Chapter 4 Audit Report No. 11 2010-11 Direct Source Procurement
Legislative and policy framework
Effective procurement of property and services underpins the delivery of
programs by Australian Government agencies. In 2009, the Australian Government
purchased over $23.5 billion in property and services using relatively
straightforward or short-term procurement, through to more complex and longer
term procurement. Agencies purchased a wide
variety of goods and services, including enabling assets such as buildings,
printers and information and communications technology; and services such as
consultancy advice on program management, and provision of government services
to the public by external suppliers.
Chief Executives of departments and agencies subject to the Financial
Management and Accountability Act 1997 (FMA Act) must promote the proper
use of Commonwealth resources. To help achieve this,
under the Financial Management and Accountability Regulations 1997 (FMA
Regulations), the Finance Minister issues Commonwealth Procurement Guidelines
(CPGs) for officials to follow when performing duties in relation to
procurement (Regulation 7). FMA Regulation 9 also
requires that approvers of spending proposals be satisfied, after undertaking
reasonable inquiries, that the spending proposal provides for the proper use of
The CPGs establish the core policy framework and articulate the
Government’s expectations for procurement. The last substantial
revision of the CPGs occurred in January 2005, and gave effect to the Australian
Government’s procurement obligations under the Australia-United States Free
Trade Agreement. Among the changes was a
general presumption of open tendering for higher value procurements, which
meant that selective and limited tendering was only available in specific and
appropriately justified circumstances. It was anticipated that the dominant
impact of the revised CPGs would be to increase the number and scope of
procurement opportunities offered to the full market by Australian Government
The current CPGs establish procurement principles that apply to all
procurement processes, and promote value for money as the core principle of the
Government’s procurement policy framework. Value for money is
enhanced and complemented by other key principles – encouraging competition;
efficient, effective and ethical use of resources; and accountability and
transparency in decision-making. Applying these procurement principles is a
requirement of the CPGs, and necessitates that agencies take a considered
approach when establishing arrangements for individual procurements.
For higher value procurements (known as covered procurements, and generally
valued at more than $80 000), the CPGs also establish Mandatory Procurement
Procedures (MPPs). The MPPs establish a
range of prescriptive obligations that must be complied with when selecting a
procurement method and managing the resultant procurement process.
Under the CPGs, agencies are obliged to maintain appropriate
documentation for each procurement. The appropriate mix and level of
documentation depends on the nature and risk profile of procurement being
undertaken. Agencies need to ensure there is sufficient documentation to
provide an understanding of the reasons for the procurement, the process that
was followed and all relevant decisions, including approvals and
authorisations, and the basis of those decisions.
The CPGs guide agencies to establish Chief Executive Instructions (CEIs)
and operational guidelines outlining their own approach to procurement, while
at the same time encouraging agencies to adopt processes that are commensurate
with the scale and risk profile of the procurement. This sentiment was also
supported by Management Advisory Committee (MAC) Report No. 7,
which outlined the minimum requirements to meet the Government’s legislative
and policy framework applicable to procurement. The MAC suggested that agencies
only adopt processes in addition to the CPGs in specific circumstances, where
the benefits of doing so outweigh the associated costs.
More recently, the Advisory Group on Reform of Australian Government
Administration reiterated that agencies need to reduce internal red tape to
promote efficiency, including streamlining administrative and legislative
compliance in areas such as financial management.
Direct Source procurement
The CPGs and related Department of Finance and Deregulation (Finance)
guidance define three procurement methods: Open Tender, Select Tender and
Direct Source procurement. Direct Source procurement is a process in which an
agency may invite a potential supplier or suppliers of its choice to make
submissions such as quotes or tenders. By its nature, Direct Sourcing is less
competitive than Open and Select Tendering as it does not provide the
opportunity for all or, in many instances, a number of potential suppliers to
compete for the provision of property and services.
For covered procurement, the CPGs require that Direct Sourcing only be
undertaken in a limited number of specified circumstances, such as when an
approach to the market has failed. For non-covered
procurement, agencies should conduct an appropriately competitive procurement
process commensurate with the scale, scope and relative risk of the
procurement. In all cases, agencies
need to be mindful that it is generally more difficult to adhere to the
procurement principles such as value for money, encouraging competition and
ethical use of resources when Direct Sourcing, but under the CPGs the onus is
on them to do so.
The ANAO Audit
The objective of the audit was to assess how well agencies had
implemented the CPGs and relevant FMA legislation when undertaking Direct
The audit examined whether selected agencies had developed a sound
procurement framework; appropriately classified procurement methods when
meeting external reporting requirements; implemented the CPGs and relevant
legislation when Direct Sourcing; and established effective procurement
monitoring and review arrangements.
The ANAO selected four FMA Act agencies to provide a cross-section of
the 104 agencies that reported procurement activity in AusTender in 2008—09.
The agencies selected for audit were:
- the Department of
Families, Housing, Community Services and Indigenous Affairs (FaHCSIA);
- the Department of
Innovation, Industry, Science and Research (Innovation);
- the Department of
Veterans’ Affairs (DVA); and
- the Australian Crime
The ANAO examined a stratified random sample of 645 procurements valued
at $10 000 and over, across the four agencies. More detailed testing
was undertaken for the 285 Direct Source procurements in the sample.
Overall audit conclusion
The ANAO made the following overall audit conclusion:
Procuring appropriate property and services, and being able
to demonstrate value for money in such activities, is a prime consideration in
the administration of Australian Government programs. Within the legislative
and policy framework for government procurement, officials must be satisfied
that decisions to procure property and services are proper and defensible. In
this context, the [CPGs] facilitate sound decisions by establishing procurement
policy, including the principles that apply to all procurement processes. The
CPGs promote value for money as the core principle in all procurements. The
other key principles – encouraging competition, efficient, effective and
ethical use of resources, and accountability and transparency in
decision-making – underpin the achievement of value for money. Agencies are
required to have regard to all such considerations in their procurement
activities. As the scale and risk profile of the procurement increases, the
transparency and defensibility of procurement activities becomes increasingly
For covered procurements (generally those above $80 000), the
CPGs establish [MPPs] that agencies are obliged to comply with when procuring
property and services. The prescriptive nature of these procedures means that
agencies do not have discretion in their application. The [MPPs] limit the use
of non-open approaches to the market (including Direct Source procurement) to a
small number of specified circumstances, thereby encouraging competition.
