Spend it wisely: the true meaning behind ‘value for money’

A core principle of major tender processes is ensuring that the procurement represents ‘value for money’. It’s a key criteria in awarding large projects, and is often used as a contract management assessment and auditing tool. Yet despite consistently being used as an indicator of success throughout both the procurement process and the life of any resulting contract, value for money isn’t a principle that is easily defined or measured.

What constitutes value for money? And once you’ve identified areas of value, how do you ensure you make the most of them?

DEFINING VALUE FOR MONEY

Most jurisdictions define value for money in any procurement guidance it makes available to potential tenderers. Generally speaking, such definitions are broadly formulated around the concepts of cost, quality and risk mitigation. The available procurement guidance is fairly comprehensive, but there are some new concepts and ideas developing around the creation and capture of value for specific procurements which may change and expand how organisations conceptualise value for money.

While the term is generally broad and centres on all relevant considerations to the procurement, recent Queensland policy demonstrates that governments can prioritise some areas of value over others. The new Queensland Procurement Policy, effective 1 September 2017, requires the state government to focus on and prioritise local employment and job opportunities.

The Commonwealth Joint Select Committee on Government Procurement recently released its report into the Commonwealth Procedure Rules (Report), recommending consideration be given to (among other things)

 1. Human rights

The Commonwealth Procurement Rules require officials to make reasonable inquiries that the procurement process considers relevant regulators and regulatory frameworks including labour regulations, occupational health and safety, and environmental impacts.

These examples are not exhaustive. The Report recommends that human rights management in supply chains, including modern slavery, should be risks identified by officials and managed through the procurement process.

Specifically, the Report recommends that procurement officers are trained in Australia’s human rights obligations, and how they should be considered during the procurement process.

 2. Environmental sustainability

Environmental sustainability is listed as a consideration in the Commonwealth Procurement Rules. However, the Report suggests this criteria would be more appropriately considered if the government assists entities in developing a better understanding as to how to capture the value this requirement brings.

Specifically, the Report suggests that the withdrawal and lapse of the National Waste Plan and ICT Sustainability Plan has left agencies without sufficient guidance in these types of procurements.

Going beyond the Report – environmental sustainability may also capture considerations at both ends of a product’s lifecycle. After increased attention to Australia’s excessive waste brought by the ABC’s War on Waste, the community may be looking for greater accountability from government suppliers.

While the Report focuses on the Commonwealth procurement landscape, the same considerations are equally applicable to other jurisdictions seeking to ensure value for money.

PROVING VALUE FOR MONEY

It may be necessary to demonstrate that a particular procurement process achieved value for money some time after the particular procurement process has been completed.

For example, in Ipex v Victoria, the Victorian government had to defend against Ipex’s claim that Victoria had failed to apply a value for money assessment by not selecting the cheapest option. Victoria ultimately succeeded, demonstrating to the satisfaction of the trial and appeal judges that it had applied all of its evaluation criteria (which looked at criteria beyond just cost) as contractually required.

In succeeding on this claim, Victoria submitted documents (specifically an Evaluation Worksheet and Evaluation Plan). These plans illustrated the exercise undertaken in deciding which tender response constituted the best value for money solution.

This demonstrates the importance of having a comprehensive and carefully considered documentary record of the decision-making process and conclusions.

Such cases may become more common, particularly if the Commonwealth Parliament passes the Government Procurement (Judicial Review) Bill 2017, which will allow dissatisfied tenderers to seek injunctions and/or compensation for breaches of the Commonwealth Procurement Rules.

ENSURING VALUE FOR MONEY

While defining value for money may be readily achieved by organisations that have appropriately considered the concepts of value relevant to a specific procurement, ensuring that the value for money is actually obtained is another matter altogether.

Here are a couple of tips for ensuring that your organisation gains the tangible benefits of the value identified during the procurement process.

 1. Protecting relationship value

An area of value may be the opportunity to partner with a specific supplier, as there may be benefit derived from finding a strategic industry partner with sought after personnel and a highly regarded reputation.

It’s important that the contract sets out key obligations which ensure that the supplier delivers on these benefits. One way to ensure this value is obtained is by including contractual clauses that set out key personnel who must be involved in the project, obligations of co-operation and best endeavours, and suspension and termination rights linked to grounds where the supplier fails to deliver the relationship benefits sought.

 2. Best practice and continuous improvement obligations

If a supplier is offering cutting edge solutions, then it may be worth binding the supplier to deliver best practice and to demonstrate continuous improvement.

Difficulties associated with collecting evidence of a competitor’s level of practice for the purposes of benchmarking or proving a breach of these obligations can make such obligations difficult to both define and enforce. Nevertheless, industry standards are an important benchmark given that suppliers are being sought after for their industry expertise.

 3. Careful contract drafting

As simple as it sounds, a key way of ensuring that the value of the benefits identified during the procurement process are carried all the way through the project is to ensure that the negotiations and contract drafting reflect the same values. Contractual obligations to meet key performance indicators reflective of the criteria identified as bringing value for money to the project (protection of human rights, commitment to environmental sustainability, strategic partnership promotion) will assist with this.

ENHANCING OUTCOMES

Carefully considering what constitutes ‘value’ in a particular procurement, documenting the value for money assessment, and ensuring the resulting contract captures that value are all key to achieving the best value for money outcome in the procurement process. It reassures your organisation, government and, crucially, the general public that the best outcome has been achieved for all.