Introduction

1. Garrison Support Services (GSS) describes a range of services provided by contractors to Defence sites around Australia. In 2008–09, total annual expenditure under Defence's GSS contracts was $454.77 million. This represented an increase of 58 per cent over expenditure on GSS in 2001–02. The majority of this increase relates to the impact of price indexation arrangements over time, although there have also been increases in the scope of services delivered under GSS contracts and some of the increase in GSS expenditure can be attributed to the higher Defence tempo of operations in recent times. The following categories of GSS generally generate the highest contract payments (in order): hospitality and catering; access control; cleaning; grounds maintenance; fire fighting and rescue; and transport. Table 1 lists all of the categories of services that may be provided under GSS contracts.

Table 1 Categories of Garrison Support Services

Note: The majority of these services are delivered in all Defence regions, although not all services are delivered in each region.
Source: GSS contracts

2. GSS contracts have been in operation for some 10 years and there are currently 10 GSS contracts which are regionally based. In 2008, Defence moved to a revised model for the procurement of GSS. This model involves contracts for the provision of what are called ‘Base Services' where contractors provide both GSS and Comprehensive Maintenance Services (CMS).¹ Tenders for the two Base Services contracts so far in place, for the former Tasmanian and North Queensland regions, were conducted in 2008 with the contracts commencing in December 2008 and January 2009 respectively.²

3. Overall responsibility for the procurement and contract management of GSS (or Base Services) lies with the Defence Support Group (DSG), which has regional staff throughout Australia. Each DSG regional manager (the Contract Authority for the regional contract) reports to the Head of Defence Support Operations (DSO). The Business Services Procurement and Contracting Branch within DSG has a key role related to GSS as it is the ‘process owner and technical authority' for procurement, contracting and commercial advice, and develops DSG policies and processes in these areas.

4. Currently, Defence is undertaking management reforms that affect GSS. One of these involved the implementation of a restructure of the DSG regions. Until 1 July 2009, the DSG regional structure was made up of 12 regions and the 10 GSS and 2 Base Services contracts currently in place relate to that structure, that is one contract per region.³ However, from 1 July 2009, the number of DSG regions has been reduced to five.⁴

5. In addition, DSG is introducing a ‘contracting hub model' which involves establishing a ‘hub'—essentially a high level management team—for each contractor involved in delivering GSS, CMS and/or Base Services contracts. Defence's aims in adopting this model include improving stakeholder management and risk management, and reducing the resources needed for contract management. Another reform is called the Base Accountabilities Model (BAM), which aims to resolve problems of blurred accountability and responsibility between DSG and the recipients of services, principally the Australian Defence Force (ADF). Implementation of both the BAM and the ‘contractor hub model' is currently underway and is expected to be substantially completed by the end of 2009.

6. In June 2009, in the context of the Defence White Paper 2009 and the 2009–10 Federal Budget, Defence announced its Strategic Reform Program (SRP). The SRP aims to deliver over the 10 years to 2019 gross savings of around $20 billion that are required to fund the achievement of the Government's plan to build a stronger ADF (known as Force 2030) and:

to fix key areas in Defence where under-investment in past years has left vulnerabilities in [Australia's] military capabilities and reduced critical support functions to the ADF. …... [the $20 billion] will be reinvested to deliver stronger military capabilities, to remediate areas where there has not been enough funding in the past and to modernise the Defence enterprise ‘backbone', all of which are essential to support the fighting force.⁵

7. As part of the SRP, the reform target savings associated with GSS has been set at $700 million over 10 years.

Audit objective and scope

8. The objective of the audit was to assess the effectiveness of Defence's procurement and contract management for the provision of Garrison Support Services.

9. Defence's approach to the provision of GSS through outsourced providers has developed over some 10 years that these contracts have been used. The audit reviewed the conduct of one of the most recent GSS procurements undertaken by Defence, the tender for the Base Services contract for the former North Queensland region.⁶ In addition, the audit examined DSG's management of the existing GSS contracts relating to three of the 12 regions making up DSG's regional structure at the time of audit fieldwork: the former Riverina Murray Valley (RMV) region, the former Central/Northern New South Wales (CNNSW) region and the former Western Australia (WA) region.⁷ The audit did not examine the policy related to the level of security or access control at Defence establishments (or who should provide such services) which informs the requirements specified in GSS contracts.⁸

Audit Criteria

10. The audit considered, in respect of the provision of GSS, whether:

• arrangements comply with Commonwealth legislative and policy guidance, as well as relevant Defence guidance;
• risks have been identified and managed;
• the roles and responsibilities of different parties within Defence have been identified;
• appropriate plans have been developed for tendering and contract management; and
• better practice has been applied as appropriate to procurement and contract management arrangements.

