At a glance
This Part of the report examines the contract management processes, policies, systems and practices in place for the Melbourne Metropolitan Bus Franchise (MMBF).
Public Transport Victoria (PTV) is not effectively managing the MMBF agreement. There is no complete contract management plan to guide management and decision‑making, which has led to the inconsistent application of contract provisions. Contract variations are not fully considered prior to implementation, which risks undermining the value of the MMBF agreement.
- PTV did not establish its contract management processes prior to commencing MMBF services.
- PTV is inconsistently applying the MMBF contract provisions and is not enforcing penalties for underperformance and non-performance.
- Contract management decision-making roles and responsibilities are not sufficiently documented.
- PTV does not have effective knowledge management or document control processes in place for the MMBF, and relies too much on the undocumented knowledge of individuals.
- PTV does not systematically verify the completion of MMBF contract tasks.
Public Transport Victoria should clarify and document knowledge management processes and contract management roles and responsibilities, and establish assurance and monitoring processes to verify contract tasks are completed.
Effective contract management ensures that all parties meet their obligations under the contract, and is necessary to secure value for money. Key elements of effective contract management include:
- policies that clarify roles and responsibilities for contract management and decision-making
- staff with appropriate skills who understand the objectives of the contract
- monitoring and management of contractor performance throughout the life of the contract
- consistent and professional application of contract provisions
- ensuring that payments are made in accordance with the contract and related performance standards.
Effective contract management also involves responding to changing circumstances and implementing contract variations as required. Contract variations should be used to ensure changed circumstances do not reduce the value of the contract, and that innovations and opportunities to increase value for money can be exploited.
This Part of the report assesses Public Transport Victoria's (PTV) contract management policies, processes and systems, and whether the Melbourne Metropolitan Bus Franchise (MMBF) agreement is being managed effectively.
PTV did not have any contract management processes in place to track performance and ensure compliance with the contract terms for the first four months of MMBF operations. As a result, it was not in a position to ensure that the contract delivered value for money during this time.
PTV's contract management policies and practices for the MMBF are inadequate, and risk undermining the value of the MMBF agreement. The lack of a contract management plan has led to inconsistency in the application of some contract terms.
These inconsistencies and PTV's willingness to negotiate extensions on contract deadlines risk reducing the value of the contract, and created a precedent for the operator to negotiate away penalties.
PTV has not assessed the value-for-money implications of the approved contract variations. This risks undermining MMBF's value, as it means there is little assurance that variations support the achievement of MMBF's objectives.
4.3 Systems, policies and processes
Effective contract management systems, policies and processes enable a contract to be administered efficiently, correctly and consistently. A contract management plan is the primary source for this—Victorian Government Purchasing Board guidance highlights the need for a contract management plan for all critical and high risk procurements.
PTV advised it has an organisation-wide contract management framework, and a quality management system certified to AS/NZS ISO 9001:2008 Quality management systems – requirements, which governs its approach to managing all contracts with operators.
This framework is supplemented by specific policies and procedures applicable to the MMBF.
4.3.1 Policies and processes
PTV does not have a complete contract management plan in place for the MMBF. Contract management processes specific to the MMBF are documented in a Contract Administration Manual (CAM) and 17 supporting Processes Administration Guides (PAG). The CAM is intended to assist PTV staff to understand the obligations of the franchise agreement and guide them through the related workflow processes. The PAGs contain workflow processes for routine contract management tasks.
The CAM and PAGs are sufficient for routine contract management and administrative processes, such as calculating payments. However, they were never intended to operate without an MMBF contract management plan. Key elements missing from the CAM and PAGs include:
- Clear roles and responsibilities—the CAM lays out a general chain of responsibility within PTV for the contract, but does not sufficiently detail where responsibility lies for specific tasks and key decisions. There is no decision‑making process for complex or contentious issues, which increases the risk of delays due issues being escalated unnecessarily.
- Guidance on contract reviews and a review strategy—there is no documented process for conducting regular contract reviews and no related review strategy.
- Requirements for data and information management, including files and recordkeeping—there is no documentation detailing the MMBF's information or knowledge management processes, policies or strategies.
Without an MMBF-specific document covering these elements, the knowledge needed to effectively manage the contract is likely to be lost due to staff changes. This risk has materialised and is covered in Section 4.4.5.
While the CAM and PAGs, in concert with PTV's contract management framework, offer sufficient guidance for routine contract management, they are not sufficient to ensure that the contract is managed effectively and consistently throughout the life of the agreement.
4.3.2 Contract management system
PTV's contract management system, Affinitext, is designed to facilitate effective contract management by breaking down the MMBF's complex processes into simple tasks that are assigned to individuals. PTV advised that MMBF franchise management staff regularly review and update Affinitext on the status and completion of due tasks, which on occasions involves physical inspection. However, it is not clear that this has systematically occurred.
Contract management staff advised that all tasks are usually completed, but acknowledged they do not systematically verify completion, or if sufficient evidence has been provided.
