Smart buyers and industry partnering in Defence procurement

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The First Principles Review of Defence brought about tremendous reform in the Department and advocated expanding the role of industry in the capability lifecycle. In current policies and via the Smart Buyer framework, the Department is calling for improved procurement models and partnerships between Defence and industry. And yet, all too often, the actual interface between the Commonwealth and the supplier is the transactional, arms-length contract.

Limitations of Transactional Contracts

What is a ‘transactional contract’? Put simply, it is a contract
that concentrates on and emphasises the transactions
between the buyer and the seller. Typical features include:

Identifiable – the method of signing must identify the signatory and that person must indicate they intend to be bound by the terms. The signatory must include their name, and must insert their electronic signature into the document and must satisfy evidentiary requirements.

  • Transferring risk to the seller
  • A complete statement of the buyer’s requirements, finalised prior to contract execution
  • Imposing liability on the seller
  • Formal contract oversight arrangements that keep the seller at arms-length from the buyer.

Put even more simply, transactional contracts can be
reduced to two foundations: Price and Power.ii Both Price
and Power have the potential to intensify direct competition
between the buyer and seller. As can be imagined, such a
basis does not encourage the parties to align their goals, and
this is precisely the primary limitation of this type of contract.

Transactional contracts are best suited to procurements
where the:

  • Full extent of requirements can be defined up-front; and
  • Quality of the relationship between the parties is comparatively unimportant.

This aligns with relatively simple, one-off procurements
involving lower levels of risk or reasonably generic products
or services.

The 2018-2019 audit of Defence Major Projects, conducted
by the Australian National Audit Office, confirmed technical
risk as the major cause of schedule slippage and cost escalation.

Incurring high technical risk within the construct
of a transactional contract is a roadmap to an adversarial
relationship with your contractor, schedule delays, and
budget management issues. A better alternative, that is
supported within government, is the development of
collaborative contracts.

Meet Complexity with Collaboration

Collaborative contracts and collaborative contracting
are defined by Defence as business relationships where
parties work together to achieve common outcomes.iv
A collaborative contract enables parties to combine their
efforts to address complexity and treat risks. The concept is
not new, and, for many years, it has been common practice
in the infrastructure and construction sectors.
It is important to note that a suite of collaborative contract
templates can be used to facilitate buyers and sellers
working towards common outcomes. Common features of
collaborative contracts, as identified in the Collaborative
Contracting Better Practice Guide, are:

  • Joint decision making
  • Partnering charters
  • Target cost or gainshare/painshare remuneration
  • No blame/no liability frameworks
  • Jointly managed program risk
  • Transparency and open book financial reporting
  • Fair and timely dispute resolution processes
  • Shared financial, configuration management, and decision support systems
  • Agility and flexibility
  • Senior executive participation

The primary benefit of this approach is that the contractor is elevated from being a Supplier concerned with delivering,
often, the minimum viable product which meets the statement of work to a Partner in the delivery and support of the required capability. For complex and high-risk projects, this is a far better approach and produces far superior outcomes.

How to collaborate?

Collaborative contracts demand detailed planning,
development of dependable risk-adjusted project schedules,
and employing reliable costing and budgeting practices.
While the specifics of procurement planning will of course
vary case by case, the first step should always be a Feasibility

A Feasibility Assessment determines the need for, and ability
of both the Commonwealth and potential suppliers to
participate in, collaborative contracting arrangements. The
outputs are likely to affect project acquisition, execution,
and support strategies. Therefore, an objective and detailed
assessment is essential. Independent advice may be sought
to provide additional assurance.

Following a Feasibility Assessment, two equally important
and related activities can occur: Relationship Design and
Contract Design, which includes the Approach to Market.

Designing the relationship

Early engagement

Engage with Industry early and regularly. Potential suppliers
must be alerted to the intended market approach as they will need time to become acquainted with the draft contract, secure potential resources, and prepare to operate within the contract requirements.

As project plans develop, communicate relevant details (within information security and probity constraints) to allow Industry to adjust and update their preparations. Engaging with Industry to share information establishes the Commonwealth’s clear intention to build a contract and trust relationship based on a Collaborative Partnership Model.

Seek input from industry

“Partners to a relationship deserve input into its creation.” Feedback from Industry on procurement models and draft contracts may result in more effective and fairer risk sharing arrangements. Various techniques may be used to solicit Industry input, such as, Requests for Information, Requests for Proposal, request for Quotes, Competitive Dialogue, and even release of exposure drafts of contract documents. Interactive Tendering techniques may also be used as part of a staged approach to market that progressively downselects potential suppliers.

Address barriers to collaboration

Any part of the procurement model or draft contract that operates to diminish or prevent collaboration should be reviewed for potential improvement. Serious consideration should always be given to Industry feedback. Perhaps there is a perception that milestone payments permit the Commonwealth to coerce a contractor by threatening its cash flow. Maybe potential suppliers feel that Key Persons clauses allow the Commonwealth to remove contractor
personnel without cause. Work collaboratively to review and amend where necessary. The aim here is to secure and protect appropriate legal rights for the Commonwealth while also promoting collaborative behaviours.