Overall conclusion

11. Defence contracts out the provision of Garrison Support Services (GSS) to allow the ADF to focus on its core functions. GSS encompass a range of services such as catering, access control and grounds maintenance.⁹ The ANAO examined the recent tender selection process conducted for the Base Services contract (which encompasses GSS) for the North Queensland region, and also contract management arrangements for three existing GSS regional contracts.¹⁰

12. Overall, the ANAO considers that Defence's current tender selection processes and contracting arrangements are delivering the necessary services. However, the effectiveness of GSS contracting is constrained by weaknesses in risk management, performance management and contract amendment administration for current GSS contracts. Inconsistencies in Defence's application of the performance management framework for GSS, both across and within regions, raise issues of the equitable treatment of contractors, and whether the level of performance payments made by Defence has been adequately substantiated.¹¹ Defence has recognised the need for reform of GSS/Base Services and has already commenced the implementation of a range of reforms.¹² However, in the context of the challenging savings target for GSS under the SRP ($700 million over the next 10 years), successful completion of reforms already in train and identification and implementation of further improvements will be essential.

13. In the longer term, to achieve efficiencies, reduce costs and improve competition, the ANAO considers that there are a range of initiatives that Defence could usefully consider to improve the procurement approach and contracting model being used, including:

• encouraging investment by contractors in longer term improvements in the provision of services that would lead to efficiencies through longer base terms for GSS/Base Services contracts (for example increasing the current five year base term to 10 years), subject to ensuring performance standards are met;
• encouraging innovation by contractors and promoting competition through improved tender and contract arrangements involving greater reliance on the specification of outcome standards to be met rather than focussing on specific processes to be carried out;¹³
• reducing the administrative burden on both Defence and contractors by simplifying the performance management arrangements, and improving contract arrangements for managing underperformance of contractors; and
• developing a mechanism to increase the knowledge of Defence users of GSS/Base Services about the services contractors are required to deliver to allow users to play a more explicit role in providing assurance that contracted services are delivered.

14. To help meet the challenge presented by the SRP savings target for GSS, Defence will need to streamline its contract management effort through improved procurement and performance management approaches that promote competition and foster innovation by contractors to provide service delivery solutions that deliver the required outcomes to Defence users, while also reducing costs to both Defence and contractors.

Key findings by Chapter

GSS Procurement – 2008 North Queensland Base Services tender (Chapter 2)

15. Defence undertook an open tender for Base Services (which included GSS) for the former North Queensland region during 2008. The contract was for an approved amount of $197.9 million over five years and there were three tenderers for the contract (all of whom have existing GSS contracts in other regions). The successful tenderer was Serco Sodexo Defence Services Pty Ltd (SSDS).

16. Based on its Tender Evaluation Plan and Probity Plan, Defence established a comprehensive process for the tender selection process for North Queensland Base Services (NQ Base Services). From the material reviewed, there is evidence that matters such as fairness, impartiality, transparency, security, conflicts of interest and the negotiation of the contract were managed appropriately.

17. The Request For Tender (RFT) required tenderers to provide detailed information on how they would deliver particular services. The technical assessment evaluation of tenders contains an undue emphasis on a tenderer's ability to provide detailed information on how it proposes to deliver services, rather than concentrating on the tenderer's ability to effectively manage and deliver services. If a tenderer did not address how it proposed to carry out relatively minor tasks, its assessment score was reduced. This approach adds to the cost of the overall tender process, can serve as a deterrent to new entrants to Base Services contracting, and provides an advantage to an incumbent firm (which can readily describe the services it is already delivering). The balance of the evaluation could be improved through focusing more on the ability of the tenderer to deliver services to a set standard; the tenderer's internal performance management and quality assurance systems; and the tenderer's ability to attract personnel with the necessary skills and experience.

