Procurement: a year in review

Introduction

2017 ushered in a number of changes to law and policy affecting Commonwealth procurement and contracting.

Just yesterday, a new version of the Commonwealth Procurement Rules (CPRs) was registered, which will commence on 1 January 2018. We consider this and other key changes affecting Commonwealth procurement and contracting this year.

Changes to the Commonwealth Procurement Rules - 1 January 2018

As mentioned, the amended CPRs will take effect on 1 January 2018. The key changes are as follows: 

• Prequalified tenders are now limited to procurements from the Legal Services Multi-use List. This means any procurements above the threshold from other existing multi-use lists must now comply with Division 2. 
• Entities can no longer conduct a limited tender on the basis that the work is a repetition of similar construction services that conform to a basic project which was previously market tested. 
• If evaluation criteria are weighted or are of different importance this must be disclosed in the request documentation.
• Tenders must be open for at least 30 days if responses are not being lodged electronically.  If the approach to market was not issued electronically, then the minimum opening period is 35 days.
• Other changes have been made which increase the information that entities are required to provide in their tender documentation.  

The new CPRs are available to view on legislation.gov.au. We will provide further detail about the changes in a separate Commonwealth Alert to be published in the coming days.

Changes to the Commonwealth Procurement Rules – 1 March 2017 

In March 2017, the CPRs were updated to include further requirements in relation to tenderer compliance with relevant standards and regulations and an economic benefit test to be applied in certain circumstances. 

The new CPRs require Commonwealth officials to take steps in the procurement process, for relevant procurements (see further below), to assess whether tenderers meet Australian standards and comply with relevant regulations and / or regulatory frameworks. Further, relevant entities (non-corporate Commonwealth entities, and corporate Commonwealth entities listed in section 30 of the PGPA Rule, that must comply with the CPRs when performing duties related to procurement) are now required to "make reasonable enquiries to determine compliance" with the applicable standards over the course of a contract.

This means that relevant entities will need to:

• consider which standards are applicable to each procurement and identify these in the procurement documentation.  Alternatively, agencies may consider asking tenderers to identify the applicable standards in their tender responses;
• only contract with suppliers that demonstrate compliance with the standards; and
• include clauses in contracts that allow the agency to audit and enforce compliance over the course of a contract. 

The new CPRs also require that for procurements over $4 million, relevant entities consider the "economic benefit of the procurement to the Australian economy". The economic benefit consideration is in addition to the assessment of other evaluation criteria such as those set out in paragraph 4.5 of the CPRs, including the quality of the goods and services, fitness for purpose and environmental sustainability. The economic benefit consideration should not detract from officials' ability to achieve value for money procurement outcomes.

The key changes have been made to Division 2 of the CPRs. This means that they will only apply to procurements above the following thresholds: $80,000 and over (in the case of non-corporate Commonwealth entities), $400,000 and over (in the case of corporate Commonwealth entities), and $7.5m and over for construction. They will not apply to procurements that are exempt from Division 2 under Appendix A, or under rule 2.6. It remains to be clarified whether or not they are intended to apply to limited tenders.

Building Code

The Code for the Tendering and Performance of Building Work 2016 (Building Code) commenced on 2 December 2016.

As with previous versions, the Building Code sets out requirements that building contractors and building industry participants must satisfy in order to be eligible to be awarded Commonwealth funded building work. Once such a contractor submits an expression of interest (EOI) or tender for Commonwealth-funded building work after 2 December 2016 (which makes the contractor a code covered entity), the contractor and its related entities must meet the requirements in section 11 of the Building Code and not be subject to an exclusion sanction (a period during which a code covered entity is not permitted to tender for, or be awarded, Commonwealth funded building work).

The Building Code also places obligations on "funding entities", including Commonwealth agencies procuring building work.  For example, section 24 requires funding entities to ensure their EOIs and tenders require tenderers to demonstrate their compliance with the Building Code.

Section 11 of the Building Code regulates the content of a building contractor's enterprise agreement by prohibiting clauses that contain restrictive work practices or undermine freedom of association. This includes clauses that:

• impose or purport to impose limits on the right of the contractor to manage its business or to improve productivity;
• discriminate, or have the effect of discriminating against certain persons, classes of employees or subcontractors; or
• prescribe or otherwise restrict the number of employees or subcontractors that may be employed or engaged on a particular site, in a particular work area, or at a particular time;
• prescribe the terms and conditions on which subcontractors are engaged (including the terms and conditions of employees of a subcontractor), or the scope of work that may be performed by employees or subcontractors;
• limit or have the effect of limiting the right of an employer to make decisions about redundancy, demobilisation or redeployment of employees based on operational requirements; or
• directly or indirectly require a person to encourage or discourage a person from becoming or remaining a member of a union.

