Parliamentary. Inquiry into Public Sector Contract Extensions

Parliamentary Inquiry into Public Sector Contract Extensions Report No. 57 Finance and Administration Committee December 2014

Inquiry into Public Sector Contract Extensions Report No. 57 Finance and Administration Committee December 2014

ii Finance and Administration Committee

Finance and Administration Committee Chair Deputy Chair Members Mr Steve Davies MP, Member for Capalaba Mr Curtis Pitt MP, Member for Mulgrave Mrs Liz Cunningham MP, Member for Gladstone Dr Bruce Flegg MP, Member for Moggill Mr Reg Gulley MP, Member for Murrumba Mrs Freya Ostapovitch MP, Member for Stretton Mr Mark Stewart MP, Member for Sunnybank Staff Ms Deborah Jeffrey, Research Director Dr Maggie Lilith, Principal Research Officer Ms Lynette Whelan, Executive Assistant Ms Julie Fidler, Executive Assistant (from 8 August 2014) Contact details Telephone +61 7 3406 7576 Fax +61 7 3406 7500 Email Web Finance and Administration Committee Parliament House George Street Brisbane Qld 4000 fac@parliament.qld.gov.au www.parliament.qld.gov.au/fac Finance and Administration Committee iii

Contents Abbreviations Glossary Chair s Foreword Recommendations vi vii viii ix 1 Introduction 1 1.1 Role of the Committee 1 1.2 Auditor-General reports reviewed 1 1.3 Machinery of Government changes 1 1.4 Inquiry Process 2 1.5 Report 3 2 Auditor-General Reports 4 2.1 Report No. 5: 2012-13 - Results of audit: State public sector entities for 2011-12 4 2.1.1 Audit objective and coverage 4 2.1.2 Summary of results 4 2.1.3 Key recommendation in the report 4 2.2 Report No. 10: 2013-14 - Contract management: renewal and transition 4 2.2.1 Audit objective and coverage 4 2.2.2 Summary of Audit results 5 2.2.3 Key recommendations in the Audit report 5 2.2.4 Departmental responses in the Audit report 6 2.3 Departmental responses to the Committee 7 3 Contract management: Background 8 3.1 Contract management 8 3.2 Queensland s procurement policies: Background 9 4 Achieving value for money 13 4.1 Monitoring supplier performance 13 4.2 Measuring and monitoring supplier performance 15 4.3 Planning for contract expiry 16 4.3.1 Evaluating supplier performance 17 4.3.2 Business needs and demand analysis 17 4.3.3 Evaluating supply market conditions 18 4.4 Contract extensions beyond original terms 19 4.5 Strategic sourcing 20 4.6 Committee comments 22 iv Finance and Administration Committee

5 Skills, governance and systems 23 5.1 Contract management skills 24 5.1.1 Contract management governance 27 5.1.2 Contract management plans 27 5.1.3 Approval process and policies for contract expiry 28 5.2 Contract management systems 29 5.3 Committee comments 32 Appendices 34 Appendix A Officers appearing on behalf of departments at the public hearing Wednesday 2 April 2014 35 Appendix B Officers appearing on behalf of departments at the public hearing Wednesday 15 October 2014 36 Finance and Administration Committee v

Abbreviations and Glossary Public Sector Contract Extensions Abbreviations ABN Australian Business Number ANAO Australian National Audit Office BAS Building and Asset Services CLA Committee of the Legislative Assembly CPO Chief Procurement Officers DAFF Department of Agriculture, Fisheries and Forestry DATSIMA Department of Aboriginal and Torres Strait Islander and Multicultural Affairs DCS (Former) Department of Community Safety DCCSDS Department of Communities, Child Safety and Disability Services DEHP Department of Environment and Heritage Protection DETE Department of Education, Training and Employment DHPW Department of Housing and Public Works DLGCRR Department of Local Government, Community Recovery and Resilience DPC Department of Premier and Cabinet DSDIP Department of State Development, Infrastructure and Planning DSITIA Department of Science, Information Technology, Innovation and the Arts DTMR Department of Transport and Main Roads EMQ Emergency Management Queensland FAC Finance and Administration Committee HHS Hospital and Health Service ICT Information and Communication Technology LSA Legislative Standards Act 1992 MoG Machinery of Government PSBA Public Safety Business Agency PSP Procurement Systems Project PTD Procurement Transformation Division PTP Procurement Transformation Program QAO Queensland Audit Office QAS Queensland Ambulance Service QCS Queensland Corrective Services QFRS Queensland Fire and Rescue Service QGCPO Queensland Government Chief Procurement Office QPS Queensland Police Service QTT Queensland Treasury and Trade SAP Systems Applications and Products vi Finance and Administration Committee

