Video transcript: Procurement and contract management

Transcript for a video of a presentation about procurement and contract management filmed at the 2018 Audit New Zealand client update.

Title: Procurement and contract management, Martin Richardson, Director, Specialist Audit and Assurance Services, Audit New Zealand

Martin Richardson

Angela was quite nice for the first prong of a two-pronged attack, wasn’t she? Not sure what that says about how I’m going to go down. But I am well placed to be part of an attack, working as I do in the SAS team of Audit New Zealand. At least, that’s what it was when I joined, and I quite liked that because – I know there’s a bunch of accountants here – but being an auditor doesn’t win you too many friends. So, I quite liked the fact that I worked in the SAS team, because then, when people heard that, you could just say, “Can’t tell you too much about it.”

They added another A, so now it’s the SAAS, and the joke doesn’t work. The reason that we have two As in our SAS, is that we provide both audit and assurance services. Our work covers the full spectrum of procurement, from planning, through the purchasing phase, to contract management, and contract completion. And as Steve alluded to, we support our audit teams where entities are involved in large-scale procurements. But we also provide assurance services directly to agencies, where they value the assistance of someone reviewing how they’re going about that procurement.

We have a range of service lines that we provide these assurance services in, but procurement, contract management, and project management are undoubtedly the three most significant. And I think those three themes fit well together. 

When you hear that we’re involved in one of your procurement processes, that’s the time to reach for this button... not really. When you’re about to reach for that button, that’s the time to call us – no, that’s not quite right, either. If you want to avoid having to reach for that button during your procurement processes, you might benefit from some of the procurement insights that we can share with you through our assurance services. And I’ll share some of those with you this morning.

No surprises – I hope – that procurement is a major activity for public entities. The New Zealand Government is highly, highly reliant on the private and voluntary sector to achieve our outcomes. We did a survey some years ago of all of the DHBs around the country, trying to get a feel for the volume of their procurement expenditure, and it revealed that, on average, 60 percent of their budget flowed through the organisation to external providers.

We’re currently going around the country reviewing the long-term planning of local government. That work is indicating that, depending on the kind of local authority we’re talking about, somewhere between 40 and 70 percent of their revenue flows out of their organisation to private sector and third sector providers. So, it’s a highly, highly significant activity. Some of the larger ministries and district health boards have got in excess of 1000 contracts in place, and perhaps just as many individual suppliers. And some contracts are huge. Think of the Transport Agency’s contract to build Transmission Gully, or the Department of Corrections contract for the Auckland East and Waikeria prisons. We’re talking about billions of dollars of public funding going out, sometimes through individual contracts. So it’s big business.

But our observation is that the level of procurement activity is growing. But athough I said that there was perhaps no surprises on that chart telling us what the proportion of expenditure was, all too often we find that, when you reveal those numbers, it is a surprise to people. Many organisations haven’t thought about or haven’t joined up all of the expenditure that constitutes procurement. And yet there are significant performance and financial implications of procurement. 

Many organisations, we find, don’t understand the risks that they face in running procurement processes, and they don’t take the function seriously enough. Yet we can all think of examples where significant frauds, for example, have arisen. Clearly something that’s to be avoided. 

In New Zealand we’re fortunate. We benefit from some good quality rules, guidance, procedures, tools, and techniques. Angela talked about functional leadership, and I think we’re fortunate to have that role, that support, to our procurement activity. Some of the resources that are available to us – both through the rules, and the associated guidance tools and templates – are great sources of good practice. They’re entirely consistent with the good practice guidance that our office puts out as well, and also consistent with global good practice, where we’ve got the chartered institute leading, thinking, and support to good procurement. Trying to raise the profile of the profession, if you like.

One thing that I would point to, however, is that when we – Audit New Zealand and the Office of the Auditor-General – talk about procurement, we think about a continuum. We think about a continuum from the planning stage, right through to the completion of a contract – not just about that purchasing phase. Secondly, we think about a continuum of funding arrangements. If you turn to the Office’s good practice guide on funding arrangements, you’ll see that it talks about purchases, grants, and gifts. Within each of those categories, it talks about conventional purchases and relational purchases; it talks about conditional grants, and grants with limited conditions. And it sets out some expectations of how the procurement process and practices might differ across that continuum.

