Engagement of consultants at Queenstown Lakes District Council

19 May 2021: We wrote to Queenstown Lakes District Council after concerns were raised with us about its procurement of services from a consultancy firm.

19 May 2021

Mike Theelen
Chief Executive
Queenstown Lakes District Council
10 Gorge Road
Queenstown 3900

Tēnā koe Mr Theelen,


Thank you for the information you sent us and for meeting with us on 12 February 2021.

Concerns raised with us

As you are aware, we have received correspondence that raised concerns about procurement practices at Queenstown Lakes District Council (the Council). In particular, those concerns related to the Council’s procurement of services from ZQN.7 (a consultancy firm) to conduct reviews of three Council bylaws.

The specific issues raised with us were that:

  • the Council engaged consultants using a direct procurement approach, which was inconsistent with the Council’s procurement policy and/or guidelines;
  • the work was split into smaller jobs to avoid a requirement to get approval at a higher level; and
  • the contractors were engaged without sufficient work being carried out to identify and/or manage potential conflicts of interest, as the contractors were former Council employees.

What we did

We sought more information to help us decide what further work by our Office, if any, into the engagement of ZQN.7 or wider procurement practices at the Council might be appropriate. This included asking the Council about its procurement practices generally, as well as how the services of ZQN.7 had been engaged. We also met with you to discuss the matter.

We have reviewed the information that you have provided to us in response to our questions.

That information included:

  • the Council’s Procurement Policy, Procurement Guidelines, and Engagement of Contractors and Consultants Policy;
  • copy of the report to the CEO on ZQN.7 Procurement (dated 4 February 2021);
  • copy of the draft presentation to Council on procurement (dated 15 February 2021); and
  • other related information.

What you told us about procurement at the Council generally

By way of background, you explained that Queenstown Lakes District has grown, and that demands on the Council have increased as well. The Council has also been dealing with large procurements such as the three waters programme, Queenstown arterial project and the Queenstown CBD street upgrades. These factors have put pressure on the capacity and capability of the Council’s resources, including in the area of procurement.

You explained that the Council has a procurement policy, which was adopted in 2016. The policy was overdue for review, but because of resourcing challenges that review did not start until early 2021.

You also noted a weakness in the way the Council’s procurement processes worked at the time, because there was a lack of alignment between the Council’s procurement policy and guidelines and established practices in relation to contracts with an estimated value of less than $50,000. For these smaller procurements, the Council’s established practice was that a direct procurement approach was appropriate, but this was not reflected in the policy and guidelines. We understand that the recently commenced review will include looking in more detail at the appropriateness of this type of approach for the Council.

What you told us about the engagement of ZQN.7

Procurement approach

You have confirmed that the Council used a direct procurement approach when engaging ZQN.7.

The Council’s guidelines require any direct procurement engagements to be conducted only once an Approved Procurement Plan has been established. Only one Approved Procurement Plan was established for the ZQN.7 engagements.

You also told us that despite the requirements of the guidelines, the Council’s accepted practice was to permit direct procurement negotiations for engagements with an estimated cost of less than $50,000. Additionally, the Council identified an urgent need for the bylaw reviews to be completed. A Council officer responsible for this area of work was aware of a “local company whose principals were well versed in infrastructure and the processes of reviewing, amending and implementing bylaws.”  The combination of this urgency, the knowledge of a local provider who was available to start immediately, and the expectation that the costs of each stage of the project would be less than $50,000 led to a direct procurement approach being taken.

Splitting of invoices

The second concern raised with us was that the work being delivered by ZQN.7 has been deliberately split into smaller amounts, to avoid the need to obtain approval at a higher level and that this amounted to inappropriate procurement practices.

You told us that there was no deliberate attempt to avoid any requirement for more senior approval of the engagement of ZQN.7 to conduct the required bylaw reviews. Instead, you said that the work was split into different projects to represent each of the bylaws that needed to be reviewed. The work was also further split to reflect different stages of each bylaw review. As a result of this splitting the work into different bylaws and stages, as well as a further engagement (unrelated to bylaw review) the Council recorded 12 engagements with ZQN.7. In 11 out of these 12 instances, the estimated costs were below $50,000.

The Council’s review of the procurement provides a rationale for splitting the contracts: they were separate work streams, and the scope and resource requirements for each stage were uncertain. However, this was not documented at the time.

Conflicts of interest

You told us that the engagement of ZQN.7 to perform the required bylaw reviews did not involve any conflicts of interest that required identification or management by the Council. You told us that this view is based on the fact that, although both consultants with ZQN.7 had previously worked for the Council, they left before you became the Chief Executive in 2016 and the Mayor was not involved in the decision to engage ZQN.7.

What you told us about work that the Council has already carried out in relation to procurement

The Council has already carried out a review of these specific procurements and identified a number of areas where the procurement was not aligned to the Council’s guidelines, as noted above.