A funding entity must not enter into a contract in respect of building work with a code covered entity in circumstances where the entity is covered by an enterprise agreement that fails to comply with section 11 of the Building Code. In circumstances where the code covered entity has related entities that also engage in building work, those related entities' enterprise agreements must also be compliant with the Building Code in order for the code covered entity to be eligible to be awarded Commonwealth-funded building work.

The Australian Building and Construction Commission (ABCC) issues Letters of Compliance for enterprise agreements that meet Building Code requirements, and can also provide advice on whether individual clauses and proposed agreements meet the requirements of the Building Code.

There are some transitional arrangements in Schedule 5 of the Building Code, which need to be read carefully to determine whether they apply.  

Contractual rights to terminate for insolvency may be unenforceable

On 12 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (Act) was passed by the Commonwealth Parliament. In general terms, the Act overrides contractual provisions which are triggered by insolvency. This is in order to provide a window (the stay period) for companies in financial difficulties to undergo genuine restructuring.

Part 2 of the Act amends the Corporations Act 2001 (Cth) (Corporations Act) to include new statutory restrictions which prevent a counterparty (such as the Commonwealth) from exercising contractual rights (including a right to terminate or seek damages) on the basis that the contractor has elected to go into voluntary administration, appoints a receiver or enters into a scheme of arrangement. Once the stay period has ended, a party can exercise the relevant contractual rights (eg to terminate for insolvency) but only on the basis of the corporation's financial position at the end of the stay period.

The corollary of this is that, during the stay period the insolvent company cannot "enforce" any contractual right it has against the other party "for a new advance of money or credit". It is unclear how this would apply to contractual payments for the achievement of milestones under a procurement contract or funding agreement. However, it is likely that any refusal by the Commonwealth to pay for goods or services that have been delivered (on the basis that it has concerns about future performance) would be a breach of the relevant contract.

Importantly, the restrictions do not apply:

• to any rights prescribed by the regulations (as made in connection with the amendment) or declared in a Ministerial determination;
• to companies that are in liquidation (unless it was in voluntary administration before being liquidated) or which have engaged in insolvent trading;
• if the liquidator, administrator or person appointed to administer a scheme of arrangement has consented in writing to the enforcement of the right;
• to any agreements made after the commencement of a scheme, receivership or voluntary administration;
• to contracts made before the Act comes into force, meaning that any rights linked to insolvency events that are included in existing contracts may still be enforced;
• to rights to terminate for reasons other than insolvency events, such as failure to perform to the contractual standard or to make a payment or other obligation; or
• to a termination by agreement, a termination for convenience or a mutual right to terminate on notice for no cause (if such a right existed in the relevant contract).

New cap on IT contracts

On 23 August 2017, the ICT Procurement Taskforce (Taskforce) issued its report recommending that Commonwealth Government IT contracts be capped at a maximum value of $100 million or three years' duration.  The Australian government has accepted this recommendation.

Some of the key drivers for this recommendation are to:

• increase transparency;
• provider greater opportunity for SMEs to provide components of significant ICT projects;
• drive the use of Agile rather than traditional "waterfall" style contracting with smaller and more regular approaches to market;
• encourage innovation by reducing the impact of contract failure; and
• reduce overall expenditure on ICT by 10% by more closely controlling higher value contracts.

The Government Procurement (Judicial Review) Bill 2017 (Cth)

A key development forecast for 2018 is the potential passage of legislation to enable judicial review of aspects of the procurement process. The Government Procurement (Judicial Review) Bill 2017 (Cth) (Bill) was introduced to the Parliament on 25 May 2017. If passed, the new legislation will provide potential suppliers to the Commonwealth with the right to seek an injunction or compensation, or judicial review of a complaint, in relation to a purported contravention of the relevant CPRs. The CPRs will need to be amended as a result of the legislation.

The Bill was developed as a result of Australia's decision to seek accession to the WTO Government Procurement Agreement (GPA). For Australia to accede to the GPA, the government must ensure that its procurement practices align with the terms of the GPA, which may result in further changes to procurement rules and processes.

The progress of the Bill should be monitored by procurement officers over the next 12 months and, if the Bill is passed, agencies will need to take steps to review their existing processes and establish new processes to manage suppliers seeking to pursue a claim under the new legislation.