State Purchase Contracts

Tabled: 20 September 2018

5 Understanding and managing contract leakage

The Standing Directions of the Minister for Finance under the FMA require effective controls over procurement so that specified public sector agencies comply with government supply policies. All departments and entities bound by VGPB policies must purchase from mandatory SPCs unless the lead agency has granted a written exemption.

DTF internal guidance material, used also by DPC, identifies monitoring and reducing expenditure made outside of SPCs, or 'leakage', as a minimum requirement of lead agencies. Managing leakage is important if SPC users are to fully realise potential savings and lead agencies are to effectively monitor and evaluate the success of SPCs.

This part examines whether departments use SPCs when purchasing goods and services, and the steps that user departments and lead agencies take to prevent and identify contract leakage, as required by contract agreements, VGPB policies and lead agency guidance material.

5.1 Conclusion

Our analysis of departments' expenditure shows potential contract leakage in three of the four SPCs we reviewed.

Due to limitations in procurement systems, four of the seven departments cannot identify if a purchase was made through an SPC. Consequently, these departments cannot identify how much they have spent outside of mandatory SPC arrangements or act to reduce the occurrence of contract leakage.

Lead agencies have also not effectively overseen user departments' compliance with the requirement to purchase exclusively through mandatory SPCs. Lead agencies do not have access to the data needed to understand the scale, nature or significance of leakage that occurs.

Understanding the scale and reasons for contract leakage, and targeting non‑compliance with mandatory SPCs, will improve cost savings and realisation of non‑financial benefits of SPCs.

5.2 Roles and responsibilities to manage leakage

Managing leakage as an SPC user

User departments and agencies are responsible for ensuring that SPC contract leakage does not occur. This is done by having robust procurement authorisation processes and procedures and by educating staff about the proper use of SPCs. User departments and agencies are also best placed to detect contract leakage because they have access to their own accounts payable data, which can be used to detect instances of contract leakage after it occurs.

All departments have policies to promote the use of mandatory SPCs. However, they could not demonstrate that they understood the extent of leakage from mandatory SPCs, or managed it effectively.

The finance or procurement systems at four departments—DET, DTF, DPC and DELWP—do not identify if a purchase was made through an SPC. Despite this, DTF was able to estimate their SPC spend in 2016–17. DET, DPC and DELWP were not, and using the data available to them in their financial and procurement systems they would not be able to identify potential leakage from SPCs. Due to data quality issues and limitations in procurement and finance systems, it is difficult for these departments to ensure compliance with VGPB policies, including the requirement to use mandatory SPCs.

User departments included in our 2012 audit report Personal Expense Reimbursement, Travel Expenses and Corporate Credit Cards also need to address the recommendation from that report, that public sector agencies should report and address expenditure occurring outside of mandatory SPCs. Four user departments included in this audit—DHHS (formerly the Department of Human Services), DJR (formerly the Department of Justice), DEDJTR (formerly the Department of Business and Innovation) and DPC—are yet to establish processes to address this recommendation.

Aside from the requirement to comply with the FMA, it is important that departments use SPC arrangements where required—otherwise they may not achieve the best value for money on purchases and may undermine the broader objectives of SPCs.

Managing leakage as a lead agency

Lead agencies rely on user departments complying with their own procurement policies and SPC rules to control contract leakage. Lead agencies do not have access to the necessary data to allow the identification of leakage from SPCs. For this reason, lead agencies rely on SPC users to educate their staff and to use their own expenditure data to identify contract leakage.

The ability of lead agencies to control contract leakage would be enhanced if accurate accounts payable data could be obtained on a consistent basis from the major SPC users.

5.3 Leakage from mandatory SPCs

Due to the absence of adequate processes to monitor leakage at the user departments, VGPB and lead agencies, we examined purchasing data at the seven departments to identify potential leakage in selected mandatory SPCs:

  • Stationery and Workplace Consumables
  • Travel Management Services
  • Staffing Services
  • Legal Services Panel.

