We might want to consider the potential long-term negative impacts of this strategy.
December 14, 2011 By Rob Bradford
In past centuries, ‘bundling’ was a tradition that ensured a young man’s
mobility was restricted to ensure there could be no shenanigans when
spending the night in the same room as a young lady.
In past centuries, ‘bundling’ was a tradition that ensured a young man’s mobility was restricted to ensure there could be no shenanigans when spending the night in the same room as a young lady. In 2011 ‘bundling’ has taken on a whole new meaning that is effecting structural change to the Ontario construction and design industries involved with delivering public infrastructure projects.
The Infrastructure Ontario (IO) definition of ‘project bundling’ is “the grouping or consolidation of the procurement of two or more projects with the view of entering into a single contract with one vendor.” On the premise that project bundling delivers cost efficiencies, IO has signaled its intent to make it a preferred delivery option across the broader public procurement sector.
Bundling in today’s world could describe, for example, an assignment to design or construct 20 cookie-cutter schools or courthouses across the province. It could take 20 bridge and/or highway rehabilitation projects in different regions of Ontario and package them into a multi-year contract. In its simplest form the concept is to take a whole bunch of what have traditionally been smaller projects and package them into one super contract.
The implications of that should be fairly obvious. All of the smaller projects that have traditionally been done by that sector of the industry will be bundled to create new opportunities for the contractors and designers that have the size and resources to bid large projects. At the next level up, when bundling is used to package large projects that would traditionally be bid by larger Ontario companies, the resulting AFP can become so large that considerable advantage is created for international contractors and designers with resources far outweighing Ontario firms.
So does bundling really deliver the expected cost efficiencies in the long run? And if/when it does, what are the related costs to the Ontario construction and design industries? – and by extension to job creation, regional businesses and economies, the provincial economy, a competitive construction market, growth and development of the Ontario construction industry, quality of the design or construction, etc.
Contractor and professional design organizations represented by the Construction Design and Alliance of Ontario (CDAO) have asked some of these questions and are in discussions with Infrastructure Ontario with the objective of developing some subjective criteria around the decision to bundle projects. The Alliance recognizes that under some circumstances project bundling is a practical procurement strategy and presents opportunity to the larger contractors and design firms that can manage their size and scope. However, CDAO has also expressed concerns about a move to widespread use of bundling in Ontario and the impact on small to medium-sized companies that will see the shrinking of their traditional markets.
While IO says a ‘net benefit’ analysis is the test for determining when projects can be bundled and has offered the industry a list of broad criteria that is used to determine net benefit, there is no indication of how the criteria are measured, how they are prioritized or how net benefit is otherwise determined. The listed criteria could easily be used to justify virtually any bundling proposal and still leaves the net benefit analysis process largely unexplained and apparently quite objective.
The industry’s objective in its discussions with IO is to develop more precise guidelines for determining when projects might be bundled. These guidelines should clearly indicate how net benefit is to be determined, which means that the criteria should include means of measurement. Most importantly, the industry is looking for criteria that emphasize impact on the industry, the public and the economy as well as strictly on anticipated cost savings.
In terms of determining net financial benefit of a bundled project, CDAO is also asking Infrastructure Ontario to look beyond straight project costs. For example, if prices to complete a design or construction project are attractive today, what will happen in the future when the number of bidders that are able to do the work is reduced to a handful? At this point, some of the negative longer-term aspects of oligopoly start to kick in and prices will almost certainly rise.
And what about our domestic construction and design industries in cases where AFP contracts are not accessible because Ontario firms cannot compete with large international companies? IO points out correctly that even when international firms are managing a project, most of the contracting and supply work will go to local firms. That, however, overlooks the fact that in most cases subcontractors and suppliers are squeezed to the point that their prices cannot deliver a reasonable profit – which speaks to the ongoing health and development of local companies. Let us not forget as well that when international firms win these huge AFP contracts, the profit goes straight into foreign bank accounts rather than being reinvested in the Ontario economy.
There is no question that project bundling can in appropriate circumstances provide financial benefit to the province. However, as the trend picks up momentum, the industry is flagging the potential long-term negative outcomes of the strategy when it is not used for the right projects.
Print this page