Part 2: Key stages of procurement

Strengthening government procurement: Lessons from our recent work.

2.1
New Zealand Government Procurement defines the three overarching stages of procurement as:

  • plan (what you need to do before approaching and selecting a supplier);
  • source (how to get quality responses from the right suppliers); and
  • manage (how to manage the contract once it's under way).24

2.2
Some principles and aspects of good procurement, such as fairness, apply throughout the whole procurement process. There are also elements of good practice that apply more specifically to the separate stages.

2.3
In this Part, we discuss the findings from our work about each of these three stages.

Plan

2.4
Planning is the foundation of good procurement, and like any foundation needs to be in place before procurement activity begins. A lack of proper planning in the early stages of a procurement can lead to issues later. Allowing enough time for proper planning can help ensure that the procurement:

  • is aligned to organisational strategy;
  • will deliver value for money and achieve its intended outcomes;
  • is appropriately approved; and
  • complies with internal and external requirements, including the Government Procurement Rules (the Rules).

2.5
Planning should clearly set out the scope and risks of a procurement, the outcomes being sought, and the resourcing and approval processes needed. Planning should include documented analysis of available options, assessing the relative merits and identifying and justifying the preferred option. This helps to understand how and why decisions were made.

2.6
Planning is the stage to consider what procurement approach will support the best outcomes. This is particularly important as new commissioning approaches and other ways of delivering services develop. In our 2023 report on Whānau Ora, we found that the public sector has been slow to make progress on using whānau-centred approaches, even when there is a clear mandate to do so and the approach will potentially achieve better outcomes.25

2.7
In our assurance reviews, a significant percentage of the procurements we looked at between mid-2019 and mid-2022 were inadequately planned. This was further reinforced when we examined procurement as part of our annual audits of public organisations.

2.8
Some of the common weaknesses we saw included:

  • inadequate or no procurement planning;
  • procurements approved without the right authority;
  • inadequate consideration of risks;
  • failure to comply with internal policies; and
  • poor or no justification for relying on an exemption from the Rules.

Aligning procurement with strategy

2.9
Good planning starts with a sound understanding of what the procurement aims to achieve. Before going ahead with procurement activities, we expect public organisations to understand the type, value, and risks of the goods and services they are looking to procure. If procurement is integral to a public organisation's overall work, the organisation should have a procurement strategy that is aligned to its organisational strategy.

2.10
Through our work, we have seen examples of good procurement that were clearly aligned to strategies and had good measures to assess whether key objectives were met.

2.11
When we looked at the Inland Revenue Department's Business Transformation programme in 2018, we saw that Inland Revenue had changed its procurement approach to better focus on relationships with suppliers and contract outcomes. The new approach was aligned to Inland Revenue's overall vision for the programme and was more flexible to ensure that procurement met the objectives it was seeking to achieve.26

2.12
In 2021, our work found that having a clear procurement strategy for vaccines put the Government in a strong position when it wanted to purchase vaccines for Covid-19. The Government needed to commit to purchasing vaccines while the vaccines were still in a trial phase. The procurement strategy was designed to increase the chances of securing advance purchase agreements for several potential vaccines. The strategy helped the Government to procure four different vaccines, including an additional supply for the Pacific countries the Government had committed to support.27

2.13
In contrast, when Tauranga City Council agreed to build a new car park, it did not have a business case for the project. Elected members had not settled on a final design or intended outcome for the project before the procurement started. According to the Council's procurement policy, the starting point for the procurement should have been a risk assessment. This risk assessment did not happen, and there was no written procurement plan for the project. After receiving expert engineering advice about serious seismic design issues with the building's design, Tauranga City Council decided to abandon the project after already spending $19 million on it.28

Identifying and mitigating risks

2.14
Through our work we frequently see insufficient consideration of procurement risks at the planning stage.

2.15
We often find that risk analysis has been carried out as a compliance activity, with not enough thought given to the specific risks of the procurement. Planning documents provide the opportunity to acknowledge risks from the outset (such as the risks of using a new supplier), record risks, and design and implement mitigation strategies.

