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New process a quandry

WHAT should we make of new contracting arrangements that are welcomed by both contractors and the Government?

Where the preferred proponents are selected without a competitive tendering process?

And where the selected contractors sit down with Government agencies to apportion risk and settle on an agreed price?

Relationship contracting has been used in various guises for more than a decade, in both the public and private sector.

Advocates of relationship contracting believe it is a win-win situation, as the parties shift from the adversarial, ‘master-servant’ relationship that characterises traditional competitive tendering to a more cooperative mode.

As one industry executive put it bluntly: “in a traditional contract your incentive is to maximise profit but in an alliance the incentives are to drive down the costs”.

They also agree that relationship contracting is only appropriate in special cases, particularly large and complex projects that are difficult to scope and design and where risks are hard to quantify.

Multiplex general manager WA John Flecker said he believed his company had been prepared to take on risks and to provide price certainty to clients, however, in some cases it was just too difficult.

“Some of the risks have just been impossible to assess,” he said.

“One of our successes has been that we take on risk, but that is mainly on the construction of commercial buildings.

“There are civil projects where there is risk that just can’t be quantified.”

Like Mr Flecker, Leighton Contractors state manager Ray Sputore said he believed competitive tendering worked well when risks could be priced and the scope of a contract was clearly defined.

When those conditions are not met, relationship-based contracting provides an alternative.

“With relationship-based contracting you are opening up the process so that everyone understands the risks and how they are apportioned and managed,” Mr Sputore said.

“Otherwise you are paying a premium for a contingent cost that may or may not be needed.”

Mr Sputore said he believed relationship-based contracting was still competitive.

“It’s a competitive process in the sense that it is open book, everyone sees what you have done and the client would get the benefit of risk contingency money not spent,” he said.

“It can be very rigorous, with independent verification of costs and performance and incentives to drive costs down.”

The challenge for Government agencies is that none of the alternative contracting models are guaranteed to produce the best outcome.

With competitive tendering there is no way of knowing how much margin has been built into the bidding prices to cover possible risks.

And even when a fixed-price lump sum contract is awarded, in practice the price is subject to variations that can increase the cost of completion.

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