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In this assignment, you are required to write a report on the critical analysis of the procurement approach. This report should provide answers to the following:

  • Describe the procurement method being used in this construction project.
  • What are the characteristics, advantages and disadvantages of the PPP procurement method?
  • Which procurement characteristics were of particular importance and why?
  • What makes this procurement method popular in its adoption?
  • In your opinion, is the procurement method suitable for this construction case study project?
  • What procurement method would this project be particularly suited for and why?

Strategic Project Alliance

Topic: Report On The Procurement Of Construction Of The Spencer Street Station

This report paper critically analyses the procurement approach by describing the procurement method that has been used in the construction project of the Spencer Street Station. The current procurement approach that has been used by the Southern Cross Station Authority is discussed in this report paper and also proposal of the more suitable procurement approach. The consortium concession period, client, location, and size of the construction project as well as the definition of the bundling of DCOM and PPP. The Spencer Street Station which is commonly known as the Southern Cross Station is the project being procured which is intended to be transformed into a world-class inter-modal transport facility that is capable of managing 15 million commuters yearly and increasing to million commuters yearly by the year 2020.  

The procurement process that was used previously by the Southern Cross Station Authority was the Public-Private Partnership procurement approach. This suggested procurement approach was faced with numerous disadvantages which were noticed after its implementation, these shortcomings include contractual disputes and delay and cost returns. The suggested procurement approach for this Southern Cross Project is relational contracting procurement approach. The amount needed to transform this project is quoted to be AUD$700 million which will make the station to serve interstate, regional, and metropolitan bus and rail commuters (Ali, 2010).

The procurement process of the station would be managed by the Southern Cross Station Authority since it is a statutory body established to represent Victorian State Government and was charged with managing the delivery phases and procurement of the station overseeing and re-development its operation. Civic Nexus Pty Ltd is a private sector consortium which signed a Development and Service Agreement with the building and designing the operational responsibility for the station over a duration of 30 years.

Procurement method can be defined as the procedure used in converting requisitions and requirements into contracts or purchase orders. The procurement methods can be broadly categorized into private procurement methods and public procurement methods (Arrowsmith, 2012). The following are procurement strategies that can be implemented by the Southern Cross Station Authority before awarding the construction tender to the Civic Nexus Pty Ltd which is a private sector consortium include:

Alliance contracting strategy is an agreement where parties enter into an agreement to cooperatively work and share reword as well as the risks determined against the indicators of performance. The service providers and the owners work as a single integrated group to provide a given project under the framework of the contract where their commercial interest is similar to the real objectives of the project. Alliancing entails a formal contract in which the parties assume to act in the project's best interest and this is the major difference from Public-Private Partnership procurement strategy where the responsibility to act in such a way is voluntary completely (Lenon, 2015).

Relational Contracting

The contractor should realize the profit from a contract so as to commercially survive since this is how it is being understood generally, although not recognized universally. There is also a need to know that the client has an influence directly on the way in which the profit is being made by the contractor, through the procurement strategy section. The major principle of philosophy in the choice of an alliance approach is the recognition that the profit of the contractor should be earned through performance and not through the ability of the contractor to win and make claims. The strategic project alliance procurement method was not used by the Southern Cross Station Authority is issuing the railway's station transformation project to the Civic Nexus Pty Ltd since the government cannot influence directly on the ways this private sector consortium is making its profit during the construction of the project (Bower, 2014).

Relational contracting is a contracting or transaction mechanism which aims at giving explicit recognition to the commercial partnership amongst the parties to the contract. The benefits, responsibilities, and essence of the contract are apportioned transparently and fairly with delivery mechanisms that aim at partnership and trust. At construction project level, this can promote working relationships amongst every stakeholder of the project by facilitating effective and efficient construction, enhancing returns of the finance, as well as minimizing the incidence and making conflict resolution much easier (Chan, 2017).

