Managing procurement risk through the COVID-19 pandemic

A traditional approach to procurement does not consider the new material risks triggered by the COVID-19 pandemic, including potential COVID-19 impacts on construction programmes, productivity and supply chain.

For those with tenders already in the market, a course correction is required. And for those about to undertake procurement, changing only what is required, as opposed to changing every aspect of your strategy, will be crucial in maintaining the momentum, whilst better managing the risks.

When we consider risk allocation, we generally consider the principle that the risk should be borne by the party best placed to bear it. While this is not always able to be fully applied, it is an appropriate yardstick when looking at the new risks triggered by COVID-19. They are unlike many current risks in that they can simultaneously relate to government regulation (global and local), physical health and economic contraction. Accordingly, these risks are difficult (or near impossible) for either party to efficiently price and generally fall into the bucket of shared risks.

In addition, these risks have a high likelihood of being realised in some form, so it is necessary to clearly define from the outset how they will be treated.

Based on our current experience and recent government guidance regarding COVID-19 claims management, we offer the following actions to consider when forming your procurement approach to market for construction services:

Specify COVID-19 Alert Level for contract

• To ensure contractors provide pricing on the same assumptions, making tender evaluations fairer, and easier to assess clearly indicate the COVID-19 Alert Level contractors are to base their offer on and, where appropriate, make use of existing government definitions in this regard
• When specifying an Alert Level, consider your critical project drivers (time, cost, quality and scope) and how they will be affected when Alert Levels change or are redefined
• Where not covered by government definition, include base assumptions for other aspects critical to your project’s success such as inter-regional / international travel restrictions
• The assumptions and base Alert Level should be included in the draft contract and can be further refined in contract negotiations if required due to a change in situation or additional guidance being released

Delay pricing

• Include a clear framework for the calculation of contractor entitlement for time and costs associated with delay and disruption from COVID-19 related events, including your position on profit (noting government guidance generally points to the philosophy of neither party materially benefiting)
• The use of ‘Daily Rates’ alone can reduce calculation complexity but may drive perverse behaviours (as we have seen in non COVID-19 delay events) and are generally inadequate for larger projects with significant sub-contracted works
• Ensure the framework is tested both prior to your market approach and as part of offer evaluation / negotiations, and consider including the contractor at this stage
• Consider asking for visibility of sub-contractor terms in relation to delay and disruption entitlement

Supply risks

• Require contractors to identify critical labour and material supply risks and to identify mitigation measures (such as more locally based suppliers) in their response
• Consider options for risk sharing for cost and/or time on identified critical items. This could include rise and fall mechanisms and Provisional Sums.
• Ensure your contract drafting clearly supports your position and considers treatment of COVID-19 impacts outside of New Zealand, such as those addressed in my colleagues Rob Beckman and Elisha Bellchambers’ recent article on mitigating heavy industry supply chain risk

Contractor business continuity plan

• Response criteria should include the requirement for a Business Continuity Plan (BCP) outlining how project work, both on and offsite, will (or will not) continue in the face of COVID-19 alerts or disruptions.
• The BCP should link to the delay pricing and supply risk management regimes.

Contractor engagement

• Consider how you can appropriately engage with potential contractors as part of the procurement process. Contractors generally have better visibility of risks in the sub-contracting and supply market and their feedback in this regard can help ensure your offer to market is attractive.

Evaluation method

• Consider your Evaluation Methodology in light of the ongoing uncertainty of what an appropriate budget is.
• Brook’s Law, as detailed in guidance from the New Zealand Ministry of Business, Innovation and Employment is one such option that allows quality (non-price attributes) to be the most important factor while still retaining the Principal’s right to negotiate price where it exceeds expectations.

Health and safety

• COVID-19 represents a direct workplace health and safety risk that needs to be managed through appropriate site controls, but not at the expense of maintaining focus on both critical (traditional) health and safety risks, including mental health. If work method adjustments for COVID-19 are not properly considered within an overall risk hierarchy, health and safety risk may increase.
• Require contractors to detail how they will appropriately manage these competing issues.

Contract model

• In this climate, contract models drawing on aspects of Early Contractor Involvement (ECI) and Alliance are worth considering where a project has significant complexity and / or scope ambiguity but do not, in and of themselves, offer a solution
• To be executed well, ECI and Alliance contracts require additional client and contractor side delivery management investment (both time and cost) to be effective. Recent attempts have shown this does not come naturally to some sectors of the construction market and as such, in some cases projects may be better served by more traditional forms of contract with some of the adjustments to risk allocation noted above.

Advisors

As with contractors, your procurement of project advisors should be considering the impacts of COVID-19. Some areas requiring attention include:

• Require designers to consider specification of materials and work methods that are less subject to COVID-19 risk. This should be intrinsic to design in a similar way to Safety in Design requirements.
• Ensuring quantity surveyors and project managers have the capability and capacity to assist in the formulation of the specified delay pricing methodologies and to rapidly assess actual cost and time delay claims. Bolstering and clearly specifying requirements around program monitoring should be considered here.
• Assess whether contract administrators (Engineer to Contract / Superintendents) should be independent of the project manager, noting that in any case this role needs to be carefully scoped
• During any COVID-19 claim event your advisors will be stretched, as their other projects are also likely to be affected. To this end you need to consider what resourcing is appropriate (noting contractual response periods and construction monitoring requirements) and how it will be economically secured.
• Consider a collaborative integrated team approach, including pooling some resources across multiple projects, and incorporating client representatives this should increase knowledge transfer, project efficiency and provide more horsepower to address a COVID-19 claim event
• Ensure your legal advisors are pragmatic, and cognisant that the current evolving environment requires both clear contract requirements and a transparent approach to risk allocation. Complex or opaque legal mechanisms for claim treatment and risk allocation will likely lead to a protracted procurement process and disputes down the line. Engage with firms that have a history of working as part of an integrated procurement and hence have a good understanding of the non-legal aspects of procurement.

Aurecon is working with a variety of clients to ensure their procurement regimes consider COVID-19 impacts and balance the desire for certainty, with ability of the market to economically price risk.

This thinking paper is part of a collection of insights and expertise from Aurecon as it explores leading through and beyond the COVID-19 disruption. Explore our insights here.

About our authors

Norm Castles leads the NZ Infrastructure Advisory team, he has extensive experience in leading procurement, contract administration, project controls and claims management in both Australia and New Zealand.

Trevor Manners is a Manager in Infrastructure Advisory, he has worked across the lifecycle of project development from portfolio strategic planning through to design and construction.  He has a particular focus on procurement and capital project delivery having worked on large infrastructure transactions in both Australia and New Zealand.

This article was originally published by Norm Castles and Trevor Manners on LinkedIn titled, "Pandemic Procurement Managing Construction Risk".