Contracting with the Australian government, whether at Commonwealth, State, or local level, represents a significant opportunity for businesses. The potential for realising new revenue streams and business growth is vast. The upcoming Brisbane 2032 Olympic and Paralympic Games only heightens these prospects, especially if you’re in Queensland.
However, the intricacies of government procurement can ensnare the unwary, transforming opportunity into liability. But how much negotiating power does a tenderer really have? Is there any opportunity to minimise risk and gain more favourable terms? Or does the plight of a tenderer inevitably involve accepting a contract that is heavily favourable to the government?
In this article, Moulis Legal special counsel Lucinda Watson looks at this common issue that arises for businesses that contract with government and when is the best time to negotiate contract terms.
Beyond the tender
The journey of responding to a government tender is fraught with compliance hurdles that can easily trip up prospective tenderers. Our article, Government tender processes…the devil’s in the detail, reinforces the importance of meticulous adherence to tender requirements.
But beyond the tendering phase, successful bidders face the oftentimes overwhelming prospect of negotiating and actually entering into contracts with government. This stage introduces the inherent risk of committing to agreements that are either too challenging to fulfill or fraught with undue risk.
Don’t fall into the trap of skipping or skimping on contract review
It is tempting to either skip or skimp on a review of the contract terms during the procurement process itself. Be warned that waiting until late in the process, or skipping contract review altogether, can have unintended consequences later down the track.
An incomplete or non-committal response to the draft contract's terms can increase the perceived risk of a tender, adversely affecting its evaluation. Ultimately, it could mean that a bid is not successful.
Moreover, failure to negotiate or clarify contractual terms during the tender phase can leave a business bound to unfavourable conditions without recourse. Taking on some level of risk and some less than ideal terms is of course normal, but the key is to be fully informed and aware of the risks being accepted.
If you’re still not convinced of the value of contract review, consider the costs of fixing a problem with the contract later down the track. The costs associated with varying a contract or going through a formal dispute process when problems arise can far outweigh the costs of reviewing and negotiating the contract at the outset. In many cases, disputes can be prevented by ensuring that the contract is clear and deliverable, setting out appropriate roles and responsibilities and allocation of risk.
You’ve got more negotiating power than you think
It is a common myth that, when dealing with government, tenderers have to accept the contract terms as they are presented to be competitive.
Oftentimes, the proposed contract included in tender documentation is heavily in favour of the government. This is most commonly seen in terms relating to risk and liability, and practical things like responsibility for delivery milestones and payment terms.
But, tenderers generally have more power than they think and there is always room for negotiation. In fact, governments usually expect tenderers to have some comments and changes to the contract terms. As mentioned above, sometimes not commenting on the contract terms can work against a tenderer as the government entity may perceive that to mean they have not read or understood the terms. In some cases, this can impact the evaluation of a tender response as representing higher risk.
Accordingly, actively engaging in the contract review and negotiation phase of a procurement process can not only mitigate risk, but can also make a tenderer’s bid more competitive. Ultimately, it is also in the government entity’s interest to get the contract right and be acceptable to both parties. Often the government is relying on tenderers for their unique expertise and it may be that a tenderer’s feedback improves the contract for the benefit of both parties. No one wins if the contract cannot be achieved or problems arise during contract delivery because certain matters were not properly considered at the contract negotiation phase.
The draft contract dilemma
Where the request for tender requires a compliance response to a draft contract, tenderers should ensure that any issues that it would seek to negotiate are raised as part of its tender response. A tenderer may be prevented from raising issues with the contract at a later date. Often tenderers will be asked to itemise any areas of the contract that are not agreed, and what changes would be sought should that tenderer proceed to the final stages of the process.
Tenderers may identify a variety of issues with a draft contract that range from nice-to-haves and helpful feedback to improve the contract, to critical items that need to be resolved in order to be acceptable. Tenderers may go through a process of considering how many of these issues it raises while strategically maintaining its competitiveness.
It is tempting to dive into the big ticket items that are so often negotiated – price, liability, indemnities, intellectual property, warranties and termination. However it is important to consider the contract in its entirety. For example, while provisions related to liquidated damages or performance metrics might, on their face, look reasonable, they need to be considered in the context of the performance obligations, milestones and deliverables. Difficult to meet performance measures or ‘failures’ that are too easy to trigger or that can occur on an ongoing and recurring basis may potentially become very costly.
Key takeaways
The allure of government contracts is undeniable, but careful attention should be paid to the contract terms as early as possible. There is value in carefully considering the contract terms and seeking to negotiate the contract where required. Ultimately, it is in both parties’ interest to have a clear and considered contract that enables each party to achieve its objectives.
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If you’re considering putting your company forward for any government contracting opportunities (including the Brisbane 2032 Olympics), yet you’re unsure of how to manage the challenges of responding to and negotiating the contract terms, join Moulis Legal at our Milton office on Tuesday, 19 March, for the first of our Contracting with government series - ‘The devil is in the details – the essentials of entering into government contracts’.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
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