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insights Article Four | October 2020 | proximity.com.au

SMART BUYERS AND INDUSTRY: PARTNERING IN DEFENCE PROCUREMENT by Dougal Pidgeon Senior Advisor Proximity

In current policies and via the Smart Buyer framework, the Department is calling for enhanced procurement models, leaner program management practices, and stronger partnerships between Defence and Industry. This was reinforced in discussions at the recent Defence & Industry Conference 2020. However, one of the greatest challenges we face is a persistent reluctance to progress the relationship between the Commonwealth and its suppliers from transactional arms-length contracts.

The First Principles Review of Defence Limitations of Transactional Contracts brought about tremendous reform in the Department and advocated expanding the What is a ‘transactional contract’? Put simply, it is a contract that concentrates on and emphasises the transactions role of industry in the capability lifecycle. between the buyer and the seller. Typical features include: In current policiesi and via the Smart ɚ Transferring risk to the seller Buyer framework, the Department is ɚ A complete statement of the buyer’s requirements, finalised prior to contract execution calling for improved procurement models ɚ Imposing liability on the seller and partnerships between Defence and ɚ Formal contract oversight arrangements that keep the industry. And yet, all too often, the actual seller at arms-length from the buyer interface between the Commonwealth and Put even more simply, transactional contracts can be reduced the supplier is the transactional, to two foundations: Price and Power.ii Both Price and Power have the potential to intensify direct competition between arms-length contract. the buyer and seller. As can be imagined, such a basis does not encourage the parties to align their goals, and this is precisely the primary limitation of this type of contract.

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Transactional contracts are best suited to procurements where the: ɚ full extent of requirements can be defined up-front; and ɚ quality of the relationship between the parties is comparatively unimportant. This aligns with relatively simple, one-off procurements involving lower levels of risk or reasonably generic products or services. The 2018-2019 audit of Defence Major Projects, conducted by the Australian National Audit Office, confirmed technical risk as the major cause of schedule slippage and cost escalation.iii Incurring high technical risk within the construct of a transactional contract is a roadmap to an adversarial relationship with your contractor, schedule delays, and budget management issues. A better alternative, that is supported within government, is the development of collaborative contracts.

Meet Complexity with Collaboration Collaborative contracts and collaborative contracting are defined by Defence as business relationships where parties work together to achieve common outcomes.iv A collaborative contract enables parties to combine their efforts to address complexity and treat risks. The concept is not new, and, for many years, it has been common practice in the infrastructure and construction sectors. It is important to note that a suite of collaborative contract templates can be used to facilitate buyers and sellers working towards common outcomes. Common features of collaborative contracts, as identified in the Collaborative Contracting Better Practice Guidev, are: ɚ Joint decision making ɚ Partnering charters ɚ Target cost or gainshare/painshare remuneration ɚ No blame/no liability frameworks ɚ Jointly managed program risk ɚ Transparency and open book financial reporting

Article Four | October 2020 | proximity.com.au

The primary benefit of this approach is that the contractor is elevated from being a Supplier concerned with delivering, often, the minimum viable product which meets the statement of work to a Partner in the delivery and support of the required capability. For complex and high-risk projects, this is a far better approach and produces far superior outcomes.

How to Collaborate? Collaborative contracts demand detailed planning, development of dependable risk-adjusted project schedules, and employing reliable costing and budgeting practices. While the specifics of procurement planning will of course vary case by case, the first step should always be a Feasibility Assessment. A Feasibility Assessment determines the need for, and ability of both the Commonwealth and potential suppliers to participate in, collaborative contracting arrangements. The outputs are likely to affect project acquisition, execution, and support strategies. Therefore, an objective and detailed assessment is essential. Independent advice may be sought to provide additional assurance. Following a Feasibility Assessment, two equally important and related activities can occur: Relationship Design and Contract Design, which includes the Approach to Market.

Designing the Relationship Early Engagement Engage with Industry early and regularly. Potential suppliers must be alerted to the intended market approach as they will need time to become acquainted with the draft contract, secure potential resources, and prepare to operate within the contract requirements. As project plans develop, communicate relevant details (within information security and probity constraints) to allow Industry to adjust and update their preparations. Engaging with Industry to share information establishes the Commonwealth’s clear intention to build a contract and trust relationship based on a Collaborative Partnership Model.

ɚ Fair and timely dispute resolution processes ɚ Shared financial, configuration management, and decision support systems ɚ Agility and flexibility ɚ Senior executive participation

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Seek Input from Industry “Partners to a relationship deserve input into its creation.” Feedback from Industry on procurement models and draft contracts may result in more effective and fairer risk sharing arrangements. Various techniques may be used to solicit Industry input, such as, Requests for Information, Requests for Proposal, request for Quotes, Competitive Dialogue, and even release of exposure drafts of contract documents. Interactive Tendering techniques may also be used as part of a staged approach to market that progressively downselects potential suppliers.

Article Four | October 2020 | proximity.com.au

Designing the Contract Iterative Development Cycles Consider an agile approach to developing the contract. Break the task into several development cycles scheduled to complement the Industry Engagement Program. This will allow outputs of completed planning cycles to be passed to Industry, and input to be sought for the next cycle. Initial cycles should concentrate on the procurement and contract models, with subsequent ones addressing the contents of the contract in progressively greater detail.

