Contractor Network Outcomes Contracts (NOCs)

Network Outcomes Contracts – an industry game changer

The Transport Agency’s new Network Outcomes Contracts (NOCs) model represents a paradigm shift in the way our highway network is maintained, and it has changed the civil construction landscape. Having reached into its second year, with the sensitive tendering process almost completed, Alan Titchall reviews its progress.

The new ‘Network Outcomes Contract’ model was developed for one primary reason – to meet “constrained maintenance budgets” during the past recession made by road funding cuts imposed over the 2012-2015 National Land Transport Fund period. The Transport Agency now concedes that, since 2000, highway maintenance costs had been “getting out of hand”.

It is now over two years since the NZTA came up with its new Network Outcomes Contracts (NOCs) model. I don’t think anyone, least of all the Transport Agency, knew how significant its changes were going to be, and what an impact they would have on both its own culture and the roading industry.

First a quick history

NZTA’s group manager, Highways and Network Operations, Colin Crampton, in 2012, was in charge of absorbing budget cuts.

Back then he wrote in this magazine that road maintenance and operations had reached a tipping point. “Facing a six percent annual increase in maintenance and operations and renewals expenditure, which equates to a $160 million shortfall over the next Government Policy Statement period, is a pretty loud wake-up call for our sector. We have to do things differently, and we have to find efficiency improvements.”

Concerned that any government funding cuts would hurt an industry already in recession, Roading NZ and the Contractor’s Federation approached the government and asked it to review its network spend from the angle of ‘efficiencies’. This resulted in a Minister’s Road Maintenance Efficiency Task Force. At the same time, the NZTA carried out its own internal review of network contracts. Both investigations found, not surprisingly, a lot of ‘inefficiency’.

As Crampton explained at the time, State Highway “business” had remained, largely, unaltered since the introduction of competitive pricing procedures some two decades before.

“For example, Opus is our predominant national supplier of network maintenance professional services, managing around 70 percent of our network,” he said. “A single supplier, yet we have 16 different contracts with them. Does this represent good value for money?”

At an early stage, the NZTA placed the focus on the size and duration of future maintenance contracts. In other words bigger, fewer, and longer than the typical five-year duration of the existing performance-based Performance Specified Maintenance (PSMC), Hybrids and Traditional contracts (with many variations) employed at the time.

The review and eventual new model ended up with multiple drivers: The government’s Road Maintenance Task Force (RMTF), made up of local government, industry and NZTA representatives, an auditor-general report into NZTA’s procurement policies, and the NZTA’s own State Highways & Operations Group. The Transport Agency must have also taken note of Auckland Transport’s moves to larger and longer road maintenance contracts after the merger of the city’s local authorities.

On the sidelines was an advisory group made up of contracting and transport sector representatives and NZTA staff.

Keeping to a promise, the NZTA did a lot of listening and collaborating with the industry; specifically, with the Contractor’s Federation, Roading NZ, and ACENZ, which all had an vested interest in any new procurement model. Ongoing roading network maintenance is, after all, the life blood of civil contracting. The transport industry at the time, it was noted, either directly or indirectly controlled more than $1.5 billion in civil contracting maintenance works every year. The way this is procured will always have a significant impact on the entire industry.

And it can be argued that the differing views of Roading NZ and the Contractor’s Federation around the development of the new procurement model, along with the use of NZS 3910, or the collaborative NEC General Conditions of Contract, crystallised the contracting industry into speaking with one voice, and was a major driver in the merger of Roading NZ and the Federation into Civil Contractors New Zealand (CCNZ) in 2014.

Roading NZ was already pushing for a technology-based, collaborative-type contract approach to road construction and maintenance with a strategy called ‘Whole of Life Savings’, which recognised that a large proportion of the total cost of an asset over its lifetime is incurred by maintenance. That cost can be reduced both by taking ‘whole of life’ into account when designing the road in the first place, and by planning an ongoing maintenance programme around the most effective options from a specified budget. The essence of this strategy was published as a document called ‘Stepping Up, to the challenge of efficiency gains’ in February 2012.

