Competition and contestability (Public Construction – Guidance 3.2.1)

Effective date: 2 August 2019

Objective: To help Agencies to achieve appropriate / efficient levels of competition

Summary

Agencies should select suppliers using processes that achieve an appropriate level of competition and contestability.

Select the most appropriate tender method to balance competition with efficiency and reducing the burden on tender participants, and the need to use scalable procurement methods that are appropriate for the complexity and value of the project and market capability.

Three types of tender process that may be used for Public Construction Procurement are open tender, Selective Tender and Limited Tender.

The circumstances when Limited Tenders, where competition is restricted or absent, maybe used are set out in Competition and contestability (Instruction 3.2).

This Guidance sets out what to consider when choosing the best way to engage the market, in tender staging and when thinking about the size of the tender field to achieve an appropriate level of competition.

This Guidance should be read in conjunction with Promoting efficiency in the tender process (Guidance 3.3) which focuses on considerations for conducting processes efficiently and reducing the burden of tendering.

Balancing competition with reducing the burden on tender participants

Competition and contestability are key principles in Public Construction Procurement and provide the best way of achieving value for money.

When choosing suppliers, Agencies should use processes that achieve an appropriate level of competition and contestability, taking account of:

• the nature and complexity of the Works or Construction Services
• the structure of the tender process and the Procurement Model
• the dynamics of the supply market and interest among potential tender participants.

Selection of the most appropriate tender method needs to:

• balance competition with efficiency and reducing the burden on tender participants
• use scalable procurement methods that suit the complexity and value of the project
• respond to the capability of the market to provide the Works or Construction Services.

For Agencies that need to comply with International Agreements, structuring a tender process needs to ensure compliance (see Complying with International Agreements (Instruction 2.1).

Open tenders

Open tender processes involve an open invitation to all potential participants to submit a proposal via a public notice or advertisement.

Any tender participant that considers they meet the evaluation criteria may submit a response and participate in the tender. Open tenders are an effective way to reach the broadest possible group of qualified tender participants.

An open tender may not achieve the best outcome when there are many potential tender participants. A high number of potential competitors can dissuade potential tender participants, because the odds of being successful may be too low.

Consider the most appropriate way to structure an open tender, in particular whether a single or multi-stage process is appropriate.

Selective Tenders

In Construction Procurement, a Selective Tender means a competitive tender open only to suppliers on a prequalification Register.

A Selective Tender may be conducted either as an invitation:

• to all tender participants in the relevant category on a Register
• to selected tender participants, (where at least three tender participants in the relevant category on a Register are invited).

Agencies may choose which type of Selective Tender is most appropriate for their procurement, balancing the principles of competition and efficiency. This should consider:

• the number of tender participants qualified in the relevant category
• market interest in the procurement
• the cost to tender participants in preparing a response
• ways to reduce unnecessary transaction costs to all participants.

Selective Tenders offer efficiency benefits by:

• providing competition, while not burdening all potential participants
• reducing transaction costs by providing a process where responses to common evaluation criteria are assessed in advance of an actual procurement, avoiding repetition.

However, Selective Tenders create potential risks:

• the choice of the selected tender participants and the number of participants selected may be seen to be unfair
• selecting from a Register limits the opportunity for consortia to bid, because consortia are generally formed on a project specific basis. (Consortia are one-off arrangements formed for a specific procurement, therefore a consortia would not appear in a Register.)

Ensure that the selection of tender participants from a Register and the number of tender participants selected is defensible. Document the reasons for any selection.

Any selection process needs to be based on fairness. For example, the selection may be determined on merit based on past performance, or on providing equitable opportunity by inviting all tender participants in the relevant category on a Register to express interest in a procurement.

Limited Tenders

Limited Tenders are most appropriate where competition is restricted or absent. The circumstances under which Limited Tenders could be used are set out in Competition and contestability (Instruction 3.2). Further discussion is provided in Limited Tenders (Guidance 3.2.2).

