CO-OPERATIVE CONTRACTING 
IN NEW SOUTH WALES, AUSTRALIA



ED SHESTOVSKY
  
GENERAL MANAGER
PROCUREMENT MANAGEMENT
DEPARTMENT OF PUBLIC WORKS AND SERVICES, 
NEW SOUTH WALES
  
  

Background
  
As the State's largest client, in 1992 the State Government of NSW instigated a Royal Commission into the New South Wales Construction Industry, to address problems in a clearly under performing industry. 
  
Flowing out of the Royal Commission recommendations, the Government introduced major reforms, including the issue of Codes of Practice and Tendering for the Construction Industry, to address corrupt and illegal practices, to encourage better performers and to change the ethos of the industry from adversarial, distrusting, dog-eat-dog to one of one of co-operation and forward looking. 
  

Code of Practice
  
The Code of Practice underpinned the Government's reform agenda, and it was seen as a catalyst to turn around the prevailing destructive industry culture. The Government used its buying power, as the largest purchaser of capital works in the State of NSW to drive the industry into being a more efficient, responsive and responsible partner. Failure to comply with the Code meant no work opportunities on Government funded projects.
  
In a nutshell, the Code of Practice established minimum standards of industry behavior on Government contracts. Objectives of the Code were to improve industry efficiency and productivity; and drive workplace reform through Best Practice in areas of:
  

Partnering
  
As part of the reform process, partnering was also progressively introduced to NSW Government projects from February 1993, with a primary objective to reduce adversarial behaviour. 
  
Partnering on DPWS construction contracts in the early stages was only implemented once a contract was awarded and only if the parties agreed to partner.
  
A partnering workshop was arranged, once partnering was agreed to by all the participating stakeholders and adopted at all levels of their respective organisations. Stakeholders can include clients, major subcontractors, suppliers, the contractor, and DPWS.
  
At the partnering workshop the project participants agree upon mutual goals for the project; develop formal problem solving and dispute avoidance strategies: and ways to improve communication. A charter outlining these mutual goals is prepared. The Charter however is not part of the contract, and acts somewhat as an agreement to agree".
  
The Partnering process is then implemented and monitored through regular meetings and a close-out workshop.
  
Key thing to remember is that this early form of partnering was an add on, and had a limited impact due to its project by project application.

Three pillars of Co-operative Contracting
  
To convert the initial partnering model into a strategic model, the concept of co-operative contracting was developed.
  
Co-operative Contracting consists of three major pillars; Best Practice Contractors, the C21 Construction Contract and a comprehensive Contractor Performance Reporting System.
  
These pillars are set on a foundation of the Government's Code of Practice. This arrangement was designed to create a stronger bond of mutual dependency between Contractors and the Department, which would act as a positive behavior modifier i.e. a driver of cultural change. 
  
This arrangement was seen as one often used by the Private Sector in its forging of strategic alliances through mutual dependence.

Best Practice Contractor Scheme
  
DPWS, for many years has had a contractor prequalification scheme for major building and civil works. However, many of these contractors had shortcomings in not consistently meeting the reasonable expectations of the Department. These shortcomings included substandard work, late completion, excessive disputation and uncooperative behaviour.
  
A new strategy was needed to improve the standard of performance of prequalified contractors.

Best Practice Strategy
  
The strategy chosen was that if contractors can demonstrate their head office and site management systems were highly developed towards a professional, transparent, cooperative culture, combined with a good track record in key construction related activities, then it is very likely that this type of contractor can provide DPWS and its clients with consistently good performance.
  
In return contractors that meet the Best Practice Scheme requirements would be given advantages over other prequalified contractors in terms of more tender opportunities, inclusion in smaller tender panels, and a 2% tender price preference in certain situations where tender panels are selected.
  
A further benefit was that contract security was almost halved for "Best Practice" Contractors

Best Practice Contractor Scheme - Pre-application requirements

Before contractors are assessed for the Best Practice Scheme they must meet the Scheme pre-application requirements. These are:

  
Best Practice Contractor Scheme - Levels of performance
  
The specific areas of demonstrated high performance for Scheme entry are in the areas of corporate culture, relationships, and management systems. The criteria considered as best reflecting these areas are customer focus; workplace practice; management practice; cooperative relationships; quality, Occupational Health Safety & Rehabilitation, and environmental management.
  
The Scheme also importantly builds on the Department's previous initiatives by incorporating an element of continuous improvement in which participants are required to demonstrate that their overall performance is on an upward trend in order to remain on the Scheme.

  
Best Practice Scheme Matrix



The minimum Scheme requirements are set out in a matrix (or roadmap) with a tiered performance criteria starting from the 'Development Stage' then to the 'Establishment Stage', continuous Improvement Stage' and finally to the 'Best Practice level' against each of the criteria. The Scheme application document defines what level of performance is needed to reach each of these Stages. (See Attachment)
  
The idea of the matrix had its roots in the American quality movement of the early 1990? (American Quality Foundation and Ernst and Young (1992)). This was modified into a construction context by the Australian Construction Industry Development Agency (CIDA), and then into the Best Practice model by DPWS.
  
Contractors can map out where their organisation is placed in terms of these requirements and implement improvements to their systems to meet the minimum criteria.
  