In addition, for covered procurements, the rigour required in documenting the
key processes, decisions, and the basis for those decisions, becomes more
important given the increased scale and risk profile of procurement.
Where procurements are non-covered (generally less than
$80 000), there will be situations where the cost of participating in an
open approach to the market is not commensurate with the scale or risk of the
task. In such situations it is the responsibility of agencies to determine an
appropriate process that will provide value for money without causing undue
costs to the industry or the agency, or reducing program effectiveness.
These processes may include establishing panels for the provision of common
property and services, accessing another agency’s panel where possible, or
seeking quotes from one or more potential suppliers.
Covered and non-covered procurements can be undertaken
through either an Open Tender, Select Tender or Direct Source procurement
process. Direct Source procurement involves an agency selecting one or more
suppliers of its choice to make submissions, such as quotes or tenders, to
provide property or services. While Direct Source procurement is, in practice,
undertaken for procurements of all scales and risk profiles, it should not be
the default procurement approach as it is not conducive to open and effective
competition and it is generally more difficult to demonstrate value for money.
The procurement principles reflected in the CPGs are expected to guide all
Australian Government procurement activities. Where Direct Source procurement
is overused, or perceived as the default method, agencies need to consider the
implications this can have for reputational risks, not only for their agency
but also for the wider public sector.
In the 2009 calendar year, 48 per cent of all contracts
entered into by the Government and reported on AusTender were Direct Sourced.
In addition, Direct Source procurement accounted for 43 per cent (or $10.2
billion) of the total reported value of all of these contracts. These results
are comparable to those of prior periods and, when considered in conjunction
with other audit findings, suggest greater emphasis should be given to
encouraging more open competition and access in Australian Government
procurement, in balancing the range of requirements agencies are required to
meet under the CPGs.
Overall, agencies were reasonably familiar with the
Government’s procurement framework and the CPGs. However, in practice, key
elements of the CPGs were not consistently followed across the four audited
agencies when choosing and conducting Direct Source procurements. For the
majority of Direct Source procurements examined, from the circumstances of the
procurement and/or procurement documentation, it was not evident that one or
more CPG obligations, requirements or specified sound practices had been met,
including for higher valued procurements.
While the agencies had all developed guidance material to
assist staff in implementing sound procurement practices, it lacked sufficient
focus on attaining value for money and encouraging competition in their
procurement activities. Beyond this, under the principles based framework of
the CPGs, agencies need to take a considered approach to establishing
arrangements for individual procurements. Improvements in agency guidance
material and procurement practices would be beneficial in assisting agencies in
achieving better performance and levels of transparency in their procurement
Agency guidance material
The ANAO commented on agency guidance material:
All four audited agencies had [CEIs] and operational guidance
for procurement that covered the requirements of the requisite legal and policy
framework. Nevertheless, these need to more clearly address Direct Sourcing
arrangements and achieving competitive procurement processes. The agencies’
procedures and delegates’ decision-making tended to favour Direct Source
procurement, limiting opportunities for competitive procurement processes.
Agencies also experienced difficulties in distinguishing Direct Sourcing from
Select Tendering. In part, this reflected a lack of clarity in Finance’s
definitions of methods for non-covered procurements; an issue which Finance
recognises and had advised it intends to address. Strengthening of agency
operational guidelines, together with additional clarity in Finance’s
procurement definitions, should improve the level of support provided to
officials to aid them in selecting appropriate procurement methods.
The ANAO made the following assessment of agency practices:
The ANAO examined procurements valued between $10 000 and
$305 million, for property ranging from stationery to buildings, and services
such as research and development, information and communications technology
support and management consultancies. Irrespective of the value or type of
Direct Source procurements, there was often limited evidence to demonstrate
that agencies’ practices for individual procurements provided value for money.
This does not necessarily mean that value for money was not achieved; rather
that, in many cases, procurement practices applied to the particular
circumstances, including the supporting documentation, did not engender confidence
that value for money requirements of the CPGs were satisfied. The audit also
highlighted issues in agencies’ application of the other principles set out in
the CPGs such as accountability and transparency in procurement
Examination of Direct Source procurements across all four
agencies provided evidence that, in 85 per cent of instances, agencies
approached only one supplier and either did not seek, or only sought one quote
prior to procurement. The practical
application of the CPGs can justify Direct Sourcing in certain instances, for
example, for simple low cost items where market forces readily determine
For complex procurements, there may not be an obvious
competitive market. In these cases, where Direct Sourcing can be justified, it
is prudent for agencies to obtain a small number of quotes from suppliers with
a history of proven performance, and to increase the rigour applied to
documenting key procurement decisions and the reasons for those decisions.
For covered Direct Source procurements, agencies could not
consistently assure that their procurements complied with the [MPPs]. That is,
from the circumstances of the procurement and/or procurement documentation, it
was not evident that a valid condition for Direct Sourcing had applied to their
higher valued procurements (covered procurements), as required by the CPGs.
When CPUs were involved in decisions to Direct Source covered procurements,
this generally had a positive impact on compliance.
In general, to improve the alignment of agency procurement
practices with the requirements of the CPGs, agencies should give more
consideration to the procurement need and risk level, how it may be met through
an appropriately competitive procurement process (one that has regard to the
current procurement market) and be able to clearly demonstrate that these
considerations have taken place.
Improving procurement approaches
The ANAO gave the following suggestions for improving procurement
As previously indicated, the intent of the CPGs is that
procurement opportunities for higher value procurements are offered to the full
market except in selective circumstances. To achieve this, the 2005 revision of
the CPGs introduced more prescriptive conditions for Direct Sourcing covered
procurements. It also maintained the requirement for all procurement to achieve
value for money. This has required agencies to implement better planning in
their approach to procurement, through more disciplined agency guidelines and
strategies that accommodate market conditions without compromising value for
money, efficiency and ethics, or creating unnecessary red tape.
Having regard to the underpinning expectations for the CPGs
and the scale of Australian Government procurement, agencies should strive to
better balance the broader benefit of competitive tendering and streamlined
procurement practices. Such a balance would see agencies giving greater
consideration to the scope of the potential procurement need at the outset of a
procurement; more often seeking opportunities to approach the market to enhance
the potential to achieve value for money; and adopting more strategic
approaches to procurement, such as greater use of panel and other standing
offer arrangements. In general, a greater emphasis on earlier planning for
procurement activities would improve the procurement outcomes. The ANAO has
made four recommendations to improve agency procurement practices in this regard,
and to bring greater clarity to the requirements of the CPGs.