The relational contracting strategy can, however, extend more than the project in question such as the relationship between the parties in a longer duration, or construction industry profitability or productivity. The implementation of the relational contracting strategy can enable a critical contribution to the social capital development as well as the four pillars of sustainable societies which include competitiveness, creative citizens, citizenship, and connectedness. The purpose of the relationship is basically an economic one that is intended to enable the transaction between organizations and to issue a framework for the exchange conduct.  The Relational Contracting strategy cannot be implemented in this project of transforming the Spencer Street Station since the relationship between the government (Southern Cross Station Authority) and the construction company (Civic Nexus Pty Ltd) is not to be extended further after this construction project has been completed (Clifton, 2016). These four pillars are shown in figure 1 below:

Figure 1: Four pillars of Relational Contracting (Coss, 2013)

The procurement method that is being used in the re-development of the Spence Street Station project is the Public-private partnership which is abbreviated as PPP. The Public-private partnership is a very broad range of partnership where the private and public sectors collaborate for some mutual benefit (Walker, 2012).

Public-Private Partnerships

The Public-Private Partnership procurement method was the method used in the procurement process of the Spencer Street Station project. The reason for this procurement method being chosen is because it is normally used for the procurement of any public projects which for this case if the transformation of the Spencer Street Station. The Public-Private Partnership has been used widely for public infrastructure over the past decade. The procurement method is an alternative to the standard process of procurement and is composed of the diverse approach to financing, construction, design, and planning. PPP is a cooperative arrangement between a given number of private and public sectors normally of a long-term nature in which the private sector gives a delivers the required service and assumes substantial operational, technical, and financial risk in the project of transforming the Spencer Street Station (Das, 2015).

In this procurement process of this project, the capital investment is done by the private sector on the basis of a contract with the government (Southern Cross Station Authority) to provide the construction of the project and the cost of offering the service is wholly or part of it borne by the government. Since this project is aimed at providing a public property, the government may give capital subsidy which has been approximated at AUD$700 million in form of the one-time grant, with an aim of making the project viable economically. The government may also support the project through the provision of revenue subsidies such as guaranteed annual revenues or tax breaks (Flyvbjerg, 2010).

This Procurement method also includes a transfer of important risks associated with the transformation of this station project for the public entity. A maximum risk allocation is the major value generator for the model of public service delivery. There are numerous drivers for the Public Private Partnership, one of them is the claim that this procurement method enables the public sector to harness the services and expertise delivered and procured traditionally by the public sector (Greenham, 2015).

The key characteristics of the Public Private Partnership procurement method used in the issuing re-development project to the Civic Nexus Pty Ltd include:

Financing: The PPP procurement process enables the government through the Southern Cross Station Authority to begin the payment of the project and then pay off the cost evenly over the duration agreed. The redevelopment of the Spencer Street Station was approximated to cost AUD$700 and was to be financed by the Australian government through its representative, Southern Cross Station Authority. The construction company given the mandate to carry out the re-development program owns the assets to be used in the re-development together with the manpower to provide labour that will take responsibility, build, and design for a duration of 30 years starting on 2002 (Greve, 2013).

Maintenance: The traditional model of funding for a project enables for planning before the commencement of the construction process. However, this does not make provisions for refurbishment or maintenance that are ongoing after the railway station is being used. In the PPP method, the maintenance cost is factored into the general cost.

Risk: The PPP procurement strategy places the responsibility associated with the risk management on the private sector that is involved in the re-development of the railway's station. The risk that is likely to be exposed during the re-development process is factored in the bidding price by the construction company (Gunn, 2013).

Winners and Losers: The individuals that realize a greater percentage of money are the group at the upfront who are majorly the lawyers and the financiers who in this case are the government through Southern Cross Station Authority and the lawyers representing the construction company.

Cost saving: The Public-Private Partnership processes are normally known to be a cost-saving method of procurement. The PPP is cheaper as compared to the processes of standard procurement. A construct and design process embedded in this procurement process normally provide lowest allowable standards under the Australian Standards, unless the project is meant to attain certain requirements. There is also an argument that the innovations used this procurement strategy brings lower cost which is normally done by reducing the floor area or construction standards (Hart, 2011).  

Faster delivery: The time of delivery is not easy to substantiate since the beginning point is not defined clearly in the PPP procurement process. In case the process begins from the initial call of expression of interest and continues through the bidding process, selection of the bidders preferred before the construction is let, then the procedure is much expensive and longer. This is because financiers, lawyers, probity auditors, and consultants are all involved and their work takes a period without any contribution to the construction and design of the project (Hashim, 2015).