Abbreviations and Glossary Glossary Acts CITEC the Committee All Acts referred to in this report refer to Queensland Acts unless otherwise specified CITEC is the Queensland Government s primary information and communication service provider Finance and Administration Committee Finance and Administration Committee vii

Chair s Foreword Public Sector Contract Extensions Chair s Foreword This report presents a summary of the Committee s inquiries into public sector contract extensions. The Committee is satisfied that the departments are already in the process of implementing a wholeof-government approach to contract management. The Committee acknowledges that the process of implementation and realisation of benefits require time and that consideration be given to reexamining the issues once the follow-up audit by the Queensland Audit Office is completed. The Committee has made two recommendations emphasising the need for a review of the benefits and effectiveness of the new whole-of-government approach to public contract extensions led by the Department of Housing and Public Works and for an assessment of training requirements. On behalf of the Committee, I wish to thank those who briefed the Committee, gave evidence and participated in its inquiry. In particular the Committee acknowledges the assistance provided by the Department of Housing and Public Works, Department of Transport and Main Roads, Department of Science, Information Technology, Innovation and the Arts, Queensland Health, and the Department of Communities, Child Safety and Disability Services. The Committee also wishes to acknowledge the assistance provided by the Auditor-General and staff from the Queensland Audit Office. Finally, I would like to thank the other Members of the Committee and the committee secretariat for their hard work and support. Steve Davies MP Chair viii Finance and Administration Committee

Recommendations Recommendation 1 32 The Committee recommends that a whole-of-government review of the benefits and effectiveness be conducted following the implementation of PTD s final phase. Recommendation 2 33 The Committee recommends that DHPW assess training requirements for all departments once the final phase of PTD is completed. Finance and Administration Committee ix

Recommendations Public Sector Contract Extensions x Finance and Administration Committee

1 Introduction 1.1 Role of the Committee The Finance and Administration Committee (the Committee) is a portfolio committee established by the Parliament of Queensland Act 2001 and the Standing Orders of the Legislative Assembly on 18 May 2012. 1 The Committee s primary areas of responsibility are: Premier and Cabinet; and Treasury and Trade. One of the functions of the Finance and Administration Committee (FAC), as prescribed in section 95 of the Parliament of Queensland Act 2001 is to consider the annual and other reports of the Auditor- General. In reviewing the reports the Committee invites the Auditor-General to provide briefings to highlight the key findings and issues. These briefings enable the Committee to question the Auditor-General and provide the members with a better appreciation of the significance of issues raised. The Committee assesses issues together with agency responses and, if considered beneficial to the public interest, will examine the matter further. This examination may take the form of written responses, briefings/meetings or public hearings. 1.2 Auditor-General reports reviewed The Auditor-General tabled Report No. 5: 2012-13 Results of audit: State public sector entities for 2011-12 on 27 November 2012. The report summarises the results of the audit of the financial statements of State public sector entities. The report also examined briefly the procurement practices for contract rollovers in all State public sector entities. The Auditor-General tabled Report No. 10: 2013-14 Contract management: renewal and transition on 3 December 2013. The report summarised the results of the Queensland Audit Office s (QAO) examination of whether agencies demonstrably achieve value for money for their goods and services contracts in their decision to extend, renew or re-tender their contracts. Sixty-two contracts were reviewed across three departments in the audit. The departments audited were the former Department of Community Safety (DCS), Department of Housing and Public Works (DHPW) and Department of Transport and Main Roads (DTMR). These reports are available from the QAO web site at https://www.qao.qld.gov.au/reports-to- Parliament. 1.3 Machinery of Government changes In the time period between the tabling of Report No. 5: 2013-13 and Report No. 10: 2013-14, some departments had undergone machinery-of-government (MoG) changes. DCS was the frontline service delivery organisation at the time of the audit in Report No. 10: 2013-14. DCS comprised of the Queensland Ambulance Service (QAS), the Queensland Fire and Rescue Service (QFRS), Queensland Corrective Services (QCS) and Emergency Management Queensland (EMQ). The central unit providing support and advice for contract activities in the DCS was Acquisition Services. The Auditor-General noted that designated client representatives in business areas undertake the role of contract manager and manage contracts on a day to day basis in the DCS. 2 1 Parliament of Queensland Act 2001, s88 and Standing Order 194 2 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 6 Finance and Administration Committee 1