Affinitext is routinely updated following approved contract variations. However, there are no established procedures for ensuring the CAM and PAGs are similarly updated. Consequently, there is insufficient assurance that the existing guidance material is up to date. This issue is examined further in Section 4.5.
4.3.3 Establishing processes and transition
There is no evidence that PTV had any contract management processes in place for the first four months of MMBF operations. This means that PTV was not in a position to ensure that the contract delivered value for money when services commenced, as it did not have the mechanisms needed to track performance and ensure compliance with the contract terms.
Our 2009 audit Melbourne's New Bus Contracts recommended that for new contracts PTV should engage more effectively with operational staff to complete the contract management documentation, and to plan for the transition to the new arrangements before existing contracts expire. This recommendation was partially implemented for MMBF transition. Operational staff were involved during all stages of the tender assessment, contract development and transition planning—however, PTV still failed to finalise its contract management processes prior to the start of services.
4.4 Contract management
PTV is not managing the MMBF contract effectively, undermining the potential for the state to realise the full value possible from the agreement. Contract terms are being inconsistently enforced, with PTV declining to apply penalties. PTV has been entitled to withhold over $380 000 in payments and seek underperformance remediation plans and commitments, which it has declined to do.
The transition from the five previous contracts to the MMBF contract occurred without any major interruption to services. However, as there were no MMBF-specific contract management processes in place, it is not possible to assess whether all aspects of the contract were being effectively managed during this time.
A Transition Steering Group was established to manage the transition, which was primarily concerned with risks and issues that could impede the commencement of operations. The group did not consider the implications of not having a contract management framework in place.
The Transition Steering Group managed the operational commencement risks well, ensuring mitigation or management plans were developed for significant risks, and requiring regular updates from those responsible for each risk. Successful management or mitigation strategies included:
- shifting the service commencement date from a weekday to a Sunday, to ensure start-up issues affected the fewest customers
- running several combined first day of service rehearsals with the operator and PTV staff.
4.4.2 Application of contract terms
Some of the MMBF contract terms and penalties are being applied inconsistently. PTV chose to extend the completion deadlines for three offer commitments—bus rebranding, the establishment of an operations control centre, and the installation of automatic passenger counters. Instead of withholding contract payments of $200 000 and making the operator develop and implement a plan to remedy the underperformance—as the contract entitles PTV to do—it chose to extend the completion deadlines.
A fourth offer commitment—the refurbishment of buses over 13 years old—was not met for the first contract year. Again, PTV had the option of withholding payment of $180 000 and making the operator develop and implement a plan to remedy the underperformance, it did not do so.
PTV advised that it has only waived the withholding of payments for some delayed initiatives offered by the contractor and now formalised in the contract, but which have no impact on core services to customers. However, a key goal of introducing the performance-based MMBF contract was to create incentives for improving performance. While deadlines may sometimes need to be extended, the contract enables PTV to reasonably reduce payments in response, but it has never done so.
PTV's practice of extending contractual deadlines rather than withholding payments is inconsistent with the state's reform objective of establishing an incentive-based contract. Contractual penalties are an important mechanism for encouraging improvements in performance. PTV's failure to consistently enforce them risks compromising the contract's value and achieving the state's reform objectives.
4.4.3 Data issues and relationship management
As noted in Part 2 of this report, ongoing issues with data reliability are impeding PTV's capacity to measure and monitor performance and effectively manage the contract. Of particular concern is the delay in setting the patronage benchmark, required to operate the Patronage Incentive Regime, which was supposed to come into effect from 1 January 2014, but was ultimately not set until February 2015 because of a disagreement between PTV and the operator.
PTV initially set the patronage benchmark based on six months instead of 12 months of data. PTV believed that the data collected by the myki systems for the first six months of the year was not reliable. The MMBF contract allows the benchmark to be set using less than 12 months of data if the data is unreliable and both parties agree to the alternative calculation. The operator disagreed with this approach. Once the benchmark was set, the operator was paid a performance incentive of over $300 000 for exceeding its patronage target in 2013–14. It is concerning that the dispute was allowed to run for so long.
Full implementation of the MMBF's performance incentive and penalty regime will not occur until after the introduction of a rebuilt timetable, referred to in the contract as the 'Greenfields timetable'. The Greenfields timetable is a redesign of MMBF services, including adjusted timings, some redesigned routes and cancellation of duplicated or low-patronage routes. It was scheduled to be introduced in April 2015, however, the state has recently delayed its implementation.
The introduction of the Greenfields timetable is the point at which the MMBF agreement is capable of operating at its full value. The MMBF agreement was designed to improve services to customers, meet the demands of more passengers, and deliver improved punctuality. Therefore, the Greenfields timetable redesign is intended to deliver better targeted services than those currently operating.