Address Barriers to Collaboration

Consider all Collaborative Measures

Any part of the procurement model or draft contract that operates to diminish or prevent collaboration should be reviewed for potential improvement. Serious consideration should always be given to Industry feedback.

The features in the Collaborative Contracting Better Practice Guidevi, and other literature on the subject, should be considered for inclusion in the contract. Examine how these may operate in practice and whether they are mutually supporting or mutually exclusive. Scenario analyses may assist here.

Perhaps there is a perception that milestone payments permit the Commonwealth to coerce a contractor by threatening its cash flow. Maybe potential suppliers feel that Key Persons clauses allow the Commonwealth to remove contractor personnel without cause. Work collaboratively to review and amend where necessary. The aim here is to secure and protect appropriate legal rights for the Commonwealth while also promoting collaborative behaviours. Jointly Develop Incentives Incentives are a powerful tool for aligning the interests of both parties. Performance Based Contracting and various remuneration models align payment to successful project outcomes. Always review the remuneration regime and linkages to milestone performance. Equally important are non-monetary incentives such as reputation, growth of skills in the contractor’s organisation, and the satisfaction derived from collaborative partnering arrangements. To maximise the effectiveness of incentives, the parties to the agreement should develop incentivisation methodologies together. Jointly Develop Skills The ability of the Commonwealth and potential suppliers to participate in collaborative contracting arrangements may depend on the collective and individual skills of their workforce. Some development is likely to be required by all parties. Where possible, again within information security and probity constraints, joint training may offer the dual advantages of increasing skills and facilitating team building in advance of contract execution.

Consider Staging, Phasing, and Rolling Waves Breaking the contract into stages may be necessary where the collaborative relationship will require further time to develop. This creates an incremental approach whereby collaborative features may be expanded to suit the growth of ability in either or both parties. The approach to market may also be broken into stages to create a more efficient process and reduce collective tendering costs by excluding non-competitive bids early in the process. Determine Exit Arrangements Collaborative arrangements are typically associated with long-term contracts. This does not mean that exit arrangements should be overlooked. Dissolving a partnership will present different challenges to terminating a supplier agreement, and the Commonwealth must consider its legal commitments both to the outgoing partner, and their replacement. Phase-out/Transition-out and enabling the Phase-in/Transition-in of the new partner is essential to ensuring continuity of service. The contract must be clear on what is required in this situation.

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Consult Widely All Defence programs will have a wide group of stakeholders. Successful delivery and support of capability may require the contract to address their needs. Consult with all stakeholders to familiarise them with the approach, identify their requirements from and interfaces to the procurement, prioritise needs and essential outcomes, and determine the best way forward.

In conclusion… Collaborative contracts provide the means to meet Defence’s goals of forming partnerships with Industry. Detailed and careful preparation of the partnering relationship and the contractual vehicle is necessary, but effort spent prior to contract execution will be richly rewarded in the delivery and support of capability.

Article Four | October 2020 | proximity.com.au

Dougal Pidgeon | Senior Advisor Proximity - Melbourne Dougal Pidgeon is a program manager and procurement specialist with extensive experience in the Department of Defence, State Government, and in Defence Industry. Dougal has worked with clients to deliver and advise on programs at each stage of the capability lifecycle, from developing requirements and approaching the market to establishing and managing contracts for the delivery, support, and ultimately disposal of systems. These programs and procurements have varied significantly in scope, value and approach, from a multi-billion dollar program to replace whole fleets of weapons, to programs designing and developing new systems or modifying off-the-shelf products, to rapid acquisitions for urgent operational requirements. Dougal assists clients to deliver programs and procurements through detailed and effective planning, establishing robust processes, maintaining clear communications, and strong but inclusive leadership. Dougal has Masters degrees in Engineering Science (Project Management) and Defence Capability Development and Acquisition, together with further qualifications in procurement and tendering. Dougal enjoys walking his dog around the green hills of the Yarra Ranges, and escaping from the notoriously variable weather there to dry out in front of a fire with a glass of red and a fine book.

i. 2016 Defence White Paper, p10; 2016 Defence Industry Policy Statement, p6. ii. David Frydlinger, Tim Cummins, Kate Vitasek, Jum Bergman, Unpacking Relational Contracts: The Practioner’s Go-to Guide for Understanding Relational Contracts, Thaslam College of Business, University of Tennessee Knoxville, p6 iii. Australian National Audit Office, Auditor-General Report No.19 2019–20: 2018–19 Major Projects Report, p 52. iv. Department of Defence, Collaborative Contracting Better Practice Guide Version 1.0 28 September 2017, p 4. v. Department of Defence, Collaborative Contracting Better Practice Guide Version 1.0 28 September 2017, p 11. vi. Department of Defence, Collaborative Contracting Better Practice Guide Version 1.0 28 September 2017, p .11.

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Article Four | October 2020 | proximity.com.au

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Smart Buyers and Industry: Partnering in Defence Procurement  

The First Principles Review of Defence brought about tremendous reform in the Department and advocated expanding the role of industry in the...

Smart Buyers and Industry: Partnering in Defence Procurement  

The First Principles Review of Defence brought about tremendous reform in the Department and advocated expanding the role of industry in the...