Council and contracts - the ins and outs

Published in the NZ Local Government Magazine

Introduction

Every year councils throughout New Zealand offer contracts by way of public tender for the supply of goods and services valued at hundreds of millions of dollars.  The value of these contracts ranges from a few thousand dollars to tens of millions of dollars.  A challenging economic environment places increased pressure on councils to achieve real savings for ratepayers and best value for the money councils spend.  Ratepayers expect that as they are being forced to tighten their belts councils also should make greater efforts to spend rates dollars in an efficient and transparent manner.

The drive to achieve cost savings means that, in order to win contracts with councils, contractors tendering for council work are cutting costs and reducing profit margins.  In a highly competitive environment contractors anxious for work are increasingly likely to hold councils accountable for the way that the tender process is conducted, tenders are evaluated and the contract awarded.  Failures or errors in following an appropriate tender process, allegations of bias or other conflicts of interest, or a failure of the decision-maker to follow the recommendations of those evaluating a tender, have the potential to give rise to expensive and time consuming arguments.  Such failings potentially lead to litigation, and hold up the award of a contract for what may be essential works in a council's construction programme.  Anecdotal evidence suggests that in tough economic times large contractors are increasingly tendering for contracts of lower value or in areas where the large contractor would previously have not expressed interest.  The consequence is that the council's processes may fall under greater scrutiny by organisations with the means to pursue claims of unfairness, error or bias.

This paper highlights some key considerations for councils putting contracts out to public tender.  A relevant consideration for councils is that the Auditor-General has a key oversight role in the application of all public moneys and to ensure that the processes followed in respect of the application of those moneys is appropriate in each circumstance.

Does every contract need to be put out to public tender?

A question that is often asked is whether or not every contract needs to be subjected to a public tender process, or whether a council is free to negotiate a contract for the provision of goods or services with a reputable supplier of the council's choice.  There is a considerable amount of pressure on councils to put even lower value contracts out to public tender in order to demonstrate a high degree of openness in a public tender process, and that it is getting the best value for each tax dollar is achieved.  There is little doubt that a council benefits from a public tender process where the contract has a substantive value. However, for lower value contracts there is considerable flexibility in the manner in which councils approach contracting.  A public tender can be expensive and time consuming to administer.  Savings achieved through a public tender process can often be more than offset by administrative expenses. 

We advocate taking a practical approach to the question of whether or not the particular contract should be able to put out to tender.  Councils should adopt strict guidelines for council officers, giving them discretion in respect of the award of smaller value contracts.  In circumstances where there is a preferred contractor with a proven track record and demonstrable ability to provide the services or goods, the council should feel free to negotiate directly with that contractor, without the need to go through a public tender process.  Provided that the council has taken reasonable steps to assure itself of the ability of the contractor to perform, and is confident based on reasonable grounds that the contract price represents good value, then a public tender process is not required.

Initial considerations in a public tender process

In advising our council clients we see a tendency toward a "one size fits all" approach to drafting tender documents.  It is critical that the request for tenders clearly sets out:

• the form and content of the tender;
• the process for submitting the tender including the date and time that tenders will close and a place where tenders are to be delivered;
• the scope of the contract works to be included in the tender;
• the method the council will follow to evaluate the tenders;
• the form of contract which the council enters into with the successful tenderer.

Contract forms

It is not unusual to see the NZS3910:2003 Conditions of Contract for Building and Civil Engineering Construction form of contract used for a wide variety of contracts for the provision of services to the councils, regardless of whether or not that particular form of contract is appropriate.  For example, if a council is requesting tenders for a cleaning contract for council premises, to attempt to modify NZS3910:2003 results in little of the original contract terms remaining, and typically creates unnecessary or irrelevant obligations on the parties.  One of the first matters to consider in the initial stage of the tender process, is the form of contract which is appropriate, given the nature of the contract works, their value, and whether or not it is appropriate to involve the specialist supervision of an engineer, project manager or architect.

We sometimes see councils proposing to use a member of their own staff as the engineer.  It is important to remember that under NZS3910:2003, the engineer owes duties to both the principal (council) and the contractor.  The council engineer is immediately placed in a position of potential conflict of interest where he or she is required to act in a manner which is in part, fair and impartial.

