In praise of the independent neutral

The primary difficulty with Government project delivery is the apparent belief that contractors and advisors cannot be trusted, where the converse is typically more reasonable.  As outlined in previous posts, my experience is that the failure of Government projects (excess costs, failed delivery and delay) arises from a failure to properly plan the project, and to reduce project uncertainty, coupled with unrealistic allocations of risk, presumably to overcome the Government's own failure to properly define the project.

The fixation with competitive tendering on lump sum fixed prices doesn't help.

This traditional lack of confidence (or, perhaps confidence which exceeds expertise and experience) lies at the core of the problem.  If the procurement approach is based on a lack of proper preparation and mistrust, the outcome will never be good.  The shame of this is that the expertise and experience is available; it just doesn't get used effectively.

For any project, the commercial risk of undertaking the project always rests with the owner.  It is not the designer's project, nor is it the contractor's or the suppliers'.  Any allocation of risk must start with this simple truism - designers, contractors and suppliers are simply functionaries paid for what they provide.  It is not their project; it is the owners'.

Furthermore, for any given project (taking into account risks inherent in the owner and the contractor, whether it's their respective capitalisation, resources or skill levels), there is always an ideal allocation of risk, and there is an efficient time for delivery and cost.  Using the contract to distort any of these will simply result in poor or late delivery, cost overrun and dispute.  Nothing is free; the challenge is to procure exactly what is needed (and not something more or less) for a fair price (not the lowest, or an inflated price) on time.

The skilled and experienced, and truly independent neutral has a significant role to play which is often under valued.  The reasons are typically prosaic, frequently driven by misguided confidence on the part of the project team - I can do that, having a neutral is not worth the cost, I want the control, how neutral is the neutral, how do I tell the boss, etc.  It may go against our "cultural cringe", but until we as a community accept that the contractor is honest, is doing its best, is entitled to make a profit over and above its costs, and independent neutrals may have expertise that owners and their paid advisors do not have, not much will change.

There is a useful role for independent neutrals fulfilling three roles (either individually or in combination):

  1. Peer reviewing

It has to be acknowledged that publications like the Government Rules of Sourcing go a long way to setting up a good culture for procurement.  However, like to so many Government publications, words on paper (or on an intranet screen) do not seem to translate into good outcomes.  The overriding concern seems to be keeping costs under control, and the solution to pass those costs on to the contractor.  At some stage, decision makers need to acknowledge that this isn't working.

A peer reviewer, whether a technical expert or commercial advisor (lawyers are generally good at this), will review the commercial and procedural aspects of a project from inception to award.  Roles include:

  • challenging the project objectives
  • reviewing procurement methodology 
  • assessing allocations of risk against commercial good practice and market conditions
  • perusing and advising on contract documentation
  • advising on negotiation issues prior to award

It is not the role of the peer reviewer to displace the owner's advisors but to review the project as a whole and to express an independent view on whether or not the approach to procurement is likely to result in a successful project outcome.  While the peer reviewer is paid by the owner (everyone is ultimately paid by the owner), unlike technical and legal consultants, it is expected to give its advice without fear or favour - it is up to the owner to make the commercial decisions, and if they wish to make a bad decision, it is down to them.  What is important is that they do so on good advice and an informed basis.

2.  Probity auditing

Many pages are written about fair and ethical procurement.  Traditionally, the Office of the Auditor General has published guidelines on process, and with limited exceptions, procurement in New Zealand has been largely corruption free.  The question which needs to be asked, however, is how effective these procedures have been in procuring successful project outcomes.

The goal, surely, is to ensure not only that a fair process is followed, but also that the proposal recommended for acceptance for any project is fair and is the "best for the project" (which may not necessarily be the lowest - a hard position for many project managers to accept).  In competitive tender procedures, this may not mean finding reasons to knock tenders out; the more productive approach is to assist tenderers to put their best proposal forward.  This may include reducing commercial uncertainty, looking for value engineering opportunities or encouraging non-conforming proposals.

For contractors, the probity auditor must be seen to be independent, approachable and willing and able to address probity issues fairly.  It is not the role of the probity auditor to introduce commercial fairness into a project, but to protect the integrity of the procurement process.  If contractors believe that they have been treated fairly, then there is a greater opportunity for them to win the project, and to invest in that opportunity.

For all its procedures and guidelines on the topic, I'm not convinced that government agencies are achieving this goal.

3.  Disputes Boards

It has always been the case in the construction industry that fair and interim disputes resolution is critical to keep projects on track.  Disagreement will always arise where there are significant uncertainties in high value projects.  

Historically in construction projects, the professional engineer has discharged what is referred to as a "dual role" of owner's representative and independent professional resolving disputes as they arise.  Being independent and impartial in resolving disputes for a project where the same person or consulting company is responsible for advising the owner, conducting feasibility studies (including site investigation), preparing the design, assisting with document preparation and tendering, approving variations and assessing and certifying claims is, frankly, beyond any professional ethical standards.  The levels of conflict of interest, let alone protecting the continuity of professional insurance cover, are simply unmanageable.

The benefit of disputes boards, or project mediators if preferred, is that they are informed from project award through to project completion, and they are available to provide prompt determinations on disputes (whether interim binding or advisory) as and when those disputes arise.  All too often, disputes clauses are drafted by lawyers with an underlying attitude of distrust - strict time bars, interim decisions made final and binding and the like all assume that claims are manufactured.  This is a poor starting point.

While it may appear naive, why contract with a party with whom there is such a level of distrust?

Provided both owners and contractors are confident that an independent neutral, involved from the start of the project, has the time and expertise to provide a workable solution to disputes, on an informed basis, then experience has shown that disputes will rarely crystallise into lengthy, expensive litigation (whether in court or arbitration).  Sadly, the same cannot be said for the independent engineer.


Until owners accept that engaging in major procurement projects is not a war of attrition, and contractors and suppliers become confident that they are not being ripped off at every turn, things will not change.  

Government procurement represents the majority of construction and technology procurement, and it is often the worst offender.  There is rarely a sensible reason for aggressive transfer of risk (reducing opportunities to claim variations, excluding force majeure claims, putting the entirety of contractors' margins at risk, transferring the Government's design liability to the contractor etc); it tends to reflect a lack of commercial expertise, confidence and, worse, a significant lack of competence in the procurement team; and it inevitably entrenches a high level of distrust from project inception.

For any project, there is ultimately a price that has to be paid.  Procuring a successful project means paying a reasonable price, procured on a sensible process.  This will almost always mean that owners must accept a significant level of pricing risk.  

Where paid advisors have "skin in the game" (to keep their client happy and to avoid liability), the independent neutral is focussed instead on giving impartial advice on a more unbiased basis.  Owners and contractors may not like what they hear, but if given on a considered basis with the benefit of experience and expertise, that independent advice is usually worth listening to.