Mike Ritchie, Managing Director, MRA Consulting Group helps councils navigate effective waste contracts and tendering.
Waste/recycling contracts are generally the largest and most valuable contracts that a council signs. These are also the most important greenhouse gas decisions a council can make.
Waste decisions also touch every household, every ratepayer and every voter, every week. So, getting them right is important.
In my view, it is not difficult to put in place a proper contract that runs well; to the benefit of all parties involved.
Many readers can recall examples of multi-year tender processes that have failed, for many reasons – no one tendered, no tenderers were selected, no contract awarded, contract awarded but not executed, contract failed and ended in dispute.
This article explores some simple principles of tendering and contracting that MRA recommends for all the local government contracts we assist with.
Here is the short version:
Be clear on the scope.
Understand risk and allocate it properly.
Model Contracts save time, risk and money.
Understand capital and provide for its funding.
Be mindful of probity matters.
Contract structure (BOO/ BOOT/D&C/Purchaser Provider) matters.
Variations are okay but not too much.
Contamination matters.
Education costs are real.
Regional considerations.
And here’s the slightly more detailed version:
Scope – For collection contracts, this is straightforward. But processing can be complicated. Who is responsible for what, when and how? Take time and make sure all the stakeholders are on board with what is being contracted. This is particularly true for groups of councils in a regional contract.
MRA uses a “Tenderer Questionnaire” with about 100 questions to document exactly what the scope and specification need to do.
Risk – Understand risks. They are unavoidable in contracts but the key is to assign them to the party best able to manage and mitigate them. For example, put ‘Product Commodity Risk’ on the material recovery facility (MRF) – they understand commodity trading and do it every day. Councils do not. But don’t put landfill levy increases onto the MRF. They cannot mitigate it or avoid it. If it is passed to them, it will just cut their margins and impose a commercial stress. Each risk should be identified and allocated according to who is best to manage it.
Model Contracts – use them. Most of the risks have been identified and allocated (sensibly). Put a good waste adviser, probity and legal team together and you have the package.
Some free advice – don’t use the council’s “General Services Contract”. It is not designed for waste. Similarly, don’t commission lawyers to write a new contract. It will cost a fortune and not add value. The lawyers’ role should be to review the contract documents you propose to use. Most Model Contracts have been tested legally, and they do the job, you just need to make sure the specification deals with the scope and risk. If the Model Contract does not quite do the job, amend it. Don’t reinvent the wheel.
Capital – Generally councils should allow the contractor to depreciate their capital over a longer period if they don’t want the gate fee or service fee, to explode. The higher the capital contribution (think new MRF, new trucks etc) the longer the contract period. That will keep the gate fee or lift cost at a reasonable level. Trying to crunch high capital contributions into a short contract period will result in a high unit cost.
Probity – Get the probity adviser in, early and often. Too many tenders get derailed due to conflicts.
Contract structure – Most collection and processing contracts are Purchaser Provider. Council ‘purchases’ a service from a trucking collector or a MRF operator, composter or landfill/energy-from-waste ‘provider’.
Although it does happen, it is relatively rare that a council or group of councils procures the construction of a new facility.
This is where Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT), Design and Construct (D&C) and Alliance Partnering come into their strengths. If you are seeking a new capital build, then seek proper contract structure advice. Properly explore options before landing on the contract model.
Variations – Some contractors put in big lists of variations during the tender process. I caution about accepting large amendments during the tender process itself. If a wide range of variations are accepted, it can mean that the tendered contract is fundamentally different and should therefore be re-tendered, so all competitors have an equal opportunity.
All operating contracts should have variation clauses, if nothing else but to allow for innovation and changes in law. Price for example, should be subject to variations for consumer price index (CPI) or rise and fall (depending on the contract length and what it is for). Holding a contractor to a fixed price, irrespective of all else, is a recipe for failure. At least talk.
Contamination – I call out contamination as a special risk in the waste/recycling sector. Who should own contamination risk? The answer is of course where it can be best managed and mitigated. That is almost always shared between council and the operator.
Council should own the contamination risk associated with education (or lack of it) and the contamination that is presented to a processor. This is done by the inclusion of ‘contamination bands’ into MRF, anaerobic digestion and composting contracts (and collection, where appropriate).
The council pays a marginally higher price for higher contamination rates. That sends the right price signal to council and compensates the processor for additional costs of dealing with contamination.
Forcing a processor to take all contamination risk at any level of contamination may feel like a win at first but it will lead to contract pain and disputation over time. It will obviously result in higher prices as processors hedge risk.
Along the same vein though, the processor should bear the contamination risk for the products it produces. If it produces a contaminated compost and cannot sell it for a high price, that is the processor’s risk. If it produces a high-grade compost that sells brilliantly, then it enjoys the higher revenues.
If the parties decide to share these risks, then that is equally good. Just define them properly and share the upside and downside.
Education – This follows on from the contamination discussion. Some councils ask their collection contractor to manage community education (usually for simplicity).
I am not a big fan. Councils are best placed to target education to the right people for the right reasons. If there are contamination bands in the contract, then the economic signals are direct and obvious. Where the collection contractor is not the processor, education priorities can be confused and economic signals weakened.
It is now common for councils to include the costs of education in their collection contracts (e.g. $5-10/hh/yr paid by the collector to council annually, thereby recognising education as an essential and ongoing, annual cost of the waste service).
Council can then engage anyone it likes to deliver the education services. It maximises the targeting of the education spend to what is needed.
Regional contracts – One of the biggest uncertainties in multi-council tenders is the commitment of tonnes. If you want a lower price (usually the point of regional tendering) then it is crucial that tenderers have certainty about the tonnage they are tendering for.
If each council keeps an opt in/opt out position it undermines certainty and will result in a less competitive tender process and higher prices.
MRA recommends that councils pre-commit their tonnes prior to tender. In practical terms we suggest they agree a threshold price before commencing the tender process. (The threshold is always confidential).
If the price comes in under that threshold, then council tonnes have been locked in already. It gives tenderers confidence that their tendering effort will be respected, and a contract will be forthcoming to the winner. It eliminates the perception of “fishing expeditions”.
For more information, visit:
www.mraconsulting.com.au
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