Methodology

Using expenditure data obtained from all departments, we used the ANZSIC categorisation to highlight expenditure that appeared to fall within the scope of one of the selected SPCs but did not go to a relevant SPC supplier. These instances represented possible leakage from mandatory SPCs, and we undertook further analysis of the invoices to confirm this. Where a lead agency had granted a user department an exemption, we marked this spend as 'not leakage'.

In a significant number of transactions we were unable to determine the nature of spend due to the limited description on the invoices. Given these limitations, this analysis is conservative and indicative, using the best available data in departments' finance systems.

Our analysis categorises spend as one of the following:

  • not leakage
  • potential leakage
  • SPC spend.

Figure 5A outlines an example of this process using the leakage analysis for the Staffing Services SPC.

Figure 5A
Leakage analysis for the Staffing Services SPC

SPC spend

Potential leakage

Not leakage

Spend within the ANZSIC category that was through the SPC suppliers.

Spend within the ANZSIC category that was not through an SPC supplier, but the invoice description suggests that it was for a service mandated under the SPC. For example, the engagement of a temporary receptionist.

Spend within the ANZSIC category that is not within the scope of the SPC. For example, engagement of permanent staff. User departments are not mandated to make these engagements through the SPC.

Source: VAGO, based on ANZSIC.

Results of our analysis of leakage

Figure 5B shows the high-level results of our leakage analysis in the seven departments, expressed as a percentage breakdown of the four ANZSIC spend categories.

Figure 5B
Breakdown of ANZSIC spend categories

Figure 5B shows a breakdown of ANZSIC spend categories.

Source: VAGO analysis of user departments' 2016–17 accounts payable data and SPC spend data from lead agencies.

Our analysis of departments' records for 2016–17 showed potential leakage of:

  • $0.25 million, or 2.1 per cent of total spend of $12.23 million, in the stationery category
  • $0.06 million, or 0.1 per cent of total spend of $48.64 million, in the travel category
  • $2.07 million, or 0.7 per cent of total spend of $289.37 million, in the staffing category
  • We identified no leakage in the total spend of $122.7 million in the Legal Services category.
Potential leakage by SPC

Figure 5C shows these leakage amounts by SPC as a percentage of the value.

Figure 5C
Potential leakage as percentage of SPC value

Figure 5C shows these leakage amounts by SPC as a percentage of the value.

Source: VAGO analysis of user departments' 2016–17 accounts payable data and SPC spend data from lead agencies.

The value of potential leakage identified could include cases where a legitimate exemption was approved by a lead agency but the record was not kept. See Section 5.4 for more detail on exemptions.

Stationery and Workplace Consumables SPC

DTF is the lead agency for the Stationery and Workplace Consumables SPC, which commenced in its current form in October 2015. User departments must purchase all mandated goods through the nominated SPC supplier. Mandated goods include:

  • paper
  • general stationery items such as pens, notebooks and folders
  • filing equipment
  • ICT consumables such as USB drives, keyboards and printer cartridges.

For items that DTF has classified as non-mandated, such as janitorial and kitchen supplies, office furniture and uniforms, user departments may purchase these items through the SPC, or choose to purchase them elsewhere. The latter would not constitute contract leakage because these items are non-mandated under the SPC. Figure 5D outlines our analysis of 2016–17 spend in the ANZSIC stationery spend category.

Figure 5D
User departments spend in stationery spend category, 2016–17

Figure 5D shows user departments spend in stationery spend category, 2016–17

Note: Figures may not total 100 per cent due to rounding.
Source: VAGO analysis of departments' 2016–17 accounts payable data and SPC spend data from lead agencies.

The seven departments spent $12.23 million in the ANZSIC stationery spend category. It is positive that the majority of this (89.9 per cent) was through the nominated SPC supplier.

From our review of invoices, 8.1 per cent of this spend was not leakage because it was for non-mandated items. We identified approximately $0.25 million of spend (2.1 per cent) as potential leakage. This amount is 2.3 per cent of the $10.99 million value of the SPC contract in 2016–17 for the seven departments.

