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Public Sector Informant : PSI
34 THE PUBLIC SECTOR INFORMANT [MAY 2010] [LEGAL AFFAIRS:RICHARD MORRISON &HOLLY MCA DAM] Squeezing savings from your contractors Procurement Well-designed contracts can help government agencies find significant savings If there are aspects of your purchase that are desirable but unnecessary, consider incorporating them as fixed-price options Adrive for greater efficiency in contracting is on, and it affects not only how you do business, but also how others do business with you. Structur- ing your arrangements in a way that is focused on efficiency can deliver long-term efficiencies over the life of your contracts. This article considers some of the tools available to help you deliver strategic reform and efficiency dividends. Look around It is common for Commonwealth agencies to apply template contracts, with a focus on minimal tailoring. However, employing (in whole or in part) the efficiency models adopted by other industries can deliver real results in the right context. For example, consider the energy- efficiency contracting model em- ployed in the facilities context world- wide. Under this model, a contractor undertakes an audit of energy use to identify inefficiencies. The contractor designs a project directed at deliver- ing cost savings and financially guarantees that undertaking the proj- ect will deliver those savings. Models such as these can provide valuable food for thought in crafting your efficiency regime. Apply effort up-front The re-tender of contracts is often seen as an opportunity to test the cost efficiency of your incumbent arran- gements. Targeted preparation can help this process deliver efficiencies. For example, incentivising your incumbent contractor to report on inefficiencies and cost drivers (inter- nal to its organisation and otherwise) before the end of its tenure can help you critically assess your needs before approaching the market. Among other things, this ''incum- bent'' analysis can be used through the market-testing process: As a benchmark for cost and efficiency analysis through the evalu- ation of tenders. To identify extra cost drivers and where cost savings can be delivered based on tendered pricing. Bring in the experts Building mechanisms into your con- tract that allow an expert auditor to review your service delivery and recommend efficiency measures can introduce independence into the pro- cess. Often, inefficiencies that are identified by a customer can be ''shot down'' by contractors based on the customer's limited knowledge of the industry and the contractor's re- sources or other factors not necess- arily apparent to the customer. How- ever, engaging an industry expert to undertake this critical analysis can remove the opportunity for repe- chage. Contract provisions can be crafted to allow you, as the customer organisation, to have the ultimate say on whether independently identified savings and efficiencies should be adopted. Think whole of life Think up-front about the cost of whole-of-life maintenance of the capability that you buy. How can you maximise life span, minimise main- tenance costs, and avoid arguments about improper maintenance procedures? Consider asking your equipment supplier to provide you with a ''whole-of-life'' maintenance plan up-front (for example, before you take delivery or ''accept'' the equipment). This plan could be supported by a commitment that the plan, if followed, will provide for the proper and efficient operation of the capability you are buying. Your support contractor's maintenance ob- ligations could then be based around that maintenance plan (whether that contractor differs from your original ''supply'' contractor or not). This will help to ensure: You can distinguish between defects in the underlying equipment and problems caused by improper maintenance procedures. Your support arrangements are specifically designed to (and suppor- ted by warranties that will) achieve whole-of-life efficiencies. Be an informed customer A one-size-fits-all approach won't necessarily help you drive savings and efficiencies. To deliver a contrac- ted requirement generally involves many varied activities on your con- tractor's behalf, and the measures needed to drive efficiency in those activities will differ depending on their nature. For example, a fixed- price contract won't necessarily drive efficiency in delivering a resource- intensive requirement. Undertaking an analysis of, and developing an understanding of, the particular activities being conducted by your contractor can help you build a framework that incentivises efficiency across the broad spectrum of activities that may be conducted. Incentives Contracts that are ''all stick'' (i.e. all focused on compensating for sub- optimal performance) don't always result in efficient contractor practices. Consequently, it can be worth con- sidering appropriate incentives for delivering cost savings. For example, consider creating a ''pool'' of sav- ings delivered by your contractor over the life of your contract. Subject to proper contract performance, an incentive regime could provide that the pool is ''shared'' as an incentive at the end of your contract: the greater the savings, the