The pitfalls of a flawed procurement process

A few weeks into March 2018, I had a series of meetings with Dispute Adjudication Boards on three large infrastructure projects I am overseeing. During one of these meetings, I met my good, old friend, Arnold, who had previously shared his experience on Dispute Adjudication Boards, on this platform.

The last time we spoke, we discussed the consequences of delayed decision making on large infrastructure projects. It is always a pleasure to meet with Arnold because he enriches my knowledge on such matters.

On this occasion, Arnold spoke to me about the pitfalls of a flawed procurement process through three interesting cases in Europe, Sub-Saharan Africa and Vietnam. This is what Arnold had to say.

Case 1 – A motor way project in Europe

A local government desired to construct a 100-kilometer stretch of tarmac road. To achieve their objective, they signed a financing agreement with a development bank which stated that, the local government was required to contribute 25% of the total budget for the construction works. In addition, the financing agreement stated that, discrimination of bidders during the tender stage was unacceptable.

A couple of months after the signing of this financing agreement, the local government announced the tender to select a suitable contractor. The tender was packaged as a design and build assignment foreseen to last five years.

The contract value was €250M and it required the contractor to spend the first 1½ years producing a detailed design, and the rest of the time (i.e. 3½ years) constructing the road.

The construction works were successfully completed and the supervising engineer issued the takeover certificate at substantial completion of the construction works. After the defects liability period had elapsed, the development bank conducted an audit, which revealed that, the local government had introduced some restrictive clauses in the tender documents, which prevented certain bidders from participating in the tender process. This was a breach of the terms of the financing agreement and consequently a violation of the procurement regulations of the development bank.

Exercising their rights, the development bank notified the local government that a penalty of 10% of the development bank’s total contribution to the project i.e. [10% of (75% of €250M)] was to be paid by the local government. The Local government did not agree to this and proceeded to the European court of justice.

The court ruled that there was indeed a violation of the terms of the financing agreement and the local government was instructed to pay a fine of €18.57M for breach of the procurement regulations.

Case 2 – A water utility in Sub – Saharan Africa

A water utility decided to build a new water treatment plant and upgrade its water distribution and sewerage system. The works tender for the water treatment plant was packaged as a design and build (yellow book) contract and the water and sewerage network as a red book contract.

In the country where the water utility was located, a clause in the local procurement and contract management law states that a major change to the scope of works during implementation is prohibited. The reasoning is that if all the contenders at the tender stage had known that a major change in scope was eminent, the outcome of an evaluation process (to select a suitable contractor) was bound to be different.

During implementation of the construction works, there were many changes to the scope of works arising from poor preparation of the design requirements – especially for the water treatment plant which was packaged as a design and build contract. These changes had resulted in an extension of time for construction with cost and profit to the contractor.

After the construction works were completed, an audit revealed there were too many changes that had taken place during contract implementation, that led to a significant increase in the project value at completion. On releasing this, the financing agency demanded that the water utility pays for the increase in project costs arising from these changes.

In their audit report, the auditors demonstrated that the cost increase in question was unwarranted because the changes on site were approved and subsequently executed at costs that were significantly higher than the going market rates for execution of similar work.

The water utility could not put up a strong case to defend their decision and they were forced to pay for the increase in costs.

Case 3 – A borrower is instructed to revise the tender documents during an ongoing tender process.

An entity in Vietnam was eager to build a railway. They prepared tender documents and received clearance from their development bank to announce the tender. Unfortunately, the loan officer at the development bank, who issued the clearance, was not a specialist in railway construction and could not provide appropriate technical input.

After the pre-bid meeting was conducted, the bidders sent a series of requests for clarification to the employer – pointing to the fact that the tender documents lacked the clarity to enable the bidders prepare competitive bids. In their formal response to the bidders’ requests for clarification, the employer kept on insisting that the documents were detailed enough to provide bidders with the clarity they needed.

Ignoring the bidders’ concerns, the employer proceeded with the entire tender process and on the final leg of the tender evaluation process, requested the development bank to issue a No Objection to award the construction contract. When the development bank received the employer’s evaluation report (containing a record of the requests for clarification from the bidders), they hired a railway construction specialist who informed the bank that the contractors had raised valid concerns about the tender documents. The railway construction specialist proposed that a re-tender was inevitable. The entire process was halted and the employer advised to improve the quality of the tender documents.

When the employer completed the overhaul of the tender documents, the railway construction specialist was re-engaged to have another look at the documentation. The development bank granted a No Objection to award the contract almost a year after the initial pre-bid meeting.

Cyrus: What key lessons can you flag up from these three cases?

Arnold: The lessons we can learn from these three cases are:

1. Do not take a No Objection for granted – A No Objection is a communication (email or official letter) issued by a financier in the context of its control over a procurement process. During the development of tender documents, the employer usually engages a consultant for such services. It is believed that sufficient quality assurance has been performed on the submission before it is sent to the development partner. When a No Objection to a tender process is issued, it is usually based on the content of your submission. When an audit is conducted at project closure or mid – way project implementation, the employer is still responsible for any mistakes in the process.

2. Understand the procurement and contract management laws governing your procurement – Whether you are a financier a borrower or a service provider, it comes in handy when you have a thorough understanding of the procurement laws of the jurisdiction in which you are operating. Many times the procurement regulations of the financier supersede those of the local jurisdiction.

3. Utilisation of project contingencies – There is a natural temptation for contractors and employers to amend scope within an ongoing works contract and pay for the increase in project costs with the contingency provisions. Beware that major changes in scope and subsequent utilisation of contingency sums are in most cases subject to prior approval by the financier. During preparation of tender documents for large construction works, it is preferable to define the scope for utilization of contingencies at the time of tender preparation in order to avoid accusations of misappropriation of funds when an audit is carried out.

4. Do not try to rush a procurement process – Take your time and ensure that you have dotted all the is and crossed all the ts. Once you announce the tender, and after you have conducted a successful pre-bid meeting, you will be overwhelmed with the barrage of requests for clarification which you will receive from the bidders. Chances are that you will have to stop the entire tender process, revisit your documents and re-issue a fresh set to the bidders.

Cyrus: Thank you for sharing your usual wealth of experience

Arnold: You are welcome

© The Builders’ Garage 2018. Permission to use this article or quotations from it is granted subject to appropriate credit being given to thebuildersgarage.com as the source.