In November 2013, DCS ceased to exist as a result of the Police and Community Safety Review and the Public Safety Business Agency (PSBA) was established. The PSBA provides strategic and corporate services to the QFRS, Queensland Police Service (QPS) and the Inspector General Emergency Management. 3 The PSBA responded to issues raised in the audit report in relation to DCS. On 1 July 2013, the DHPW s QBuild and Project Services businesses merged to form Building and Asset Services (BAS). 4 The DHPW business areas also include the Accommodation Office, Building Codes Queensland, Building Policy Unit, Corporate and Executive Services, Housing Services and QFleet. 5 The DHPW also hosts the Procurement Transformation Division (PTD) which was formerly known as the Queensland Chief Procurement Office (QGCPO). 6 Background and other information on PTD and QGCPO are outlined in section 3.2 of this report. 1.4 Inquiry Process The Committee of the Legislative Assembly (CLA) considers the Auditor-General s reports when they are tabled and then refers the report to the relevant parliamentary committee. Auditor-General s Report No. 5: 2012-13 - Results of audit: State public sector entities for 2011-12 and Report No. 10: 2013-14 Contract management: renewal and transition were referred to the FAC for consideration. The Committee resolved to conduct an inquiry into public sector contract extensions on 13 February 2013. The Committee met with the Auditor-General and officers from the QAO on 6 March 2013. The Auditor-General agreed to provide additional information to the Committee regarding the public sector contract extensions issue raised in Auditor-General Report No. 5: 2012-13. The Auditor- General advised the Committee that he intended to conduct a further audit on this issue. The Auditor-General tabled Report No. 10: 2013-14 on 3 December 2013. The Committee met with the Auditor-General and officers from the QAO on 19 March 2014. The Committee agreed to incorporate the results of the audits included in Auditor-General s Report Nos 5: 2012-13 and 10: 2013-14 as part of its inquiry. The Committee held a public hearing with officers from the QAO, DHPW, DTMR and the Public Safety Business Agency (PSBA) on Wednesday 2 April 2014. In June 2014, the Committee wrote to all departments to obtain further information on various statistical or data on procurement contracts. Specifically the departments were asked to provide the following: The number, type and value of all procurement contracts with an annual expenditure over $50,000 that have been rolled over or extended since 1 July 2007 without going through a retendering process where the contract did not stipulate an extension option and where the contract did stipulate an extension option. The number and value of all procurement contracts with an annual expenditure over $50,000 coming up for review in the next two years. 3 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 7 4 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 36-38 5 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 7 6 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 7 2 Finance and Administration Committee

Details of the how procurement contracts are managed within the department. Whether changes to the Queensland Procurement Policy was useful in managing the department s procurement contracts and whether the department was satisfied with the level of training provided by central agencies to ensure the elements of the policy are understood by staff. Progress in implementing the Auditor-General s recommendations in Report No 10: 2013-14. Other initiatives that were undertaken as a result of the audit findings. How the department plans for contract expiry. The Committee held a further public hearing on Wednesday 15 October 2014 with officers from Department of Communities, Child Safety and Disability Services (DCCSDS), Department of Education, Training and Employment (DETE), DHPW, Department of Science, Information Technology, Innovation and the Arts (DSITIA), DTMR and Queensland Health to discuss the information provided to the Committee. A list of officers who gave evidence at the public hearings is contained in Appendices A and B respectively. Transcripts from the hearings have been published on the Committee s website and are available from the Committee secretariat. 1.5 Report The recommendations in this report are addressed to the Premier, the Treasurer and Minister for Trade and the Minister for Housing and Public Works as the responsible ministers. Finance and Administration Committee 3

2 Auditor-General Reports 2.1 Report No. 5: 2012-13 - Results of audit: State public sector entities for 2011-12 2.1.1 Audit objective and coverage Whilst the main objective of the audit report was to summarise the results of the 2011-12 financial statement audits of State government departments, statutory bodies and government owned corporations; and the entities they control, the report included the results of a preliminary survey across departments in the general government sector of the extent of the rollover of contracts over $50,000 for the delivery of materials and services. 2.1.2 Summary of results The survey found that fourteen departments provided data ranging from one to five years commencing in 2007-08 which indicated that more than $4 billion worth of contracts had been extended or rolled-over in that period. Departments advised that they had extended or rolled-over more than $1.2 billion worth of contracts in the financial year 2011-12. 7 The survey results also identified that 40 per cent of the contracts rolled-over (worth $423 million) had no provision for extension. In addition, it was identified that some departments could not confirm whether the contracts they rolled-over had a provision for extension or not, because of limitation in departmental contract registers. 8 The Auditor-General considered that a significant value of current contracts may be being rolled-over without adequate market testing. Of further concern to the Auditor-General was that four departments indicated that deficiencies in their contract registers meant that the information was not readily tracked and monitored. This deficiency weakens the ability of the department to centrally monitor and manage contracted expenditure. 9 The survey report noted the significance of these amounts as payments for supplies and services in 2011-12 for the fourteen departments totalled $6.653 billion which includes recurrent expenses not related to contracts or a procurement process. In addition, commitments relating to contracted expenditure were $5.114 billion for the year. 10 2.1.3 Key recommendation in the report The Auditor-General recommended that all State public sector entities review their procurement practices for contract rollovers to ensure there is appropriate contract succession planning and that value for money is being maintained. 11 2.2 Report No. 10: 2013-14 - Contract management: renewal and transition 2.2.1 Audit objective and coverage The results of the preliminary survey reported in Report No. 5: 2012-13 prompted the QAO to undertake a more in depth audit. 12 7 Queensland Audit Office, Report No. 5: 2012-13: Results of audit: State public sector entities for 2011-12, November 2012: 8 8 Queensland Audit Office, Report No. 5: 2012-13: Results of audit: State public sector entities for 2011-12, November 2012: 8 9 Queensland Audit Office, Report No. 5: 2012-13: Results of audit: State public sector entities for 2011-12, November 2012: 8 10 Queensland Audit Office, Report No. 5: 2012-13: Results of audit: State public sector entities for 2011-12, November 2012: 9 11 Queensland Audit Office, Report No. 5: 2012-13: Results of audit: State public sector entities for 2011-12, November 2012: 9 12 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 6 4 Finance and Administration Committee

