In the 2009-2010 financial year, the Commonwealth Government spent around $42.6 billion procuring goods and services, making it one of the largest purchasers in Australia. The statistics show a dramatic increase in Commonwealth procurement over the last few years, with the Commonwealth spending just under $33 billion in the 2008-2009 financial year and approximately $26.3 billion in 2007-2008.
The increase in the number of tenders issued by the commonwealth arguably brings with it greater legal risk for the commonwealth, as its agencies seek to manage the rising number of tender processes. Where these tender processes are inadequately conducted, the commonwealth may be exposing itself to reputational risks as well as litigation challenging the tender process. it is therefore important for australian government agencies to understand their obligations under the commonwealth procurement framework, particularly in relation to the core principle of 'value for money'.
'Value for money' is the key principle in all government procurement. under the Financial Management and Accountability Act 1997 (cth), agency chief executives must promote the proper use of commonwealth resources. this means that they must use their agencies' resources in an efficient, effective, economical and ethical way not inconsistent with commonwealth policies. commonwealth policy in the form of the Commonwealth Procurement Guidelines,1 which is given legislative effect by regulation 7 of the Financial Management and Accountability Regulations 1997 (cth), emphasises the obligation of agencies to achieve 'value for money'. accordingly, the concepts of efficient, effective economical and ethical are ultimately subject to the overarching principle of 'value for money'.
Despite being the core principle underpinning australian government procurement, 'value for money' is not always easily defined, assessed or understood. While it can be summed up as the achievement of the desired outcome at the best possible price, it is clear that 'value for money' does not necessarily mean the lowest price. this was confirmed by the recent decision of Ipex ITG Pty Ltd (in liq) v Victoria [2010] Vsc 480 (Ipex). in that case, the court held that an obligation to assess tenders for best 'value for money' did not compel the selection of the cheapest tender. even though the plaintiff's tender was compliant with the essential criteria set out in the relevant request for tender, the court found that it did not necessarily mean that the plaintiff had complied with the Victorian government's expectations and business requirements. the court further held that the nature of that particular request for tender meant that the question of best 'value for money' was a subjective business judgment.
The subjective nature of the concept of 'value for money' is apparent when considering the procurement of goods which are not readily quantifiable. the procurement of a fleet of government vehicles is vastly different from the procurement of exhibits for a contemporary art exhibition for the national art gallery. the former is easily quantifiable into classes and categories. the latter, however, is necessarily more subjective and difficult to quantify, with relevant considerations including:
- the type of art, for example paintings, sculptures, photographs or costumes
- the period, theme and type of artists, and
- the price range for each piece.
As the latter example demonstrates, 'value for money' cannot be readily determined by a quick and easy mathematical or other formula. What is required is a holistic approach which transparently identifies the requirements of the particular procurement and the basis of the matters that will be regarded in coming to what is effectively a decision that has objective and subjective elements to it.
The Commonwealth Procurement Guidelines state that in assessing 'value for money', a whole-of-life 'value for money' assessment is required. this includes the consideration of factors such as:
- fitness for purpose
- the performance history of each prospective supplier
- the relative risk of each proposal
- the flexibility to adapt to possible change over the lifecycle of the property or service
- financial considerations including all relevant direct and indirect benefits and costs over the whole procurement cycle, and
- the evaluation of contract options.
Accordingly, 'value for money' is a comparative concept that requires an analysis of a wide range of factors including all relevant costs and benefits of a proposal against alternative options. practically, however, 'value for money' evaluations for so called run of the mill purchases often give more weighting to fitness for purpose aspects having regard to the requirements specified in the request for tender. this means, in practical terms, that assessments of 'value for money' often tend against high quality goods and services and naturally tend towards the lowest price. as such, developing proper legal process and probity plans and effective evaluation criteria architectures, methodologies and processes will assist in achieving 'value for money' and demonstrating that all legal, process and probity obligations have been met.
Ultimately, there is a high degree of subjectivity inherent in the principle of 'value for money'. courts are willing to take a practical and commercial approach and have recognised the subjectivity of 'value for money' in cases such as Ipex and Cubic Transportation Systems v New South Wales [2002] nsWsc 656 (where the court held that the government was entitled to place considerable, if not exclusive, weight on commercial considerations). the courts do not, however, accept improper motive or bias in the making of decisions. generally, the agencies that best manage 'value for money' assessments not only recognise the concept as inherently subjective but are able to develop effective and practical ways to address the issue and to demonstrate compliance with their legal, policy and accountability obligations under the financial management framework. it is evident that commonwealth agencies need to have developed clear indicators of what they wish to achieve and how much it should cost in the open market. accordingly, the importance of proper market research and analysis cannot be underestimated. a sensible approach is to identify the procurement activity and then map the steps to foster this in a way which demonstrates the four "e's" – efficiency, effectiveness, economy and ethics.
Conclusion
As outlined above, an assessment of 'value for money' essentially involves the consideration of a variety of factors. it is not sufficient to choose the lowest priced tender on that basis alone. the failure to establish proper methodologies and processes to assist in this assessment and any consequential failure to assess 'value for money' adequately has the potential to result in prolonged and highly publicised litigation. therefore, when managing a tender process, it is vital that government agencies be fully informed of their obligations under the commonwealth procurement framework and be able to identify the circumstances upon which considered legal advice should be sought, whether from an internal or external source.
Footnotes
1 In March of this year, the department of finance and deregulation indicated that part of the current review by the department of the Commonwealth Procurement Guidelines would examine whether the next document should be renamed the Commonwealth Procurement Rules to reinforce to government agency staff that they are mandatory, not discretionary. see for example, Mr John grant, first assistant secretary, procurement division, department of finance and deregulation, Committee Hansard, canberra, 2 March 2011, 13 and Joint committee of public accounts and audit, parliament of the commonwealth of australia, Review of Auditor-General's Reports Nos 39 2009-10 to 15 2010-11 (2011) [4.23].
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