29 Mar 2012

80% of the effort for 20% of the project: Making the PPP bid process more efficient

by Marcus Davenport

Some sensible steps can be taken to reduce bid costs and time, benefitting both bidders and procurement agencies.

Structures and delivery models are continually evolving and PPPs are no exception. Incremental changes are always happening in documentation as sophistication increases, lessons from previous deals emerge, the law changes and negotiated outcomes are reached.

In the Australian PPP market, much of the documentation is often accepted from day one and receives very little review or negotiation. For most PPPs it would be fair to say that, when it comes to legal documentation, 80% of the effort is put into 20% (or, some would say, less than 20%) of the content when settling a documentation-heavy PPP transaction.

The bulk of the work is often in dealing with "re-bids" through the bid process and the unique aspects of the project at hand, or resistance to what may have been "market standard" before the market moved. Some of this is both unavoidable and a healthy testing of what the market can (or should) accept. But has it gone too far in the name of value for money?

Why seeking value for money can be a false economy

The procurement agency understandably seeks "value"; arguably it would be remiss if it did not push bidders as hard and as far as they can in a competitive process.

When this is pushed too far, however, the "value for money" equation suffers from diminishing returns while the cost to bidders rapidly increases. In the end that cost becomes either a project cost (and therefore ultimately a cost to government), or a cost to the losing bidders.

If it's borne by losing bidders, they then must assess the financial viability of staying in processes where both the time and costs required can be extreme. Subsequent projects could suffer, as losing bidders either seek to recover costs incurred in previous losing bids, or don't participate and thereby reduce the competitiveness of those later tender processes.

So what can be done to make the process more efficient, less costly and reduce the "20%"?

Details in bid proposals and multiple re-bids: too much information?

Very detailed design proposals are now seemingly the norm and from a very early stage of the bid process, leading to a requirement for fully worked up project documents and, often, a preference for fully worked up downstream contracts (or at the very least detailed term sheets). Is this justifiable or necessary?

The same goes for bid process itself. Procurement agencies commonly require bidders to lodge quite extensive responses to an expression of interest, a very detailed response to a request for proposal and then a "best and final offer" response. I have also been involved in processes that have gone even further and taken two bidders through to full documentation before a preferred bidder is selected. Rarely is a preferred bidder selected directly after responses to a request for proposal.

The justifiable counter-argument from government is that detailed bids and extending competition are the best ways to maintain competitive tension and avoid the reopening of commercial issues once a single preferred bidder has been selected.

But at what cost? There is perhaps currently an over-emphasis on locking in a bid team to certain terms rather than truly looking to partner on a project. For example, where a particular project might have a number of stakeholders there is always the possibility that their voice is only heard in detail during the user group design process after financial close and this can lead to changes in the bid design in any event. This seems to potentially undermine the value of too much detail (time and money) spent in establishing that design in the first place during the bid phase.

Further, once a bidder is selected as preferred, it is much more able to engage with government on matters that remain in contention, and thus more likely to reach mutually beneficial negotiated outcomes. The alternative is that bidders must simply bid their bottom-line position which may not always reflect the best outcome for either side.

There is no doubt that less certainty around the locked-in commercial position and the design can expose government to increased risk, however, that risk may be off-set by the shortening of bid times (and associated costs) and the positive response from bidders who know much earlier if they are in or out of the race.

Last year's RICS research report, "RICS view: the future of Public Private Partnerships", suggests tender processes in the UK run at an average of 34 months, in Australia at around 17 months and in Canada at around 14 - 16 months. RICS says this directly correlates with bid costs, which in Canada are typically 0.35% - 1% of the capital value compared with 0.5% - 1.2% in Australia and 2%-3% in the UK.

While 1% may not seem a large number, in the context of a $1b project this equates to $10m and if there are three bidders each spending that (plus the costs incurred by the governmental agency) then the numbers become large. If a bidder is spending that sort of money on unsuccessful bids this can soon become a major disincentive, so reducing time and cost is key.

Project scope

Sometimes the project scope in PPPs is extended beyond what might be regarded as a core deliverable. For example, a bidder for a specialised project asset might also have to build a related asset outside its expertise, or to take on a "brownfields" site without properly performing due diligence on what may be the environmental, structural or other condition of the site (and bearing the risk).

Often these aspects of the scope add a degree of complexity to the bid process and the build period, leading to greater uncertainty and therefore generally lead to greater scrutiny, conservatism of approach and additional time and cost.

It is acknowledged that seeking bidder innovation of complex matters is part of the appeal of a PPP, but like everything, if that is pushed beyond a reasonable expectation it will have cost consequences.

These aspects might be better delivered by the governmental agency or under a delivery model other than a PPP; the extra cost of negotiating and implementing what is often a complex aspect of the project may not be delivering the best value for money outcome for government.

The way forward for PPPs

I believe the following objectives would help reduce bid costs and time:

  • more emphasis on the partner aspects of a public private partnership – unless there is no clear preferred bidder, government should seek to appoint a preferred bidder as early as possible and then work with them to resolve for mutual benefit remaining outstanding issues;
  • keep the scope as simple as possible – avoid the temptation to add on too many aspects to the scope which are not core to either the project or the expertise of targeted bidders; and
  • communication and the pipeline – it is important for bidders to have an understanding of what projects are on the horizon, and for government to understand the availability in the market at any point in time to deliver a robust tender process and a project. Regular interaction between government and industry is therefore key; likewise government policy on the pipeline of projects in the near future and beyond should be as clear and definite as possible.

Of the 25 recommendations in the RICS Report, three are particularly important in this context:

  • a clear legislative and regulatory framework for PPPs;
  • reforming the tender process by reducing the information requirements at the bid stage; and
  • simplify and seek to standardise PPP contracts, while keeping them flexible enough to deal with changing market circumstances and unique aspects of specific projects.

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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.