Other advantages of the Public Private Partnership procurement process include:

  • The appropriate PPP project risks allocation enables the reduction of risk management expenditure.
  • The experience and expertise of the private sector are used in the implementation of the PPP project. The experience and expertise of the Civic Nexus Pty made it be awarded the tender for the re-development of the Southern Street Station.
  • The private sector is given a chance to acquire a remuneration that is of long-term. For this project, the contract was awarded to the Civic Nexus Pty Ltd which was given an opportunity to acquire a long-term remuneration of the Spencer Street Station whose completion period is expected to be in the next 30 years(Jefferies, 2015).
  • Ensures timely provision and higher quality of public services. This procurement process ensures that re-development of the Spencer Street Station which will be capable of managing 15 million travellers and increasing to 40 million commuters yearly by the year 2020. The procurement process will only award the tender to the construction company that has a perfect design of the project so as to achieve a high quality.
  • Ensure the essential investment in the public sector and more efficient management of public resources. An investment like the re-development of the Spencer Street Station was made possible by the PPP procurement approach which awarded the tender to a private sector consortium(Walker, 2015).
  • Designs are developed by the bidders, this makes it easy for them to work on the construction effectively since they are well conversant with the design.
  • Greater certainty of the value of contract before the beginning of construction process. Before the beginning of the re-development of the project of the railway station, the value of the construction process is well known since all the cost are determined during the procurement process using the PPP approach(Kumaraswamy, 2010).
  • The PPP projects are normally completed on schedule than projects contracted out in the traditional process. The duration of starting and completion of the project is clearly stipulated in the PPP procurement approach and this project on the re-development of Southern Street Station is meant to last for 30 years starting in the year 2002.

Contractual disputes: This is one of the major disputes that are associated with the PPP procurement method. There is need of paying a lot of money which was approximated to be more than millions of dollars in liquidated damages.

Cost and Delay overruns: This is also a major challenge that is faced the Public-Private Partnership procurement method. There is the risk of the unanticipated cost of giving continuous 24-hour permission needed by rail operators during the phase of construction (Thomson, 2014).

Precise specifications: The need to precisely specify the requirements is normally difficult, especially for those in the soft sciences like health and education. In these sectors, agencies of government are normally looking towards implementation of new approaches but may not have the ability to clearly articulate what is meant in terms of construction design (Limited, 2011).

Development and Briefing: There is the need for the PPP project to be very detailed design, this means that the Southern Cross Station Authority to be very clear concerning its requirements. There is no chance of changing the aspects of the design as the project proceeds in the PPP process, except with a high penalty cost. Should the government wish to make some changes or additions to a PPP project under construction, it will be at the mercy of the owning consortium and the cost is a process that is non-competitive (MacDonald, 2013).

Community consultation: The Public-Private Partnership procurement process gives very limited chance for the community suggestions and comments about the purpose, design, and location of the project. Other disadvantages of the Public Private Partnership include:

  • Not all risks can be transferred to private sector cost-effectively
  • The high cost of contracting rule out numerous projects. The cost of re-development of the Spencer Street Station was approximated to be AUD$700 million which economist view as an exaggerated cost as a result of the Public Private Partnership procurement approach, especially during the contracting process.
  • Difficulty of contracting needs specialist skills from the public sector
  • Longer and more costly compared to traditional public procurement. The duration of procurement process of PPP is longer which led a very long completion duration as well as the cost of the entire project(Masterman, 2012).
  • The agreements are comparatively inflexible, complicated, and long-term making it impossible to evaluate the impacts that the project may have on future activities. It is clear that after 30 years of re-development program of the Spencer Street Station, there will be other changes which would be necessary to be incorporated as at that time.  

The PPP procurement process enables the government through the Southern Cross Station Authority to begin the payment of the project and then pay off the cost evenly over the duration agreed. The redevelopment of the Spencer Street Station was approximated to cost AUD$700 and was to be financed by the Australian government through its representative, Southern Cross Station Authority. The capital investment is done by the private sector on the basis of a contract with the government (Southern Cross Station Authority) to provide the construction of the project and the cost of offering the service is wholly or part of it borne by the government. The PPP procurement strategy places the responsibility associated with the risk management on the private sector that is involved in the re-development of the railway's station (OECD, 2014).

