Department of Corrections' procurement of rapid deployment of prison accommodation

17 September 2019: Our reply to Mr Lawrence Yule, MP about his concerns raised with us about the Department of Corrections' approach to procuring design and build services for rapid deployment of prison accommodation.

16 September 2019

Mr Lawrence Yule, MP
Member of Parliament for Tukituki

Tēnā koe Mr Yule


Thank you for your letters of May and June 2019, requesting that we investigate the procurement of design and build services for rapid deployment of prison accommodation by the Department of Corrections (the Department).

In those letters, you raised concerns about the Department’s approach to procuring design and build services for rapid deployment of prison accommodation. In particular, you were concerned by the Department’s decision in June 2018 to execute a variation to its contract with Decmil Construction NZ Limited (Decmil NZ). Following the variation, the Department had a contract in place with Decmil NZ for the delivery of 988 beds – 610 more than the original contract.

We have reviewed the information you provided, and obtained further information from the Department about the matters you have raised. We have also spoken to the Ministry of Business, Innovation and Employment (MBIE), which publishes and administers the Government Rules of Sourcing (the Rules).

I report in this letter on what we understand the situation to be, and how the Department managed the contract, including our understanding of the steps taken by the Department to demonstrate that it had considered the Rules and applied the Five Principles of Government Procurement (the Principles).

Based on the information we have seen, we have decided not to undertake any further work on this matter for the reasons set out below. 

The Department of Corrections’ initial procurement process in 2017

The Department has a key role in ensuring that there is sufficient and appropriate accommodation available to meet the forecast demand for prison population (also referred to as the “muster”). The muster is the term used by the Department and the Ministry of Justice to describe the number of accommodation places required at any time. The results of these calculations are then modelled to forecast the required future levels and type of prison accommodation. The muster numbers can increase significantly, sometimes at short notice, and the Department is expected to be able to respond quickly to changing demands.

The Department has a Prison Capacity Programme, driven by the need to increase the capacity in prisons across New Zealand to accommodate a projected increase in prison numbers. As part of this programme, the Department developed a Modular Build Programme, which is aimed at procuring a rapid build and deployment of prisoner accommodation units and ancillary facilities.

From the information we have seen, it is apparent that the Department always envisaged the possibility that further beds might be required. This was reflected in the scope of the initial request for quote (RFQ), which highlighted to interested parties that there was a possibility the contract would be extended.

The Department carried out the original procurement in accordance with accepted good practice. This process included advertising the potential work on the Government Electronic Tender Service portal, applying the Rules to the procurement process, and engaging an independent probity auditor from Audit New Zealand (a business unit of the Office of the Auditor-General) to provide real-time assurance, which means that the probity auditor was present at key stages during the process.

The probity auditor’s work considered whether:

  • the procurement process was conducted in accordance with applicable policy and planning for the process;
  • the procurement process conformed to accepted good practice;
  • any obvious potential risks identified during the process were managed and/or mitigated; and
  • the issue of probity was addressed to ensure the integrity and consistency of the process so that no parties were unfairly treated.

Shortly after the original contract was agreed in May 2017, the probity auditor issued a formal report to the Department providing probity assurance over the procurement for design and build services for rapid deployment of prison accommodation.

Subsequent variation of the contract in June 2018

As noted above, the original RFQ highlighted the possibility that further beds would be required. This was also contemplated in the final contract awarded to the successful tenderer, with the inclusion of a specific clause relating to future variation of the contract. Without the benefit of hindsight, the Department did not know the size of the final variation.

The Department was made aware of a need for more modular build units, and the contract was subsequently varied as anticipated by the clause in the contract. The Department engaged external lawyers to complete the contract variation and the lawyers provided certification that the variation was completed in accordance with the Department’s instructions.

On this basis, the additional units procured from Decmil NZ were obtained under the original contract (awarded in 2017), as varied. Since there is no new contract, there was no requirement for a new tender process, and therefore no expectation that the variation to the existing contract be assessed against the Rules.