Auditor-General s Report No. 10: 2013-14 summarises the results of whether agencies achieved value for money from their goods and services contracts in their decisions to extend, renew or retender their contracts. The (former) Department of Community Safety (DCS), DHPW and Department of Transport and Main Roads (DTMR) were selected for a subsequent audit based on the results of the preliminary survey outlined in Report No.5: 2012-13. These departments represented 57 per cent of the total number of contracts and 48 per cent of the total value of contracts rolled over in 2011-12 across government departments. 13 The audit reviewed 62 contracts across the three departments. The audit also found that 58 of the 62 contracts had been extended in 2012-13. 14 The Auditor-General highlighted that Queensland government departments have a legal obligation to obtain value for money from their contracts as an annual procurement of $10.9 billion including $2.42 billion on general goods and services is spent. The audit noted that essential contract management activities should include the monitoring of supplier performance, efficient contract administration and timely planning and contract expiry. 15 The Auditor-General explained: One indicator that the required contract management skills, systems and governance arrangements are in place and operating effectively is that, before a contract is due to expire, the department has clearly established whether it should terminate or renew the service being provided or the goods being supplied; and, if it is to renew, whether it would achieve better value for money by extending the existing contract or by re-testing the market. 16 2.2.2 Summary of Audit results The audit report found that the audited departments could not consistently demonstrate that they achieved value for money from their goods and services contracts, or obtained the best solution for the best price. Their ability to achieve value for money from their contracts was weakened by poor performance management of their suppliers and ineffective planning for contract expiry. The departments did not have in place sufficient contract management skills and systems to manage all their contracts consistently to the same high standards. 17 The Auditor-General noted that the deficiencies in governance arrangements and contract management systems hindered the audited departments ability to plan effectively for contract expiry. The department is unable to plan for contract expiry ahead of time and contracts were more likely to be extended without confirmation that the current arrangements were achieving value for money. 18 2.2.3 Key recommendations in the Audit report The Auditor-General made four recommendations. These were that all departments: 1. develop and implement a contract management capability framework to ensure the department has sufficient, appropriately skilled resources to manage contracts effectively 13 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 6 14 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 1 15 Ms Heidrich, Transcript 2 April 2014: 2 16 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 1 17 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 1 18 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 1 Finance and Administration Committee 5

2. develop and apply a risk/value matrix approach to: Public Sector Contract Extensions define expectations for effective contract management and establish supplier performance monitoring regimes to ensure value for money is realised with contracts allocate resources commensurate to the risk of contracts for efficient contract administration 3. validate the value for money proposition of a contract, before extending or renewing it, by reviewing: the original assessment of risk, demand and the supply market the supplier's performance 4. implement a contract management life cycle system to enable: consistent monitoring of supplier performance spend analysis an early trigger to prepare for contract expiry. 19 2.2.4 Departmental responses in the Audit report In accordance with section 64 of the Auditor-General Act 2009, a copy of the report is required to be provided to the relevant entities with a request to comment prior to its tabling. A copy of Report No. 10: 2013-14 was provided to DHPW, DCS and DTMR for comment. 20 DTMR agreed with all the recommendations from Report No. 10: 2013-14. DTMR noted that the Auditor-General s report had provided the department with a number of opportunities to further improve their capability, governance and systems to ensure effective management of their contracts. 21 PSBA advised that officers from their department met to discuss the recommendations made to DCS. The Director-General of the PSBA advised that the PSBA/DCS supported and agreed with the recommendations. The target date of 30 June 2015 was provided as the timeframe for implementation of all recommendations by the PSBA. 22 DHPW acknowledged the Auditor-General s findings and explained that because of their whole of government responsibility around procurement, they outlined their commitment to ensuring uplift in capacity around contract management across government. The department s Procurement Transformation Program (PTP) resulted in the Procurement Transformation Division (PTD) being established in May 2013 as the Queensland Government s centre-led procurement function. DHPW advised: The first phase (Wave 1) of the Procurement Transformation Program started in June 2013 and has recently been completed. 23 The department also explained that Wave 2 was due to be completed by June 2014. 24 19 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 4 20 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 4 21 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 31-33 22 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 34-35 23 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 36 24 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 37 6 Finance and Administration Committee