Tender staging and field size

Staging a tender and determining an appropriate field size for a procurement are ways to improve the efficiency of a procurement while maintaining competition.

Tender staging involves undertaking the procurement over a number of stages, with the number of potential participants reducing as the stages progress. The first stage usually involves either open competition or open expressions of interest from a relevant category in a Register.

Agencies may use multi-stage procurement processes when conducting open or Selective Tenders. When conducting a multi-stage procurement process for a Selective Tender, the initial invitation stage may be either open or selective. For clarity, the requirement to use a Forward Notice set out in Forward notices (Instruction 5.1) applies to multi-stage tender processes. The Forward notice must be used in advance of the first notice that starts the multi-stage tender process.

Single stage procurement is often used for Limited Tenders or Selective Tenders, because the number of participants invited to submit a response is small.

Example

An Agency decides to call an open tender for a Works project. As it expects considerable interest in the tender, it decides to use a multi stage process to filter the number of participants - the first stage being an expression of interest and the second stage being invitations to submit responses.

In the Tender Documentation at the expression of interest stage the Agency advises that it intends to use a shortlisting process, inviting four suppliers to submit offers to undertake the Works. Evaluation criteria used at this first stage include capability to complete the Works, capacity to meet the project timelines and proof that a participant holds registration as a Registered Builder in Victoria.

In response to the first stage expression of interest the Agency receives 12 responses.

The Agency evaluates the expressions of interest and determines which four participants will be invited to submit responses.

Field size is the number of participants competing in a procurement, or a stage of a procurement.

Generally, the number of tender participants invited should be between three and six. The recommended field size applies to:

• the second (or later) stage of an open tender
• the direct selection of potential tender participants from a Register; as part of a Selective Tender
• the second (or later) stage of an expression of interest offered to all prequalified suppliers from a category of a Register, as part of a Selective Tender
• a Limited Tender, where the value of the Works is expected to be more than $75,000 (inclusive of GST) but less than $750,000 (inclusive of GST)
• a Limited Tender, where the value of the Construction Services is expected to be more than $75,000 (inclusive of GST) but less than $300,000 (inclusive of GST).

For large or design-led tenders, the number of tender participants invited to prepare project-specific tenders should be limited to a maximum of four. This recommended field size applies to either:

• the tender participants invited under a Selective Tender
• the maximum size for a short list in a multi-stage procurement.

In major projects with complex and expensive tender requirements (such as public private partnerships or alliancing projects), a field size of two maybe sufficient.

For smaller construct-only projects, the field size should be limited to a maximum of six - for example where the Tender Documentation includes a Bill of Quantities (a measured list of the materials needed for the Works).

In determining whether to seek more than the minimum number of tender participants consider any competitive benefit that could be achieved from a larger field against factors such as the:

• time and cost of preparing and evaluating tenders
• complexity of the project
• project delivery method
• structure of the supply market
• interest among potential tender participants.

The benefits of a flexible approach

The planning process should enable Agencies to build a productive relationship with suppliers in the relevant market.

A program of works could justify establishing a Supplier Panel following a competitive tender process to provide a ready source of suitable participants to support multiple related procurements.

The breakdown of the procurement into packages provides the opportunity to have more participants engaged to provide Works or Construction Services. For example, few major contractors operate in regional areas, so dividing a large project into several smaller projects may give local participants a greater opportunity to compete for a project.

Lack of interest in an expression of interest or market testing exercise can be an indicator that the procurement strategy needs to be revisited. Any change should be undertaken carefully. For example, breaking the project into smaller work tasks may increase the number of potential participants, but may also add to integration risks between the smaller projects and increase the contract management task.

Tools and support

The Practitioners Toolkit includes key documents, guidance and information about the Ministerial Directions and Instructions for public construction.

For further information about the Ministerial Directions and Instructions for public construction procurement, please contact the Construction Policy Team.