Practice Note on defining ‘public construction’

Identifying when a procurement is ‘public construction’

Department of Treasury and Finance

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© State of Victoria 2016

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ISBN 978-1-925551-24-2 (pdf/online)

Published December 2016

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Contents

Purpose of the guide

The procurement landscape in Victoria

General principles in the Financial Management Act 1994

Ministerial Directions issued under the PDCMA

Victorian government departments and agencies that need to follow the Ministerial Directions

Defining a ‘public construction’ procurement

Guiding principles for classifying procurements as ‘public construction’

Helpful procurement resources

General resources

Page 1

Purpose of theguide

The purpose of this guide is to help public construction procurement practitioners in departments and agencies to determine when a procurement is ‘public construction’.

Public construction procurement must be undertaken in accordance with the Ministerial Directions (Ministerial Directions)issued under the Project Development and Construction Management Act1994 (PDCMA). In order to determine whether the Ministerial Directions apply to a procurement, it is important to determine whether a procurement is a public construction to ensure the requirements in the Ministerial Directions apply.

Although there are some types of procurement that are relatively easy to categorise as public construction, in practice there are a lot of grey areas. This guide is intended to help practitioners determine whether a procurement is public construction’, and whether the Ministerial Directions apply.

Where ambiguity exists in relation to whether a procurement falls within the scope of the Ministerial Directions, advice should be sought in the first instance from the area responsible for procurement within your departmentor agencyto ensure a consistent application of the requirements within the department or agency’s internal governance frameworks.

If further information is required,the Public Construction Policy Team within the Department of Treasury and Finance (DTF) can also provide additional advice to help determine whether the procurement is public construction.

The Victorian Government Purchasing Board (VGPB) can provide advicefor goods and services procurement.

The procurement landscape in Victoria

Two specific sets of rules and guidance apply toprocurement by Victorian government departments and agencies:

  • the supply policies issued by the Victorian Government Purchasing Board (VGPB) which relates to the procurement of goods and services; and
  • the Ministerial Directions for public construction issued by the Minister responsible for Part4 of the Project Development and Construction Management Act 1994 (PDCMA).

The scope and application of these rules differs depending on the nature of the procurement and the entity undertaking the procurement.

This Guide is focused on assisting public construction procurement practitioners in determining whether a procurement is governed by the Ministerial Directions issued under the PDCMA, particularly in instances where it is not clear what regime should govern the procurement.

Broadly, the VGPB Supply Policies, and the Ministerial Directions apply as follows:

VGPB Supply Policies / Ministerial Directions
  • Apply to the supply of goods and services and the disposal of goods (other than for building and construction and health-related goods, services and equipment).
  • Apply to Victorian Government departments and entities specified under section 54AA of the Financial Management Act 1994(FMA)[1].
  • Are principles-based and require ‘in-scope’ entities to adopt procurement policies (consistent with the framework) that apply to goods and services procurement.
/
  • Apply to ‘public construction’as defined in the PDCMA (see page 4).
  • Apply when the procurement is undertaken by, or on behalf of, any department or public body as defined in the PDCMA.
  • Establish mandatory requirements for tendering and contracting for public construction.

General principles in the Financial Management Act 1994

The FMArequires government to manage financial risks prudently, having regard to economic circumstances, and states that financial risks include risks arising from management of assets and liabilities of the State. This includes contracting for infrastructure and incurring obligations under public private partnerships (PPPs).

The Standing Directions issued by the Minister for Finance under the FMA (FMAStanding Directions) establish the overarching principles for the acquisition of assets, goods and services. FMA Standing Direction 4.2.1 requires the Accountable Officer to ensure that the Agency:

  • establishes, maintains and embeds appropriate governance arrangements;
  • is efficient, effective and economical;
  • has appropriate processes in place covering the acquisition lifecycle;
  • has appropriate capability to manage the acquisition throughout the acquisition lifecycle;
  • is able to demonstrate that any financial commitment, obligation or expenditure delivers value for money for the Agency and/or the State; and
  • undertakes investment planning and evaluation of performance when Agency planning has identified the need to acquire significant services, assets or infrastructure.