2.3 Departmental responses to the Committee Subsequent to the public hearing on 2 April 2014, the Committee agreed to undertake a survey of all Queensland departments in order to assess the stage of implementation of the audit findings. The Committee wrote to all departments on 9 June 2014 to obtain further information as follows: 1) The number, type and value of all procurement contracts with an annual expenditure over $50,000 that have been rolled over or extended in the past five years without going through a retendering process (where the contract did not stipulate an extension option). 2) The number, type and value of all procurement contracts with an annual expenditure over $50,000 that have been rolled over or extended in the past five years without going through a retendering process (where the contract did stipulate an extension option). 3) Procurement contracts with an annual expenditure over $50,000 coming up for review in the next two years. 4) Details of the how procurement contracts are managed within the department. 5) Whether the changes to the Queensland Procurement Policy (amended in 2013) was considered useful in managing the department s procurement contracts; and whether the department was satisfied with the level of training provided by central agencies to ensure the elements of the policy are understood by staff within the department. 6) Progress made in implementing each of the Auditor-General s recommendations in Report No. 10: 2013-14. 7) Initiatives undertaken as a result of the audit findings. 8) Planning process for contract expiry. Responses to Committee s questions 1-3 (above) showed some inconsistencies when compared with figures previously provided to the QAO in some departments. The survey by the Committee also highlighted that some departments managed their procurement processes more efficiently than others. In some instances, procurements activities are handled centrally or by a different department e.g. Department of Aboriginal and Torres Strait Islander and Multicultural Affairs (DATSIMA) has a memorandum of understanding (MoU) with DCCSDS, and Department of Environment and Heritage Protection (DEHP) managed procurement contracts with a whole of life value greater than $100,000 on behalf of Department of Agriculture, Fisheries and Forestry (DAFF). It should also be noted that some departments were established after the MoG changes in 2012. Their responses have been incorporated into relevant sections of this report. Finance and Administration Committee 7

3 Contract management: Background 3.1 Contract management A procurement process includes three major phases; procurement planning, contract formation and contract management. The audit focused on the contract management phase which comprises the following processes (Figure 1): Monitor supplier performance Review demand and supply market analyses Vary, extend or complete. 25 Figure 1: Contract management phase in the procurement process. Source: Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 5 The Australian National Audit Office (ANAO) is a specialist public sector practice providing a full range of audit and assurance services to the Parliament and Commonwealth public sector agencies and statutory bodies. 26 The ANAO developed and updated their better practice guide Developing and Managing Contracts: Getting the right outcome, achieving value for money in February 2012 as they considered there was a continued interest in and the need for guidance in the area of developing and managing contracts in the Australian government public sector. The guide is intended to be a general reference document and identifies the key issues and considerations that entities should be aware of when developing and managing contracts. 27 The guide also emphasises the importance of active and effective contract management throughout their life to ensure that contractor performance is satisfactory and that stakeholders are well informed and contract requirements are met. 28 The ANAO s guide outlines that: Value for money in a procurement process requires a comparative analysis of all the relevant costs and benefits of each proposal throughout the whole procurement cycle. 29 25 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 5 26 Commonwealth of Australia, Australian National Audit Office http://www.anao.gov.au/ [Accessed 21 November 2014] 27 Commonwealth of Australia, Australian National Audit Office http://www.anao.gov.au/publications/better-practice-guides/2011-2012/developing-and-managing-contracts [Accessed 21 November 2014] 28 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:84 29 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:5 8 Finance and Administration Committee

