Introduction

1. Contracting in many Australian Government agencies involves a significant level of expenditure and agency resources. Contracting activity ranges from straightforward procurements such as the provision of advisory services through to complex long term projects that may involve the development of information and communications technology. It may involve an oral or a written contract.

2. To support its operations, each year the Government purchases billions of dollars in goods and services, including capital acquisitions. In 2007–08, the Government purchased $24.6 billion of goods and services from suppliers,¹ being 30 per cent of its total goods and services expenses. In comparison, in constant dollars, the Government spent $23.2 billion on supplier goods and services in 1997–98. This also was 30 per cent of its total goods and services expenses.

3. Government agencies entered into around 69 500 contracts in 2007–08 worth more than $26.4 billion,² 99 per cent of which had a value of less than $5 million. Many of these contracts were for the provision of goods and services for periods greater than one year.

4. The Commonwealth Procurement Guidelines (CPGs) establish the core procurement policy framework and articulate the Government's expectations of all departments and agencies subject to the Financial Management and Accountability Act 1997 (FMA).³ The CPGs establish the Government's procurement policy for agencies. The Guidelines focus on value for money and how it may be achieved by agencies when procuring. The CPGs advise that:

Procurement encompasses the whole process of acquiring property or services. It begins when an agency has identified a need and decided on its procurement requirement. Procurement continues through the processes of risk assessment, seeking and evaluating alternative solutions, contract award, delivery of and payment for the property or services and, where relevant, the ongoing management of a contract and consideration of options related to the contract.⁴

5. The CPGs guide agencies to develop contract terms and conditions consistent with the financial management framework underlying the procurement of goods or services. In so doing, they aid agencies in achieving value for money in their purchasing.

6. Contract management is an important phase in the procurement cycle that commences after the contract is signed. It focuses on managing the rights and obligations of parties to the contract and ensuring that goods and services are delivered in accordance with the contract.

7. In July 2009, the Minister for Finance and Deregulation announced the next steps in the Government's approach in purchasing and contract management.⁵ The Minister announced that the Government was conducting scoping studies in a number of product markets to determine whether coordinated procurement arrangements, such as negotiating whole-of-government contracts, can improve overall value for money in these markets. In addition, the Minister outlined reforms to government purchasing to promote value for money and to achieve better results for businesses and the community, including the appointment of a Procurement Coordinator to oversight government procurement practices and policies.

Audit objective and scope

8. The audit objective was to assess the effectiveness of agencies' contract management by determining if they had sound practices and systematic approaches to this activity. Particular attention was given to each agency's:

• day-to-day management of individual contracts; and
• approach to managing its contract population.

9. The audit examined contract management in three agencies: the Australian Federal Police (AFP), the Australian Trade Commission (Austrade) and the Department of Foreign Affairs and Trade (DFAT).

10. The audit had two parts. The first involved the ANAO reviewing the management of 30 small to medium size contracts (ten in each agency) with estimated expenditure for each of between $80 000 and $5 million. The majority of contracts were for the provision of a service, such as legal services or property management.

11. The second part of the audit involved an examination of each agency's policy and processes to manage its contract population. This involved reviewing how each agency managed its contract data, monitored and reported on supplier performance, and managed risks, training and supplier relationships.

Overall conclusion

12. The CPGs indicate that the aim of individual contract management is to ensure that goods and services are provided to the required standard within the agreed schedule so as to achieve value for money. Generally, once a contract is signed, the contract's duration is much longer than the initial procurement stage. Therefore, consistent and informed contract management is important for an agency to get the most value from each procurement.

13. Overall, the ANAO concluded that, for the three audited agencies, contract management processes and practices provided an adequate level of support for the provision of goods and services. Notwithstanding, there were a number of instances where there was insufficient evidence that delegates had approved contract variations or invoice payments. Additionally, none of the agencies periodically reviewed the success of its approach to contracting such as through monitoring the percentage of contracts completed on time and on budget, or the number and purpose of contract variations, so as to improve procurement and contract management practices.

14. Consequently, agencies will benefit from:

• improving management and recording of payments, including compliance with relevant Finance Regulations; and
• giving more attention to the approval process for contract variations.

15. The three agencies' procurement and contract advisory units provided a satisfactory level of support for agency staff to manage small to medium size contracts. Given the devolved nature of contract management in agencies and in light of agencies' continued reliance on contracts with the profit and not-for-profit sectors, the audit identified potential improvements in these units' roles. These included:

• improved processes to provide contract management advice; and
• periodically reviewing agency-wide contracting performance, for example, through analysis of the contract register or surveys, to encapsulate agency trends in contract management practices and approaches which delivered superior contract outcomes.

16. Accordingly, the ANAO has made two recommendations. The first is aimed at strengthening agency compliance with Finance Regulations when they vary contracts. The second encourages agencies to develop a systematic approach to advising staff who manage contracts, and for agencies to review the success of their approaches to contract management.