Table 4.1 ANAO recommendations, Audit Report No. 11
To improve the transparency of Commonwealth procurement,
the ANAO recommends that:
(a) Finance review the clarity
of the CPGs, including classification of procurement methods, specifically
Direct Source and Select Tender procurements, and
(b) agencies review
their policy and guidance on classifying procurement methods to ensure
consistency with the CPGs and related guidance.
Agencies’ responses: Agreed
Having regard to the scale and risk profile of different
procurements, the ANAO recommends that agencies develop concise
guidance and templates, covering:
(a) methodology for
estimating the value of procurements to inform decisions about whether the
procurement should be treated as covered;
(b) the expected level
of documentation to support decisions to undertake Direct Source procurement
(covered and non-covered); and
(c) consideration of the
level of risk and the existence of conflicts of interest for the Direct
Source procurement, consistent with the CPGs and Management Advisory
Committee Report No. 7.
Agencies’ responses: Agreed
Having regard to the scale and risk profile of different
procurements and to improve compliance with the CPGs, the ANAO recommends
that agencies assist delegates to address reasonable inquiry requirements
prior to procurement approval, by:
(a) documenting the
procurement need, the prevailing market circumstances and other matters that
support the use of Direct Sourcing;
(b) documenting value
for money assessments when Direct Sourcing; and
(c) reviewing, and where
necessary strengthening, pre-approval compliance assurance mechanisms when
Agencies’ responses: Agreed
To enhance the annual procurement planning process and
provide a basis for adopting more strategic and efficient procurement
processes, the ANAO recommends that agencies regularly analyse their
procurement activities with a view to streamlining multiple approaches to the
market for similar types of property or services.
Agencies’ responses: Agreed
The Committee’s Review
The Committee held a public hearing on Wednesday 2 March 2011, with the
- Australian National
Audit Office (ANAO);
- Department of
Families, Housing, Community Services and Indigenous Affairs (FaHCSIA);
- Department of Finance
and Deregulation (Finance);
- Department of Innovation,
Industry, Science and Research (Innovation); and
- Department of
Veterans’ Affairs (DVA).
The Committee took evidence on the following issues:
- clarification of the
Commonwealth Procurement Guidelines;
- complexity of the Commonwealth
- achieving value for
- United States Free
Trade Agreement obligations;
- consequences of
- training and support;
- agency procurement procedures;
- the role of Central
- other procurement
- best and final
procurement using panel arrangements; and
- further ANAO audits
of government procurement.
Clarification of the Commonwealth Procurement Guidelines
The ANAO found that the CPGs should be clarified to enhance correct
reporting of procurement methods, and recommended that:
- Finance clarify the
CPGs, particularly the classification of procurement methods; and
- agencies review their
policy and guidance to ensure consistency with the CPGs and other requirements.
The Committee asked Finance about the timetable for this review. Finance
stated that it is undertaking a consultative process which aims to rework the
CPGs by 1 July 2011. This involves:
... working on providing greater clarity around the
Commonwealth Procurement Guidelines and processes ... to ensure that we make
those processes somewhat more transparent and easier to understand ...
The Committee asked if Finance would formally review the changes it
would make to the CPGs after they have been put in place. Finance assured the
Committee that it constantly reviewed changes to ensure feasibility and
functionality, incorporating ongoing meetings with staff at various levels in
The Committee raised concerns with the terminology used for the CPGs,
and asked if they were rules rather than guidelines. Finance told
the Committee that the CPGs were rules that are required to be followed, and
said that part of the current review by Finance of the CPGs would examine
whether the next document should be renamed to clarify this point.
The Committee also noted confusion surrounding the procurement
definitions. Finance provided the following definitions of the three methods of
Figure 1 Procurement Methods
a request for tender on AusTender and evaluating all compliant submissions..
two-stage process (where potential suppliers are shortlisted following an
Expression of Interest process sought through an open approach to the
market); selection from a multi-use list; or selection from a list of all
potential suppliers with a specific licence or ability to meet a legal
requirement that is essential to the procurement.
and receiving responses directly from one or more suppliers; it can be used
only for procurements where it is specifically allowed under paragraph 8.33
of the CPGs and where the value and reasons for the direct source are
documented (refer to paragraph 8.34 of the CPGs).
submission no. 2, p. 2.
The ANAO found that incorrect or inconsistent reporting of procurement
method in the audited agencies ranged from 6 per cent to 28 per cent.
The ANAO stated that incorrect reporting of procurement method could diminish
the accountability and transparency of Australian government procurement.
The ANAO observed that in order to enhance correct reporting of procurement
methods, staff require a clearer knowledge of procurement methods.
Improving staff comprehension of the three procurement methods will mean they
are better able to correctly classify procurement. This would reduce the level
of incorrect or inconsistent reporting of the procurement method.
The Committee asked Finance to comment on the ANAO’s findings of incorrect
classification of procurement. Finance described confusion in agencies when
determining the type of procurement, particularly when undertaking procurement
When you buy off a panel you should actually then say it is
an open approach or a select approach. What many people say is, ‘Oh, I went
directly to the panel, so it is direct procurement.’ Informing is one thing,
but we are looking at how we can make it easier to comply within the framework
that we have.
In addition, Finance raised the possibility of changing the procurement
definitions to enhance comprehension:
... we are looking at options. One is: can we describe them
better? The second is: do we actually need to have three or would two suffice?
... we are looking at what is actually in the free trade agreement and at how
we can meet our obligations there without disrupting terribly departments’
Complexity of the Commonwealth Procurement Guidelines
The Committee asked Finance for its views on the complexity of the CPGs.
Finance stated that the CPGs comprised six basic rules:
One is value for money—achieving value for money—[...] second
is that for above $80,000 you are expected to approach the open market, and
that selection process can be done through a panel. The third is that when you
do go to the open market, advertise on AusTender. The fourth is to give at
least 25 days [...] in the market for suppliers to respond. The fifth is the
rule that no late tenders can be accepted unless the agency’s system is at
fault [...] the last one is that within six weeks of signing the contract—and
the contract is above $10,000—you must put it on AusTender.