The Contractor’s Federation pushed for collaborative forms of contract under ‘alliance’ type principles. It also had an agenda to maximise the number of new maintenance contracts and protect the interest of its smaller members. The Transport Agency at one point talked about two mega network maintenance contracts (one for each island), before this number crept up under negotiations to eight and, finally, 23.

Position of the small and medium contractors

From the outset, the new model, developed by the NZTA’s own maintenance and operations review team (under its Headway Focus project), moved to performance outcomes, rather than the inputs focus of existing contract models.

The development of a single performance contract involved aggressive levels of aggregation, which resulted in lively industry debate. Would reducing maintenance to a single supplier contracting model result, over time, in a lack of industry competition, and a diminishing number of small to medium contractors?

In a column in this magazine Colin Crampton acknowledged this concern.

“That’s why the new contracting model includes built-in measures to encourage more head contractors, and for these bigger suppliers to form new arrangements with medium to small contractors to be competitive. For example, the [contracts] will have a two-year transition period during which head contractors must tender out a fixed percentage of work based on the historical market. This will give current suppliers an opportunity to work and grow with the new model.”

Crampton added: “We think the [new model] covers all the competitive bases. But we’ll need to see it in action to be sure competition is being encouraged, not stifled. And if it is, be prepared to act, quickly and proactively.”

The final model, launched in 2013, is called Network Outcomes Contracts (NOCs) and features mechanisms, as promised, that require Primary Suppliers to engage and treat SMEs fairly. There’s a direct channel for contractors to raise issues regarding unfair contractual conditions and behaviour. The minimum default percentage for subcontracting out NOC physical and consulting work is 20 percent, but no less than that subcontracted on historical levels in the region (which means well over 30 percent in some regions).

At the NZ Transport Agency & NZIHT annual conference last month, I had an opportunity to talk with agency management over the success of this arrangement.

Says NZTA group manager Highways and Network Operations, Tommy Parker: “In competitive tendering there are always going to be winners and losers.

NZTA's Tommy Parker
NZTA’s Tommy Parker

“We went through a long process with extensive consultation with the industry and specified a minimum amount of work by subcontractors to sustain local market for smaller players.

“We do encourage all contractors to come and talk with us and liaise, and we have a number of avenues [through] which they can do that.

“The impression I get is that by and large it [NOC model] is fair and is working for most people and our contractors are getting a fair crack of the whip with work. I won’t say that is the situation in every case, but generally we are satisfied at where we have got to.”

Nic Johanssen, the NZTA’s primary liaison person with contractors in regards to the NOCs, says: “Most contracts are delivering to the timeframes from the initial contract start date which shows contractors are starting well, and are keen to get it right.”

He adds that no subcontractors have raised issues regarding unfair contractual conditions or behaviour, but nor has any subcontractor ‘stepped up’ to become a Primary Supplier.

“Not as yet,” says Johanssen. “We are seeing good cross-section representation on contract boards and contract management teams. One of the benefits of this model is that it provides the opportunity for subcontractors to step up to lead contractors in the future – as this is only the first round of tenders under the NOC model, we would envisage the potential for this stepping up to occur in future tendering rounds.”

 One network approach

A fundamental principle of the new NOC model is a ‘one network approach’ so road users experience no differences between regions. While the size of each region varies, the average roading area per contract is between 1200 and 1600 kilometres.

The one network approach is the reason both contractor and NZTA work together as one team, and even share offices, and work on consistent management and measurements (through Operational Performance Measures [OPMs] and Key Results Areas (KRAs), assisted with the NZTA’s visual identity guidelines manual.

The NZTA acknowledges areas of ‘vulnerability’ in terms of overall contract compliance (eg, ‘shoulder’ measurements) and where OPMs are open to interpretation, such as vegetation control. All sealed services must be free of vegetation, but what about lichen and moss? While there are things in the NOC that are still open to interpretation, any decisions made must be on a “national basis”, says the NZTA, while acknowledging areas such as ‘emergency response’ will vary according to the scale of the region.

At the conference it was noted: “In these situations we decide what is fair and reasonable using a collaborative approach and ensure a national consistency, while appreciating there is always going to be some variation around our regions. Meantime expect ongoing changes to the [visual identity] guidelines as the document evolves.”

 

 

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