How do you justify value for money in procurement?

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SA Local Government Procurement Forum
“Value for Money”
Amendments to the Local
Government Act…..
what does it mean?, how do you manage it?
how do you justify?
Bruce Fleming
Senior Policy Officer - Financial
Office for State/Local Government Relations
Department of Planning and Local Government
September 2010
Value for money
•
Parliament has delegated to councils, by legislation, power
over people’s lives and property that are exercisable only
by governments – powers to tax, powers to make and enforce
laws, powers to issue orders to land owners, and so on.
•
The authority entrusted to councils as local governments
must be exercised in the public interest, and councils must
be accountable for its exercise.
(Extract from Second Reading Speech to Parliament by Minister Gago, Minister for Sate/Local Government Relations, SA Government)
Value for Money
Because of their powers, Councils must exhibit “good public
administration” meaning that a council;
•
acts with due care, diligence and foresight
•
identifies and manages risks associated with a procurement
•
makes informed decisions
•
is accountable for the use of council and other public resources.
Value for money
Procurement is;
•
"the whole process of acquisition from third parties (including logistical
aspects) and covers goods, services and construction projects. This
process spans the whole life cycle from initial concept and definition of
business needs through to the end of the useful life of an asset or the
end of a services contract".
(Review of Civil Procurement in Central Government, Peter Gershon, 1999, UK National Audit Office, Office of Government Commerce)
Value for money
How do you manage value for money in procurement?
Definitions
In the context of procurement, value for money has been defined as:
–
‘the best available outcome for the money spent in procuring the agency’s
needs’ (Australia New Zealand Government Procurement Agreement)
–
the ‘best possible outcome for the total cost of ownership’ (guidance provided by the
OAG)
–
‘the optimum combination of whole-of-life costs and quality (or fitness for
purpose) of the good or service to meet the user’s requirement’
(HM Treasury, United Kingdom).
Value for money
How do you manage value for money in procurement?
Section 49 (1) of the LG Act states;
A council must develop and maintain procurement policies, practices
and procedures directed towards:
(a) obtaining value in the expenditure of public money
•
Value for money is not about achieving the lowest initial price: it is defined as
the optimum combination of whole life costs and quality.
Value for money
How do you manage value for money in procurement?
Achieving VfM may be described in terms of the 'three Es' - efficiency,
effectiveness and economy, of all activities where:
• a. ‘Efficiency’ means doing the same as before, but with fewer
resources (money, staff, space).
• b. ‘Effectiveness’ means doing more than before with the same
resources as now (or less).
• c. ‘Economy’ means doing less with fewer resources, i.e. making
savings.
(Annual Report on Value for Money, 2006, (KPMG) Imperial College London Central Secretariat)
Value for money
How do you manage value for money in procurement?
(Annual Report on Value for Money, 2006, (KPMG) Imperial College London Central Secretariat)
Value for money
How do you manage value for money in procurement?
•
•
•
•
•
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Transparency and consistency
Regulations
Accountability
Equitable access
Efficiency and effectiveness
Policies, practices and procedures
Value for Money
Value for money is an assessment of elements that
considers cost and non-cost factors
Non-cost factors including:






Fitness for purpose;
Technical and economic issues, such
as technical performance, reliability and
economic life;
Supplier capability;
Exposure to risk;
Availability of maintenance and support;
Compliance with specifications.
(Procurement Policy Framework - South Australian State Government)
Cost factors including:
Whole-of–life costs: including:
 Acquisition costs
 Operating costs
 Maintenance costs
 Alteration and /or
refurbishment costs
 Support costs
 Disposal costs
 Transaction costs
Value for money
How do you justify value for money in procurement?
Involving:
•
An assessment of whether or not an organisation has obtained the
maximum “whole of life” benefit from the goods and services it
acquires and/or provides, with the resources available to it
•
A measurement of the “actual” cost of goods and services
•
And taking into account of the mix of quality, cost, resource use,
fitness for purpose, timeliness and convenience of the procurement
To judge whether or not the above, when taken together, constitute good
value for money.
Value for money
How do you justify value for money in procurement?
Obtaining value for money refers to formulating procurement decisions that
achieve the best possible outcome in both financial and non-financial terms
in a timely and efficient manner, commensurate with the nature of the
purchase.
(Procurement Policy Framework - South Australian State Government)
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