This article was published in the December/January edition of New Zealand Construction News.
The Ministry of Business, Innovation and Employment recently released new Government Procurement Rules (Rules) that government agencies must apply as part of their construction procurement process. There have been government procurement rules in place since 2006, but the new, revised Rules focus on achieving broader outcomes for the public good rather than focussing on the lowest price.
The Rules must be applied by government departments, the NZ Police, the NZ Defence Force and most Crown entities (Agencies). Other government agencies, such as local councils and tertiary education institutes, are encouraged to have regard to the Rules.
The Rules apply to:
- the procurement of goods or service or refurbishment works, where the total estimated value is $100,000 or more (excluding GST)
- the procurement of goods or services for any new construction project with an estimated value of $9 million or more (excluding GST).
This article summarises some of the key changes in the new Rules, and how these changes affect contractors. Contractors are referred to as “suppliers” in the Rules, and in this article.
How do the new Rules affect contractors?
The Rules place obligations on Agencies, both in the procurement phase and through delivery of the project, to achieve public value by delivering social, economic, environmental and cultural benefits. These new obligations will inevitably affect how suppliers tender for and deliver contracts.
Some of the key aspects suppliers will need to be aware of are:
- During the tender stage, suppliers should consider how they can demonstrate achieving public value (secondary benefits) on a project.
- During delivery, suppliers will need to demonstrate how they are providing secondary benefits and complying with the new Government Procurement Charter and Supplier Code of Conduct. Suppliers may need to allocate resources to comply with any reporting obligations imposed by Agencies in relation to compliance with the Rules.
- Suppliers will likely also need to demonstrate how they are achieving the Government’s ‘priority outcome’ of increasing the size and skill level of the construction sector workforce. Suppliers will need to be ready to answer tender questions regarding the supplier’s skills development and training practices, and those of their subcontractors.
- Suppliers will need to ensure that their subcontractors also have good business practices and are achieving public value.
- Agencies are now required to actively engage in risk allocation and management strategies, which should see a fairer allocation of risks.
Achieving ‘public value’ through broader outcomes
The Rules are focussed on achieving ‘public value’, not by reference to the lowest price, but to “the best available result for New Zealand for the money spent” over the whole life of the goods, services or works.
To achieve ‘public value’ on government projects, Agencies are now required to consider Broader Outcomes when purchasing goods, services or works (Rule 16). The term Broader Outcomes is defined in the Rules to mean:
The secondary benefits that are generated by the way a good, service or works is produced or delivered. These outcomes can be social, economic, environmental and cultural benefits, and will deliver long term public value for New Zealand.
What this means for suppliers is that during the tender process, Agencies will require tenderers to demonstrate how they will meet the Broader Outcomes. The Notice of Procurement or Request for Tender must specify which Broader Outcomes the supplier is expected to deliver (Rule 38).
Agencies will no longer be looking for the lowest price; rather, under Rule 46 the Agency must award the contract to the supplier that has offered the best public value, including Broader Outcomes, over the whole life of the goods, services or works.
Agencies must report on their achievement of Broader Outcomes to the Ministry of Business, Innovation and Employment. We expect this will mean Agencies become more involved during the contract process as they will be monitoring the project to ensure the Broader Outcomes are being achieved. Suppliers may also see Agencies incorporate contract terms requiring the supplier to report on the Broader Outcomes they have agreed to deliver.
Contracts with priority outcomes
The Government has specified a priority set of four specific outcomes, called Priority Outcomes. For certain contracts that have been designated by the Government, Agencies must include requirements relating to the Priority Outcomes in their procurement. The Priority Outcomes are:
- Increasing the number of New Zealand businesses contracting directly to Government, including Māori and Pasifika businesses (Rule 17).
- Increasing the size and skill level of the construction sector workforce (Rule 18).
- Improving conditions for workers and future-proofing the ability of New Zealand businesses to trade (Rule 19).
- Reducing emissions and waste, to assist the Government meet its goal of significant reduction in waste by 2020 and beyond. (Rule 20).
Certain types of contracts are “designated” against one of the Priority Outcomes. Suppliers tendering for the work in a designated contract area will need to show that they can achieve the Priority Outcome. The Agency must then conduct due diligence throughout the contract to ensure the Priority Outcomes are delivered.
For example, when procuring any construction works over the threshold (see Rules 6 to 8), Agencies must include questions about the skills development and training practices of the supplier and their subcontractors. This must also include questions about what more a supplier would do over the course of the contract to improve or build skills. The focus of this Priority Outcome is for the Government to support the growth of the capacity and capability of the construction workforce. More information on the Priority Outcomes and the designated contract areas can be found here.
The Supplier Code of Conduct and Government Procurement Charter
The Rules have also introduced a Supplier Code of Conduct and Government Procurement Charter, both of which place expectations on suppliers in relation to their business practices. Agencies may require suppliers to show that they are meeting the expectations of the Code and Charter.
Of note for suppliers, the Charter requires Agencies to engage with businesses with good employment practices, encourage collaboration across businesses, and engage with Māori, Pasifika and regional businesses. Agencies are also required to work with suppliers on risk mitigation and risk allocation strategies.
The Charter can be found here.
The key areas of the Code are:
- Ethical behaviour
- Labour and human rights
- Health, safety and security
- Environmental sustainability
- Corporate social responsibility
Agencies can exclude a supplier from participating in a contract if the supplier breaches the Supplier Code of Conduct (Rule 44). The Code can be found here.
Requirements for subcontractor standards
Suppliers may also now be required to demonstrate that they are achieving Broader Outcomes and public value in their subcontracting. Rule 25 says Agencies should require suppliers to engage subcontractors who have good standards in employment and health and safety, and who support training and skills development. The subcontractors should also comply with the Charter, the Code and the Priority Outcomes.
Improving prompt payment
In line with the intent to improve the conditions for suppliers and subcontractors, the new Rules also focus on prompt payment of suppliers and subcontractors. Rule 51 says Agencies must pay suppliers promptly, and must encourage suppliers to pay their sub-contractors promptly. Suppliers should refer to the guidance notes accompanying Rule 51 as these give some tips for how to structure payment terms and systems.
The Government Procurement Rules can be found here.
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