30 Jun 2009

Incumbent contractors: levelling the playing field

by Steven Power

Early identification and management of incumbent contractor issues will make the tender process more effective.

Long-term contracts between government and the private sector for the provision of services or support to government are common. When it comes time to re-tender the service or support function, government may face a number of challenges in conducting an effective tender process due to the existence of the incumbent contractor. The incumbent contractor will already have the personnel, equipment, business processes and know how to perform the new contract. This perceived advantage of the incumbent contractor can result in prospective contractors in the market not tendering for the new contract. We have seen a number of instances where the only tender (or the only tender with the potential to offer value for money) submitted for the new contract is from the incumbent contractor.

This article looks at some of the issues which arise from having an incumbent contractor participate in a tender process in these circumstances and some practical steps which can be taken by government to manage these issues and to level the playing field for bidders.

Adopt an effective disclosure and bidder engagement process

The incumbent contractor will typically have an in-depth understanding and working knowledge of the service or support function. Providing bidders with detailed information about the service or support function and the opportunity to ask questions and clarify government's requirements prior to the submission of tenders will help ensure that all bidders have an appropriate understanding of government's requirements. Detailed information about the service or support function (including performance data in relation to the existing contract such as volume or demand levels) can be included in the tender documentation or disclosed through a virtual or physical data room and bidders can be given the opportunity to ask questions throughout the tender preparation phase. Any disclosure of information will need to have regard to any obligations of confidentiality owed to the incumbent contractor and government will need to ensure that it disseminates information in an even-handed manner.

For more complex procurements, an interactive bidder engagement process can also be adopted during the tender preparation phase by conducting a series of one-on-one workshops with bidders on key issues to allow bidders the opportunity to discuss their proposals with government and ask questions. Obviously, probity issues associated with such workshops will need to be managed carefully to ensure that all bidders are treated fairly. This approach may necessitate starting the tender process earlier and giving bidders more time to prepare and submit tenders than would otherwise be the case in order to allow bidders sufficient time to digest the greater volume of information. This approach will also provide bidders with comfort that they are getting access to all relevant information.

Ensure the existing contract contains an effective transition-out provision

Government should never underestimate the effort and time required to achieve a seamless transition from an incumbent contractor to a new contractor, particularly if there is an end-user customer. When drafting a contract, the focus is typically on what happens under that contract and rarely on what happens on the expiry of that contract or on any transition from that contract to a replacement contract. Contracts often do not contain provisions which effectively deal with the transition from the incumbent contractor to a new contractor on the expiry of the contract. This can make life difficult for government trying to re-tender contracts. Long-term service or support contracts should contain a detailed and enforceable transition-out provision which provides for the contractor to prepare and implement a transition-out plan which meets government's minimum requirements as specified in the contract.

The content of a transition-out plan will vary from contract to contract but will typically deal with the incumbent contractor disclosing information to both government and other bidders, the potential transfer of employees from the incumbent contractor to the new contractor, the potential for a phased transition to the new contractor, data transfer provisions (where applicable) and a general obligation for the incumbent contractor to co-operate with the new contractor. Consideration needs to be given as to how the incumbent contractor will be compensated for implementing the transition-out plan. If the incumbent contractor has not already priced the cost of compliance with the transition-out plan in the contract price or is not otherwise compensated, the level of compliance or co-operation may not be satisfactory - you get what you pay for.

Prior to commencing any tender process, the existing contract will need to be reviewed to determine whether the transition-out provisions are appropriate. If they are not, government may need to negotiate appropriate transition-out arrangements with the incumbent contractor prior to commencing the tender process.

Effectively manage the tender process

Appropriate tender management strategies should be implemented where government anticipates receiving a limited number of tenders due to the existence of an incumbent contractor. Avoid committing to hold an industry briefing in the tender documentation without first being assured that at least two serious bidders will attend. Also, consider how to engage with the preferred bidder in the event that only one tender with the potential to offer value for money is received. If the preferred bidder becomes aware that it is the only effective bidder, it will be extremely difficult for government to negotiate an optimal outcome with that bidder. Resolving key issues with that bidder prior to notifying the bidder that it is the preferred bidder might be one option.

Adopt strategies to facilitate a new contractor resourcing the contract

The incumbent contractor will have established a workforce, equipment, business processes and know-how in order to provide the service or support function to government. In respect of some contracts, this may have entailed the incumbent contractor developing resources which are unique to that contract. For example, in order to provide services or support in a remote location, the incumbent contractor may have established a uniquely skilled workforce at that location over a long period of time. It may be difficult for other bidders to demonstrate how they will establish their own workforce at that location in the event they are successful. In such circumstances, consider how government can facilitate a transfer of employees from the incumbent contractor to a new contractor. For example, provisions can be included in the incumbent contractor's transition-out plan to facilitate a transfer of employees by requiring the incumbent contractor to allow the new contractor to meet with prospective employees. Consideration also needs to be given to the application of the Fair Work Act 2009 which commences on 1 July 2009 and the potential implications in relation to a transfer of employees from the incumbent contractor to a new contractor in these circumstances - which warrants a separate paper in itself.

Another example is where unique, high-value assets are required in order to provide the services or the support function. Other bidders will most likely need to acquire these assets if they are successful whereas the incumbent contractor will already have the required assets. Unless there is a liquid market for the assets, the other bidders may seek to recover the full cost of the assets in their tender price, potentially making their tenders uncompetitive. In such circumstances government should consider making the term of the new contract sufficiently long to enable the successful contractor to recover the cost of the assets over the life of the contract, giving the new contractor the flexibility to lease the assets or provide some of the assets as government-furnished equipment.

Ensure that IP rights are sufficiently broad

Incumbent contractor IP can be a significant sticking point for government. The incumbent contractor often will have brought background IP to the existing contract and developed foreground IP for the purpose of performing that contract. This IP can be critical to the ongoing service or support function and necessary for the new contract. Prior to commencing any tender process, it is important to ensure that government has appropriately broad rights to use critical IP and to sub-license and disclose that IP to any new contractor. If the IP rights are not sufficiently broad, government may need to negotiate appropriate rights with the incumbent contractor prior to commencing the tender process. This can be a difficult process as contractors often vigorously protect their IP.

Early identification of issues which arise from having an incumbent contractor participate in a tender process and the implementation of strategies to manage these issues and to level the playing field for bidders will assist government to conduct an effective tender process. Where these issues are not effectively managed, potential bidders may be reluctant to go to the expense of participating in the tender process, resulting in government receiving a limited number of tenders.

Related Knowledge

Get in Touch

Get in touch information is loading

Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.