2.16
In local government, some councils are aiming to achieve broader outcomes with their procurement activity, such as supporting local employment. If elected members want to prioritise local suppliers, or suppliers that pay a living wage, councils should consider how to incorporate those objectives into their procurement policies and processes at the outset.29

2.17
As well as the risks of individual procurements, public organisations should consider their procurement risks more broadly. As a general principle, public organisations need to be transparent about their strategic risks, including strategic supplier risks, and provide appropriate oversight of risk management. This includes having adequate processes in place for reporting strategic supply risks to senior leaders and governing bodies, and the actions undertaken to mitigate risks as appropriate.30

Appropriate records

2.18
Good record-keeping supports good procurement. Timely record-keeping in the early stages of procurement planning helps to ensure that procurement is aligned with organisational policies.

2.19
Clear and accessible records allow the public to have assurance that the procurement decision was well-considered and an appropriate process was followed. When the records for a procurement are not complete, the public can lose confidence in how the organisation is using public resources.

2.20
In 2019 the University of Waikato directly procured services that had, by October 2023, seen about $1.1 million paid to the contractor. In that case, we did not see clear records documenting the reason for the services, why the provider who was selected was the only or best-placed provider to deliver those services, and why the amount paid to the provider was appropriate. The absence of records addressing these matters, as required by the University's own procurement policies, makes it difficult for the public to have assurance that public money has been appropriately spent.31

Source

2.21
Sourcing involves going to the market and selecting a preferred supplier. The principles of accountability, fairness, and openness are important at this stage to ensure that all potential suppliers have the same opportunities and information they need to tender for the contract, and that important decisions are supported and documented.

Receiving and evaluating submissions

2.22
The way that organisations manage and evaluate tender responses from potential suppliers is central to the principle of fairness. Public organisations should have a clear process for recording all submissions, how and when responses have been received, and how they were assessed.

2.23
In our assurance reviews and annual audit support work, we saw examples of good practice in tender close activities. These included effective processes and controls to ensure that responses were recorded and processed accordingly, and evidence and approvals to show whether submissions met any specific requirements before being evaluated.

2.24
Along with managing any conflicts of interest, evaluating submissions is one of the highest procurement risk areas for public organisations. During this stage, public organisations decide which tenders, if any, best meet their requirements based on agreed and documented criteria. The evaluation process ultimately determines whether the organisation will get the best outcome possible from the responses received. Appropriate documentation is important to show that a robust process was followed.

2.25
We saw good practices from public organisations for documenting evaluations. Some examples included:

  • applying an evaluation guide that had been tailored to the procurement process and included "what good looks like" for evaluation criteria rather than a generic rating scale;
  • providing guidance and training for evaluators before submissions closed;
  • maintaining a clear separation between different roles in the evaluation process (in particular, between those running the procurement process and those evaluating tenders); and
  • using specialised software to record evaluation scores and comments, to help moderate and agree on each of the evaluation scores.

2.26
However, some of the tender closing practices we looked at needed improvement. Examples of poor practice include:

  • having no documentation or process for receipting or storing submissions;
  • having no review of compliance with any pre-conditions (or no record of one) before submissions are evaluated;
  • accepting submissions that did not follow stated requirements, with no explanation;
  • accepting late submissions with inadequate documentation or approvals;
  • not recording all submissions as part of the receipting process and overlooking valid submissions; and
  • not having considered how to address matters that may arise during evaluation.

Communications during the tender period

2.27
Communication with prospective suppliers during the tender period needs to be carefully managed. Public organisations should document the controls they have in place for tender communications and submissions to ensure that all interested parties have fair, confidential, and timely access to information. Communication is also an important factor in market and supplier confidence.

2.28
In our assurance reviews, we saw that managing communications with respondents often was an area of good practice.

2.29
For example, one public organisation had comprehensive protocols and used an electronic file-sharing tool and a communications log to carefully manage how and when information was shared with respondents. This ensured that all respondents were treated fairly.

