2.11 The development stages (see Figure 2.1) of a project are intended to allow it to be more accurately costed, and designed to a 30 per cent level of completeness, by the time the project seeks final approval.
2.12 The strategic business case (the first approval stage) provides a review of early development work prior to committing significant development funds to the project. The project is developed to a level of detail that is intended to provide a +/-30 per cent degree of cost certainty and a feasible construction schedule. Depending on the capital cost, development costs, sensitivity, complexity or risks associated with the project, the project may be approved within Defence, or by Government.
2.13 The Defence Private Finance Manual states that any project that is likely to involve the capital expenditure of more $20 million should be screened to determine if a PPP should be used to fund the project. This usually occurs at the strategic business case development stage. Many of the capital works projects that Defence delivers are over $20 million and so are required to be screened in this way. In those cases where a PPP financing option for a project was considered but rejected this was primarily due to:
• the length of time private financing administration and tendering processes add to a project. This can be as much as 24 months, with associated costs for Defence resources, and price escalations over time; and
• there being little difference between the cost of financing the project through direct procurement or a PPP (particularly given that at the strategic business stage the accuracy of costing the Public Sector Comparator is +/-30 per cent).
2.14 The preparation of the detailed business case (the second approval stage) includes the refinement of the project design to a stage where it is considered by Defence that the final cost of the project, including any ongoing operating costs, can be estimated to a +/-10 per cent degree of certainty. To achieve this degree of certainty a considerable amount of design, cost planning and construction scheduling is undertaken by consultant architects, engineers and in some cases by construction contractors.
2.15 To assist in the development of the detailed business case, Defence engages a Project Manager/Contract Administrator23 (PM/CA) on a contract for the development phase, with the eventual delivery of the construction phase of the project being dependant on Government and Parliamentary approval. The department maintains a panel of PM/CAs and will request tenders from members of the panel when a project reaches the point where the development of a strategic business case is required.
2.16 Once a PM/CA is contracted, the decision is taken as to whether to use a Managing Contractor or a Head Contractor to build the planned capital work24. Where a Managing Contractor is to be used, they may also be contracted for development to ensure that they, the designer, cost planner and PM/CA have a common understanding of the requirements of the project. Defence advised that this methodology results in a much higher level of scope and cost certainty for projects, although it can be more expensive initially.
2.17 The PM/CA and Managing Contractor usually have two stage contracts - stage one for development and stage two for delivery. The standard suite of contracts Defence use include a clause to the effect that progress to the delivery stage is dependant upon Parliamentary approval of the project (the Committee process) and satisfactory performance in the development stage. Defence advised that where either are not met, the delivery stage of the contract will not go ahead.
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23 The PM/CA undertakes the management of the capital asset project on Defence's behalf.
24 Managing Contractors hire companies or subcontractors to do all of the building works. Head Contractors do the building work themselves. Managing Contractors are usually used for large and complicated building projects, whereas Head Contractors are used for more straight forward projects.