The Government Rules of Sourcing and the Principles of Government Procurement

The Rules and the Principles are published and administered by MBIE. The Rules are the Government’s standards of good practice for government procurement and incorporate New Zealand’s international commitments on government procurement (until they are replaced by the Government Procurement Rules 4th edition that will come into force in October 2019). Application of the Rules is mandatory for government departments, including the Department.

The public and businesses, particularly those seeking to win contracts through openly advertised procurement opportunities, rightly expect government departments to carry out procurement activities in accordance with the Rules (and the underlying Principles). As noted above, there was no requirement to re-consider the Rules because the work had already been procured under the 2017 contract, albeit through a variation to that contract.

In addition, there are no specific provisions in the Rules that relate directly to the concept of contract variations or extensions. That is, there is nothing in the Rules that imposes any threshold, either financial or proportional, above which a new procurement exercise must be carried out.

That said, based on the documents from the time of the contract variation that we have reviewed, it can be seen that the Department realised that the required increase of units was significant. The Department also recognised that its approach might be considered unusual, especially because the process was expected to be required quickly to meet expected dates for new units to be ready for use (based on the muster predictions).

Accordingly, the Department took specific steps to demonstrate that its process was robust and designed to get the best value for money during the full life of the contract (not just on a price per unit basis).

Steps taken by the Department of Corrections to demonstrate that its approach remained accountable, transparent, and reasonable

The Rules include a general requirement, under Rule 14, that procurement opportunities must be openly advertised, unless one of the specified exemptions set out in Rule 15 applies. MBIE has told us that the Rules are designed to be flexible and, at times, a pragmatic approach is required in order to give effect to the underlying the Principles, which are:

  • Plan and manage for great results.
  • Be fair to all suppliers.
  • Get the right supplier.
  • Get the best deal for everyone.
  • Play by the Rules.

In this instance, the Department has told us that it considered the “Additional goods, services or works” exemption (Rule 15.9d) when documenting its rationale for varying the contract. The following three conditions must be met in order to exempt an entity from the general rule of openly advertising the procurement opportunity:

  • The original contract was openly advertised.
  • A change of supplier cannot be made for economic or technical reasons.
  • A change of supplier would cause significant inconvenience or substantial duplication of costs for the Department.

The Department has told us that extending the contract enabled it to leverage off the existing development work that had already been carried out for the first tranche of units. If the existing contract was not extended, the Department was concerned that it would have lost considerable time on the project, at a time when there was continued and increased pressure on the prison network. The delays would have been caused by having to re-tender the work and potentially having to engage with a new provider to develop an appropriate unit design, as well as production arrangements.

The Department took steps to show that appropriate judgements and risk assessments had been applied to the decision to extend the contract.

These steps included:

  • commissioning an independent due diligence report to assess the risk of Decmil NZ being unable to fulfil the contractual requirements;
  • obtaining an independent assessment of whether Decmil NZ’s costs were fair and reasonable; and
  • obtaining joint approval for the contract extension from the Ministers of Finance and Corrections before signing the contract extension.

The Department has documented the results of this work, and the judgements that were applied in coming to the decision to extend the existing contract, in a rationale document authorised by the Deputy Chief Executive.

The Department has provided evidence to show that it turned its mind to the challenges and issues that it faced. With the Principles and Rules in mind, the Department engaged in a collaborative process with the market, sought advice where appropriate, and engaged with the Treasury and the Minister of Corrections before the contract variation was executed.

Other matters

The Department has said that it would be happy to meet with you and answer any further questions about this particular procurement.

Also, MBIE has said it is willing to meet with you if you have questions about the Rules, or the policy behind their application, more generally.

Given the public interest in these matters, we will be publishing a copy of this letter on our website.

Thank you for raising your concerns with us.

Nāku noa,

Signature - GS

Greg Schollum
Deputy Controller and Auditor-General