The path to standardised contracts in NSW

The NSW Government's Construction Leadership Group (CLG), representing the major construction procurement agencies of the NSW Government, released two discussion papers to industry in support of its commitment to procure construction projects in a more collaborative way.

The first is on the different types of construction procurement models used across NSW in the construction sector, and the second is on understanding when and why different types of security should be used in construction projects.

Construction Procurement Methods

The Construction Procurement Methods Industry Discussion Paper aims to:

• identify preferred procurement methods in the construction industry and industry drivers for selecting models;
• initiate discussion between government and industry to identify and consistently define the most commonly used procurement models; and
• facilitate the development of a set of guidelines which will document best practice for each of the main procurement methods and the circumstances in which each method is the best option.

The paper recognises that in the current market, where there is an unprecedented level of construction activity, the private sector is not capable of absorbing all risks (particularly those which are not capable of being fully priced or assessed such as risks related to utilities, planning approvals and latent conditions) and that a more collaborative risk allocation is necessary.

CLG acknowledges that it is "championing the development of standard contractual risk-sharing mechanisms…which keep both parties appropriately incentivised… It intends to develop standardised legal language for these risk-sharing mechanisms to reduce the cost of doing business for Government and industry."

The paper explores a wide variety of models including construct only, design finalisation and construct, design and construct, cost plus, managing contractor, early contractor involvement, framework agreement, incentivised target cost, alliance, collaborative client contract, and delivery partner. For each model it identifies where it should be used, key benefits and risks and recent examples.

Guidance on Security for Construction Projects

The Guidance on Security for Construction Projects Industry Discussion Paper was prepared in response to the NSW Government Action Plan: A ten point commitment to the construction sector, and to demonstrate the Government's commitment to reduce the costs of bidding through standardisation of requirements for bonding, parent company guarantees and other forms of security across projects and agencies.

The Security Paper aims to assist government procuring agencies when acting as principal to a construction contract, to understand:

• why there is a need for security for construction projects;
• how to optimise the different types of security;
• the effectiveness of each type of security; and
• the implications that may arise from calling on security.

It focuses on the following three types of security:

• parent company guarantees (PCG);
• unconditional undertakings (ie. bank guarantees and insurance bonds); and
• cash retention.

While the paper does not set financial targets as to where each type of security may be appropriate, it encourages a holistic approach including considering both capped and uncapped liabilities when determining the appropriate amount of security, project risks across the project timeline, the contractor's corporate structure and enforcement issues if a proposed PCG involves an overseas entity and alternatives to bolstering a security package such as including liquidated damages, set off arrangements, indemnities and fixed and floating charges.

The CLG has called for submissions on the two papers so we look forward to seeing how these develop through further industry engagement.

If you would like to make a submission on the Security Paper, there is still the opportunity to do so until 28 February 2019.