Finance told the Committee that the six basic rules of the CPGs were not
particularly complicated. However, additional layers of guidance and processes created
by agencies make procurement more complex, as staff must give consideration to
many different issues:
The complexity is really to do with the number of layers of
guidance or advice that is provided to people and trying to navigate your way
through all of those things.
The Committee asked Finance if the procurement process could be made
less complex. Finance told the Committee that staff undertaking procurement
felt ‘daunted’ by large activities, and considered that making the process less
complex would lead to higher levels of compliance and higher levels of
achieving value for money.
The Committee asked each agency for its views on the complexity of the
CPGs and the additional guidance required to undertake procurement. The
Committee queried if this could be addressed by increasing the number of rules
in the CPGs or by adding another layer of guidance above the agency level.
Innovation stated that the CPGs have changed since 2005 and that this makes
continual training necessary to remind staff involved in procurement of their
roles and responsibilities. The Department told the Committee that this is
particularly important when some staff are undertaking procurement irregularly.
The Department stated that it has processes, systems and guidance in place to
support staff undertaking procurement.
DVA responded that it had no issue with the CPGs, and accepted that they
were refined as issues emerged. DVA stated that the process supporting the
rules was essential to understand how to apply the rules. DVA noted that the
audit highlighted the need for clarification in this manner and that agencies
must ensure that staff involved in procurement understand the current rules.
FaHCSIA supported these comments and stated that the fact that the CPGs
were simpler meant they were more useable. FaHCSIA reiterated the importance of
the procurement principles and was not certain that lengthier, more
constraining rules would improve compliance or enhance the achievement of the
procurement principles. Noting the devolved purchasing arrangements, FaHCSIA
mentioned that this current arrangement works well and agencies understand the
The Committee acknowledged the devolved approach for procurement, where
agencies create their own chief executive instructions, procurement procedures
and document templates from the CPGs. The Committee commented that when the
revised CPGs are released, agencies will try to reapply the guidelines to their
documents, tighten up their processes and create new templates. The Committee suggested
that a standardised approach to procurement would remove agency interpretations
of the CPGs. The Committee asked Finance to discuss the difficulties of agency
interpretation, judgement and subjectivity and the potential benefits of a
whole-of-government, standardised approach to procurement.
Finance updated the Committee concerning the work it is undertaking with
regard to standardisation across the public service:
... we are looking to standardise the tender and contract
processes around procurements below $80,000 ... That would look like a set of
common documentation that would be available and expected to be used across
government as a whole for the three-quarters of procurements that are
undertaken every year, so it is a very substantial group of things.
... To the extent that we have success with that we intend to
take the same approach and apply it to contracts between $80,000 and $250,000,
which is [the] next largest group. This is the group that takes us right up to
the threshold where the free trade agreement essentially says that they must
have an open tender type of process, except for the exempt category of
... We have a project under way at the moment to try to streamline
or harmonise a lot of [CEIs] in key areas, one of which is procurement, across
the Public Service. ... That should drive some streamlining or commonality in
processes as a whole.
Achieving value for money
The Committee were particularly concerned about the issue of achieving
value for money in Commonwealth procurement. The ANAO emphasised that the core
principle that Australian Government agencies must apply when undertaking
procurement is value for money. This is enhanced by:
- efficient, effective
and ethical use of resources; and
- accountability and
transparency in decision-making.
The Auditor-General reiterated this to the Committee during the hearing:
... if the principles could particularly be in the forefront
of every procurement officer’s mind as they make their decisions on
procurement, they would not go too far wrong—and that is open, effective
competition leading to value for money and being able to justify the position
you have taken in your procurement approach.
The ANAO stated that agencies could demonstrate a value for money
outcome by obtaining multiple quotes to provide a comparative analysis of costs
and by taking into consideration the scale, scope and level of risk of the
procurement. The Committee asked the
ANAO if the culture in agencies was to achieve value for money when
undertaking procurement, or merely to demonstrate value for money by ‘ticking
The ANAO responded that staff involved in procurement must be reminded
that they need to be able to justify their decisions:
[If you were asked] to explain this procurement action and
whether it represented value for money, would you be comfortable to do so? If
the answer is yes, because they followed a particular approach and documented
their reasons succinctly—and it may only be a matter of lines—that is the right
answer. But if you cannot and you find yourself floundering, you probably have
not given enough thought to the approach and the adherence to the principles.
The Committee raised concerns regarding the possibility that a fear of
being non-compliant could suppress initiative and prevent staff from achieving value
for money. The Committee asked Finance how a culture of compliance with strict
regulations created enough space for judgement calls about value for money.
Finance replied that there is a range of compliance issues, including some
which are more minor and related to inadequate documentation.
However, Finance reiterated that:
... the fundamental issue is that public servants have an
obligation in procurement processes to achieve value for money. They have to
make judgements along the way about how best to achieve that value for money
... when you make a judgement to go one way or the other way, you write it down
and you make explicit why you have chosen one path rather than the other.
United States Free Trade Agreement obligations
The ANAO reported that the last review of the CPGs occurred in January
2005, and encompassed the changes to procurement obligations in the United
States Free Trade Agreement (USFTA). The Committee asked Finance
if only the USFTA was reflected in the CPGs. Finance responded that the CPGs
also broadly incorporated the Chile and Singapore agreements, thus reflecting
Australia’s free trade agreement obligations. These incorporations mean
that staff do not have to consult any free trade agreements when undertaking
The Committee asked Finance if there had been any significant changes to
the CPGs as a result of the USFTA. Finance explained the implications to the
... the free trade agreements clarified some processes and
brought in a couple of clear rules. For example, you must go to the market
above $80,000. That is very clearly a free trade agreement rule. The US free
trade agreement is now a benchmark.
The Committee asked the ANAO how the CPGs differed from previous
procurement guidance. The ANAO responded:
... before we had the $80,000 rule, a lot of these direct
sourcing arrangements used to apply at a much higher level. One of the things
that the US free trade agreement brought in was the discipline that said once
you get above $80,000 you need to be able to demonstrate much more easily and
readily the open process that you have employed.