18. The ANAO considers that Defence should evaluate whether the current design of the tender selection process for Base Services best supports an open, competitive tender process over the longer term. Defence informed the ANAO that it considers that any tender evaluation process must include a balanced consideration of all technical worth, price and risk aspects in order to make ‘value for money' assessment decisions. However, Defence indicated that it is continually seeking to improve the procurement process and, as such, agrees that the tender evaluation approach can be reviewed with the aim of improving the efficiency and effectiveness for Defence and tenderers, whilst still ensuring that an appropriate ‘balance' is achieved and that all tenderers are treated in a fair and equitable manner.

19. The ANAO also proposes that Defence improve the written debriefs provided to tenderers subsequent to tender assessments by providing tenderers with an assessment against each of the evaluation criteria, noting the strengths and weaknesses of the tender of the particular organisation.

Contract management framework (Chapter 3)

20. At the time of audit fieldwork, the DSG regional structure was made up of 12 regions.¹⁴ The 10 GSS and two Base Services contracts currently in place relate to that structure, that is one contract per region. The ANAO examined the management and administration of three of these GSS contracts—the contracts for the former Riverina Murray Valley (RMV) region, the former Central/Northern New South Wales (CNNSW) region and the former Western Australia (WA) region. These contracts are delivered by three different firms, involve services being delivered to all three Services and include broad geographic coverage.

21. Under the GSS contractual arrangements there is a requirement for a Regional Contract Governance Plan (RCGP) for each contract. These plans, in large part, outline the processes that are to be followed as part of contract management and related administration, including how performance measurement will be dealt with in the particular region. Given the contractual arrangements in place and the substantial funding involved, it is important that Defence has recorded assessments of the key risks associated with its GSS contract management functions, and how it proposes to manage them. None of the three DSG regions in the ANAO's audit sample had documented risk assessments of DSG's responsibilities in connection with the region's contract for GSS.¹⁵ Structural reforms currently underway within DSG intend to develop GSS risk management at a national level. In the light of any risk assessments undertaken for contract management, there are likely to be changes needed to be made to RCGPs to take account of the outcome of the assessments.

22. In the three regions visited by the ANAO, DSG's communication arrangements with its GSS contractors and the ADF users of GSS appear generally effective. They cover all relevant parties and provide a framework to allow issues to be appropriately escalated. Most forums were being consistently utilised, and overall those interviewed were satisfied with the arrangements.

23. DSG staff in the regions visited informed the ANAO that they were generally able to access suitable training on procurement and systems such as CAPMAN.¹⁶ With the current process to introduce the ‘Professionalising Contract Management' (PCM) course, the need for contract management training is now being addressed. However, the PCM course could be improved by the inclusion of specific guidance on the application of risk management to GSS. Although not specifically tailored to the detail of the GSS contracts, the training conducted in the former RMV region which focused on managing the relationships in contracts, including managing conflict during negotiation, appears to have contributed to the development of an effective collaborative relationship between DSG and contractor personnel in that region.

24. However, currently DSG does not have a central, easily accessed repository of training and guidance material for either its own staff or contractor staff involved in the management of GSS, CMS and Base Services. In order to improve access for base and regional personnel, including contractor personnel, to up to date training and guidance material and to provide a convenient mechanism for regular, timely communication with these personnel, the ANAO has recommended that Defence assess the benefits of establishing a central information source (possibly an intranet site) for GSS and CMS related communication, training and guidance material.¹⁷ Such a site would help contribute to a consistent national approach, allow for ease of communication, provide an authoritative up-to-date reference source and reduce the demand for local solutions.

Contract performance management and measurement (Chapter 4)

25. The framework for GSS performance management is based on the contractor meeting several performance and compliance indicators for each service. Performance measurement is based on a self-assessed score by the contractor, which is reviewed by DSG. Compliance indicators are based on objective criteria and are assessed as met or not met. DSG and contractor staff interviewed by the ANAO considered the assessment of performance against these compliance criteria as relatively straight forward. However, in contrast, performance indicators are subjective assessments of contractor performance in service delivery, and are scored out of 100.

