Every operator knows the battle of applying for tenders and contracts. The tedious back and forth with governments, contract prices and commercial terms are front of mind during what is sure to be a tumultuous time.
The next two years in Australia are set to be just that, with renewal processes occurring in Queensland, Tasmania, South Australia, New South Wales and Victoria.
With several contracts up for grabs, accounting firm Pitcher Partners want to ensure that operators are ready for the process ahead of them.
Involved in the bus industry since it was founded 33 years ago, Pitcher Partners provides accounting, audit and taxation services while also having specialist teams that support operators through business acquisitions, sales and contract renewals.
“When it comes to contract renewals, we work with operators across the country negotiating contracts or participating in tenders,” Pitcher Partners Melbourne client director David Fennell told ABC.
“While the context is quite different for both these two processes, the fundamental cost and modelling work is basically the same.
“We love to see our clients have successful contract outcomes but it must be at an appropriate price that adequately compensates operators for risk.”
At the commencement of a bus contract, an operator has a fixed price contract to deliver bus services. The contract price can generally change in two ways during the term of the contract – through service growth or indexation of payments.
Therefore, when determining contract price, Fennell says operators must focus on three factors: ensuring the base contract price adequately provides for operating costs and risk, ensuring service unit rates fully fund future service changes, and that they are adequately protected for cost increases through the contract term.
This will be based on the contract indexation mechanisms, the base contract pricing, mitigation through supply agreements and other actions.
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“Driver wages are the largest cost in any bid and therefore should be given its fair share of attention and scrutiny,” Fennell says.
“Incumbent operators can have advantages when it comes to scheduling based on their knowledge of the existing routes.
“On the flipside, incumbency can be a disadvantage, where existing knowledge can limit the ability to challenge the status quo.”
There are several basic cost considerations that need to be covered off to make sure all driver wages and related on-costs are considered. One consideration which can be overlooked is costing on shifts versus a roster. Costing on a roster is preferred as it will more accurately capture overtime and make up pay.
The mechanisms and methods to calculate costs for zero-emissions bus fleets are basically the same as for a diesel fleet. The difference is that operators have less experience running ZEB fleets and less data to inform their assumptions and bid costs.
Because there is less data, it’s reasonable to expect a greater level of cost variance during the contract term and this needs to be considered when bidding costs and margin.
“If you’re bidding or negotiating as incumbent, you’ll have the advantage of being able to compare to the actual operating cost base,” Fennell says.
“This provides a strong point of comparison to understand. If you are not incumbent, then you will be reliant on assessing the competitiveness of your bid based on benchmarks.”
Costs per bus hour, bus kilometre and overhead costs per bus are all relevant and useful metrics.
Indexation rules in bus contracts are simple arrangements on face value. However, an increase to a particular cost category, which is applied at a particular time, at a particular frequency, on a base value and using an identified cost index (CPI, LPI, Fuel Index), can soon become confusing.
“Applying these arrangements can get more complicated the further you get into the detail,” Fennell says.
“One of the areas to be thought of is the cost impact versus the revenue impact.
“If you take wages for example, they will usually increase once or twice a year in July and/or January.
“The associated revenue increase is typically annual at July or the contract anniversary. So there can be a mismatch in timing and amount between these arrangements which may need to be accounted for in the bid price.”
Service change rates are usually bid by operators separately to the annual contract price. When working in compressed bid timeframes, there is a lot of focus on the annual contract price, and the service unit rates can be an afterthought. That can come back to bite when a large service change occurs three years into the contract.
“The first thing you should understand before calculating service change rates is the definition of the service units,” Fennell says.
“It’s important to be clear. For example, clarifying whether bus hours are paid based on live hours or a total hour basis, or whether they include any idle or layover time. The less hours included in the defined bus hour, then the higher the rate should be.
“I’ve seen examples where operators have assumed the definition of service unit rates were consistent between the existing and new contracts, and as a result, under costed the service unit rates for the new contract.”
Another thing to consider would be incremental operating costs associated with growth buses. Some contracts will compensate incremental buses with an additional overhead payment to cover these costs while other contracts only compensate operators on a bus hour and kilometre basis.
This means that while you will be paid for the capital costs of a growth vehicle through the fleet payment, you won’t be paid for the incremental registration, insurance and other bus related costs unless you build this into your kilometre or bus hour service change rates.
The tender/contract process is one that can be complex and operators can benefit from a helping hand.
“We take great pride in the work that we do with operators across the country,” Fennell says.
“Our main goal is that every contract entered in to by operators we work with is fair, sustainable and therefore can be successful.”
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