The ANAO s guide outlined that the key elements to good contract management to be: managing risks managing relationships managing resources specifying responsibilities keeping records and behaving ethically. 30 The ANAO suggests that a contract management plan could be a useful tool in supporting management of risks to the success of a contract and is a major contributor in ensuring value for money is achieved. The contract performance management process may involve: performance monitoring i.e. collecting data on performance; performance assessment i.e. deciding whether performance meets the entity s needs; and taking appropriate action such as understanding and extending features of good performance, correcting areas of underperformance, or amending the contract requirements to meet changing needs. 31 In addition, systematic monitoring is an essential component of a performance assessment as in practice, performance will be assessed with feedback and reports provided throughout the monitoring process. 32 The ANAO also suggests that having a systematic approach to monitoring, which includes what information is required and when it is required, can assist in identifying any potential problems and allow early remedial action to be taken. It also allows timely reporting to senior management and other stakeholders.33 QAO used examples from the guide to provide context and background to their Report No. 10: 2013-14. 3.2 Queensland s procurement policies: Background The overarching policy for the procurement of goods and services is known as the Queensland Procurement Policy (QPP) was approved by Cabinet in June 2013. 34 The QPP replaced the State Procurement Policy (SPP) 2010. The objectives of the SPP were to: advance Government Priorities achieve value for money ensure probity and accountability for outcomes. 35 30 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:6-7 31 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:95 32 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:95 33 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:96 34 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: Appendix 1: 2 35 Queensland Government, Department of Public Works, State Procurement Policy, September 2010: 2 Finance and Administration Committee 9

The SPP outlined that: Public Sector Contract Extensions each agency should use its best endeavours to ensure that competitive local suppliers are given a full, fair and reasonable opportunity to supply the Queensland Government and to deal with suppliers which treat their employees fairly. 36 The SPP framework was managed by the Queensland Government Chief Procurement Office (QGCPO) in the (former) Department of Public Works. 37 QGCPO collaborated with Open Windows Australia Pty Ltd, a contract life cycle management software vendor, to establish Q-Contracts in January 2012. Q-Contracts is a whole-of-government common use supply arrangement which provides a contract lifecycle management solution to all Queensland Government agencies. The responsibility of developing and monitoring Q-Contracts came under the QGCPO. 38 The Auditor-General outlined that an alternative solution suggested by the QGCPO was the 2011 procurement process reform initiative business case. At the time of the audit, the PTD has spent $1.1 million to deploy Q-Contracts for use by all budget sector agencies. The implementation of a contract life cycle management system, Q-Contracts was also proposed as part of the business case. 39 A review of the government s procurement practices was undertaken in late 2012 by Ernst and Young. DHPW advised that the review identified significant opportunities to achieve greater value for money by leveraging the government s procurement spend and implementing smarter sourcing practices. A three to five year procurement transformation program was recommended by the review that could enable the realisation of between $663 million to $1.303 billion in benefits. 40 One of the major changes recommended was to replace the three policy objectives of the previous SPP with a policy purpose and six principles. 41 The QPP underpins the government s procurement transformation program. 42 The six principles are: Principle 1: We drive value for money in our procurement. Principle 2: We act as 'one government', working together across agency boundaries to achieve savings and benefits. Principle 3: We are leaders in procurement practice - we understand our needs, the market, our suppliers and we have the capability to deliver better outcomes. Principle 4: We use our procurement to advance the government's economic, environmental and social objectives and support the long term wellbeing of our community. Principle 5: We have the confidence of stakeholders and the community in the government's management of procurement. Principle 6: We undertake our procurement with integrity, ensuring accountability for outcomes. 43 36 Queensland Government, Department of Public Works, State Procurement Policy, September 2010: 2 37 Queensland Government, Information sheet: Queensland Government procurement, Queensland Government Chief Procurement Office, Department of Public Works, August 2011 http://www.psc.qld.gov.au/for-executives/employment/ses/assets/procurement.pdf [Accessed 21 November 2014] 38 Queensland Government, Fact sheet: Q-Contracts QGCPO 846-10, Queensland Government Chief Procurement Office, Department of Public Works, September 2012 http://www.hpw.qld.gov.au/sitecollectiondocuments/factsheetqgcpo846-10qcontracts.pdf [Accessed 21 November 2014] 39 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 26 40 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 1 41 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 2 42 Queensland Government, Queensland Procurement Policy, Department of Housing and Public Works, June 2013: 2 43 Queensland Government, Queensland Procurement Policy, Department of Housing and Public Works, June 2013: 1 10 Finance and Administration Committee

