Liability caps and risk management: E-Alert April 2010

Important changes to the Defence Procurement Policy Manual

Introduction

The have been some important changes to the Defence Procurement Policy Manual (DPPM) of which suppliers need to be aware.

On 1 April 2010 the Defence Materiel Organisation (DMO) released the latest version of the DPPM which, among other things, formalises DMO's newly developed Liability Risk Management Process (LRMP).

Respondents to Defence tenders who are proposing to limit their liability contractually should be aware of the new DMO requirement to complete a risk assessment in the mandated format.

Liability Risk Management Process

Consultation Program and revisions to the DPPM

Defence kicked off a program of consultation with stakeholders (including selected industry representatives) more than two years ago, releasing a draft Discussion Paper in February 2008. DMO then released a series of revised drafts before formally releasing its Liability Risk Management Process and implementing related updates to the DPPM.

What is the LRMP?

The LRMP contains a detailed methodology for identifying, categorising, assessing and rating procurement risks.

It also sets out seventeen "Principles" to be applied by DMO when deciding how to treat risk.
Many of these Principles cover familiar ground but Principle 3 of the LRMP creates a new requirement to be met in tender responses.

Principle 3 of the LRMP states that the Commonwealth "must not consider a proposal from industry to limit Liability without first reviewing a comprehensive Risk assessment undertaken by the contractor in the form set out in this paper" (our emphasis).

What does industry need to do now?

If you are a potential supplier responding to a Defence tender and you intend to limit liability contractually, your tender response must include a risk assessment in the prescribed form.

It remains to be seen whether this policy will apply to simpler, less risky procurements. The DPPM states that written risk management strategies are not usually required for Simple procurements.[1]

Tenderers should also be costing proposed liability profiles tendered against draft procurement contracts.[2] We would recommend that tenderers be prepared, in negotiation, to price alternative liability regimes to assist the Commonwealth in weighing up "Value for Money".

The good news for tenderers is that DMO Procurement officers do not need to seek advice from DMO Legal if a proposed limitation of liability regime reflects the standard ASDEFCON clauses "without material change" and the mandated risk process has been followed.[3]

In preparing proposed amendments to a draft procurement contract contained in tender documents, it would therefore be advantageous for respondents to retain as much of the structure and drafting of the ASDEFCON clauses as is acceptable.

Additional materials

Please click here to view the revised version of the DPPM, which can be downloaded from DMO's website. See in particular paragraphs 15 –34 ('Limitation of Liability") to Chapter 3.1.5 ("Indemnities, Limitation of Liability and Insurance") of the DPPM.

The DPPM will now be updated on a quarterly basis.

Please click here to download the Liability Risk Management Process and the Liability Risk Assessment template.

If you require further information, please contact Geoff Musgrove or Sean Field.

[1] Paragraph 9 ("Simple Procurement and risk management") of Chapter 3.2 ("Risk Management in Procurement" of the DPPM).
[2] See paragraph 17 of Chapter 3.1.5 of the DPPM.
[3] See paragraph 31 of Chapter 3.1.5 of the DPPM.