Exemptions from open tendering

2.30
In some situations, public organisations can be exempt from open tendering. This is covered by the Rules.32 Where an exemption applies, it is important that organisations clearly record the reasons for the exemption.

2.31
For example, an exemption from open tendering can apply when, for technical reasons, there would be no real competition during an open tender process. We saw this exemption applied when Wellington City Council procured structural engineering services for the repair of Wellington Central Library. The Council considered that a direct procurement using a closed tender process was the best option because one supplier held unique technical knowledge that would have meant there would have been no real competition during an open tender.

2.32
Wellington City Council took appropriate steps to consider how it wanted to strengthen the library, engaged the market about how that solution might be delivered, selected the provider in line with the Rules, and documented its decision. That is good practice, even though, like other local authorities, the Council was not required to follow the Rules.33

2.33
In another example, the Ministry of Health applied an exemption from open tendering to procure an immunisation register for Covid-19, on the basis that it was an emergency. The Ministry sought retrospective approval for this approach, as allowed by the Rules.

2.34
Our work has also identified situations where better consideration is needed of the whole-of-life value of the goods or services being procured before moving to direct sourcing for seemingly smaller-value contracts.

2.35
In early 2023, we wrote about the direct procurement of consultancy services for the Levin landfill by Horowhenua District Council. When the consultants were first engaged the expected costs were a maximum of $20,000. The initial work led to further work which was undertaken by the same consultants. Eventually the consultants were paid nearly $900,000 for services in relation to the landfill. The procurement approach did not adhere to the Council's procurement policies given the total potential contract value over time.34

2.36
Under the Rules, public organisations are required to publish a contract award notice on the Government Electronic Tender Service. Publishing contract award notices supports transparency and is particularly important when a procurement was not openly advertised.

2.37
This aspect of compliance needs considerable improvement. In our work on emergency procurement, 94% of emergency procurements we examined from six agencies between June 2018 and July 2022 did not publish a contract award notice on the Government Electronic Tender Service.35

Setting up panels of suppliers

2.38
One way that public organisations can manage procurement is by setting up a panel of suppliers. This is a list of suppliers that have been pre-selected and have agreed to the terms and conditions of supply.

2.39
To get the best outcomes from panels of suppliers, public organisations need to:

  • be confident that a panel is the best procurement option; and
  • follow the Rules when setting up and using panels.

2.40
In 2020, we surveyed public organisations that are mandated or encouraged to comply with the Rules about their use of supplier panels. Nearly all the organisations that responded were using all-of-Government panels for some goods and services, and just under half had also set up their own supplier panels.

2.41
After the survey, we looked in more depth at the way four public organisations were using their own supplier panels. All four public organisations needed to improve how they managed relationships with suppliers.

2.42
The public organisations needed to be more transparent about the nature and level of procurement going through each panel. This involves sharing information, such as who else is on the panel, upcoming work, and who has been awarded work.

2.43
The organisations also needed to improve how they monitored each panel's performance. This should include monitoring supplier performance, considering whether a panel is achieving intended benefits, and identifying where improvements are needed.36

Manage

2.44
Procurement does not end when a contract is signed – the final stages of the procurement include managing contracts and relationships with suppliers and ensuring that the outcomes and benefits of the procurement are achieved.

2.45
Good contract management helps to ensure that suppliers are delivering what has been agreed and paid for and helps organisations assess whether the procurement has achieved value for money.

2.46
Examples of good contract management practices that we have seen in our work include:

  • good policy direction and guidance about contract management expectations and requirements;
  • clear roles and responsibilities at each contract stage, with evidence of reviews and approvals such as checklists and guidance;
  • robust monitoring and review processes to manage the receipt and review of contract reporting and help monitor supplier performance;
  • regular supplier meetings to discuss performance, address concerns, and share intelligence relevant to the contract; and;
  • documentation of these meetings, with documentation provided to all parties.