The review recommended strengthening the Council’s procurement framework over the next six months by:   

  • establishing a Procurement Steering Group to lead changes at the Council, including providing guidance and support to staff;
  • carrying out a review of the use of supplier panels within the Council to ensure that their use is consistent with the guidelines;
  • proposing an interim set of changes to the guidelines while a more formal review of the policy and guidelines is carried out;
  • delivering mandatory procurement training to staff;
  • reviewing procurement resourcing to ensure that it is adequate; and
  • increasing transparency of procurement decisions.

We understand that the Council supports these recommendations being implemented and that the Audit Finance and Risk Committee will be directly involved in monitoring improvements to the Council’s overall procurement framework.

Our observations and recommendations

Application of the Government Procurement Rules

To achieve good procurement results, public organisations need robust policies and processes. The Ministry of Business, Innovation and Employment (MBIE) has published the Government Procurement Rules (the Rules). These are intended to support good market engagement, which leads to better outcomes for agencies, suppliers, and taxpayers. The Rules promote good practice for procurement planning, approaching the supplier community, and contracting.

Where application of the Rules is mandatory or expected, they must be followed for all procurements worth more than $100,000, or $9 million for new construction works. As a local authority, the Council is not required to apply the Rules to its procurement activities but is encouraged to do so.

The Rules are based on five principles of Government Procurement, 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.

Although we acknowledge that there is no obligation for the Council to follow the Rules, they provide a good foundation for making robust procurement decisions. We recommend that the Council considers incorporating the Rules into its internal policies and guidelines, especially in relation to significant procurements (for example, those over the thresholds identified by the Rules).

Maturity of the Council’s procurement policies and processes

The Council’s procurement policy and guidelines were first issued in 2016 and were expected to be reviewed after 12 months. It is important that public organisations regularly update policies and other guidance to ensure that guidance remains relevant and up to date and to maintain consistency with aspects of good practice that might be identified elsewhere. For example, the New Zealand Government Procurement webpages published by MBIE contain a wealth of material that can be used by all public organisations.

Regular review also ensures that practices that are inconsistent with the policy or guidelines are identified and either the practice or documentation is changed. 

The Council has not reviewed its policy or guidelines since their adoption in 2016 and it is likely this has contributed to the lack of alignment between them and Council procurement practices. This misalignment has been identified in relation to the engagement of ZQN.7, and is known to exist in relation to other contractors and consultants engaged by the Council.

We encourage the Council to continue to progress the review and update of its procurement policies and guidelines and to complete these as soon as possible. As noted above, as part of the review and update process, we recommend that the Council compare its policies and guidelines to the Rules published by MBIE and incorporate any requirements that are relevant to the Council’s activities, and consider any of the other cases where it is aware of misalignment.

Engagement of ZQN.7 consultants

Based on the information that we have seen, the hourly rates charged appear reasonable and the consultants were appropriately experienced to carry out the work that they were engaged to complete. Additionally, we did not see any evidence that there was a conflict of interest and we note that we were told the consultants had left the Council more than three years prior to the first engagement. The issue here is whether the Council followed robust processes and can demonstrate how it made decisions.

In line with best practice, the Council’s guidelines require officers to consider the whole-of-life value of the goods or services being procured and preclude contract splitting “so as to avoid the necessity for entering into a particular procurement process.” Although the Council review found that there was no deliberate intent to split the contract for this purpose, the separation and staging of the different parts of the reviews without a clearly documented procurement plan exposed the Council to risk.

Although the Council has provided a rationale (after the events) for splitting the contracts, the practice was neither documented nor tested, a point which is acknowledged in its review. Accordingly, the Council’s records do not answer the question effectively raised in the Council’s guidelines – “how much is this all going to cost, and what procurement option will get the best outcome for the community?”.

Establishing how much a project or contract will cost can be achieved in various ways. In this instance, it appears no attempt was made to establish a budget for the review of each bylaw or for the reviews overall. The actual costs regularly exceeded the estimates, which we understand were made by Council Officers. After the first stage of the review was completed, we can understand why the Council chose to continue using the same consultants for subsequent stages. However, in the absence of any analysis of the potential costs for each stage, the estimate for each stage has little meaning. This creates a risk that the Council will pay more than it should, if it does not have an idea of what a good or service will cost.

The Council has exposed itself to questions being asked about the fairness of the selection of ZQN.7 and the transparency that the Council displayed in its procurement approach.

We recommend that the Council ensure that there is sufficient documentation to support its decision-making processes.

We also recommend that the Council ensure that there is sufficient, appropriate evidence to show how the expected price of the services being procured has been calculated.

We further recommend that the Council ensure that it has processes for establishing appropriate budgets for procurement activities. Where appropriate, this might include talking to staff in other local authorities who might have engaged in similar activities.

