing No. 35

Number 35

20 August 1997

COMPETITIVE TENDERING AND
CONTRACTING

Introduction

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

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.

130
June 1997, No. 558/97.
See also Legal
Briefing No. 33.

215
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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