Jointly develop incentives

Incentives are a powerful tool for aligning the interests of
both parties. Performance Based Contracting and various
remuneration models align payment to successful project
outcomes. Always review the remuneration regime and
linkages to milestone performance. Equally important are
non-monetary incentives such as reputation, growth of skills
in the contractor’s organisation, and the satisfaction derived
from collaborative partnering arrangements. To maximise
the effectiveness of incentives, the parties to the agreement
should develop incentivisation methodologies together.

Jointly develop skills

The ability of the Commonwealth and potential suppliers
to participate in collaborative contracting arrangements
may depend on the collective and individual skills of their
workforce. Some development is likely to be required by all
parties. Where possible, again within information security
and probity constraints, joint training may offer the dual
advantages of increasing skills and facilitating team building
in advance of contract execution.

Designing the contract

Iterative development cycles

Consider an agile approach to developing the contract.
Break the task into several development cycles scheduled
to complement the Industry Engagement Program. This will
allow outputs of completed planning cycles to be passed
to Industry, and input to be sought for the next cycle. Initial
cycles should concentrate on the procurement and contract
models, with subsequent ones addressing the contents of
the contract in progressively greater detail.

Consider all collaborative measures

The features in the Collaborative Contracting Better
Practice Guide, and other literature on the subject, should
be considered for inclusion in the contract. Examine
how these may operate in practice and whether they are
mutually supporting or mutually exclusive. Scenario analyses
may assist here.

Consider staging, phasing, and rolling waves

Breaking the contract into stages may be necessary where
the collaborative relationship will require further time to
develop. This creates an incremental approach whereby
collaborative features may be expanded to suit the growth
of ability in either or both parties. The approach to market
may also be broken into stages to create a more efficient
process and reduce collective tendering costs by excluding
non-competitive bids early in the process.

Determine exit arrangements

Collaborative arrangements are typically associated
with long-term contracts. This does not mean that
exit arrangements should be overlooked. Dissolving a
partnership will present different challenges to terminating
a supplier agreement, and the Commonwealth must
consider its legal commitments both to the outgoing
partner, and their replacement. Phase-out/Transition-out
and enabling the Phase-in/Transition-in of the new partner
is essential to ensuring continuity of service. The contract
must be clear on what is required in this situation.

Consult widely

All Defence programs will have a wide group of stakeholders.
Successful delivery and support of capability may require
the contract to address their needs. Consult with all
stakeholders to familiarise them with the approach, identify
their requirements from and interfaces to the procurement,
prioritise needs and essential outcomes, and determine the
best way forward.

In conclusion

Lessons and achievements

Collaborative contracts provide the means to meet Defence’s goals of forming partnerships with Industry. Detailed and careful preparation of the partnering relationship and the contractual vehicle is necessary, but effort spent prior to contract execution will be richly rewarded in the delivery and support of capability

About the author

Dougal Pidgeon is a program manager and procurement specialist with extensive experience in the Department of Defence, State Government, and in Defence Industry.

Dougal has worked with clients to deliver and advise on programs at each stage of the capability lifecycle, from developing requirements and approaching the market to establishing and managing contracts for the delivery, support, and ultimately disposal of systems. These programs and procurements have varied significantly in scope, value and approach, from a multi-billion dollar program to replace whole fleets of weapons, to programs designing and developing new systems or modifying off-the-shelf products, to rapid acquisitions for urgent operational requirements.

Dougal assists clients to deliver programs and
procurements through detailed and effective planning, establishing robust processes, maintaining clear communications, and strong but inclusive leadership.

Dougal has Masters degrees in Engineering Science (Project Management) and Defence Capability Development and Acquisition, together with further qualifications in procurement and tendering.

Dougal enjoys walking his dog around the green hills of the Yarra Ranges, and escaping from the notoriously variable weather there to dry out in front of a fire with a glass of red and a fine book.

About the author

i. 2016 Defence White Paper, p10; 2016 Defence Industry Policy Statement, p6.
ii. David Frydlinger, Tim Cummins, Kate Vitasek, Jum Bergman, Unpacking Relational Contracts: The Practioner’s Go-to Guide for
Understanding Relational Contracts, Thaslam College of Business, University of Tennessee Knoxville, p6
iii. Australian National Audit Office, Auditor-General Report No.19 2019–20: 2018–19 Major Projects Report, p 52.
iv. Department of Defence, Collaborative Contracting Better Practice Guide Version 1.0 28 September 2017, p 4.
v. Department of Defence, Collaborative Contracting Better Practice Guide Version 1.0 28 September 2017, p 11.
vi. Department of Defence, Collaborative Contracting Better Practice Guide Version 1.0 28 September 2017, p .11.

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