Defence procurement law fundamentals

Mandatory procurement clauses

Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?

The DPPM provides that where an ASDEFCON template exists for a particular type of procurement, that template should be used for a new procurement of that type and should only be amended in accordance with relevant policy. The ASDEFCON contract templates for complex procurements contain mostly ‘core’ clauses that are intended to be retained. Such core clauses include the right of Defence to terminate for convenience, limitations on the contractor’s liability and the indemnification of Defence by the contractor. While there is no express doctrine requiring certain clauses to be ‘read into’ the contract regardless of their express inclusion, certain terms may be implied into a contract pursuant to general principles of Australian contract law if permitted by the contract terms (eg, an implied obligation to act in good faith).

Cost allocation

How are costs allocated between the contractor and government within a contract?

The DPPM provides for a range of potential cost-allocation options depending on the complexity of the project and the level of risk to both Defence and the contractor. For example, the parties may agree for the contractor to be paid a fixed fee regardless of the costs actually incurred, subject to certain variations detailed in the contract. Alternatively, Defence may permit variations to compensate for increases in the cost of labour and materials. Defence may also agree fixed or variable labour rates and overheads where the amount of labour required under a contract is uncertain. Cost-sharing arrangements may be adopted in high-risk projects where the contract costs cannot be accurately determined.

Disclosures

What disclosures must the contractor make regarding its cost and pricing?

The disclosures a contractor is required to make regarding its cost and pricing will depend on the fee structures chosen. For example, if a contract is for a fixed price and was formed following a competitive procurement process, a contractor is not typically required to provide costing information. However, cost details are often required for variations and supplies priced by reference to cost inputs. If a contractor requires an advance payment to meet upfront costs (eg, to pay manufacturers for raw materials), the contractor may need to provide to Defence invoices and orders relating to the advance payment.

Audits

How are audits of defence and security procurements conducted in this jurisdiction?

The Auditor-General may access Defence contractors’ and subcontractors’ records and premises to conduct performance audits. In addition, the Australian National Audit Office conducts an annual review of major Defence acquisitions. The review, which is published in a major projects report, includes information relating to the cost, schedule and the progress towards delivery of required capability of individual projects as at 30 June each year.

IP rights

Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?

Defence has an intellectual property policy aligned with the federal government policy. Defence policy is to maintain a flexible approach in considering options for ownership, management and use of intellectual property. Defence is required to conduct a risk assessment to determine whether it should own any intellectual property developed under the contract. Defence will generally require the contractor to provide it with a licence to use the contractor’s pre-existing intellectual property for broadly defined ‘defence purposes’. If Defence sees a security risk in allowing the contractor to commercialise created intellectual property, Defence is more likely to wish to own such created intellectual property and limit the contractor’s right of use.

On 10 May 2018, an updated version of the ASDEFCON (Strategic Materiel) template was released by Defence that incorporates a new framework for intellectual property. The objective of the new framework is to better reflect the importance of technical data and software and their relationship with intellectual property. The Commonwealth’s position is that the core clauses ensure the Commonwealth has the necessary rights to items of technical data and software that enable it to effectively and efficiently use the defence capability, as intended. We understand that Defence intends to introduce the new framework for intellectual property into the remaining pro forma documents that make up the ASDEFCON suite of contracting templates; however, at the time of writing, this has not yet occurred. Minor revisions have since been made to the framework for intellectual property on 8 July 2019.

Economic zones

Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement related benefits?

While programmes have been developed for the benefit of certain contractors, they are not typically amenable to use by foreign defence and security contractors.

Forming legal entities

Describe the process for forming legal entities, including joint ventures, in this jurisdiction.

In Australia, a joint venture describes an arrangement in which two or more parties enter into an agreement to pursue common objectives while remaining separate legal entities. Joint venture arrangements may be either unincorporated or incorporated. There is no legislation directly regulating arrangements of either type. Under an unincorporated joint venture, the respective rights and obligations of the participants are essentially determined by contract. The rights and duties of the participants are usually set out in detailed joint venture documents and may be interpreted and supplemented by reference to general contract law. A joint venture will often be conducted by a corporate entity owned by the joint venture participants. In this case, the participants normally enter into shareholder agreements and Australian corporations laws will apply to many aspects of their relationship. While Defence permits the submission of procurement bids by joint ventures, it will usually seek to enter into a contract with a single legal entity. Defence may sometimes contract with multiple parties as part of a public-private partnership or similar structure, although it will usually insist the multiple parties owe their obligations to Defence on a joint and several basis.

Access to government records

Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?

The Freedom of Information Act 1982 (the FOI Act) grants a right of access to a document held by Defence (potentially including previous contracts). This extends to documents held by a party providing services (though not goods) to Defence under contract. If a document falls under one of the FOI Act’s nine exemptions (including documents affecting national security, defence or international relations), Defence may refuse to release it or can redact the exempt sections. Documents falling under one of the FOI Act’s eight conditional exemptions must be released, unless it would be contrary to the public interest to do so. In practice, freedom of information requests to access Defence contracts are often partially or fully rejected relying on an exemption but this result cannot be guaranteed. In addition, the Australian Geospatial Intelligence Organisation, the Australian Signals Directorate and the Defence Intelligence Organisation are excluded from the operation of the FOI Act. The CPRs also require federal government agencies to make available via the AusTender website contracts for goods or services valued at or above A$10,000 (including goods and services tax). This requirement is subject to the relevant FOI Act exemptions. A log of decisions by Defence on giving access to documents under FOI Act requests can be viewed on the Defence website.

Supply chain management

What are the rules regarding eligible suppliers and supply chain management and anti-counterfeit parts for defence and security procurements?

The Modern Slavery Act 2018 (Cth) came into force on 1 January 2019, and establishes a supply-chain reporting regime requiring commercial and not-for-profit entities with annual consolidated revenue of at least A$100 million to submit a Modern Slavery Statement to the Minister for Home Affairs each financial year. The Modern Slavery Statement is required to describe the structure, operations and supply chains of the reporting entity, any risks of modern slavery in the reporting entity’s operations and supply chains, and actions taken by the reporting entity to assess and address those risks. Modern Slavery Statements will be published online on a central register, which is to be maintained by the Minister and made freely accessible to the public. Equivalent legislation applicable to commercial organisations has been passed in the Australian State of New South Wales; however, at the time of writing, state legislation has not yet commenced.

Further, the Global Supply Chain (GSC) Program is a federal government programme managed by the Centre for Defence Industry Capability. It involves working with eight ‘prime’ contractors to obtain opportunities for Australian companies to work within their supply chains. Each of the prime contractors are provided funding to set up a GSC team within their organisation. This team takes ownership of managing and identifying which Australian companies can be part of the organisation’s supply chain, and liaises with the GSC teams from other prime contractors to foster growth of the Australian defence industry.

There are no specific rules regarding anti-counterfeit parts for defence and security procurements. The requirements for a procurement may require bidders to submit details on how they address this issue.