26. ANAO analysed the performance scores allocated to contractors in 10 regions throughout Australia between July 2008 and December 2008. This analysis showed performance had predominately been assessed as having met or exceeded ‘agreed' performance targets under the GSS performance management arrangements. This is consistent with the feedback provided by ADF representatives interviewed at the bases visited as part of the audit, who indicated that they were generally satisfied with the services provided by contractors under GSS.

27. However, there are difficulties in the scoring system differentiating between ‘agreed' performance and ‘maximum' performance, which are both shown as green traffic lights in the relevant reporting system, the Contract and Performance Management (CAPMAN) system. ANAO's analysis of performance scores awarded in this range for the three regions in the ANAO's audit sample identified markedly different scores being given for what appeared to be the same, or very similar, levels of performance based on the comments supporting the scores recorded in the CAPMAN system.

28. Under the GSS contracts, the scores for performance against the performance indicators for each service translate into different margin (or performance) payments. The ANAO identified inconsistencies in Defence's application of the performance management framework for GSS, across and within regions, that raise both issues of the equitable treatment of contractors and questions as to whether the level of performance payments made by Defence has been adequately substantiated. Contractors receive differing margin payments depending on the performance score received. Ratings between 80 and 90 per cent usually provide margin payment at the ‘agreed quality target' level and ratings at 90 per cent and above usually attract a margin payment at the ‘maximum quality target' level.¹⁸

29. In addition, GSS contractual provisions to recalibrate performance targets where maximum scores are consistently achieved have never been applied, even though in some regions, for particular performance indicators, the maximum margin payment has been made for an extended period. Without such a mechanism being applied, and in light of the inconsistencies around performance measurement, the contractual Performance and Risk Reward Remuneration Model is not able to ensure that ongoing performance across GSS contracts is consistently reflected in the margins paid to the various contractors.

30. Overall, the ANAO considers that the performance management and risk/reward elements of the GSS contracts are not operating consistently or effectively and recommends that they be reviewed.

Administration of GSS payments and contract amendments (Chapter 5)

31. Processing of payments to GSS contractors generally occurs in an effective manner. However, there is potential for considerable improvement in the administration of contract amendments by DSG. Records related to contract amendments were incomplete and the processing of amendments was not timely in the three regions comprising the ANAO's audit sample. Delays in processing amendments increase costs to Defence in some cases, as contractors charge higher labour rates for services not established in the contract.

32. Other matters identified in relation to GSS administration include:

• the need to emphasise to DSG regional staff the importance of pursuing any non-delivery of contracted services in a timely manner and, if appropriate, to seek adjustment to contractor payments;
• that in the view of both contractors and ADF members involved, it appears that the use of ADF personnel in contractor managed operations (such as messes) causes considerable dissatisfaction and tension, and there may be merit in re-examining this approach to maintaining relevant specialist skills for such ADF personnel; and
• in relation to the maintenance of savings over the life of GSS contracts (original contracts were entered into in 1998), Defence advised that, using analysis from a 2002 internal audit report as a baseline,¹⁹ and adjusting for price changes and scope increases, real GSS expenditure has not varied significantly from that outlined in the internal audit report of 2002, which suggests that savings have been maintained over the life of the contracts.

The GSS Procurement and Contracting Model (Chapter 6)

33. The ANAO identified a number of options that Defence could consider regarding the future operation of GSS and Base Services procurement and contract management. The key options are set out in paragraph 13.²⁰ While it is approximately four years until the term of any of the existing contracts under which GSS are provided is completed, it would be timely for Defence to commence planning for a new round of contracts now. This should allow for appropriate consideration of how best Defence can improve its approach to GSS and Base Services procurement and contract management to support achievement of the SRP savings target of $700 million over the 10 years to 2019. In addition, there is scope for changes relating to the administration of existing contracts to set the scene for future arrangements, and make economies in current administrative practices.

Defence's response

 34. Defence's response to the proposed audit report was as follows:

Defence acknowledges the findings noted in the ANAO Report in relation to the procurement and contract management of the Garrison Support Services Contracts. Defence agrees to each of the five recommendations made within the report.

Defence had already commenced a number of reform activities associated with the procurement and management of the Garrison Support Services contracts prior to and during the ANAO audit. Defence will continue to address the issues highlighted in the report, primarily through a number of reform activities currently underway as part of the Defence Strategic Reform Program and the Non-Equipment Procurement reviews.