Key findings by Chapter

Day-to-day management (Chapter 2)

17. Daily management involves several activities including contract payments, monitoring and reporting, and varying contracts. The ANAO reviewed the management of 30 contracts worth approximately $37 million.

Payments

18. The ANAO reviewed 45 recent supplier invoices and found 21 had insufficient evidence of approval by a delegate. Additionally, 85 per cent of contract managers interviewed advised that they did not check payments (or did not know how to check payments) in their agency's Financial Management Information System (FMIS), relying on their accounts payable section, as well as the internal checks within the finance system, to ensure payments were accurate and timely.

Payments to small businesses

19. Government policy for payments to small businesses requires agencies to adopt maximum payment terms ‘not exceeding 30 days' from the date of receipt of correctly rendered invoices. The implications of agencies not paying correctly rendered invoices from small businesses within 30 days are that they are not complying with Government policy, and that they may be required to pay interest on late payments for contracts with a worth up to $1 million. Six of the 30 supplier contracts reviewed were with small businesses. Thirty six of the 45 invoices reviewed were paid within the 30 days, while nine were paid after 30 days, two of which were for small businesses.

20. We also examined the results of the Department of Innovation, Industry, Science and Research's annual Survey of Australian Government Payments to Small Business for 2006–07 and 2007–08. While Austrade and DFAT reported that they paid more than 90 per cent of their small business invoices within 30 days, the number of small business invoices the AFP reported as paid within 30 days dropped from 76 per cent in 2006–07 to 69 per cent in 2007–08. The AFP advised that this was due to a largely decentralised and manual accounts payable process. AFP further advised that improvements to its FMIS and related processes had since increased compliance.

21. The results of the invoice review and contract managers' responses to interview questions on payments indicated that many contract managers would benefit from financial skills training. The latter training involves agencies determining which financial controls and reports were most important for contract managers. For example, where an FMIS checks for duplicate invoices, training could include advice for contract managers of the existence of such a control.

Monitoring and reporting by contract managers

22. The ANAO interviewed contract managers to determine how they monitored their contractors' performance. Seventy five per cent advised they had regular contact with the contractor ranging from ad hoc contact to scheduled meetings and performance reports. Only ten of the 29 contract files contained documentation of monitoring activities, such as copies of supplier reports, minutes of meetings or records of email or telephone communications.

23. While there were potential improvements in the monitoring of contractors' work, for instance, in documentation of decisions and communication, agencies' monitoring and reporting were largely commensurate with the complexity and risk of the contracts reviewed.

Contract variations

24. Twenty three of the 30 contracts had at least one variation suggesting that the ‘norm' was to vary contracts. The majority of variations (53 per cent) were for an extension to the duration of the contract. Other variations included the addition of services, increased pricing, changes to personnel, and/or reporting requirements.

25. The ANAO reviewed contract files for evidence of properly executed variations and found 80 per cent of files contained signed correspondence between both parties. However, for some variations there was either no correspondence on file showing the agreement of both parties, or documentation was unsigned. There was also a small number of variations approved after the expiry of the contract.

Compliance with legislation

26. Finance Regulations set out the requirements for approval of current and future spending proposals. FMA Regulation 9 requires that an approver must not approve a proposal to spend public money unless the approver is satisfied, after reasonable inquiries, that giving effect to the spending proposal would be a proper use of Commonwealth resources, that is, an efficient, effective and ethical use of public money that is not inconsistent with the policies of the Commonwealth.

27. FMA Regulation 10 requires authorisation for a spending proposal where any of the expenditure under the spending proposal is expenditure for which an appropriation of money is not authorised by the provisions of existing laws or a proposed law before the Parliament. If so, an approver must not approve the proposal unless the Finance Minister (or delegate) has given written authorisation for the approval. FMA Regulation 10 authorisation most commonly arises in relation to multi-year spending proposals. Where an agency requires FMA Regulation 10 authorisation, it must obtain this from the Finance Minister's delegate before seeking FMA Regulation 9 approval.

28. The ANAO reviewed 55 variations across 23 contracts and identified 32 that required FMA Regulation 9 approval and/or FMA Regulation 10 authorisation. Eleven of these 32 variations did not have documentation on file indicating that a delegate had approved and/or authorised the variation.

29. Around 30 per cent of contract managers interviewed did not know about these two Regulations and whether they had applied them. The consequence was that if a contract manager changed a contract with out obtaining approval, he or she may have committed the agency to a spending proposal without complying with legislation.

30. Agencies will benefit from reviewing, where necessary, their policies, guidelines and training, including refresher training, affirming that their personnel understand and comply with FMA Regulations 9 and 10.

Agencies' management of their contract populations (Chapter 3)

31. The approach an agency takes to manage its contract population, the resources devoted, and the effort required, is best guided by:

• the number, complexity, and value of its contracts; and
• the importance of contracts to agency goals.