The Committee asked if there had been any domestic and international
purchasing change in relation to the USFTA, and if there had been any internal
audits of purchasing change. Finance responded that it was not aware of any
such reviews but stated that agencies consider that the threshold has improved
assessment and oversight mechanisms for procurement.
Finance added that government procurement was open to domestic and internal
competition prior to the USFTA, and that small and medium enterprises do win
In fact, of the total contracts reported on AusTender for
2009-10 (procurement contracts valued at more than $10,000), the SME share was
approximately 56 percent by volume and 32 percent by value, worth approximately
The ANAO found that the audited agencies did not retain adequate
documentation to demonstrate how they had assessed and achieved value for money
for direct source procurements. No documentation was provided to the ANAO for
74 per cent of the audited direct source procurements.
The Committee asked the ANAO how many cases of non-compliance were serious
issues and how many were due to a lack of documentation. The ANAO responded
that it is difficult to determine whether procurements complied with the CPGs
or achieved value for money without a clear paper trail.
The ANAO reiterated that the procurement principles include documenting
key procurement decisions and actions. The ANAO found that
there was considerable scope for improving the documentation of such decisions.
The ANAO stated that:
Irrespective of the value or type of Direct Source
procurements, there was often limited evidence to demonstrate that agencies’
practices for individual procurements provided value for money. This does not
necessarily mean that value for money was not achieved; rather that, in many
cases, procurement practices applied to the particular circumstances, including
the supporting documentation, did not engender confidence that value for money
requirements of the CPGs were satisfied.
In order to support recordkeeping requirements, improve the transparency
and accountability of government procurement, and increase compliance with the
CPGs, the ANAO recommended that agencies assist delegates to adequately
document the decisions they make when undertaking Direct Source procurement.
The Committee asked each agency to detail the steps they had taken to address
the ANAO’s recommendation.
FaHCSIA stated that it had reviewed all of its procurement and contract
management policies, guidelines and templates since the audit. FaHCSIA reiterated
The ANAO Audit found that FaHCSIA’s process for the approval
of departures from the [MPPs] of the CPG[s] as “good practice”. This process,
which has been mandated within the agency, requires all proposals for Direct
Sourcing of goods or services above the procurement threshold of $80,000 to be
approved by the Branch Manager with responsibility for the CPU prior to
approval by the relevant delegate.
Innovation stated that the Department is reviewing its procurement
guidance material and expects this process to be completed by 1 July 2011.
Innovation has also developed procurement checklists and an internal quarterly
reporting process. In 2009, Innovation implemented a module on contracts into
its financial management information system, which utilises an automatic
workflow to process procurement documentation. In 2010, Innovation commenced
half-day and two-day procurement and contract related training.
DVA reported a number of steps the Department has taken to improve the
- the development of a
suite of procurement templates covering: value for money, level of risk, Direct
Sourcing justification, procurement plans;
- increased emphasis on
explaining the importance of procurement documentation in all training and
internal publications to all staff;
- a software upgrade of
the Department’s internal contract register application has occurred to make
the application more user friendly for business areas and modifications were
made to ensure that [FMA Regulation 9] authority was easily identifiable to the
- the promotion of the
use of standard templates issued by the Department of Finance and Deregulation
for low risk procurements.
The ANAO also noted that agencies often appeared to be obtaining one or
no quotes when undertaking direct source procurement, demonstrating minimal
process despite varied scale and risk levels. The ANAO found that:
... for 85 per cent of the audit sample, from available
evidence only one, or no quotes were sought, with many of these procurements
being covered or of considerable value ...
The Committee asked each agency to explain why this may have occurred in
FaHCSIA responded that:
The majority of these procurements were contracts for:
- software licensing,
postal services and utility services where there is only one provider of the
- accommodation and
venue hire, training and research services where there is a limited number of
providers. In these cases, selection is primarily made following a request for
In these cases, Direct Source was considered an appropriate
procurement solution. In addition, FaHCSIA has established a number of panel
arrangements to allow business areas to streamline procurement processes.
Innovation told the Committee that:
We have anecdotal evidence to suggest that, in a number of
cases, multiple quotes were obtained, however this was not adequately
documented. Notwithstanding, it is acknowledged that the number of quotes
obtained may be an issue ...
DVA stated that at the time of the ANAO’s audit, the Department’s:
... procurement practices in respect of non-covered
procurements (<$80,000) were consistent with the requirements in the
Commonwealth Procurement Guidelines and Finance guidelines at the time that did
not specify the requirement for more than one quote. As a result of this audit
and the recommendations for clarity in procurement guidelines, the Department
has amended its document and online training to ensure all procurements
demonstrate value for money by obtaining multiple quotes.
The Committee asked Finance if it could provide information on instances
of non-compliance with the CPGs and how the Department responded to such cases.
Finance explained that the present devolved working environment meant that
Finance did not receive this information from government agencies so was not
able to report on breaches, however annual reports
tabled in parliament contained these figures.
Consequences of non-compliance
The ANAO found that internal agency audits identified similar issues
with compliance, documentation and reporting as the Auditor-General.
The Committee asked each agency to provide details of the internal consequences
for individual staff who demonstrated non-compliance with the CPGs and agency
requirements, given that previously identified issues did not seem to have been
FaHCSIA stated that it reports non-compliance through the Certificate of
Compliance process, and addresses identified issues by bringing them to the
attention of the relevant delegate and ensuring the delegate undertakes
appropriate training to prevent reoccurrence.
Innovation responded that it:
... reports instances of non compliance with Regulation 7
(Commonwealth Procurement Guidelines), Regulation 9 (approval of spending
proposals) and Regulation 10 (arrangements beyond available appropriation) as
part of the Certificate of Compliance process. Part of the Certificate of
Compliance process is to include remedial action to be taken against any
All performance agreements at the SES Level include
compliance as a standard criterion. Therefore, compliance is taken into account
when assessing performance at this level.
DVA stated that when a staff member has breached the CPGs:
... the Department works at improving that staff member’s
understanding of the procedures and the importance and need for compliance ...
Training and support
The ANAO found that strengthening agency guidance would improve
compliance with the CPGs by raising awareness of its procurement requirements.
The Committee suggested a lack of awareness of the requirements in the CPGs
could be addressed through training and support.