Defence remains committed to pursuing ongoing continuous improvement in relation to the procurement and management of the Garrison Support Services Contracts.

Footnotes

¹ CMS involves, amongst other things, the maintenance and repair of Defence fixed plant and equipment, and provision of engineering and other specialist advice. For the second round of GSS contracts, which were let on a rolling basis from 2004, the rules of the tender allowed tenderers to submit a combined GSS/CMS bid, however a combined bid was only successful in the case of the South Queensland region.

² Defence restructured its regional structure for the delivery of GSS in July 2009 (see paragraph 4).

³ The twelve DSG regions at the time of audit fieldwork were: Sydney Central, Sydney South West, Central Northern New South Wales, Australian Capital Territory and Southern New South Wales, Riverina Murray Valley, Victoria, Tasmania, North Queensland, South Queensland, Northern Territory and Kimberley, South Australia and Western Australia.

⁴ The five current DSG regions are North New South Wales, South New South Wales, Victoria and Tasmania, Queensland, and Central and West.

⁵ The Strategic Reform Program, DELIVERING FORCE 2030, Department of Defence, June 2009, Introduction by the then Secretary and the Chief of the Defence Force on p. 3.

⁶ The Strategic Reform Program, DELIVERING FORCE 2030, Department of Defence, June 2009, Introduction by the then Secretary and the Chief of the Defence Force on p. 3.

⁷ Base Services contracts involve the combined delivery of both GSS and CMS.

⁸ Fieldwork for the audit was conducted between February and April 2009. As noted in paragraph 4, DSG introduced a new regional structure on 1 July 2009 under which the twelve previous regions have been reduced to five.

⁹ The access control service provided under GSS and Base Services contracts is one of the layers of security in place at Defence bases throughout Australia. For example, specific measures are taken to protect sensitive items of equipment and munitions, as well as buildings in which particularly sensitive work is undertaken.

¹⁰ See Table 1 for a full listing of the categories of GSS that may be provided to Defence establishments under current GSS and Base Services contracts.

¹¹ As noted in paragraph 9, the ANAO examined the administration of the GSS contracts in the former RMV, CNNSW and WA regions.

¹² This is because analysis of performance scores awarded for contractor performance at or above ‘agreed' performance targets for the three regions in the ANAO's audit sample identified markedly different scores being given for what appeared to be the same, or very similar, levels of performance. Contractors receive differing margin payments depending on the performance score received. Ratings between 80 and 90 per cent usually provide margin payment at the ‘agreed quality target' level and ratings at 90 per cent and above usually attract a margin payment at the ‘maximum quality target' level.

¹³ These include a reduction in the DSG regional structure from 12 regions to five, steps to introduce a ‘contracting hub model' and the new Base Accountabilities Model (BAM) by the end of 2009 (see paragraphs 4 and 5).

¹⁴ And/or requiring detailed information about how individual services are to be delivered.

¹⁵ Fieldwork for the audit was conducted between February and April 2009. As noted in paragraph 4, DSG introduced a new regional structure on 1 July 2009 in which the twelve previous regions have been reduced to five.

¹⁶ Such risk assessments should be reflected in each region's Regional Contract Governance Plans (RCGPs).

¹⁷ CAPMAN is Defence's Contract and Performance Management system for GSS.

¹⁸ Base Services contracts comprise both GSS and CMS.

¹⁹ For illustrative purposes, assuming a difference of 2 per cent in the margin between ‘agreed' and ‘maximum performance', and annual contract payments of $30 million, the difference between the margin payment for ‘agreed' and ‘maximum' performance could be up to $0.6 million per annum.

²⁰ Management Audit Branch, Report No: 01/008, Contract Management of CSP Contracts – Garrison Support, 7 February 2002.

²¹ Other options raised in Chapter 6 include: placing greater explicit reliance on contractors' own quality assurance systems; reducing risk and administrative overhead through redesigning the contract arrangements to minimise the requirement for contract amendments and streamlining the administrative processes for necessary amendments; further exploring the opportunities for ‘gain share' within contracts whereby contractors are provided with incentives to make efficiencies and/or economies with the benefits shared between Defence and the contractor; and, for discretionary services, considering whether there is scope for the user (principally the ADF) to deal directly with the contractor and apply its funds to meet the costs.