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Risk sharing deals on big capital works jobs

The high risks  associated with key infrastructure projects have prompted the Western Australian Government to adopt radical contracting arrangements.

Mark Beyer reports.

THE successful bidder for the State Government’s $200 million city rail project could receive a $10 million bonus if they achieve top results.

The unsuccessful bidder has not been forgotten – they are guaranteed a $500,000 fee for their role in the bidding process, which is now underway.

These payments are just two of the innovative aspects of the city rail contract, which has been developed specifically to deal with the unique risks of the project.

Main Roads is another Government agency to adopt a radical new contracting model for its next big project, the $50 million Roe High-way stage seven extension.

“Alliance contracting will have Main Roads and the contractors working as a single entity, making joint decisions at every stage of the project and sharing risks and savings,” Planning and Infra-structure Minister Alannah MacTiernan said.

Under this structure, Main Roads will select its preferred contractor based purely on capability.

Only after this selection will the two parties start discussing the price of the contract.

The Water Corporation is a third Government agency to have adopted ‘alliance’ contracts, for projects such as the $150 million upgrade of the Woodman Point wastewater treatment plant.

Major construction firms such as Clough, Leighton Contractors and Multiplex, which stand to benefit from the reduced risk, have welcomed the new contracting arrangements.

“We’re pleased to see the principles applied here in WA,” Leighton Contractors state manager Ray Sputore said.

“It allows the risks to be apportioned to those who can best manage the risk and we think it delivers the best value for money solution.”

The Government also says it will be a winner under the new system.

“It’s a very different approach from design and construct contracts, where price was the definitive element,” Ms MacTiernan said.

“These projects are complex and they entail a lot of risk management. We need to be more creative in the way we manage that.

“Otherwise, you pay a huge premium for risks that may or may not eventuate.”

The city rail project provides a prime example of this problem.

“The scope, scale and complexity of the project is unique,” WA Government Railways Commission’s director city project Richard Mann said.

The project involves boring six-metre wide tunnels in soft soil under the central city.

It will also involve traffic disruption in William Street and complex stakeholder relationships.

If private firms were asked to submit a traditional fixed-price quote for this work, they would build in a fat margin for risk.

At the same time, the Government was keen to achieve some price certainty, particularly given the political sensitivity surrounding the overall $1.4 billion budget for the expansion of Perth’s rail network.

The solution to these twin challenges was a hybrid contract that combined elements of ‘alliance’ contracting and traditional competitive tendering.

“What we have developed is a unique model,” Mr Mann said.

“We have looked at the specific risks and will apportion them to each of the parties.”

The contract, which provides incentives for the parties to work together and develop cost saving innovations, has been reviewed at the highest levels of Government.

Mr Mann said the contracting model was jointly developed by Treasury, Crown Law, Planning and Infrastructure and Railways and had been endorsed by Cabinet.

Out of five consortia that lodged expressions of interest, a short-list of two consortia has been selected, based purely on their capabilities.

The short-listed consortia both comprise Australian engineering and construction companies – Clough and Leighton respectively – in partnership with Japanese under-ground construction and tunnelling specialists.

They have three months to pre-pare detailed proposals and finalise their price, after which the preferred proponent will be selected.

Mr Mann said the losing bidder would be paid $500,000 in return for rights to intellectual property contained in their bid.

The fee would also help to cover some of the losing bidder’s costs.

“They have specialist consultant teams that would need to be mobilised for a job like this,” he said.

“It’s a very intensive process and we want to encourage industry to put in the best possible proposals.”

The contract also includes provision for a performance bonus “in the order of $10 million”, over and above the agreed project price.

“It rewards outstanding performance on five key performance indicators, which are time, safety, building damage, public relations and value engineering,” Mr Mann said.

“They will only get the full a-mount if they are outstanding in every regard.”

A key aspect of the contract is that bidders can set their price based on the geotechnical conditions present-ed by the Government.

The Government will bear the risk of unexpected variations in geotechnical conditions or un-expected underground obstructions, for instance from prior building work.

In order to manage this risk, the Government has commissioned in-tensive assessment of the ground conditions.

“The results are very encouraging,” Mr Mann said.

 “Conditions on the foreshore are a bit more favourable than we expected.

“For the bore tunnel, there was nothing unexpected.

“It confirmed that the assumed [construction] methodology was sound.”

The contract includes special provisions to minimise building damage.

This is hardly surprising, given the central location of the project and the protracted controversy over building damage associated with the Graham Farmer Freeway Tunnel.

The contractors must present detailed plans for testing, monitoring and protecting buildings.

The Government will meet the cost of repairing damaged buildings, however, this cost may be recouped indirectly via reductions in the performance bonus.

The contract also provides for a 50:50 sharing of any savings that arise from innovations.

 

This ‘value engineering’ provis-ion provides a clear incentive to deliver improvements.

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