GOVERNMENT DITCHES ‘LOWEST PRICE’ MODEL

Government looks to ‘lead by example’ with new procurement rules

After coming under fire for ‘lowballing’ contracts for years, the Government has stepped up with new procurement rules, which came into force on 1 October. The new rules require government agencies contracting for construction projects to consider a range of factors taking the focus off the lowest price in favour of a broader and longer-term view.

Avoiding low-balling

In describing the impetus for the new rules, Phil Twyford said the “lowest price model” approach resulted in construction companies cutting costs and undercutting each other so intensely that some projects became financially unviable.

“In the worst cases, companies collapsed before construction was completed, resulting in sub-contractors not being paid,” said Twyford.

This appears to have been the case in the recent collapse of Stanley Group, which acknowledged it under-priced a flagship Housing New Zealand (HNZ) project by as much as $2 million.

“The new rules move away from a ‘lowest price model’ to a ‘broader outcome model’, which has to take into account the financial health of the construction company, the health and safety of its workers and the environmental health of the building,” said Twyford.

Leading by example

Government contracts make up 18% of all large-scale construction projects and the new rules must be applied to all government construction projects with a value over $9 million.

Speaking to the rules’ further possible reach, Phil Twyford commented: “This is about the Government leading by example, and we hope the private sector will follow suit”.

The new rules begin with a new focus on market engagement; government agencies are now required to engage with possible suppliers to consider opportunities, risks, and solutions associated with procuring and delivering, before bids are sought.

Going forward, those bidding for government construction work will need to demonstrate:

• What skills development and training is being undertaken by the construction company and its subcontractors.
• Whether the bidder’s competence matches the complexity of the project.
• What sustainable building practices are being used, such as using sustainable materials and minimising waste.

Training requirements

One of the aspects of the new rules that has long been discussed is the requirement for bidders to show evidence of the training and skills development that will need to occur as part of the project.

The new rules provide specific guidance for government agencies on the kinds of questions they should ask of potential suppliers, such as:

• What is the total number of apprenticeship weeks that have been completed over each of the last three years?
• What percentage of your workforce is currently in training apprenticeships?

This aspect of the new rules will favour suppliers who already actively support employee training.

In addition, for large jobs over $50 million or lasting longer than three years, government agencies must create a specific skills and training development plan.

Influencing the market

A staunch supporter of this initiative is the Building & Construction Industry Training Organisation (BCITO), which recommended using procurement practices to incentivise firms to train to the incoming government in 2017.

“One straightforward, low-cost, and low-compliance method of encouraging training is through the Government’s own procurement policies,” said Warwick Quinn, Chief Executive of the BCITO.

“While residential and private commercial clients might form the majority of construction activity in New Zealand, the Government is also a significant source of demand. Moreover, while private sector demand tends to be highly cyclical and operate in something of a ‘boom and bust’ cycle, government demand is far more stable.

“The public sector’s position as a major source of clients and largescale construction work means that its procurement policies can have significant effects on the industry. By requiring or  encouraging public sector agencies to include participation in training within their procurement evaluation and selection criteria, the Government will strongly incentivise the industry to invest in developing its workforce.”