In Australia’s current economic climate, where demand for infrastructure projects exceeds resource supply, a perception is building amongst infrastructure investors that the financial/risk power play between client and contractor is too much a one sided game. Hostile, hard dollar contracts have been usurped by the camaraderie of pain/gain share relationship-style arrangements, which although appear successful in achieving political time/risk objectives, may be somewhat lacking in their commercial contestability.

The new IIDI methodology provides for camaraderie backslapping by relationship partners through the sharing of real efficiency gains rather than the perception of one sided benefits. These efficiency gains are derived by the early involvement of a contractor in the infrastructure planning and procurement stages of a project/program, thereby maximising return on investment through synergies in scope, geography and industry.

What is strategic procurement?

Strategic procurement is the satisfaction ‘of an organisation’s needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers, with the objective of delivering solutions to meet pre-determined and agreed organisational needs.’ Simply put, strategic procurement is the planned process of converting money or kind into goods and services.

Strategic procurement and its application to infrastructure

The process for infrastructure procurement has a life cycle commencing with the master plan and finishing with completion of the contract. Figure 1 highlights the phases of for the supply of infrastructure.

The method of infrastructure project delivery generally varies subject to the complexity of the project, the design and construction risks and the availability of administrative resources.

These procurement models of delivery are:

• Business as usual: These are standard form contracts, based on a short term view of project identification and roll out. Typically the contracts are lump sum or schedule of rates and generally adversarial in style.
• Pure alliance: A strategic form of procurement. A consortia team of contractors and designers is formed and the contract executed prior to contract sum being established. Selection is based on non financial criteria. The contract is not commercially tested, rather relationship based with an open book focus.
• Commercial alliance: A strategic form of procurement. A consortia is selected prior to contract execution based on a competitive contract sum and the compatibility of players in the portfolio management team. The contract is administered using relationship principals, collaboration and no dispute provisions.
• Managing Contractor: Is a strategic form of procurement where a team is selected to provide project management services for complex programs of works. For the provision of this service the managing contractor is paid a fee, however is excluded from undertaking any of the work during the delivery phase. The contract for the provision of this service may include pass through costs for works completed and the contractor takes no responsibility for the works.
• Engineer, Procure, Construct and Manage: This is generally applied to large contracts rather than a program of works. It is completed in phases with each phase being undertaken sequentially. This method has limited opportunity for concurrency.
• IIDI: A strategic form of procurement. Relies on economies of scale, long term tenure and alignment of parties’ interests.

In the past, infrastructure procurement was managed on a piecemeal basis, with projects individually marketed under hard dollar, individual business as usual contracts. Limited strategic thought was invested into this process. If a job needed to be done, it was either undertaken internally or outsourced on a case by case basis.

The next step in the evolution of infrastructure procurement saw strategy infiltrate the process, with the rise of relationship based contracts through alliances and managing contractor arrangements. A job needed to be done, an alliance was created or managing contractor arrangement developed and the partners could be consulted on the best way to deliver a project/program (and sometimes sub-projects under that overarching project).

However, notwithstanding the costs associated with relationship style arrangements, the involvement by the contractor was still too little, too late. In recent times, clients have come to realise that industry partners, who have the commercial knowledge and market contacts to make decisions that can maximise efficiency, are in the best position to assist with the planning stages of infrastructure programs. IIDI, which involves an industry partner at the early stages of an infrastructure program’s development, can best harness these skills to optimise efficiency gains.

The table below outlines how this model can improve the effectiveness and efficiency of the procurement process.

By involving the contractor in early infrastructure planning decisions, the above graph shows that over time, the supplier costs and (consequent selling price) can be brought downwards. The gap between the two lines can also be reduced over time as the magnitude of spend via this model increases and the marginal cost of overhead/profit decreases.

In summary, this model drives efficiency gains through:

• economies of scale;
• reduction in transactional costs;
• better utilisation of resources;
• alignment of parties’ interests; and
compliance with the client’s internal or legislative procurement policies, while taking advantage of any strategic procurement opportunities.

The IIDI has a number of features set out to achieve these gains including an overarching Head Agreement that has no scope or value (and conversely unlimited scope and value) for the right to provide engineering and construction management services to the client for an agreed period.

The IIDI

Through the use of IIDI methodology, the management service provided by the contractor in collaboration with the client includes the selection, prioritisation, bundling, procurement and delivery of a selected program of works by the utilising the contractor’s intimate knowledge of the marketplace and pre-existing relationships.

Projects identified as being part of the program of works will be competitively bid by the marketplace via subcontract arrangements the results of which will be presented to the client for assessment and approval.

In addition, the contractor has the option to bid for the works providing the contractor can prove to the client that the information provided by the marketplace in response to a Request for Tender (RFT) is commercial in confidence and the contractor will act fairly and honestly at all times.

If the tender response is not accepted by the client as being value for money the brief for the tender may be redefined and resubmitted to the marketplace as a new RFT or may be procured outside this arrangement using the client’s other facilities.

Within the IIDI, there is no obligation to award any works to the contractor if the responses from the RFT are not considered by the client to offer value for money.

Work that is considered by the client to be value for money will be delivered using a separate project order raised by the client. This will be a separate and independent legal instrument executed with the contractor for the carrying out of that particular portion of the work.

The scope of the work to be included in the program of works is only limited to the experience of the contractor and by the marketplace’s capability and capacity.

Under the IIDI method, the management team responsible for the program of works includes representatives from the client and contractor. The team are responsible for the selection, sequencing, priority, procurement and delivery of projects using relationship principals of collaboration and cooperation designed to align the parties’ interests and outcomes.

The management process is designed to extend over a reasonable tenure. Current practices include tenures of up to 5 years, with options to extend if successful or to terminate if unsuccessful. The benefit of the arrangement can be seen in project batching, construction synergies and longer planning horizons for resourcing and resource levelling during project delivery.

The contractor is involved in all aspects of project development from feasibility to commissioning. The contractor assists with the project’s planning and procurement phases through the utilisation of the contactor’s market reconnaissance and knowledge as well as networks of goods and suppliers.

Finally, the IIDI stipulates that the service provided via the overarching agreement is not subject to separate payment but recovered via a mark-up for overhead and profit. This is applied to direct project costs recovered under the separate project order contracts. The value of the work and the commercial arrangement is agreed between the parties prior to execution of a contract for the work. The payment may include performance incentives as a reward for effect and good work. In the event that more work is put through the model of procurement than first expected the contractor will over recover project management and support staff costs. This over recovery may be encouraged as an incentive for the contractor to produce good work and the development of good behaviour. Conclusion

The benefits from an early contractor strategic procurement model have been utilised by infrastructure investors in the United Kingdom for a number years. More recently, at both state and local government levels, Australian infrastructure investors have been investigating the benefits to be derived from this methodology. In particular, IIDI is being utilised in south east Queensland for the roll out of significant local government infrastructure investments.

As the economic climate cools, a client’s expenditure priorities will be reassessed in light of adjusting political objectives. This reassessment will result in closer scrutiny of the return on infrastructure expenditure and consequentially, closer scrutiny of the methodology for procuring the infrastructure. Client’s will be exploring innovative initiatives that enhance efficiency gains and still achieve political expediency without returning excessive profits to private partners. IIDI, as the next step in the evolution of infrastructure procurement/contracting methodologies, achieves these objectives.