Of the $253 000 identified as potential leakage, approximately 50 per cent of this spend went to seven suppliers. Armed with this type of information, user departments should conduct checks of their accounts payable systems over time for transactions with these suppliers to identify potential leakage for further investigation.

Figure 5E breaks down the total leakage amount to show the amount identified in each user department, including this amount as a per cent of that department's spend on the SPC.

Figure 5E
User departments leakage in the stationery spend category in, 2016–17

Figure 5E shows user departments leakage in the stationery spend category in, 2016–17

Source: VAGO analysis of departments' 2016–17 accounts payable data.

We conducted a price comparison of popular stationery goods purchased through the SPC to identify the potential impact of leakage where departments purchased stationery items through other retailers.

We selected the 10 most commonly purchased stationery items through the SPC by the seven departments in 2016–17. We compared the SPC price for these items with the price for like-for-like items at a leading stationery retailer, as shown in Figure 5F.

Figure 5F
Lowest price on 10 most commonly purchased stationery items

Stationery Item

Did the SPC have the lowest price?

SPC cost
($)

Stationery retailer cost
($)

Variance
(%)

Item 1

28.55

24.95

–13

Item 2

2.33

5.63

142

Item 3

0.11

0.38

246

Item 4

2.26

2.49

10

Item 5

2.16

2.99

38

Item 6

4.81

5.00

4

Item 7

1.16

2.78

140

Item 8

4.64

9.67

108

Item 9

4.60

7.89

72

Item 10

9.60

11.90

24

Source: VAGO analysis from data provided by DTF and online from a stationery retailer.

When compared to the stationery retailer, the SPC delivered significantly cheaper prices for nine of the 10 items. This highlights the necessity for user departments to control for leakage. User departments must ensure that all business units purchase stationery items through the SPC to prevent paying higher prices at other stationery retailers.

Travel Management Services SPC

DTF is the lead agency for the Travel Management Services SPC, which commenced in its current form in September 2016. The SPC contract states that user departments must book all flights and travel accommodation through the appointed SPC supplier, Corporate Travel Management. The Victorian Public Service Travel Policy, established by DTF in November 2017, diverges from this directive, stating that departments need only book Victorian accommodation through the SPC 'when possible'. In discussions with the category manager, we have considered Victorian accommodation not to be mandated under the SPC.

Our analysis of departments' records showed that in 2016–17 the seven departments spent $48.64 million in the ANZSIC travel spend category. Of this, 17.7 per cent was through the nominated SPC supplier, as Figure 5G shows. This indicates that the SPC is not capturing the majority of the spend in the wider spend category.

Figure 5G
Travel spend category in user departments, 2016–17

Figure 5G shows travel spend category in user departments, 2016–17

Note: Figures may not total 100 per cent due to rounding.

Source: VAGO analysis of departments' 2016–17 accounts payable data and SPC spend data from lead agencies.

Approximately 73.9 per cent of the total category spend was not leakage because it was for services not mandated to be booked through the SPC. On further investigation, we found that the majority of this spend was for venue hire in hotels. For example, the booking of rooms in a hotel to run training sessions or all-staff forums. As these payments are not for accommodation, they are not mandated by the SPC and cannot be considered contract leakage. However, the volume and value of these payments does represent an opportunity for aggregating this spend that DTF should explore.

We also identified that 8.2 per cent of the spend category was for accommodation in Victoria that departments did not book through the SPC. While this is not technically leakage, it does represent a significant amount of spend and is a missed opportunity for the current SPC. As discussed in Section 2.2, DTF recognises the need to ensure that departments book more of their Victorian accommodation through the SPC. The number of Victorian accommodation bookings through the SPC doubled between 2016–17 and 2017–18.

We identified approximately $0.06 million of spend—or 0.1 per cent of the category spend—as potential contract leakage. This amount is 0.7 per cent of the $8.6 million value of the SPC contract in 2016–17 for the seven departments.