Contract management systems and processes

Several of the engagements with ZQN.7 resulted in costs that were higher than the initial estimate, as identified by the review that the Council completed. In some instances, the final cost was significantly more than the initial estimate, as shown in the table below.

Date of Purchase Order Project Stage Approved Procurement Plan Initial Estimate Final Cost Difference
Mar-18 Speed 1 N $10,000 $10,000 $0
Mar-18 Trade Waste 1 N $15,000 $7,713 $7,288
Mar-18 Traffic and Parking 1 N $20,000 $20,000 $0
May-18 Speed 2 N $10,000 $76,589 ($66,589)
May-18 Trade Waste 2 N $10,000 $42,724 ($32,724)
May-18 Traffic and parking 2 N $10,000 $66,919 ($56,919)
Jun-18 Trade Waste 3 N $24,000 $30,324 ($6,324)
Jan-19 Traffic and Parking 3 Y $136,000 $148,128 ($12,128)
Mar-19 Speed 3 N $50,500 $87,525 ($37,025)
Oct-19 Bus Stops - N $10,000 $10,000 $0
Oct-19 Speed (School Safety) 4 N $12,000 $10,522 $1,478
Jan-20 Speed (NZTA) 4 N $16,500 $17,700 ($1,200)
        $324,000 $528,144 ($204,144)

We understand that, in some cases, either at the request of elected members (via Council officers) or because of the complex nature of the bylaw under review and the high level of public feedback that was received, additional work was performed by ZQN.7. We also understand that these changes did not trigger any additional review by the manager responsible for the contract or escalation to someone with a higher level of authority.

We accept that the initial costs recorded were estimates and that final costs for work often vary, but the Council’s current guidance does not provide much assistance for staff who might find themselves responsible for managing a contract that has changed significantly.

Good procurement practices do not stop after a contract has been signed. It is important that public organisations continue to manage contracts in order to assess whether they are receiving value for money.

The current policy is focused on the estimated total cost of the contract, which is then used to determine which procurement method should be applied and what level of approval is required before the contract can be entered into.

The current guidelines do have a section on “Supplier Management” but this is principles-based. There is no clear guidance on what action should be taken in cases where there are significant cost variations or changes to the nature of work to be performed.

We recommend that as part of the review of its procurement policy and guidelines, the Council update these to include guidance and procedures about how the delivery of goods or services will be managed. For example, this might include:

  • procedures for assessing whether the goods or services are delivered to the agreed levels or volumes;
  • guidance about how risks will be managed;
  • procedures relating to contract variations, including what documentation is required;
  • procedures relating to charges and cost management; and
  • confirmation of what management reporting will be required for to each contract.

Conflicts of interest and employment of former Council employees

We have not seen any evidence of undeclared conflicts of interest that should have been managed carefully by the Council and we did not become aware of any circumstances that would have prompted further questions.

The decision to engage ZQN.7 to complete the work was made by Council employees, with no involvement by elected members, including the Mayor. In addition, although the principals used by ZQN.7 to carry out the bylaw reviews had both previously worked for the Council, their employment had ended some three years previously and both had been employed by other Councils in the intervening period, before ZQN.7 was incorporated.1


Both the Council’s review and our assessment of what happened in this case identify improvements that can be made to strengthen procurement and subsequent contract management processes. These include:

  • incorporating relevant aspects of the Government Procurement Rules into the Council’s policies;
  • ensuring that appropriate documentation is retained to support Council decision-making processes;
  • developing guidance for determining appropriate estimates for new contracts;
  • updating policies and guidance to include guidance around contract management to ensure delivery of goods and services is well-managed;
  • developing procedures and guidance for staff in relation to charges and cost management; and
  • confirming what management reporting will be required for each contract the Council enters into.

The Council has started to address the issues. Therefore, based on the information that you provided, we do not intend to inquire into the Council’s engagement of consultants, in particular ZQN.7. However, we consider it important that the Council implements the changes identified.

It is likely the Council will take some time to address and embed changes. Our Appointed Auditor will follow-up on any changes that the Council makes.

Accordingly, we will be sending a copy of this letter to our Appointed Auditor for their information, and for consideration as part of their planning of future audits. Please provide the Appointed Auditor with an update in six months, setting out what progress has been made with implementing changes.

Because this letter raises matters that are of public interest, we also intend to publish it on our website.

Thank you for your assistance in responding to our questions about this matter.

Nāku noa, nā

David Lemmon
Manager, Inquiries

1: There has been reference in the media to one of the consultants having been employed by the Mayor as a nanny for his children. This was some years earlier, and in any event, we understand the decision to use the consultants was not made by the Mayor. Instead the decision was made by Council staff. In those circumstances, there was no conflict of interest.