As Canada gears up for a huge expansion of defense infrastructure across the Arctic, Deloitte is warning that the federal government’s typical reliance on fixed-price contracts could be a major impediment to getting projects done on time and on budget.
In its report, Delivering Arctic Infrastructure at Speed: Why Canada Needs a New Procurement Risk Model, Deloitte argues that fixed-price contracting is poorly suited to the realities of the North, where construction seasons are short, logistical challenges are significant and uncertainty remains high.
The issue is growing in importance as Ottawa commits billions of dollars to NORAD modernization, Northern Operational Support Hubs, Arctic radar systems, runway upgrades and transportation infrastructure.
Deloitte says the priority now is to go beyond announcing big investments and ensuring projects can actually be delivered efficiently in some of the country’s most challenging environments.
“Speed is really the main thing that should be a barometer of whether you’re successful,” said Jordan Eizenga, partner, infrastructure and real estate at Deloitte Canada and one of the authors of the report.
Eizenga says the federal government should consider a fit-for-purpose procurement model or collaborative delivery approach for complex northern projects, rather than a lengthy procurement process, with a request for qualifications and a long request for proposals process to secure a fixed project price.
Such an approach could help reduce uncertainty before construction starts, while establishing a more clearly defined and transparent framework for risk sharing between government and industry, the report said.
Traditional procurement is tested by Arctic conditions
Canada is significantly increasing its investments in Arctic defense, including in Coast Guard infrastructure, northern transportation networks and military operational hubs across the region.
But Arctic projects are subject to very different conditions than those in southern Canada.
Projects can be impacted by limited transportation options, limited availability of labor and accommodation, uncertain ground conditions and relatively limited pools of contractors with extensive northern experience.
Many remote sites are only accessible by sealift operations, winter roads or limited air transportation within narrow seasonal windows. Materials, equipment, fuel and accommodation for the workforce often have to be arranged months in advance.
Therefore, to miss one construction season can delay a project for a whole year.
Deloitte says the situations are evidence of the shortcomings of a procurement system built on fixed-price contracts.
The general intent of fixed-price contracting is to provide cost certainty thru the requirement that contractors submit a firm price prior to construction. This method can be effective where project conditions are well understood and risks can be accurately assessed.
But the Arctic doesn’t always provide that level of certainty.
“Because there’s too much risk and unknown, they’re not going to be able to tell you what it’s going to cost, so you’re not going to get a firm, fixed-price construction number,” Eizenga said.
Contractors asked to price projects with uncertain ground conditions, fragile supply chains, limited labor availability and changing requirements may respond by adding significant contingencies, reducing the scope of their bids, requesting contractual protections or deciding not to participate at all, Deloitte says.
It can lead to less competition, higher prices and longer disputes after construction has begun.
Nanisivik demonstrates how difficult it is
The report cites the Nanisivik Naval Facility as an example of the consequences of incorporating Arctic risks into a fixed budget too early.
Initially, the project was envisioned as a strategic refueling and docking facility in the High Arctic. It was later scaled down in an attempt to keep the project on budget.
Instead, Deloitte’s position is to take a fit-for-purpose approach. This means keeping traditional contracting methods where the risks can be managed, and applying a staged and collaborative delivery model for projects where there is greater uncertainty in the Arctic.
Three-tiered procurement process
Deloitte’s proposed model breaks procurement down into three stages.
The first would be to choose a delivery team based on qualifications and capabilities, not just the lowest-cost bid. Criteria would include Northern experience, logistics expertise, plans for Indigenous partnership, safety performance and technical capability.
The second phase would be a period of funded project development. Before construction commitments are finalized, contractors, engineers, Indigenous partners and government officials would work together to further define the project, investigate site conditions, evaluate logistics and refine costs.
The third phase would create a target-cost model that features shared incentives and transparency. Government and contractors would agree on project budgets and delivery plans. If it is above expectations, both parties would share in the upside. And if costs rose or schedules slipped, the costs and consequences would be shared too.
Deloitte seeks Arctic procurement pilot
Deloitte offers three recommendations for the federal government to implement the proposed model.
First, Ottawa should pilot the collaborative risk-sharing approach on a forthcoming Arctic defense initiative. Possible candidates: an airfield upgrade, a radar support facility or a Northern Operational Support Hub.
Second, the government should establish a formal policy framework that would allow for models other than fixed-price procurement for Arctic projects where risks cannot reasonably be priced in the initial bidding process.
Third, Defense Construction Canada, the Department of National Defense and other federal agencies should enhance their internal capacity to manage collaborative procurement arrangements.
“That would mean more capability in areas like commercial management, logistics, Indigenous engagement, scheduling and project controls.
For Deloitte, changing the procurement model is about matching how Arctic projects are contracted with the realities of construction in the North, especially as Canada accelerates infrastructure spending to bolster its sovereignty and national security.