Figure 5H breaks down the total leakage amount to show the amount identified in each user department, including this amount as a per cent of that department's spend on the SPC.

Figure 5H
Leakage in the Travel Management Services SPC in user departments, 2016–17

Figure 5H shows leakage in the Travel Management Services SPC in user departments, 2016–17

Source: VAGO analysis of departments' 2016–17 accounts payable data.

We conducted a price comparison of SPC hotel rates to the market to identify the potential impact of leakage where departments do not book travel arrangements through the SPC.

As Figure 5I shows, we compared the rates for 10 hotel rooms between the rates offered through the SPC and the rates offered on a popular accommodation booking site. We searched comparable rates on the same day to ensure consistency of pricing, and comparisons were for the same room booked for the same night.

Figure 5I
Lowest price on 10 hotel rooms

Hotel room

Did the SPC offer the cheapest rate?

SPC rate
($)

Accommodation website rate
($)

Variance
(%)

Room 1

190

270

42

Room 2

167

201

20

Room 3

147

223

52

Room 4

127

205

61

Room 5

138

269

95

Room 6

129

139

8

Room 7

150

158

5

Room 8

152

174

14

Room 9

139

159

14

Room 10

176

178

1

Source: VAGO, using the SPC booking system and a popular accommodation booking site on 11 July 2018.

The SPC offered lower rates for all 10 hotel rooms—in some cases by a significant amount. For example, for Room 5, the nightly rate listed on the accommodation site was 95 per cent more than the SPC rate. This again highlights the importance of SPC users ensuring that staff book travel through the SPC. It also reinforces the need for DTF as a lead agency to consider mandating that all Victorian accommodation bookings be made through the SPC.

Staffing Services SPC

DTF manages the Staffing Services SPC, which commenced in its current form in January 2016. All engagements of temporary staff for administrative roles, IT roles and specialist roles must be engaged through the Staffing Services SPC. Engagement of permanent staff may also occur through the SPC but these engagements are not mandatory.

The SPC model includes eight master vendors and more than 200 'tier-2' vendors, which may provide staff on behalf of the master vendor. In this circumstance, the user department engages solely with the master vendor, including for payment. DTF considers payments made directly to tier-2 vendors to be contract leakage.

Our analysis of departments' records showed that in 2016–17 the seven departments spent $289.37 million in the ANZSIC staffing services spend category. As Figure 5J shows, the majority of spend—70.8 per cent—was through the eight nominated SPC suppliers. This is a positive indication that the SPC captures the majority of spend in the wider spend category.

Figure 5J
Staffing services category spend in user departments, 2016–17

Figure 5J shows staffing services category spend in user departments, 2016–17

Source: VAGO analysis of departments' 2016–17 accounts payable data and SPC spend data from lead agencies.

From our review of invoices, 28.5 per cent of this spend was not leakage because it was for non-mandated engagements such as for permanent staff. We identified approximately $2.07 million—or 0.7 per cent—as potential contract leakage. This amount is 1 per cent of the $204.88 million value of the SPC contract in 2016–17 for the seven departments.

Figure 5K breaks down the total leakage amount to show the amount identified in each user department, including this amount as a per cent of that department's spend on the SPC. We identified no potential contract leakage in DET or DTF.

Figure 5K
Leakage in the Staffing Services SPC in user departments, 2016–17

Figure 5K shows leakage in the Staffing Services SPC in user departments, 2016–17

Source: VAGO analysis of departments' 2016–17 accounts payable data.

Of the $2.07 million identified as potential leakage, more than 55 per cent went to two suppliers. Armed with this type of information, user departments should conduct their own checks of their accounts payable systems over time for transactions with these suppliers to identify potential leakage for further investigation.

We also identified that departments made payments directly to tier-2 vendors. When we queried these payments with user departments, a common response was that these payments did not constitute leakage, which demonstrates confusion among users regarding the contract rules.