DHPW produced a document titled Bridging document which outlines the differences between the former SPP and the new QPP. The QPP strategies include changing from being agency-centric to embodying principles of one-government which means that the procurement operating model is driven from an understanding of total expenditure and a category management approach rather than from an agency perspective. In addition, the (previous) Procurement Board of Management was replaced by the Directors-General Council (DG Council). 44 The DG Council has a significant role in leading the procurement function with membership set at the Director-General/Chief Executive level. The DG Council will oversee the management of the Queensland Government s procurement expenditure, and drive collaboration across government to ensure the optimisation of spend, including efficiencies and effectiveness of the supply chain. 45 The audit report identified that DHPW had established a PTD within their department. The Committee sought clarification from the department as to the reasons for the establishment of this division and what it consists of. The DHPW explained that the PTD was established in May 2013 following the Ernst and Young 2012 review. The department also outlined that PTD was created with a focus on: transforming the approach to procurement across government (strategic, portfolio and category management focus) driving and providing support for the overarching procurement framework aimed at a consistent One-Government approach (but not a one-size-fits-all model) providing specialist resources to work with agencies to enable delivery of government priorities. 46 DHPW advised that the first phase (Wave 1) of the PTP, which was essentially a proof of concept, was completed in October 2013. Wave 1 achieved four significant results. These were: the enablement of $82 - $130 million in benefits a decrease in the average sourcing time from approximately 300 days down to 92 days a detailed assessment of the procurement capability of 676 government procurement employees the delivery of some targeted training and development activities. 47 DHPW explained that the PTP consists of: The realisation of the benefits through a series of sourcing waves that will utilise levers across government, including aggregating demand from agencies, leveraging whole-of-government spend and eliminating duplication of sourcing for the same goods or services. The creation and implementation of smarter sourcing practices by refining and streamlining sourcing processes. This will enable better outcomes for both government and industry through the reduction of red tape and duplication. 44 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: Appendix 1: 2 45 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: Appendix 1: 2 46 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 1 47 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 2 Finance and Administration Committee 11

A mega category approach to managing the more than $17 billion of government spend by classifying all goods and services into six main mega categories and taking a strategic approach to managing the suppliers and contracts within these categories. The implementation of the Cabinet Budget Review Committee (CBRC) approved portfolio based operating model which simplifies reporting and decision-making relationships, increases strategic alignment and allows improved procurement execution that is driven by value and risk. The creation of a consistent contract management framework across government that ensures value for money is obtained and retained post contract award. The execution of a government procurement capability strategy (premised on 70/20/10 strategy i.e. 70% on the job training, supported by 20% mentoring/coaching and 10% formal training). 48 The second phase (Wave 2) was launched on 31 March 2014. The aims of Wave 2 are to identify the most cost effective and efficient way to source government goods and services, and to implement new strategies across government. The expected completion date for Wave 2 is September 2014. 49 The department also outlined that the PTP s role is to grow the right capabilities across the public sector and is underpinned by an approach of delivery value whilst building supporting frameworks, tools and capabilities. 50 The DHPW advised the Committee that the review of procurement across government identified a lack of capability between ICT strategies across some departments in regards to Q-Contracts so part of the PTD was to also examine the long-term strategy on this issue. 51 48 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 1-2 49 Queensland Government, Procurement Transformation, Department of Housing and Public Works http://www.hpw.qld.gov.au/aboutus/businessareas/procurementtransformation/pages/default.aspx [Accessed 21 November 2014] 50 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 1 51 Mr Castles, Transcript 15 October April 2014: 6 12 Finance and Administration Committee

4 Achieving value for money Audit Report No. 10: 2013-14 highlighted that long term contracts must be well managed to ensure value for money is achieved throughout the life of the contract. 52 The ANAO s Better Practice Guide outlines that entities ought to have in place management arrangements that are designed to maximise the overall value for money of contracting activities. These arrangements should also enable them to have in place processes that meet all the internal and external management and reporting responsibilities in a cost-effective manner. 53 The Auditor-General considered that it is essential to have effective contract management for expected benefits of a contract to be fully realised after it has been awarded. Management of the risks, resources, relationships, supplier performance and contract variations is necessary. 54 The audit included a review of how effectively the audited departments managed supplier performance and planned for contract expiry. Sixty-two contracts were examined in detail: 17 from the DCS, 15 from the DTMR and 30 from the DHPW. The Auditor-General explained that more DHPW contracts were reviewed because the department had previously hosted the former Queensland Government Chief Procurement Office which managed whole-of-government contracts. 55 4.1 Monitoring supplier performance Report No. 10: 2013-14 noted: Effective, risk-based contract management during the life of a contract means that, by the time a contract is due to expire, the department has clearly established whether it should extend or re-tender. 56 Effective contract management practice can significantly reduce the overheads associated with contract extension or renewal. 57 The audit identified that the audited departments were unable to consistently demonstrate that they achieved value for money from their goods and services contracts. Their ability to achieve value for money from their contracts was weakened by poor performance management of their suppliers and ineffective planning for contract expiry. The departments did not have in place sufficient contract management skills and systems to manage all their contracts consistently to the same high standards. 58 The Auditor-General identified that the audited departments established performance management frameworks for their contracts on an exception basis, rather than as standard practice. Sixty-nine per cent, 43 of the 62 contracts, reviewed contained key performance indicators (KPIs), but only 13 contracts had sufficiently detailed performance management frameworks to enable objective assessment of supplier performance. 59 The number of contracts reviewed that included all, some or none of the elements required for an effective performance management framework is shown in Figure 2. 52 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 5 53 Commonwealth of Australia, Australian National Audit Office, Developing and Managing Contracts Better Practice Guide, February 2012:72 54 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 10 55 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 10 56 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 10 57 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 11 58 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 10 59 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 11 Finance and Administration Committee 13