The key point being that not all goods and services that the public sector wants to procure can rely on the existence of a competitive market to provide that supply. Therefore, different approaches to procurement, different procurement models, different contracting approaches, may be appropriate. But we can’t get away from the fact that all of that is procurement, and all of it relies on third parties to deliver our objectives.

Audit New Zealand’s involvement in our assurance services often relates to probity. But what is that? Essentially, it’s about a fair and ethical approach to procurement. It chimes in quite nicely with what Al was saying earlier. Fairness really involves the application of good practice. If we comply with the principles and the rules that Angela talked about, we’ll be close to being fair. Probity involves the application of those principles. 

MBIE has described those principles as “Planning and managing for great results, being fair to all suppliers, getting the right supplier, getting the best deal for everyone, and playing by the rules.” We define them a little differently in the Office of the Auditor-General guidance. We talk about accountability, openness, achieving value for money, legality, fairness, and integrity. But if the words are different, the underpinnings are the same. The trick to achieving probity is to think through all of those tricky situations that occur during procurement process and how they might be tackled in line with the principles.

We’ve done some risk assessments of procurement practices around the sector, and it’s revealed some interesting results. We’ve been able to highlight the factors that, in our view, drive or give rise to heightened risk in the way that procurements are managed. The top issue that we’ve come up with is the structure and way in which procurement is organised in many entities. We see lots of examples of procurement devolved across the organisation, to people with limited expertise, limited oversight, and having to juggle procurement with all of the diverse other responsibilities that they have in their role. We just wonder if that recognises the importance of procurement to the delivery of our objectives, as I said earlier.

Other areas that we see risk are internal review – often we don’t perceive the visibility of procurement at the highest levels in the organisation. Some organisations don’t have good quality, up-to-date policy and procedures in place, and sometimes the link to financial delegations isn’t clear. 

One thing that we often get accused of as auditors is being obsessed with process. Some people seem to think that there’s a conflict between public expectations of probity and process, and achieving outcomes. “If only we didn’t have to go through this process, we could jump to implementing the solution.” In our view, both are important, but good process contributes to a good outcome, and the two considerations need to be balanced. Because the consequences of not considering probity in a tender process can be quite significant. 

There’s risk of legal challenge. We can all think of cases that have hit the media – public sector entities being taken to court by disappointed tenderers, unsuccessful suppliers. And even if a legal challenge can be defended, or indeed avoided, there can still be damage to an agency’s reputation, to personal reputations, significant cost and delay can be incurred. There can also be damage to the market, such that vendors are unwilling to participate in future processes. 

Occasionally we’ve found ourselves in the unusual situation for auditors, of discouraging agencies from adopting an overly rigid approach to process. A couple of examples – and they seem quite minor, but I think the outcome could have been more major. There was one example where a procuring entity had asked for the price and the non-price aspects of a tender to be delivered separately. One of the tenders had inadvertently put their pricing information in with their non-price. The agency was going to treat that as a non-compliance and reject that proposal. 

But we talked to that agency about thinking through what the purpose of separating those two aspects is. The purpose, really, is to support the robustness of the non-price evaluation, so that those judgements aren’t influenced by knowledge of the price. If you think something’s cheap, you might view it as being of a lower quality. Or if you think the price is attractive, you might score its quality aspects up because you want to select that option. But in this case there was no danger of that, because it was the procurement manager that had seen the two in the same envelope. Nobody that was going to evaluate the bits had been influenced; there was still time to rectify the situation. So, for the sake of a technical non-compliance, that agency could have lost a perfectly good proposal that the market had put effort into putting forward.

Another example: a council was tendering its road maintenance contract and, when it received the proposal, noticed that one proposal significantly exceeded the page limits it had set out in its tender document. So the council offices proposed to remove the excess pages – a typical response to a situation like that – to bring it back into compliance. The problem was, you then end up trying to review a document that finishes mid-sentence, with half of the information you need to evaluate it missing.

We pointed out to them that their tender document didn’t actually say that this was a drop-dead compliance issue – it was guidance; it was a preference for proposals to be of a certain length. By tossing away those pages, they would have actually rendered one of the only two proposals that they got impossible to evaluate. Process overriding sensible decision-making. Because, ultimately, they were looking for the best supplier, and I expect that that approach to process might not have helped them get there.

But that’s not to say that, in either of those examples, the fundamental principles of probity were lost. In fact, they were supported by adopting a sensible and pragmatic approach to process.