The Committee asked Finance to explain its provision of training and
support to agencies, and state whether or not this was happening regardless of,
or in response to, the audit. Finance provided information to the Committee on
its ongoing commitment to procurement training and support:
... Finance considers that procurement capability—that is
skills, competency and experience—needs to be improved to promote better
compliance in agencies with procurement requirements. In this respect, Finance
has introduced a range of initiatives, many of which were initiated before the
Audit Report, but are adjusted to take account of changes in policies and areas
in which compliance with the CPGs can be improved. These initiatives include:
Foundations Seminars—and introduction to the Procurement Framework (held 4-5
times a year);
Discussion Forum (held about every 6 weeks);
- Agency visits;
- Procurement Update (a
weekly update on the procurement component of the Finance website);
Newsletter (issued monthly); and
- Working with key
agencies to ensure availability of Certification 4 and degree courses dealing
Finance stated that procurement training would happen regardless of the
audit, but that:
... it has been given a new focus and sense of purpose, if
you like, by the audit findings, which essentially tell us that there are some
issues that we have to address and give us a bit of a handle about what those
The Committee asked if Finance had the resources to implement the ANAO’s
recommendations. Finance confirmed that it had the required skills set for
procurement policy and agency outreach.
The ANAO also recommended that agencies improve training and support to
staff undertaking procurement. The Committee asked the
audited agencies to provide details of the steps they had taken to implement
this recommendation. The Committee particularly asked each agency to:
- provide details of
its procurement training programs;
- state who provides
this training; and
- state if procurement
training is compulsory for all delegates involved in procurement.
FaHCSIA stated that it undertakes regular reviews of policies and
guidance, which are easily accessible on the agency’s intranet. The Department
also stated that all CPU staff have, or are acquiring, nationally recognised
qualifications in government procurement. FaHCSIA noted the difficulty in
attracting and retaining senior procurement staff.
The Department advised that internal training is available to all staff and
delegates are encouraged to attend these courses and others delivered by
Finance, the Australian Public Service Commission and other private training
providers. Shane Carroll and
Associates developed FaHCSIA’s current two-day training course, with the
Department’s CPU. FaHCSIA also delivers internal one- and two-day training
courses on financial management. However, the Department
stated that procurement training is not mandatory:
FaHCSIA considers policy and guidelines available on the
Agency’s Intranet, coupled with guidance from the CPU, is sufficient to support
delegates when exercising their financial delegations.
Innovation stated that it has an online procurement toolkit and has
commenced further procurement and contract-related training, all of which are
reviewed on an ongoing basis. These include half- and two-day training courses
for staff and delegates. Innovation stated that
CIT Solutions and its internal procurement team developed the Department’s
current procurement training suite, however the suite is now being delivered by
Major Training Solutions. Innovation stated that procurement
training is not mandatory, however procurement training is available, and:
The department requires all delegates who approve spending
proposals to undertake a Financial Accreditation test prior to becoming a
delegate. This mandatory test is designed to test a delegates [sic]
understanding of approving spending proposals including questions on
Additionally, the department has developed a series of
checklists for managers which outline key considerations when approving a
DVA stated that its internal Contract Advisory Unit provides procurement
training services to its staff. DVA advised that it is
moving to introduce mandatory training, in addition to its regular internal
procurement training sessions. DVA provided the
following details of steps the Department has taken to improve procurement
- extensive one-on-one
discussions with individual managers and Senior Executives as well as a special
awareness session for all Senior Executives in order to establish a top-down
approach underlining the importance of procurement practices;
- updates to the
procurement Chief Executive Instructions;
- internal instructions
issued to emphasise the importance of [FMA Regulation 9] compliance and use of
- publication on the
departmental intranet of a suite of templates covering procurement activities;
- increased emphasis on
procurement process / documentation in internal publications to staff involved
in procurement activities;
- implementation of
on-line training package to supplement national training sessions; and
- [DVA’s internal Contract
Advisory Unit] conducting quality checks of all contract information uploaded
to the departmental contracts register and referral back to business area if
Agency procurement procedures
The ANAO recommended that agencies develop guidance and templates that
concisely cover the following aspects of the procurement process, in order to
improve compliance with the CPGs:
- methodology for
estimating the value of procurement;
- the expected level of
required documentation for direct source procurement;
- consideration of risks;
- consideration of conflicts
The Committee asked each agency if it had developed a long-term,
concrete action plan to ensure future compliance with this recommendation, and
to detail the steps it had taken to implement these plans.
FaHCSIA stated that in addition to periodic documentation reviews, it is
currently developing an enhanced procurement management system called
Procure-to-Pay. This system is scheduled for introduction in the 2011-12
Innovation stated that it had implemented measures to improve compliance
with the CPGs. Innovation is currently reviewing its procurement guidance
material (to be completed by 1 July 2011) and has undertaken the following
- commenced delivery of
a procurement and contract-related training course to procurement officers and
- instituted a mandatory
quality assurance stream through its financial management information systems;
- developed checklists
for approval documents; and
- introduced an
internal quarterly reporting framework.
DVA stated that it is developing its Quality Management Framework to
assist in complying with the CPGs. This will reiterate the importance of
compliance. DVA also noted that:
In addition, the Division that is responsible for managing
the majority of high value procurement activities within the Department has
consolidated its procurement function into one area within the Division to
strengthen procurement expertise and streamline procurement activities.
The role of Central Procurement Units
The ANAO found that Central Procurement Unit (CPU) involvement in
individual direct source procurement decisions improved compliance with the Mandatory
Procurement Procedures (MPPs) of the CPGs:
The timely involvement of CPU staff in decisions to Direct
Source, generally had a positive impact on compliance with the [MPPs of the
CPGs]. In this regard, a good practice implemented by FaHCSIA required
clearance by the CPU Branch Head of decisions to Direct Source procurements in
excess of $80 000.
The ANAO also reported that the role of the CPU in the audited agencies
- provision of legal
and commercial advice and support, including advice on agency and Commonwealth
- development and
maintenance of agency procurement policy and guidance;
- management of
agencies’ contract registers, and internal and external reporting; and
- provision of
The Committee asked the ANAO if, given their effectiveness, CPUs should be
more involved in procurement activities. The ANAO told the Committee that it is
important that staff who procure irregularly are able to contact a CPU or an
officer with expertise to assist them in the process.