greater the percent- age of the pool that your contractor is entitled to share in at the end of the day. Intelligent assignment of risk Risk drives cost in contracting: the more risk you ask your contractor to bear, the more risk pricing is included in the bottom line. Risk assessments are commonplace in Commonwealth contracting. But the process of as- signing risks between the contracting parties is often done without signifi- cant consultation, and without precise consideration of the underlying price drivers attached to each risk. Con- sider identifying key risks and seek- ing alternative pricing from tenderers based on assuming, or not assuming, those risks. This process may identify cost drivers that are not otherwise apparent. It will also help you assess whether the price you are paying to allocate a particular risk is really justified. Consider special conditions If your contract requirement compr- ises both low and high-risk elements, you may wish to consider tailoring your contractual framework to reflect the price effects of risk. For example, consider whether it would be appro- priate to apply special conditions to only the high-risk elements of your contract. Typically, high-risk contract requirements justify specific com- mercial terms (including a different risk-allocation model to low-risk requirements) which generally drive increased contract costs. Applying ''special conditions'' to only high- risk elements of your contract (such as specific insurance and liability arrangements) can help quarantine extra risk cost and ensure it is not applied to your total contract require- ment (i.e. including low-risk ele- ments). Bells and whistles The ''bells and whistles'' that you buy often ultimately cost you the most. The requirements that might reasonably be perceived as ''gold- plated'' aspects of a purchase are generally the most complex, expens- ive and time-consuming to deliver. Quite often, these components of a procurement are also where the most problems arise. It is important to ask yourself up-front what your baseline requirement really is. If there are aspects of your requirement that are desirable but unnecessary, consider incorporating them as fixed-price options that can be taken up once your baseline requirement has been fulfilled. This way you avoid paying up-front for requirements that may ultimately be unnecessary, or which may introduce extra risk (and there- fore cost) into your baseline price. Be efficient in your own processes Undertake an analysis of what your own contractual processes require and what they are costing you. Often contracts require substantial docu- mentation to be produced by your contractor, as well as attendance at various forums, costing both time and money. While these procedures can have important functions, it is import- ant to critically assess how valuable they are to you and whether they actually add to your outcome, or just your costs. Streamlining the proces- ses embedded in your contract may save you money and time. If you can't assess up-front what the value of particular procedures may be, ensure your contract allows you the flexibility to remove surplus require- ments over its life (while also benefiting from associated cost re- ductions). Secure your future It may sound trite but ensuring your contractual arrangements provide you with the flexibility to ''go else- where'' in future can ensure that a contractor's focus on efficiency and delivering savings is maintained. Appropriate intellectual property rights regimes, step-in rights, descop- ing rights, powers to embed your (or a third party's) personnel and direc- tive powers can ensure that if you are not getting what you paid for, you can do something about it. Richard Morrison is a partner at Sparke Helmore Lawyers. Holly McAdam is a special counsel at the same firm. MPhil (UNSW) PhD (UNSW) The Master of Philosophy (MPhil) Program is a part-research, part- coursework degree (1.5 years full time equivalent) that includes an examinable coursework component and a thesis embodying the results of an original investigation. Credit may be available for related completed Masters coursework programs. Opportunities are also available for study towards PhD degrees in business and management disciplinary areas. For more information please contact: The PG Coordinator, School of Business T: (02) 6268 8074 E: email@example.com W: www.unsw.adfa.edu.au/sbus www.unsw.adfa.edu.au/sbus MBus (UNSW) GradDipBus (UNSW) The Master of Business program provides you with the opportunity to acquire an advanced understanding of the concepts and principles that underpin e ective management, business decision making and leadership in organisations. This is an integrated coursework program delivered exibly in on-campus and distance modes. The Graduate Diploma in Business can serve as an articulation pathway to the MBus degree. Entry to the program is available to applicants with a rst degree in humanities, science or engineering or without a rst degree providing they have acceptable experience and/or quali cations. School of Business Postgraduate coursework and research degree programs at the School of Business, Canberra campus of the University of New South Wales
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