Procurement’s a changing landscape. We’re seeing some emerging practice. We’ve heard about all-of-government contracts. We’re seeing more and more common capability contracts. We’re seeing strategic alliances. We’re seeing increased use of panel contracts and pre-qualification. We’re seeing increased and innovative market engagement process and interactive tender processes. All of that’s good, but all of it means that you need to think carefully about how you apply those probity principles, and what process may be appropriate. 

Just to finish off with some of the issues and observations that we’ve come across in reviewing many procurement processes, both as part of our audits and through providing assurance over them.

Firstly, planning. Many of the issues that we encounter with procurement processes can be put down to poor or limited planning. Planning might not have been done early enough or robustly enough. Often there’s an end date, and it’s typically determined by when a board is meeting to sign off on a contract, or a council meeting or something like that. So there’s an end date that’s fixed. Then there’s a start date that’s slipping, perhaps because people are fitting procurement in around their day job. So the bit that gets squeezed in the middle is the actual sourcing process itself. The people that get squeezed in the middle are often the market respondents that are having to put together a tender to respond to your requirements. I would suggest that squeezing the market into the amount of time that they can think about your requirements and how best to service them, probably isn’t the best way to get the best value, best quality service from the market.

Secondly, the costs of procurement. Running a tender process can be a highly expensive exercise – not only for agencies, but for the market to respond to. I provided probity assurance over all of the public-private partnerships that the Ministry of Education have run over a number of years. I’ve had to sit in meetings where the Ministry has debriefed unsuccessful respondents. And those respondents are sitting there without a contract, having invested upwards of a million dollars in bid costs. That’s a massive investment in playing the procurement game that we’ve put them through. So, it’s important to recognise that a procurement process has significant cost.

Defining requirements well. We reviewed a tender process – taking my point about cost – that did not result in a contract. The reason was, until the proposals came in, the purchasing entity didn’t really understand well enough what its requirements were. It was only when it saw the proposals, and some of the non-compliant proposals, that it fully understood the capabilities of the market. So it cancelled that tender process, and went back to market with a broader scope, recognising the capabilities of the market. But unfortunately, having sunk their costs into the initial process, the market was gun-shy from proposing again into a rerun process. Getting this wrong has an opportunity cost for future market engagement.

Three more points and then I’ll finish and let you go for lunch.

Procurement has a huge impact on the business as usual. I’ve often sat in tender evaluation meetings and people are rushing to get there. They tell stories of how they’ve had to read this huge pile of proposals that they’ve been asked to evaluate, over the weekend or in the evenings. They haven’t managed to record any notes against the criteria that they’ve been asked to evaluate against, because time hasn’t allowed that. I often suggest to such people that there’s little that they could do in that week at work that would have more impact on the delivery of public services, than evaluating those proposals fully. If they downed tools on the rest of the day job, and focused on that, I think that would have the most impact on public services. Yet people have these tasks lumped on top of their day jobs, asked to squeeze it in. If we think back to those tenderers, putting in a million dollars’ worth of bid costs, I wonder whether that’s really fair and appropriate. 

Two more. Consultants – that’s why I’ve got a picture of a fence. We think that it’s great that the public sector makes use of technical specialists, consultants, when they don’t have the expertise in-house. And why would you have the expertise for every single procurement methodology, contracting form, or particular project that you might get involved in? You probably don’t need that all the time. So it’s perfectly appropriate to involve consultants. But we struggle when consultants want to jump that fence. Perhaps they’ve been involved advising an agency, building up a business case for a particular project. They then want to jump the fence and bid into that subsequent procurement process to provide the solution to the problem that they’ve just scoped up. We struggle to see how that is operating a fair playing field, and it certainly needs some careful thought as to how you’re going to manage any inherent conflicts in that.

Finally, a point about due diligence. Often the poor cousin of evaluation, we find, something that gets tagged on the end. “Oh, yeah, we’ve got to go through our due diligence process, but we know that this is who we’re going to contract with.” And maybe it’s a constraint or quick check of some financials. But, again, we can all reflect on some examples that we’ve seen across the sector, of ethical issues arising, or an organisation proving that perhaps it doesn’t have quite the capacity that it said it did, or it’s committed on other projects. Considerations that are legitimate in deciding to work with a provider. We would urge that due diligence be given a greater emphasis in the procurement process.

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