Finance added that the Department encouraged the involvement of CPUs in
procurement. FaHCSIA, Innovation and
DVA agreed that expertise and advice in CPUs were valuable to the procurement
process. The Committee asked
each agency to explain how it structures and manages its procurement processes.
FaHCSIA told the Committee that the Department had a CPU to provide
advice to staff, in addition to guidance. The Department noted that irregular
procurement is also an issue within its Department, but that staff understand
the value for money principle and where to find procurement advice. FaHCSIA
also noted improvements it had made during the audit process.
Innovation reported that it is ensuring that procurements are undertaken
by staff who understand and can comply with the CPGs and departmental
processes. Innovation stated that staff procure with differing frequencies, so
increasing awareness and ensuring training is undertaken improves compliance
with the CPGs and departmental requirements. Innovation provided
further detail on procurement processes to the Committee, emphasising the
pressure imposed by time constraints:
... it comes down to an interpretation of the rules. There is
always an interpretation of the rules when you are talking about specific
situations and about procurements that may have to happen within a short time
... it is very much driven by timing interpretation ...
DVA noted that it expected staff to contact the Department’s CPU for
advice and support when undertaking procurement, and agreed with Innovation’s
comments regarding time constraints. DVA mentioned that the focus on
documentation to prove compliance required staff to understand the process and
definitions. It stated that confusion about directly approaching a provider on
a panel established by an open tender process (which should be recorded as open
tender, not direct sourcing) had been an issue.
DVA provided further information regarding how it changed its procurement
processes during the audit process, which included advising managers
individually, renewing procurement information, updating the CEIs, addressing
non-compliance and reviewing AusTender listings.
DVA increased the visibility of a key mantra:
... ‘If it’s not documented, it’s not done’ ...
Other procurement approaches
The Committee sought clarification from Finance on various types of
procurement approaches during this review. These included:
- multi-use lists;
- allied tendering;
- best and final offer
- contract splitting;
procurement using panel arrangements.
The Committee noted past use of multi-use lists for procurement,
highlighting that micro-businesses (typically operating with four or fewer
people) were unable to participate in the process, and stating concerns that
some lists lacked quality assurance or risk management, yet the completed list could
be deemed the only option for providers to use. A multi-use list is a list,
intended for use in more than one procurement process, of pre-qualified
suppliers who have satisfied the conditions for inclusion on the list.
The Committee asked Finance to comment on this procurement method. Finance
stated that there is presently a multi-use list for advertising, containing
approximately 230 firms. Finance confirmed that this was a prequalification
list, established with appropriate checks, and that it was fluid, so businesses
could be added or removed if their eligibility changed. These processes
included referee checks. Agencies were encouraged to engage with suppliers on
the list that have not been previously engaged with government.
The Committee asked Finance for feedback as to how allied tendering
fitted into the CPGs and the procurement principles. The Committee asked if allied
tendering could be used as a value for money judgement, and if this would be
acceptable if it was adequately documented. Allied tendering is a procurement
process, where organisations respond to an open tender, and an agency may
select two tenders and ask the organisations to ‘cut a deal’ to share the
Finance explained to the Committee that allied tendering was an
The procurement guidelines do not prohibit that sort of
approach. Alliance contracting is quite common in places. What you want to do
is make sure you understand who has the risk and who is responsible. That is
the key issue when you undertake those types of approaches. There is nothing
that says you cannot do it. If it makes good business sense and achieves value
for money, it is fine.
Best and Final Offer
The Committee noted that the best and final offer approach frustrated
many organisations, who felt they had gone through a genuine procurement process,
but been undermined at the end of it. The best and final offer (BAFO)
procurement process is where organisations respond to a tender, then the agency
asks some organisations if they could improve their offer.
The Committee asked Finance to comment on this process. Finance made two
- that value for money is
much broader than price; and
- that there will
always be final negotiations with significant contracts.
The Committee asked Finance if using BAFO could make the initial tender
process questionable. Finance responded to this concern:
If it is built into the process and it is quite clear that
you might go to best and final offers, there is no problem at all. If you think
about it, there are other mechanisms that other jurisdictions use for simple
procurements—buying computers or something like that—where they use a Dutch
auction, essentially, and you actually see the prices, though not necessarily
who is putting them in. Is that a best and final offer approach—it is in the end.
The Committee commented that such a Dutch auction process would be more
transparent than a closed BAFO process.
The ANAO found that seven procurements of the audited sample had been
divided into separate smaller procurements. This is an instance of
The MPPs state that procurements must not be divided into
separate smaller procurements to circumvent a threshold ... [where seven]
procurements were reported as contract notices with values of $80,000 or less,
the agencies had procured the same services from the same supplier on a
continuing basis, and the cumulative value of services exceeded the procurement
thresholds. In these instances the MPPs should have been applied to the
The Committee asked the ANAO for its assessment of the incidence of
contract splitting in the sample and in government agencies more widely. The
ANAO noted that contract splitting had been found to occur in this and other
recent audits, and that this was not an acceptable practice for government
procurement. The ANAO added:
... we saw a small number of examples of behaviour that
sought to get around the covered procurement thresholds or that did not address
those thresholds properly ...
We saw some other examples where agencies had not estimated
the value of the procurement with any degree of accuracy. They had estimated
the value at under $80,000 and there were a couple of cases where at the end of
the day the procurement was well in excess of the $80,000 threshold.
However, the ANAO emphasised that:
... these examples were very much in the minority; there were
only a few in that large sample [of 280 Direct Source procurements audited for
Cooperative procurement using panel arrangements
The ANAO noted that cooperative panel arrangements, whereby multiple
agencies access suppliers from the same panel, increased the efficiency of
procurement processes. Processes that incorporate whole-of-government panels or
intra-agency cooperative panels provide:
... an opportunity for the agencies to better appreciate
their overall procurement requirements, as a basis for adopting more strategic
approaches to procurement ...
The Committee noted that many agencies sign up to ‘co-panel’ and
suggested that the procurement of standard government services and standard
capabilities required by multiple government agencies could be facilitated
through a whole-of-government panel.