Instruction 4.2.1 to the FMA Standing Directions further elaborates on theseprinciples. When an Agency is acquiring assets, goods and services, the Accountable must ensure the Agency:

  • applies relevant legislation, standards, policies and funding arrangements;
  • achieves value for money;
  • understands and engages the market;
  • encourages open and fair competition;
  • supports probity, accountability and transparency; and
  • manages risks appropriately.

In addition, Instruction 4.2.1 requires Accountable Officers to establish appropriate processes covering the acquisition lifecycle. It also sets out requirements for contract management and performance, including contract specification requirements.

It is the responsibility of the Accountable Officer to determine the most appropriate way to achieve these requirements.

Ministerial Directions issued under the PDCMA

Standards and directions issued under the PDCMA apply to any public construction undertaken by, or on behalf of, any department or public body, except to the extent specified in the standards or directions or determined by the Minister (currently the Minister for Finance) (s. 33 PDCMA).

ThreeMinisterial Directions have been issued under the PDCMA.

  • MD1 – Tendering provisions for public construction
  • MD2 – Contractual provisions for public construction
  • MD3[2]
  • MD4 – Construction requirements for a community fire refuge

MD1 and MD2 establish the tendering and contractual requirements for public construction procurement. MD1 and MD2 complement the FMA, and do not establish or alter the rules for financial reporting or financial management established by the Minister for Finance under the FMA.[3]

To operationalise MD1 and MD2, guides have been issued by the departmental Secretary (currently Secretary to the Department of Treasury and Finance). The MD4 guide is issued by Emergency Management Victoria.

The Ministerial Directions and associated guides can be found under the Public Construction Policy and Resources page of the DTF website.

Victorian government departments and agencies that need to follow the Ministerial Directions

The Ministerial Directions apply to public construction undertaken by, or on behalf of, any department or public body. The term ‘public body’ is defined in Section 3, based on the definition in the FMA. For the purposes of the PDCMA, a public body is:

(a)a public statutory authority;

(b)a State business corporation within the meaning of the State Owned Enterprises Act 1992; and

(c)a body, office or trust body establishedby or under an Act or enactment, or by the Governor in Council or a Minister, where the Minister declares that body or office to be subject to the PDCMA.

The Ministerial Directions apply to a broader group of agencies than the VGPB supply policies.

Defining a ‘public construction’ procurement

The Ministerial Directions apply to procurement of ‘public construction’, which is a term defined in the PDCMA as:

‘…any matter relating to the construction, maintenance, rehabilitation, alteration, extension or demolition of any improvements on land by, or on behalf of, departments or public bodies and includes –

(a)design and construction practices;

(b)tendering processes;

(c)project delivery; [and]

(d)contract administration.’

Taken literally, the words ‘any matter relating to’ in this definition mean the Ministerial Directions could apply to almost anything with a connection to improvements made to land. However, practitioners generally take a more practical view, to avoid perverse outcomes in the application of the rules.

While some goods and services fall clearly ‘in’ or ‘out’ of the definition of public construction, in practice there are many ‘grey areas’ where practitioners need to make a decision as to which procurement rules will be applied..

Where a procurement falls in a grey area, practitioners will need to make a judgement on the most appropriate way to categorise their procurement.This may mean that in some situations the Ministerial Directions are the most appropriate rules for a type procurement, while in others the VGPB policies will be used, depending on the particular situation. In all cases, the overarching principles set out in the FMA Standing Directions apply.

All decisions about whether or not a procurement is ‘public construction’ and the reasons supporting the decision should be clearly documented. Once a decision is made, the applicable rules should be followed consistently throughout the procurement process. In the case of the Ministerial Directions, this means the tendering requirements and principles of contracting must be followed.

Guiding principles for classifying procurements as ‘public construction’

The following chart shows the areas where DTF commonly receives queries about whether a procurement is public construction.

Yes: Matters to which Ministerial Directions apply*
Building and construction-related services /
  • Architectural services, engineering, design and surveying.
  • Construction and project management.
  • Note that services covered by State Purchase Contracts must be procured in accordance with the State Purchase Contracts. For example, legal advice for the purpose of delivering a construction project must be procured under the SPC.