There is a range of forms of contract available to a council when considering a tender (or a negotiated contract).  These forms of contract range in scope and complexity from a relatively brief standalone contract, to NZS3915 where no person is appointed to act as an engineer supervising the contract, to NZS3910:2003 for larger civil engineering and construction contracts, particularly those involving roads.  It is also important to note that in some cases, where funding is obtained for public works from central government organisations such as the New Zealand Transport Agency, the form of contract will often be determined by the funder, who will require a specific contract form to be used. 

There are a number of specialised forms of contract which are also used in relation to the engagement of consultants and for other specialised services.  In each case, an appropriate form of contract should be adopted.  The best practice is not simply to use a form of contract because it appears to have been endorsed by a particular professional body.  The form of contract needs to suit the particular circumstances having regard to the nature and scope of the works and the value of those works.  Sometimes, additional cost in preparing the form of contract at the outset can save considerable cost later on.  Especially if the relationship sours between the council and its contractor and the contract terms become essential to resolving a dispute.  Uncertainty in the drafting of the contract creates a wider scope for disputes, potentially leading to litigation.  Ideally, the council will have a range of contract options open to it, and these can be readily adapted to the particular requirements at  the time.

Tender evaluation

Choosing an appropriate evaluation methodology to assess tenders received by the council is also a critical part of preparing the tender documentation.  The public, the media and contractors are keenly interested in ensuring that tenders are evaluated in a fair and impartial manner.  Adopting an evaluation methodology which is appropriate to the nature of the contract works, having regard to their estimated value, can result in savings in the conduct of the tender process, and avoid unnecessary complexity.  In the case of contracts having a value of less than $100,000 it is acceptable in most circumstances to adopt a Lowest Price Conforming Tender method of assessment.  In the case of contracts having a value in excess of $100,000, it is preferable to use a Quality-Price Trade Off method, or an alternative method which evaluates the non-price attributes of the contractor.  Typically, methodologies adopted in the case of higher value contracts give a weighting of 70% to price related attributes and a 30% weighting to non-price attributes.  Non-price attributes include such things as the contractor's ability to perform the services under the contract, and the contractor's proven track record.

Running the tender process

The tender document should clearly set out the form of tender document the contractor is required to submit, and any ancillary documentation the contractor is required to provide.  The tender documents set out the terms and conditions of the contract to be formed with the successful tenderer.  It is therefore essential the tender documents are complete and appropriate at the outset, because there is typically little scope to correct substantive errors once the tender is issued.

Where the council is setting out the process it will follow it will be held accountable for failures in that process by the contractors.  We recommend providing the maximum flexibility on the part of a council to reject all tenders received and to re-tender the contract, or to amend the tender documents and  process on account of minor unforeseen circumstances or errors.  Council will not be able to rely on these provisions in all circumstances, but in their absence there will be no ability to alter the process. 

The area in the tender process which is frequently most susceptible to criticism is the evaluation of tenders received.  In the case of simple evaluation methodology such as the Lowest Price Conforming Tender method, the scope for criticism is greatly reduced.  Using that method, conforming tenders are considered, and the lowest tender typically awarded.  This method is adopted where the contract works are relatively simple, and the track record of the contractor and the ability to perform either well established or not particularly relevant to the supply of services. Matters relating to performance can usually be adequately addressed through the contract terms rather than through a process of evaluation prior to the award of the contract.  In the case of larger contracts where non-price attributes are assessed, there is a greater scope for differences of view as to how attributes should be weighted.  While weighting of those attributes is largely an objective process there is some limited scope for preference to be given to a contractor.  However when that occurs there can be a suggestion that a person evaluating the tender has a conflict of interest creating bias.

Conflicts of interest

Perceived or actual conflicts of interest are almost inevitable in council tendering.  Often, council officers and other persons evaluating tenders have had past personal or business relationships with tendering contractors.  Clear conflicts of interest arise when the relationship between tenderer and evaluator is close or where the evaluator and the tenderer have an existing business relationship.  A sensible approach needs to be taken in assessing whether or not a conflict of interest arises.  The general rule is that if there is or could be perception of a conflict of interest that must be disclosed by both the contractor as part of the tender documentation and by the proposed evaluator before that person is appointed to the tender evaluation team.  With the best will in the world, there will always be cases where perceived conflicts of interest arise.