Legal Services Panel SPC

DJR manages the Legal Services Panel, which commenced in its current form in March 2016. All legal services in the mandated areas of law under the contract must be engaged through the SPC. Legal services not in these mandated areas are not required to be engaged through the SPC. This type of expenditure is not contract leakage. The SPC has 23 nominated legal suppliers.

Our analysis of departments' records showed that in 2016–17 the seven departments spent $122.7 million in the ANZSIC legal services spend category. Of this, more than half of the spend—63.1 per cent—was through the SPC, as Figure 5L shows. This indicates that opportunities may be available for DJR as the lead agency to consider other types of legal spend that could be incorporated into the SPC.

Figure 5L
Legal services category spend in user departments, 2016–17

Figure 5L shows legal services category spend in user departments, 2016–17

Source: VAGO analysis of departments' 2016–17 accounts payable data and SPC spend data from lead agencies.

We identified no potential leakage for the Legal Services Panel.

5.4 Exemption process

If departments do not wish to use a mandated SPC, they must apply for an exemption. If granted, this expenditure is not contract leakage. Departments can apply for an exemption from an SPC to the:

  • the relevant minister prior to the establishment of a new SPC
  • accountable officer at the lead agency if they are a participating party in an existing SPC
  • category manager at the lead agency for a one-off purchase.

There are set criteria for granting exemptions. Acceptable reasons to grant an exemption include:

  • a supplier is no longer able to service an area
  • a regional supplier can deliver better value for money
  • a conflict of interest arises with the SPC supplier.

It is important for lead agencies and user entities to keep track of exemptions both requested and granted. For a user department, keeping a central record of exemptions is an important part of understanding SPC spend and compliance. For lead agencies, these records allow for trend analysis to identify potential areas where users are seeking multiple exemptions, which potentially indicates a problem with the SPC scope and offerings.

We sought information from user departments and lead agencies on the number of exemptions requested and granted.

User departments

We asked the seven user departments for exemptions requested and granted for all SPCs. None of the user departments held a central register of SPC exemptions. DEDJTR, DET, DTF, DPC and DJR were able to search for exemption records for some SPCs, but DHHS and DELWP were unable to provide any evidence of exemptions sought or granted because they do not keep central records.

The devolution of the procurement function across all user departments makes tracking exemptions very difficult. For example, in a large department like DHHS, business units are responsible for their own procurements under a certain value, with no involvement from the Internal Procurement Unit. If this business unit seeks an exemption under an SPC, the Internal Procurement Division is unaware. Consequently, even in the departments that are able to search for some exemption records, they did not have a comprehensive view of all exemptions sought under all SPCs across the entire department.

As a result, user departments have a limited understanding of SPC compliance in their business units. User departments are less able to identify patterns where exemption applications may be concentrated in certain business areas, or where reoccurring exemption applications may represent a problem with the SPC scope.

Lead agencies

We asked DTF, DPC and DJR as lead agencies for records of exemption applications made to them by user departments and to flag where they had approved these applications. Due to the low value of the Rosetta SPC, we excluded Cenitex from our analysis.

Department of Justice and Regulation

DJR keeps a central register of all approved exemptions in an exemption policy report. These records include the:

  • user making the application
  • name of the legal matter and the area of law
  • non-SPC supplier that the user wishes to engage
  • reason for the exemption application
  • outcome and approving officer
  • cost of the legal matter subject to exemption
  • expected end date of the legal matter.

In 2016–17 DJR granted nine applications for exemption from the Legal Services Panel SPC across four user departments. While we conducted leakage analysis in the Legal Services Panel SPC, we were able to use this exemption policy report to cross-check potential instances of leakage with legal matters that DJR had approved for exemption.

Department of Treasury and Finance and Department of Premier and Cabinet

DTF and DPC do not keep central registers of exemptions. This limits their ability to conduct trend analysis to identify potential areas where users are seeking multiple exemptions that potentially indicate a problem with the SPC scope and offerings.

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