Preparatory works /
  • Excavation and grading, demolition, drainage, earthworks, foundations, fencing, geotechnical investigations, site clearing and scaffolding.

Building and construction works /
  • Bricklaying, erecting frames and walls, concreting, carpentry, flooring, tiling, plumbing, and roofing/guttering.
  • Installation of fittings such as electrical wiring, heating, ventilation, power supply, drainage, and fire protection.
  • Civil works including roads, bridges, sewers, pipelines, railways, industrial plant, bores, dredging and retaining walls.

* Please note this table is intended to be illustrative of the types of procurements that clearly fall under the Ministerial Directions, and is not intended to give a comprehensive summary of all items that are subject to the Ministerial Directions.

Maybe (or ‘grey areas’): Matters to which Ministerial Directions may apply depending on the particular circumstances of the procurement
Maintenance /
  • ‘Maintenance’ is included in the PDCMA definition of ‘public construction’, however practitioners define ‘maintenance’ differently.
  • The key link in the PDCMA definition is that the maintenance must be ‘on the improvement to land’ (i.e. the fixed asset).
–Where maintenance is focused on the physical structure and fixtures, it will be covered by the Ministerial Directions (e.g. structural repairs, lifecycle items, repairs that extend the life of the structure).
–Where maintenance is of nonfixed items, even where these have been installed as part of an initial construction project or constitute capital expenditure for financial reporting purposes, the VGPB policies may be more appropriate (e.g.changing light globes, servicing of removable air conditioning units (as opposed to ventilation systems), repairs to modular furniture).
–Practitioners should also note these activities may be covered by a broader facilities management agreement.For example, one which covers provision of general cleaning, gardening and security services may also include minor works such as repairing broken windows, which would ordinarily be considered public construction. When procuring a contract that bundles a number of activities together, practitioners should focus on the predominant purpose of that contract and the potential impact of the activities on the land or building where the activities are being undertaken.
ICT /
  • Installation of ICT often involves works that entail building and construction, and included as part of a package of works (e.g. cabling behind walls or signs on freeways or installation of networks in office space). However, the ongoing operation of and upgrades to ICT infrastructure may not constitute ‘public construction’ where it is focused on the operation of the system, rather than maintenance of, or upgrades to, the built components.
  • Practitioners should consider the predominant purpose of the procurement when determining the most appropriate policy to apply, noting the following:
–Software development services are covered by the eservices panel and are not public construction.
–Where an ICT system includes both installation of ‘hard’ components (such as wiring) in addition to provision of the software, practitioners should consider the predominant purpose of the procurement and whether the built component is incidental to the procurement of the software.
Interior design and fit out /
  • Interior design and physicalfit-out is often included in a package of works for a building or construction project. However, when undertaken after the initial build, practitioners should consider the nature of the fitout and works being undertaken when determining whether the work constitutes public construction and is on the improvement to land. Practitioners should consider whether the physical fit-out is the primary purpose of the supply or incidental.
–Where painting is undertaken as part of a broader package of works, it should be procured as part of the package.However, procuring painting on its own, depending on its scale and method, might or might not be construction.
–A wall, even a moveable one, forms part of a building. In contrast, an unattached workstation (e.g. modular furniture) may be more properly considered a supply of goods, although whether this then falls into a more permanent alteration to a building due to the scale should be considered.
–Carpeting undertaken alongside carpenters, floorers, electricians, etc. in a whole building is likely ‘public construction’ whereas replacing a carpet in a single room may be a supply of goods.
–Tables and chairs may be procured as part of a works package when an initial fitout is undertaken, but subsequent procurements may be more appropriately handled under the VGPB policies.
Landscaping /
  • Where landscaping is undertaken alongside the design and execution of a building or construction project, it is ‘public construction’. However, ongoing maintenance of landscaped areas may not be.
–For instance, general gardening activities (e.g. clearing leaves, lawn mowing) may be considered more akin to cleaning on some sites, whereas others (e.g. a road reserve) may be more properly classified as maintenance of the improvement to land as this work is critical for preserving the built infrastructure.
–Practitioners should consider the natureand scale of the landscaping works being undertaken, the equipment required to undertake the works, and how the works relate toand impact on the physical asset.