The minimum requirements of the current Scheme have increased from those of the former Scheme. This is the "Continuous Improvement" element of the Scheme. When this occurred in late 1999, some 6 initial Scheme members failed to make it into the next Scheme.
  
The strategic plan of DPWS is to ultimately only use Best Practice Contractors on DPWS contracts.
  
There are currently 29 Best Practice Contractors accredited with DPWS, while there are some 100 Prequalified Contractors in all. The preferences given to Best Practice Contractors result in them being given almost exclusive access to 70% of DPWS expenditure on Capital Works.

C21 Construction Contract
  
The second pillar of co-operative contracting is the C21 Contract which incorporates many of the features of partnering. The typical methods of payment for this contract are Lump Sum or Schedule of Rates. It is not an open book arrangement.
  
NSW government agencies and the construction industry developed the C21 Contract for construction contracts valued over $1 million. C21 uses plain English and has a user-friendly format.
Whilst 90% of C21 has equivalent obligations in risk allocation to conventional General Conditions i.e. FIDIC, Australian Standards etc, it requires the parties to do all they reasonably can to co-operate in all matters relating to the Contract.
  
There are early warning provisions. Clause 5 requires (and I quote) Each party must do all it reasonably can to promptly inform the other on anything of which it becomes aware which is likely to affect the timing, cost or quality of the Works, and the parties must then investigate how to avoid or minimise any adverse effect on the Works."
  
The parties are required to regularly meet to evaluate and monitor performance of the contract. Contractors used for C21 contracts are chosen because they have demonstrated a co-operative approach across their organisation. Because of this, the 1 to 2 day partnering workshop is replaced under C21with a ½ day 'start-up' workshop.
  
C21 encourages innovation and offers incentives to contractors to suggest cost effective improvements. Contractors are able to keep cost savings, subject to satisfying the Principal that work scope is not affected.

C21 Contracts are required to be completed defects-free. There are no liquidated damages. A Contractor's poor performance would show up in the Contractor's performance report, which in turn would restrict future tender opportunities for that Contractor, or ultimately lead to removal from the Departments pre-qualification lists.
  
Under C21 the parties appoint an independent Valuer to promptly resolve the cost and time impacts of any disputed variation. The Valuer's decision is final and binding.

Security is reduced on contracts based on C21 and further reduced by around 50% for Best Practice Contractors.
  
C21 can be used for Design & Build contracts without modification.
  
A C21 Sub contract has also been developed which reflects head contract provisions down the supply chain.

Contractor Performance Reporting
  
The third and final pillar of co-operative contracting is Contractor Performance Reporting.

NSW government has a whole of Government approach for its agencies, which requires all agencies to regularly monitor performance of its contractors. The reporting process provides feedback to Contractors on their performance on each project. Natural justice provisions apply and Contractors can appeal against perceived unfair assessments.
  
Performance information can be exchanged between government agencies and is used for the purpose of evaluating contractors for registration, pre-qualification, tender listing, expressions of interest or awarding contracts. 
  
Generally the reports are prepared at 3 monthly intervals (but at least once every 6-months) and also immediately after practical completion and at finalisation of a contract. Each performance report is discussed with the Contractor and any Contractor's comments form part of the report. The report will state whether the Contractor is recommended for further work.
  
The report performance criteria include time management; management and suitability of site personnel; management of subcontractors; standard of work; contract administration; quality systems; occupational health, safety rehabilitation management; management of industrial relations; environmental management; workforce or skills development and co-operative relationships.
  
An unsatisfactory performance report can result in a Contractor being denied further work opportunities of a similar nature by the reporting agency. This embargo may be extended across all Government agencies, depending on the seriousness of the breach. However, the Contractor must be given the opportunity of an independent review if one is sought.

Outcomes
  
The latest Contractors benchmarking report comparing DPWS Best Practice and Non-Best Practice tracked over a 5-year period show the Best Practice Contractors are consistently providing superior performance. (See below)



DPWS continues to benchmark its C21 contracts, partnered and non-partnered contracts.This benchmarking analysis shows that the success of construction contracts tends to reflect the extent co-operative contracting attributes are used. 
  
Contracts using co-operative contracting arrangements tend to have less contract duration increases; fewer variations, less variation cost increase; and less contract disputation.(See over)

Conclusions
  
In conclusion, the NSW experience can be summarised in this way. In 1988, the Capital Works program to support the Australian Bi-Centennial Celebrations resulted in construction costs increasing by over 40% over 2 years. When a similar event (but bigger in relation to an increase in Capital Works) the Sydney 2000 Olympics occurred, the cost growth for construction in NSW remained relatively flat. This outcome demonstrated the industry had progressed to that forward looking state which was a key objective of the post Royal Commission reform process in NSW.

Reference Documents
  
For further information on the Contractor Best Practice Scheme, C21 or Contractor performance reports please refer to these internet sites.

	Contractor Best Practice Scheme
	Accreditation Requirements
	1998-2001

  
  
    
Copyright 2000 Department of Public Works and Services, N.S.W., Australia

All rights reserved. No part of this paper may be reproduced, distributed, published, or transmitted without the prior permission of the copyright owner.