NSW guidelines reflect positive Australia-wide shift on construction risk

New guidelines for the procurement of large, complex infrastructure projects, issued by the premier of New South Wales (NSW), provide the latest evidence of these shifting attitudes, recognising the significant delivery difficulties faced by infrastructure mega-projects in the state.

We have written previously of serious problems in the sector which, if left unaddressed, will ultimately affect our ability to continue developing world class infrastructure and prolong  Australia’s “profitless infrastructure boom”. While significant work remains, the market is moving in response to growing evidence that effective risk identification, management and collaboration leads to the best project outcomes.

Shifting government approaches to procurement

The issues we have previously identified in the Australian infrastructure market include:

• inequitable risk allocation in construction contracts, leaving contractors with risks which they cannot hope to control;
• excessively complex and administratively burdensome contractual processes, non-compliance with which commonly results in legitimate claims being arbitrarily extinguished; and
• an ‘us versus them’ mentality and associated lack of emphasis on engagement and collaboration between interested parties.

Basic risk management principles tell us that unmanaged risks are more likely to transpire and will have greater impact when they do. These inequitable risk allocations are also often accompanied by a lack of sufficient pre-project planning, due diligence and collaboration around risk allocation and management.

Better approaches are beginning to emerge, particularly on major government projects.  Much more work still needs to be done to see improvements flow down to smaller and medium-sized projects. Still, we see it as very positive that major government and other key stakeholders seem to be realising that the adversarial mentality entrenched in the industry ultimately leads to worse outcomes for everyone.

This gradual shift in attitudes has been hard-fought, and we should be careful not to slip back into traditional ways of thinking or to accept a ‘window dressing’ approach to collaboration. Recent experience has shown that innovation and collaboration will be key to ensuring that Australian taxpayers receive value for money, while sharing the risks and benefits of infrastructure delivery equitably between participants. The industry must keep up the hard work and continue to build on these gains.

The NSW premier’s recent memorandum recognises the significant difficulties faced by numerous mega-projects in the state including ground conditions, congested site locations, heritage issues, and stakeholder engagement. It places renewed focus on early engagement with contractors to identify, mitigate and nominate risks that cannot be readily quantified or priced. Importantly, where identified risks mean that a fixed price cannot realistically be determined at the tender stage, the memorandum gives a clear mandate for the use of ‘target cost’ payment mechanisms, which create a far more equitable sharing of risk in circumstances where risks cannot readily be priced.

The memorandum also emphasises the use of project ‘packaging’ – the practice of dividing a single mega-project into smaller elements. This is an important step which will facilitate competitive bids from a wide range of participants in the construction market, including tier 2 and 3 contractors. Project packaging will not only drive value for money for NSW citizens, but will make infrastructure projects in the state far more attractive to a diverse range of national and international participants.

In addition, and recognising common frustrations for major infrastructure tenderers, the memorandum emphasises streamlining, timeliness and clarity in tender processes. This may hopefully address some of the significant wasted cost traditionally associated with government PPP tenders – for successful and unsuccessful tenderers alike – and encourage participation.

Like many in the industry, we have previously called for a shift from the traditional fixed-price engineering, procurement and construction (EPC) contracting model to a more ‘hybrid’ approach. The market seems to have taken note. While, as expected, alliance-style agreements are still far from the norm, we are seeing more and more willingness to embrace risk sharing and collaboration-style contracts in government procurement.  The benefits of adopting collaborative style and project packaging approaches to project delivery not only have an economic benefit, but also result in higher quality assets being delivered in shorter periods of time, as issues are workshopped and resolved in a timely and more cost effective manner.

Alternative contracting structures such as split scope contracting, early contractor involvement (ECI) and engineering, procurement, and construction management (EPCM) are also creeping into conversations, especially in the emerging renewable hydrogen industry.  We are hopeful that the step change in government procurement will also filter through to the private sector in due course as the market see the economic benefits that alternative procurement approaches can produce.

While we are not going to see the back of traditional lump sum and EPC contracting any time soon – particularly given the influence of risk averse financiers – it is encouraging that parties are becoming more willing to think outside the box.

Co-written by Toby Evans of Pinsent Masons