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Knowlege, expertise &

contract failuresAthol Yates , Senior Policy Analyst

Institution of Engineers, Australia

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Content of this presentation

• What went wrong?• Examples of a lack of expertise• Lessons learned

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What went wrong?

• Canberra Hospital implosion• HMAS Westralia ship fire• Collins class submarine• Amphibious transport ship project• ACT Bruce Stadium redevelopment• IT Outsourcing Initiative

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Royal Canberra Hospital Implosion

• A 1kg fragment of steel killed a spectator who was 430 metres away among the watching crowd of over 30,000.

The Explosives sub-contractor has been charged with manslaughter by gross negligence.

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HMAS Westralia

• 1998: Fire in the main machinery space. 4 dead.• The fire was caused by diesel spraying from a burst fuel hose.

The original rigid hose was replaced with a flexible one.

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Collins class submarine contract

• Myriad of design deficiencies include engine noise, propellers, periscopes and combat systems.

• $5 billion project to build 6 submarines.

• Project cost blowout and time overruns.

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Amphibious transport ship project

• Convert 2 old US ships into amphibious transport ships• Original budget $125 million• Final cost $400 million• Nearly 3 year project time blowout

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ACT Bruce Stadium redevelopment

• 1996 total cost of $27 million of which $12 million to come from taxpayers

• Auditor-General found it would cost taxpayers $45 million

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IT Outsourcing Initiative

• $5 billion program to transfer IT work to the private sector from 100 Commonwealth agencies

• Debate over level of savings• Initiative was behind schedule and over budget in its

management• Risk management inadequacies

The IT

Initiative

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Are competent people employed?

2 skills required•contract management expertise•subject matter expertise

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“None of those persons possessed any knowledge or experience in the implosion technique and [they] were unqualified to prepare a true risk assessment of the demolition. The so-called risk assessment plan was a failure.”

ACT Coroner, Hospital Implosion, 1999

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“Key personnel within the RAN, and more particularly ADI Limited, were not adequately trained or qualified for the responsibilities placed on them.”

Naval Board of Inquiry into the fire

in HMAS Westralia, 1999

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“The Committee understands from Navy personnel that more extensive submariner assignment to the project at the specification and procurement stage might have prevented some of the submarines' problems.”

Parliamentary inquiry into the

submarine project, 1999

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“there was insufficient appropriately experienced Defence staff in the shipyard or the project office to coordinate and control repair .”

Report on the

Amphibious Transport Ship Project, 1999

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“not allocating sufficient appropriately qualified staff to the redevelopment was a contributing factor to the difficulties encountered during the redevelopment.”

Auditor General’s

Report into Bruce Stadium

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“reduced in-house staff numbers to manage the contracts create an increased risk to the Commonwealth.”

ANAO Audit of the

Defence Estate Organisation, 2000

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“there have been concerns that some agencies lacked sufficient in-house expertise to manage transitional arrangements”

Humphry Report, 2001

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Cost of uninformed buyers

Issue engineers ITGovernment- Contractslacked adequate input oftechnical expertise

26% 24%

Industry - Charge a riskpremium if the governmentappeared to not be aninformed buyer

64% 42%

Average risk premiumcharged

17% 21%

IEAust, 2000, 2001

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Lessons learned

Lesson 1: Be an informed buyer

• Contracting expertise

• Subject matter expertise

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Lesson: Be an informed buyer (cont)

1 Examine the good or service to be procured to determine the level of technical expertise required to be an informed buyer.

2 Evaluate the relevant existing level of in-house and external technical expertise available.

3 Undertake a cost benefit analysis of in-house versus contracted-in expertise at each stage of the contracting process.

4 Obtain and where appropriate, retain the expertise.

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Conclusions

Questioning of accepted management wisdom

Generalists managing technical activities Specialist numbers being reduced due to

arbitrary benchmarking Reliance on contractor's quality assurance

rather than supervision

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Lesson 1: Have effective risk policies, risk management and competent people

Contract managers had carried out initial monitoring visits to CWCs but then limited monitoring to ad hoc visits to some CWCs and desk based monitoring. However none of the offices visited had completed a formal round of monitoring since the commencement of the CWC contracts.

ANAO report into Work for the Dole Program

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Lesson 1: Have effective risk policies, risk management and competent people

“the main reason citied for the lack of monitoring activity is that contract managers have not had time”.

This led to the obvious ANAO statement that it “is concerned that the department is exposing itself to considerable risks by not monitoring the progress of CWCs”.

ANAO report into Work for the Dole Program

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Lesson 2: Undertake comprehensive competency assessment of contractors

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Lesson 2: Undertake comprehensive competency assessment of contractors

To minimise the risks to public safety in future public works projects "any claims made by the tendering body as to their ability to meet any special requirements must be independently and objectively checked before the letting of the contract".

ACT Coroner, Hospital Implosion, 1999

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Lesson 2: Undertake comprehensive competency assessment of contractors

“Defence should ensure that the prime contractor and the subcontractors have the technical, financial and managerial expertise to carry out the project and to respond to likely risks.”

Report to the Minister for Defence on the

Collins Class Submarine, 1999

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Lesson 3: Follow proven engineering, contracting & safety processes

Proven processes are invariably developed after years of experience and improvement.

Bypassing them or rationalising them by eliminating cross-checking and supervision to save time and money can have exactly the opposite effect.

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Lesson 3: Follow proven engineering, contracting & safety processes

ACT WorkCover did not follow established safety processes. It failed to:

• ensure that the explosive workplan required by the Demolition Code of Practice was met,

• scrutinise departures from the original demolition workplan, • issues appropriate prohibition notices in accordance with

the OH&S Act to ensure the methodology was safe.

ACT Coroner, Hospital Implosion, 1999

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Lesson 3: Follow proven engineering, contracting & safety processes

The decision to replace rigid fuel lines with flexible hoses should have been processed through the Navy's change process and approved by Lloyds Register. However "both processes were bypassed, largely as a result of ignorance and incompetence".

"The formal RAN configuration change process is circumvented at times, generally by well intentioned personnel, and this can have a severe impact on safety.”

Naval Board of Inquiry into the fire

into HMAS Westralia, 1999

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Conclusions

Contract risk is increasing• Projects are becoming more complex.• Projects are involving more partners.• Contracts are becoming larger and therefore the

penalty for failure is becoming more significant.• Risk management is being used as the basis for

engineering design rather than risk avoidance through over-design.

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Conclusions

Contract failures indicate

management practices are inadequate

Greater attention needs to given to risk management

Risk management is becoming more

important+

=

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Risk Management &IT Outsourcing

• "this review has identified significant risks in the transition and implementation process of outsourcing",

• "some risk areas have not been as anticipated or actively managed as they would have been had there been more buy-in to the process by agencies", and

• "priority has been given to executing outsourced contracts without adequate regard to the highly sensitive risks".

Humphry Review

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AS/NZS 4360

Risk Management

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Step 1: Establish the context

Policy objectives which lacked indicators were •"leveraging access to private sector technology and know how" and •"improved potential for staff career development in an environment where IT&T is the core business

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Step 2: Assess Risks

Materialised risks: • lack of senior management buy-in which "is by far the most significant risk factor for implementation management", and • there was "no general acceptance that smaller agencies will have their service requirements adequately attended to in the context of a larger group or cluster

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Step 3: Implement treatments

Humphry treatments include: • reducing the power of the Executive Agency, encouraging buy-in by giving power to agency heads, •allowing agencies to utilize the most efficient form of outsourcing and

•by putting outsourcing outcomes in the employment

contracts of agency heads.

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Step 4: Monitoring & Review

Program unchanged until 2001.