Figure 2: Elements of performance management framework. Source: Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 11 Report No. 10: 2013-14 identified that there was a lack of a performance management framework for 19 out of 62 contracts. The Auditor-General considered that this meant departments were unable to identify objectively any potential problems with contract deliverables. 60 The audit found that DTMR had more established performance management frameworks as all contracts reviewed there had some elements to enable objective assessment of each supplier s performance. 61 The DTMR acknowledged that gaps were identified as a result of Report No. 10: 2013-14. The department noted that these gaps included a lack of strategic planning towards contract management and a lack of ability to obtain accurate contract data and spend analysis. 62 The department explained that PTD has now provided them with a Contact Management Framework which reflects a value/risk approach. 63 DTMR also advised the Committee that the department began a procurement reform in 2012 to address a number of issues around procurement. The department explained they had conducted extensive internal and external consultation which resulted in a number of reform activities being adopted by DTMR. The reform activities included the establishment of a new operating model which provides a single point of accountability for procurement within their department. 64 The Auditor-General also identified significant differences in performance management frameworks between regional offices at the DHPW. For example, one office had all the elements of an effective performance management framework in the contracts reviewed, while another office had none of these elements. 65 However the QAO acknowledged that at the time of tabling Report No. 10: 2013-14, the PTD had already commenced in terms of building the capability. 66 The DHPW also advised the Committee that, subsequent to the audit report being tabled, a working group was formed comprising Chief Procurement Officers (CPOs) from the departments mentioned in the audit report. 67 60 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 11 61 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 12 62 Correspondence from Director-General, Department of Transport and Main Roads, to FAC dated 12 August 2014: 6 63 Correspondence from Director-General, Department of Transport and Main Roads, to FAC dated 12 August 2014: 3 64 Mr Mead, Transcript 2 April 2014: 2-3 65 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 10-11 66 Mr Brahman, Transcript 2 April 2014: 5 67 Correspondence from Director-General, Department of Housing and Public Works, to FAC dated 19 August 2014: 2 14 Finance and Administration Committee

DCCSDS acknowledged the need to improve contract management capability and their approach has reflected their procurement profile and their decentralised procurement model. The DCCSDS explained that they are further developing a contract management capability framework outlined in their Investing in Queenslanders, Social and Human Services Investment Blueprint 2014-19. 68 4.2 Measuring and monitoring supplier performance The audit identified that contracts managers in the three departments monitored supplier performance to some degree. However, the Auditor-General noted that over two thirds of the reviewed contracts had insufficient evidence that supplier performance was monitored consistently against objective and measurable criteria. Only 21 out of 62 contracts examined had effective supplier performance monitoring throughout the contract life cycle (Figure 3). 69 Figure 3: KPIs monitored throughout contract term. Source: Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 13 The Auditor-General reported that overall departments audited did not maintain adequate records of meetings with suppliers to discuss their performance. Examples of this included: DCS recorded evidence of regular performance review meetings with suppliers for one of the 17 contracts reviewed. At DTMR, contract managers met with suppliers to discuss progress and to provide feedback on their performance for all reviewed contracts; but for half of the contracts, there were no records of meetings held with suppliers. 70 DTMR advised that since the audit, existing procurement procedures have been updated. The departmental procurement procedures now include practices for contract rollovers to include addressing whether there are any supplier performance problems, whether the goods and/or services meeting the requirements of the users as well as whether there are any changes in the demand for the goods and services. The department also explained that they are in the process of implementing a contract management life cycle system in the form of the Procurement Systems Project (PSP). 71 68 Correspondence from Director-General, Department of Department of Communities, Child Safety and Disability Services, to FAC dated 15 August 2014: 6 69 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 13 70 Queensland Audit Office, Report No. 10: 2013-14: Contract management: renewal and transition, December 2013: 13 71 Correspondence from Director-General, Department of Transport and Main Roads, to FAC dated 12 August 2014: 5 Finance and Administration Committee 15