Finance noted that this approach could reduce the cost of procurement
for businesses as well as agencies and indicated that it supported and endorsed
the use of cooperative procurement, in appropriate circumstances:
If one or more agencies goes out to tender for a particular
type of service or good, they may choose to do that with a clause that
essentially allows other agencies to look at that list and access that panel or
that contract. From a whole-of-government perspective that is one of the ways
that you can achieve value for money ... The addition of cooperative procurement
clauses in these processes is a welcome development from a whole-of-government
Further ANAO audits of government procurement
The Committee asked the ANAO if it intended to undertake further audits
of procurement. The ANAO stated that it would not repeat work on Direct Source
procurement, but would examine other aspects and issues relating to procurement
as the audit had identified broader issues. For example, the ANAO
informed the Committee that it is currently undertaking an audit on the use of
panel arrangements in procurement, to gauge how effective the process is.
The ANAO further indicated that it intended to undertake a program of audits on
various aspects of government procurement in the future.
The Committee is gravely concerned about the findings of the ANAO audit,
and many of these concerns were not alleviated during the Committee’s review.
The Committee was particularly concerned to see the high level of direct source
procurement instead of more competitive procurement options; the insufficient
governance mechanisms; the lack of documentation and the possibility that value
for money is not always being achieved. If these results are indicative of
procurement practices in the wider APS, the Committee finds this even more
Regarding value for money, the Committee considers, as indicated in the
CPGs, that this is the paramount goal of procurement. The Committee reiterated
throughout the review that government agencies have an obligation to achieve value
for money in procurement processes. The review linked low levels of compliance
with the CPGs to the perceived lack of achieving value for money. However, the
Committee raised concerns that having a culture of compliance might not leave
enough space for judgement calls about value for money.
The ANAO stated that a lack of documentation does not indicate that
value for money has not been achieved; however the Committee considers that
undocumented processes should be viewed with high levels of suspicion. In these
circumstances, the Committee is of the opinion that the default assumption
should be that ‘if it’s not documented, it’s not done’, hence value for money
is unlikely to have been achieved.
Although a range of issues were covered during the inquiry, the
Committee considers that the following areas warrant specific comment:
- revision of the CPGs;
- CPUs and approval
templates and training;
conditions, including training and testing; and
- consequences of
The Committee anticipates a timely release of the revised CPGs and urges
Finance to address the Committee’s concerns in the Department’s ongoing review
processes. The Committee encourages Finance to make the CPGs easier to
understand for the broader APS, in order to facilitate compliance. The
Committee sees the revision of the CPGs as imperative to improving practices
and compliance in government procurement.
The Committee recognises the important role that CPUs play in improving
compliance with the CPGs. The Committee therefore encourages CPU involvement in
procurement activity above set thresholds, in an advisory, support and
compliance capacity. In addition, the Committee sees benefit in strengthening
approval processes, to improve accountability. This could include a central
officer, such as the head of the CPU, being required to formally endorse that
correct procurement processes have been followed.
Regarding whole-of-government approaches, the Committee accepts that the
procurement process is complex. Despite this, the Committee considers that a
whole-of-government approach to support procurement at an agency level could
improve compliance with the CPGs and the efficiency of procurement. The
Committee suggests that standardised whole-of-government templates and training
could provide examples of best practice and ensure staff undertaking
procurement understand their responsibilities. The Committee commends Finance
for providing procurement training and support to government agencies. However,
the Committee would like to encourage Finance to more broadly promote the
training opportunities it provides for both CPU and non-CPU staff. The
Committee encourages appropriate evaluation of this training material to test
if it is leading to value for money outcomes.
The Committee notes that as agencies interpret the CPGs, different
processes and templates could cause difficulties with subjectivity and
judgement. The Committee sees benefit in having a standardised
whole-of-government set of templates and checklists, to assist procurement.
This would provide a generic foundation that agencies can expand on as
required. This in turn should improve outcomes and efficiency.
Regarding delegation conditions, the Committee is of the opinion that
there may be merit in obliging individuals with official delegation to undergo
compulsory procurement training, or at a minimum, testing. This would ensure
that responsible officers meet a minimum level of competency to spend
taxpayer’s money and that their skills remain current.
Regarding the consequences of non-compliance, the Committee was not
provided with sufficient evidence to give it confidence that the consequences
of non-compliance are adequate or are being applied. The Committee does commend
Innovation’s practice of incorporating compliance into SES performance
agreements as a novel and beneficial approach. However, the Committee would
have liked to have seen more evidence of a compliance structure. If this does
not exist, the Committee would encourage agencies to develop such a structure
to ensure that
non-compliance is taken seriously and is adequately addressed.
The Committee thanks the agencies for their involvement in this review
process and would like to acknowledge those agencies that demonstrated areas of
good practice. The Committee is encouraged by the improvements made during, and
subsequent to, the ANAO audit. The Committee notes that all audited agencies
agreed with the ANAO’s recommendations, and anticipates further improvements in
light of this review.
However, the Committee remains concerned that while agencies have
improved their documentation procedures and training, they have not given the
Committee confidence that they have adequately addressed the ANAO’s
recommendations on estimation methodology, risk analysis and conflicts of
interest in their guidance. Furthermore, the Committee reiterates that it does
not accept that time constraints are an excuse for non-compliance.
Finally, the Committee supports the ANAO’s intention to conduct further
audits into a range of government procurement processes. The Committee retains
an ongoing interest in this area of public sector administration and will
continue to scrutinise it. Due to the significance of the findings in this
review, the Committee sees benefit in the ANAO conducting another audit into
Direct Source Procurement in the near term.
The Committee understands that achieving value for money involves active
judgement as well as rigorous processes and compliance with the CPGs. It is in
this context that the following recommendations are made.
The Committee recommends that the Department of Finance and
Deregulation actively promote and culturally address the use of CPUs across
the Australian Public Service.
The Committee recommends that the Department of Finance and
Deregulation investigate the viability of developing and implementing
whole-of-government templates and checklists for use across the Australian
Public Service and report back to the Joint Committee of Public Accounts and
Audit within six months of the tabling of this report.
The Committee recommends that the Department of Finance and
Deregulation investigate the feasibility of implementing a process of
regular, mandatory testing and/or training for all Australian Public Service
officers with delegation authority above $10 000, with the aim of ensuring
currency and competency. Finance should report back to the Joint Committee of
Public Accounts and Audit within six months of the tabling of this report.
The investigation should include, but not be limited to,
at agency or whole-of-government level;
mechanisms to achieve outcomes (see paragraph 4.105 above); and
costs and benefits of the scenarios considered.