32. We reviewed each agency's contract register to determine the number of active contracts and their value. On 30 June 2008, the three agencies had over 2 100 active contracts worth more than $2 billion.

33. The three agencies advised that they recorded contract expenses in their financial statements under the heading ‘Suppliers, provision of goods and services to external entities'. We reviewed each agency's financial statements to determine growth in external supplier expenses and external supplier expenses as a percentage of total departmental agency expenses. From 2005–06 to 2007–08, the AFP's and DFAT's supplier expenses grew by 28 per cent and 30 per cent respectively, while Austrade's reduced by 12 per cent.

34. In 2007–08, the three agencies committed approximately 40 per cent of their departmental expenses to external suppliers. The nature and size of contracting in the three agencies warranted each agency having a systematic approach to manage its large population of contracts.

35. To oversee the administration of procurement and contracts and assist their contract managers, each agency had established a procurement and contract advisory unit. Each advisory unit:

• developed and maintained policy and guidelines;
• provided advice and training;
• managed the contract register; and
• prepared reports for internal and external audiences.

36. Contract management in the AFP and DFAT was mostly decentralised. In the AFP the procurement and contact advisory unit managed some agency wide contracts and two of the AFP's units also had procurement and contract advisory support teams providing assistance to AFP staff. DFAT placed specialist contract managers in four of its divisions. Contract management in Austrade was fully decentralised.

Managing and reporting contract population data

37. For agencies to manage their contract populations they need systems to collect, manage and disseminate information for internal and external purposes. The principal method for recording such information was through each agency's contract register.

38. The three agencies' contract registers had the basic characteristics necessary to meet their external reporting requirements, for example, in recording information such as contractor name, contract start and finish dates, and value. However, there were some limitations in terms of the accuracy, consistency and completeness of the information in the register, such as:

• fourteen of the 30 contracts were incorrectly listed in contract registers;
• financial data recorded in the contract registers related to different types of information, leading to some ambiguity in interpretation. For example, the data was sometimes a potential and sometimes a confirmed expenditure. Additionally, in some cases, the financial data was for the current year commitment or expenditure, while other data was for the life of the contract (that is, commitment or expenditure over several years). Clarifying the nature of the financial data would assist users of contract registers; and
• limited monitoring of contract end dates by AFP and DFAT affecting the preparedness of agencies to manage follow-on arrangements.

39. The ANAO considers that there is merit in agencies considering the costs and benefits of linking the contract register to the FMIS and broadening access to the register. We noted that:

• none of the contract registers was linked to the agency's FMIS, reducing the ability to track and report payments, particularly where the contract was for several years. The AFP has since moved the register into its FMIS, DFAT is considering linking theirs, while Austrade had assessed the resources required to link the two systems and found that presently it would be too expensive to connect them; and
• there was limited access to the contract register. View access in two agencies was limited to the procurement and contract units and to the originator of the contract record. This inhibited the sharing of information. If more staff were able to access contract data (remaining mindful of security and confidentiality requirements), they could determine if the goods and services they required were already being provided to the agency and, if so, whether they could use existing contracts for those purposes.

40. The three agencies conducted some agency wide monitoring and reporting of contracts including through affirmations of compliance with financial legislation⁶ and through financial commitment registers. Although each agency had many contracts, there was minimal agency-wide monitoring of: supplier performance, annual contracting costs, numbers of extensions and variations, and numbers of contracts finished on time and within budget.

Central agency leadership

41. Finance organises procurement discussion forums and distributes a procurement bulletin on Commonwealth procurement. While some briefings and presentations may have introduced aspects of contract management, the latter was not a direct focus. These forums provide the opportunity to discuss and share ideas on contract management alongside the current focus on procurement.

Summary of agencies' responses

42. Each of the audited agencies agreed with the two recommendations in this report. Agency responses to each of the recommendations are shown in the body of the report. Agencies' general comments are shown at Appendix 6.

Footnotes

¹ These figures exclude expenditure on capital acquisitions, such as the purchase of military equipment. Source: Department of Finance and Deregulation, available from: <http://www.finance.gov.au/publications/commonwealth-consolidated-financial-statements/2008.html> [accessed 29 September 2009].

² These figured include expenditure on capital acquisitions. Source: Department of Finance and Deregulation (AusTender), available from: <http://www.finance.gov.au/publications/statistics-on-commonwealth-purchasing-contracts/index.html> [accessed 29 September 2009].

³ Commonwealth Procurement Guidelines – FMG 1, available from: <http://www.finance.gov.au/publications/fmg-series/procurement-guidelines/index.html> [accessed 29 September 2009].

⁴ Department of Finance and Deregulation, Commonwealth Procurement Guidelines, December 2008, p. 3.

⁵ Minister for Finance and Deregulation, Australian Government Procurement Statement, 28 July 2009.

⁶ Chief Executive Officers (CEOs) make these affirmations through providing their Ministers with annual Certificates of Compliance with financial legislation.