Allegations alleging conflicts of interest or other impropriety on the part of the council, its officers, or on the part of a contractor involved in a tender process or a valuation are relatively common.  There are a wide variety of persons who can be motivated to allege bias or favouritism toward a particular contactor.  Such persons range from a contractor who failed to win a tender to a disaffected council or contractor employee with no particular agenda other than to cause the maximum amount of disruption and embarrassment to the council or the contractor. 

A council is duty bound to undertake an appropriate investigation of all allegations of substance where a conflict of interest is alleged.  Where the allegation relates to specific information and events and the person making the allegation is prepared to put their name to their claims the prudent council will take the allegation seriously.  At the other end of the scale are those anonymous, unsubstantiated, general allegations of impropriety that are designed for no purpose other than to frustrate the tender process and cause damage to the reputation of the council and the contractor.  Unanswered this latter class of allegations has the potential to do enormous damage.  Such allegations are often impossible to investigate adequately due to the lack of information regarding specific issues, and the unwillingness of the person making the allegations to step forward and take ownership of their allegations.  A prudent council needs to draw a line between serious allegations of the first type, and spurious allegations of the second type.  A council which has conducted a robust tender process with appropriate disclosures from the Council officers involved in the tender process, and the contractors submitting tenders, should have confidence in that process.  A clear and unequivocal statement expressing confidence in the process by the council at an early stage is likely to demonstrate to the maker of a spurious allegation, that any such allegations made, and any further allegations, are a waste of that person's time.  That does not mean to say that the council should ignore serious allegations, but rather, the council should have confidence that its processes will avoid potential conflicts of interest.

Allegations of impropriety are often of interest to the media.  Public bodies such as councils are held to a higher standard because they deal with public money.  The damage to the reputation of the council, and the damage to the reputation of the contractor can be real and substantial.  The council cannot act on every unsubstantiated claim  or allegation of impropriety.  To do so would mean that the tender process is open to hijack by anybody who is disaffected or wants to cause disruption.  Delays can be expensive and often have flow on effects, such as urgent contract works being delayed while allegations are investigated. 

We recommend taking a pragmatic approach when dealing with conflicts of interest.  Based on the criteria set out above substantive claims need to be investigated.  Spurious anonymous allegations need to be dealt with in a robust way.  That will often mean that the council needs to respond to the media article at an early stage with a clear and unequivocal statement of confidence and support in the tender process.  A well drafted contract will incorporate an ability for the council to hold a contractor, its directors, shareholders and employees to account for any non-performance or act potentially bringing the council into disrepute.   A contract may entitle the council to require that a particular person be removed, or may result in termination of the contractual relationship altogether.

Awarding the contract

For lower value contracts using a simple evaluation method it is often the case that the council has delegated authority to a council officer to award the contract.  Ideally there will be a tender which is clearly ahead of the others in terms of its price and the clear winner is awarded the contract.  In the case of larger contracts there is usually a need to obtain authority to award the contract from a committee with delegated authority or from the council itself. 

The role of the council officers who have been involved in the process of the tender and its evaluation is typically to report the findings of the evaluation in a clear, concise and unambiguous manner to the council for consideration.  The decision whether or not to award the contract rests with the elected members of the council, or with a committee of council members, or with particular council officers if authority has been delegated. 

Assuming that the tender process has been robust, appropriate in its form and documents, the tenders have been evaluated using an appropriate methodology, and any conflicts of interest resolved in the appropriate manner, the council should have no difficulty in following the recommendations of its officers.  If the council does not follow that advice, and rejects or does not follow the recommendations or the tender process the council may find that it is in breach of its own processes and open to a claim for judicial review of its decision on the basis of bias or breach of natural justice.  Such decisions typically involve much unproductive time being spent, together with the associated cost which is invariably born by the council itself and cannot be recovered.

Many of these issues can be avoided if in the first instance, due consideration is given to how the tender process is to be conducted and documented and the process is administered through to a conclusion in a consistent manner.

For more information, please contact:

Howard Johnston
Partner
t: +64 9 979 2161
e: Howard Johnston

Chris Paterson
Senior Associate
t: +64 9 979 2173
e: Chris Paterson

Last updated: 31 July 2009

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.