The reason for this procurement method being popular is because it is normally used for the procurement of any public projects which for this case if the transformation of the Spencer Street Station. The PPP method enables the individuals to reduce or avoid conflict when they are engaged in a complex project. The Public-Private Partnership processes are normally known to be a cost-saving method of procurement. The PPP is cheaper as compared to the processes of standard procurement. The procurement method is an alternative to the standard process of procurement and is composed of the diverse approach to financing, construction, design, and planning (Ogunlana, 2011).  

The Public-Private Partnership procurement approach is not the most suitable procurement approach that could have been used in procurement of the Spencer Street Station project due to significant disadvantaged such as comparatively inflexible, complicated, and long-term making it difficult to evaluate future activities, procedures are long and costly, restriction of the government ability to make major changes during re-development process, and not all risks can be transferred to private sector cost-effectively. The most suitable procurement method can be used instead of the PPP strategy is the relational contracting (Ross, 2013).

Relational contracting is a contracting or transaction mechanism which aims at giving explicit recognition to the commercial partnership amongst the parties to the contract. Relationship contracting is a term used to denote new styles of the contract which attempts to attain results that are acceptable to every individual involved in the project of construction delivery. This relational contracting procurement strategy is a process of establishing and managing the relationships between the parties which are aimed at removing all the barriers, encouraging optimum contribution, an enabling all parties to attain success. The benefits, responsibilities, and essence of the contract are apportioned transparently and fairly with delivery mechanisms that aim at partnership and trust (Rowlinson, 2016).

The relational contracting strategy can, however, extend more than the project in question such as the relationship between the parties in a longer duration, or construction industry profitability or productivity. The implementation of the relational contracting strategy can enable a critical contribution to the social capital development as well as the four pillars of sustainable societies which include competitiveness, creative citizens, citizenship, and connectedness (Ryan, 2012).

In relational contracting procurement approach, there are no contractual disputes as in the Public Private Partnership approach. This is because the relational contracting approach attempts to attain results that are acceptable to every individual involved in the project of construction delivery, the parties involved in the project construction include the Southern Cross Station Authority which is representing the government and is also the major financier of the whole project as well as the Civic Nexus Pty Ltd which is signed with the building, designing, and taking operational responsibility of the re-development of the Spencer Street Station (Schwindt, 2014).

The relational contracting approach with being involved in establishing and managing the relationships between the parties which are aimed at removing all the barriers, encouraging optimum contribution, and enabling all parties to attain success. Another advantage of the relational contracting approach is that there are precise specifications. The need to precisely specify the requirements is normally easy in this procurement approach since it speculate that the designing of the project is a sole responsibility of the bidders hence the Civic Nexus Pty Ltd is expected to come up with the design for the project for the approval of the Southern Cross Station Authority before construction can be started (Scott, 2010).

Conclusion

This report paper critically analyses the procurement approach by describing the procurement method that has been used in the construction project of the Spencer Street Station. The procurement process that was used previously by the Southern Cross Station Authority was the Public-Private Partnership procurement approach. The Public-Private Partnership have been used widely for public infrastructure over the past decade. The procurement method is an alternative to the standard process of procurement and is composed of the diverse approach to financing, construction, design, and planning.

This suggested procurement approach was faced with numerous disadvantages which were noticed after its implementation, these shortcomings include contractual disputes and delay and cost returns. The suggested procurement approach for this Southern Cross Project is relational contracting procurement approach. Relational contracting is a contracting or transaction mechanism which aims at giving explicit recognition to the commercial partnership amongst the parties to the contract. This procurement strategy is a process of establishing and managing the relationships between the parties which are aimed at removing all the barriers, encouraging optimum contribution, an enabling all parties to attain success.

The relational contracting approach with being involved in establishing and managing the relationships between the parties which are aimed at removing all the barriers, encouraging optimum contribution, and enabling all parties to attain success. This makes the relational contracting procurement process to be more effective than the Public-Private Partnership procurement process.

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