Supplier management

2.47
In our 2021 performance audit of strategic suppliers, we heard that suppliers considered good relationship management important for achieving procurement outcomes, getting the best value, and managing risks. However, suppliers also told us that many public organisations take a more transactional approach instead of a relationship-based one.37

2.48
In 2018, we saw that Inland Revenue has regular meetings with its most important suppliers to discuss the supplier's performance based on feedback from Inland Revenue staff, which it uses to identify risks and areas for improvement.

2.49
Staff at Inland Revenue told us that this approach helps to get the best performance from suppliers and identifies problems before they become serious.38 Suppliers told us that they see value in this open, regular, and structured way of working, for similar reasons.

2.50
In our 2020 report about network outcome contracts at New Zealand Transport Agency Waka Kotahi, we saw that Waka Kotahi ensured that it had regular engagement with suppliers through the management and governance structure that provides oversight of the contracts. Within this structure, Waka Kotahi and suppliers work together to monitor performance, manage risks, and build effective relationships. We found that this approach was becoming more effective over time.39

Contract management

2.51
We have also seen cases where contract management needs to be improved. In our annual audit support work between mid-2019 and mid-2022, 61% of the 150 procurements that we looked at needed to improve their contract management. These included cases where:

  • there were no contract management plans for significant contracts;
  • there was no contracts register or system to track important details for contracts;
  • contract extensions were offered without sufficient supporting information to demonstrate clear consideration of the reasons for an extension;
  • contracts and/or variations were agreed verbally, or were not fully signed by both parties before work began;
  • services were provided under an expired contract;
  • public organisations were not measuring supplier performance;
  • public organisations were not providing formal written feedback to suppliers about poor performance; and
  • there was a lack of reporting, advice, or escalation to management about risks or performance issues.

2.52
It is not uncommon when managing procurement for there to be reasons to extend contracts. In such situations though, careful consideration needs to be given to maintaining the elements of good procurement. The extension and rollover of contracts without proper consideration can create many of the same issues already covered in this report.

2.53
There is significant room for improvement in the way that many public organisations manage contracts. Even simple improvements such as a comprehensive contract register would support more trust and confidence in public sector procurement and help to ensure that public organisations are getting good value when they spend public money.

24: New Zealand Government Procurement, Guide to procurement, at procurement.govt.nz.

25: Controller and Auditor-General (2023), How well public organisations are supporting Whānau Ora and whānau-centred approaches, at oag.parliament.nz.

26: Controller and Auditor-General (2018), Inland Revenue Department: Procurement for the Business Transformation programme, at oag.parliament.nz.

27: Controller and Auditor-General (2021), Preparations for the nationwide roll-out of the Covid-19 vaccine, at oag.parliament.nz.

28: Controller and Auditor-General (2021), Tauranga City Council car park building project, at oag.parliament.nz.

29: Controller and Auditor-General (2020), Local government procurement, at oag.parliament.nz.

30: Controller and Auditor-General (2021), Strategic suppliers: Understanding and managing the risks of service disruption, at oag.parliament.nz.

31: Controller and Auditor-General (2024), Procurement of services by the University of Waikato, at oag.parliament.nz.

32: Exemptions from the requirement to openly advertise an opportunity are covered by Rule 14.

33: Controller and Auditor-General (2022), Project Te Matapihi: Structural engineering services for the central library, at oag.parliament.nz.

34: Controller and Auditor-General (2023), Engagement of consultants by Horowhenua District Council, at oag.parliament.nz.

35: Controller and Auditor-General (2023), Getting it right: Supporting integrity in emergency procurement, at oag.parliament.nz.

36: Controller and Auditor-General (2020), Getting the best from panels of suppliers, at oag.parliament.nz.

37: Controller and Auditor-General (2021), Strategic suppliers: Understanding and managing the risks of service disruption, at oag.parliament.nz.

38: Controller and Auditor-General (2018), Inland Revenue Department: Procurement for the Business Transformation programme, at oag.parliament.nz.

39: Controller and Auditor-General (2020), New Zealand Transport Agency: Maintaining state highways through Network Outcomes Contracts, at oag.parliament.nz.