In summary, the following general questions may help public construction procurement practitioners to determine whether a procurement that falls into the ‘grey’ areas should be classified as a ‘public construction’ procurement:

  • If the procurement is for a package of goods and/or services, some of which are public construction and others that are not, what is the primary and predominant focus of the procurement and are goods/services required for the project acquired under the same contract?
  • Does the supply have an obvious physical impact onland or an improvement to land (e.g. does it alter the land or physical structures on it)?
  • What contractual terms are most appropriate for the procurement (e.g. is there a site that must be managed? What warranties are needed from the supplier?)
  • Is the procurement covered by a mandatory State Purchase Contract (e.g. financial advisory, probity or legal services)?If so, then the State Purchase Contract applies.
  • Are the costs associated with the supply asset expenditure or output (operational) expenditure for financial reporting purposes? Practitioners should note that while this may be helpful in some situations, it is not a determinative assessment as not all asset expenditure is public construction (e.g. rolling stock or ICT equipment).

No: Matters to which Ministerial Directions do not apply
Goods with no installation /
  • Procurement of goods for the purpose of operating a building, even where the initial procurement may have been part of a package of works covered by the Ministerial Directions, is likely to be covered by the VGPB policies where the goods are not supplied with any installation component.
  • Where there is an installation component (as for ICT, discussed under ‘grey areas’) practitioners should consider whether the installation is incidental or a primary feature of the supply. If installation is a major element of the supply, then the Ministerial Directions may be more appropriate.

Services that do not impact on physical structure /
  • Services that do not impact on a physical structure are covered by the VGPB supply policies. For instance, provision of ‘soft services’ under a facilities management contract are most appropriately dealt with under the VGPB supply policies, even though they are linked to the operation of a building (e.g. security services, reception services and catering).
  • Services such as couriers, legal services, business case planning, may be used to facilitate the completion of a building or construction project and included in a project budget, howeverthese services should be procured under VGPB supply policies (including State Purchase Contractsand mandatory panels where applicable).
  • There may be instances where suppliers, who normally provide public construction services, are engaged to provide nonconstruction advice,which is unrelated to alterations to a physical asset (e.g. business planning). In these cases, the VGPB rules may be more appropriate for the procurement.

State Purchase Contracts /
  • State Purchase Contracts are standing offer agreements for the supply of common use goods and services to the Victorian Government. Some State Purchase Contracts are mandatory depending on the good/service being procured and whether the government entity is an inscope entity for the purposes of the VGPB.
  • Practitioners should note that State Purchase Contracts apply for a number of services relevant for public construction projects (e.g. probity advisers, commercial and financial advisory services and legal advisers who advise on transaction planning, structuring and documentation).
  • The rules governing the application of these State Purchase Contracts must be followed in the context of public construction projects.

Cleaning /
  • Although cleaning generally falls under the VGPB policies, site cleaning as part of completion of a building or construction project, is considered public construction and covered by the Ministerial Directions.
  • Practitioners should also be aware that in some circumstances there may be overlap between ‘cleaning’ (e.g. removal of graffiti) and ‘maintenance’ (e.g. where graffiti is included in a package for maintenance of an improvement to land).

Helpful procurement resources

General resources

  • Project Development and Construction Management Act 1994
  • Financial Management Act 1994
  • Standing Directions of the Minister for Finance issued under the FMA.
  • DTF Public Construction Policy website, where you can find the Ministerial Directions and the Practitioner’s Toolkit(where Construction Contracts Advisory Panel model tender provisions for MD1 and approved forms of contract for MD2 can be found).
  • Victorian Government Purchasing Board website, which includes further information about in-scope entities, VGPB policies and State Purchase Contracts.
  • Health Purchasing Victoria (HPV) website, which provides further information about HPV and its policies.
Further questions

Public Construction Procurement Practitioners should always refer to the area responsible for procurement within your department or agency in the first instance to ensure a consistent application of the requirements within the department or agency’s internal governance frameworks.