Under the MMBF agreement, the Operational Performance Regime (OPR) comes into force when the Greenfields timetable commences. This activates penalties of up to $2 million each year for underperformance. PTV believes its current data reliability issues will be resolved by the time Greenfields is implemented, however, any delays in resolution means PTV will be unable to assess the success of Greenfields or fully exploit the OPR.
4.4.5 Knowledge management
PTV does not have effective knowledge management processes in place for MMBF, despite having sufficient knowledge and document management systems.
PTV uses TRIM as its record-keeping system, but the system has not been used to manage MMBF information and knowledge effectively. Specifically, document control within TRIM has not been enforced meaning there are multiple versions of key documents and no clear indication of which is the final authoritative version. During the conduct of this audit, PTV was unable to readily produce final, approved versions of several key documents relating to the tender process and the management of the MMBF agreement.
This poses a significant risk for PTV, as new or inexperienced personnel may inadvertently rely on incorrect information contained in draft documents when managing the contract and formulating related decisions.
This situation means that there is an overreliance on the knowledge of individuals, which has not been routinely captured in a way that successors or the wider PTV organisation can make use of. For example, PTV referred many questions relating to the conduct of the tender to an individual who no longer works for PTV. Personnel will continue to change and new staff will have difficulty sourcing information or reasons for previous decisions.
The lack of effective knowledge management also has implications for future bus service procurement and reform. The lessons learnt during the MMBF procurement are likely to be lost, as the key documents and reasons for decisions cannot be readily located.
4.4.6 Contract management training and support
PTV does not routinely supply contract management staff with specific contract management training. Line staff mainly learn their duties on the job, with the higher level managers relying on their previous experience and training. Affinitext and TRIM training is provided for staff, with refresher training and in-house support available, but this is generic system training. There is no specific training or formal induction for staff involved in managing the MMBF agreement. PTV provided contract management training for relevant staff in February 2015.
4.5 Contract variations
Contract variations are sometimes necessary to respond to changes in the operating environment, or to take advantage of innovations or unanticipated circumstances. However, they should not reduce the value of the contract to the state, nor should they be used to escape consistent underperformance. All contract variations should be assessed to ensure value for money is maintained, and that key elements of the contract are not undermined.
There have been two variations to the MMBF agreement. While both variations were approved at the appropriate level and in accordance with MMBF provisions, there is no evidence that PTV analysed how the value of the contract would be affected. The impact of these variations on the original value proposition of the contract remains unclear.
The first contract variation was executed in August 2013, three months after execution of the franchise agreement. The primary purpose of this variation was to put into effect the financing and depot arrangements finalised following execution of the MMBF agreement. This is not unusual in large projects—financing arrangements are seldom concluded before a signed contract is in place. However, this variation also made changes to other aspects of the contract:
- Patronage growth targets—the benchmark figure for the increase in the patronage that will occur each year decreased by approximately 113500 passengers.
- Real monthly operating payment (RMOP)—the total amount paid for services each month was reduced by approximately $29600 per month.
The second variation, executed in June 2014, primarily concerned additional depot details finalised after the start of operations. However, it also changed other aspects of the contract:>
- RMOP—this payment was increased by approximately $39000 per month above the price set by the first variation, cancelling out the savings gained in the first contract variation. The overall effect of this was to increase the price of services by approximately $9500 per month, or 0.1percent, above the original agreement. PTV has noted that this increase was to take into account a cost that it previously understated in information it provided to tenderers.
- Offer commitments—the requirements and deadlines for the refurbishment and rebranding the operator's fleet were extended, as detailed in Section 4.4.2.
In the absence of a contract management plan, no guidance is available to MMBF staff on how to ensure value for money is maintained in respect of proposed variations. The Contract Variation PAG is insufficient, containing only high‑level process guidance to ensure variations are properly approved.
PTV needs to ensure that all decisions on contract variations are robust and take into consideration the overall effect of the changes on the contract's value proposition. In particular, variations regarding the performance monitoring regime should be carefully analysed to ensure expected performance standards are not reduced.
PTV has processes in place to ensure that Affinitext is updated following contract variations. However, these are generic Affinitext processes, and are not specific to MMBF. There are no processes in place to ensure the MMBF CAM and PAGs are updated following contract variations, and there is no evidence that these documents were reviewed or updated following the June 2014 contract variation. MMBF's contract management system and processes are at risk of diverging from each other as Affinitext is updated while the CAM and PAGs are not. This will render the CAM and PAGs ineffective, as their processes will no longer reflect variations to the contract.
That Public Transport Victoria:
- ensures that contract management processes are in place prior to commencement for any new service contracts
- establishes a contract management plan for the Melbourne Metropolitan Bus Franchise in accordance with Victorian Government Purchasing Board guidance
- establishes knowledge management and document control processes to ensure critical information and reasons for decisions are readily available to the necessary staff
- establishes a process for systematically monitoring and verifying the completion of required Melbourne Metropolitan Bus Franchise contract management tasks
- consistently enforces the terms of the Melbourne Metropolitan Bus Franchise agreement in accordance with the contract.