New Commonwealth Procurement Rules: Making way for SMEs

Summary of changes

The updates cover:

1. in the planning of proposed procurements that encourage competition and are non-discriminatory, and provide appropriate opportunities for SMEs to compete, officials should in the context of achieving value for money, inter alia, consider: ‘the potential benefits of having a larger, more competitive supplier base, including the disaggregation of large projects into smaller packages, where appropriate, that maximise competition’;
2. limiting insurance requirements in contracts to reflect the actual risk borne by suppliers under the contract liability caps;
3. not requiring suppliers to take out required insurance cover until a contract is to be awarded;
4. extension of the Commonwealth Supplier Pay On-Time or Pay Interest Policy⁴ (Pay On-Time Policy) for payments by non-corporate Commonwealth entities to all suppliers under Commonwealth contracts;
5. providing an exemption from Division 2 of the CPRs for Department of Defence procurements up to $500,000 in value; and
6. requiring compliance with Commonwealth ‘procurement connected policies’.

There is no change in the core rule of the CPRs – achieving a value for money outcome from a procurement, and that procurements should:

• encourage competition and be non-discriminatory;
• use public resources in an efficient, effective, economical and ethical manner that is not inconsistent with Commonwealth policies;
• facilitate accountable and transparent decision making;
• encourage appropriate engagement with risk; and
• be commensurate with the scale and scope of the business requirement.⁵

It also remains of fundamental importance that in assessing value for money in relation to submissions from potential suppliers, officials must consider the relevant financial and non-financial costs and benefits.⁶

Encouraging procurements from SMEs

 CPR 5.5 currently provides that to ensure SMEs can engage in fair competition for Government procurements, officials should apply procurement procedures that do not unfairly discriminate against SMEs and provide appropriate opportunities for SMEs to compete. Officials ‘should’ consider in the context of value for money:

a. the benefits of engaging competitive SMEs when specifying requirements and evaluating value for money;

b. barriers to entry, such as costly preparation of submissions, that may prevent SMEs from competing; 

c. SMEs’ capabilities and their commitment to local or regional markets; and

d. the potential benefits of having a larger, more competitive supplier base.

The updated CPR 5.5d. now includes the additional consideration of the possibility of designing the procurement process to involve the ‘disaggregation of large projects into smaller packages, where appropriate, that maximise competition’.

This change and the then Minister’s statement in the Foreword emphasise the importance of the design of the procurement process. Rather than proceeding on a standard course in line with previous practice, the Minister stated that the updated CPRs ‘emphasise the importance of procurement approaches that are open to innovative solutions’.
In designing a procurement process that will achieve a value for money outcome and demonstrate implementation of the various CPRs, including the updated CPR 5.5, officials will need to understand the market for the potential supplies. This will often require early engagement with industry to assess:

• the technical capabilities of the potential suppliers;
• the degree of competition in the market; 
• potential risks and issues that may arise; and
• the options for the type of procurement process and the benefits and costs involved.7

While encouraging competition is a key element of the CPRs, officials should still consider the costs involved (for the Commonwealth and potential suppliers) in a proposed process to ensure the one chosen is commensurate with the scale, scope and risk involved.

Early engagement with potential suppliers enables procurement processes to be developed that address the particular characteristics of the supplier market and assist in delivering a value for money outcome.⁸

Splitting a large project into smaller procurements is one option that officials should now consider in developing a procurement plan. This may bring the opportunity for greater competition for various supplies and provide the Commonwealth with the opportunity to gain lower prices than may be the case with a process involving only a few suppliers, or a sole supplier. Other potential benefits may be that such a process will result in development of sovereign capabilities and more reliable supply chains. However, there will be costs involved in the development and administration of a number of procurement processes instead of one. Similarly, there may be other risks that need to be addressed when considering the option e.g. control of relevant patent or other IP rights; responsibility for integration of different supplies, etc.

The two options identified for disaggregation are: 

• a single approach to market allowing responses to one or more categories of the supplies; and
• separate approaches to market in respect of the different supplies by the tenderers.⁹

Importantly, a procurement must not be split into smaller procurements solely to avoid relevant procurement thresholds referred to in the CPRs.¹⁰

Examples of disaggregated procurement - Defence naval shipbuilding

Defence is undertaking a number of large procurements involving the construction, outfitting and sustainment of new naval vessels. In recent years Defence (CASG - Naval Construction Branch) developed new procurement arrangements for various supplies required in the outfitting and ongoing support of ships such as the Air Warfare Destroyers (DDGs) and supply ships. One involved a single approach to market through a Request for Tender (RFT) allowing tenderers to respond in respect of one or more categories of supplies. The other involved separate RFTs for different supplies (or in some cases categories).

1.1 DDG construction and outfitting

The outfitting of the DDGs involved supply of the On Board Allowance items - before the ships could sail, approximately 3000 different items ranging from hoses, fire extinguishers and rescue equipment, to oils, batteries, tools, kitchen and bedding supplies, to name a few, were required to be delivered.

This procurement could be left to the prime contractor under the build contract, or Defence to purchase the different items from individual suppliers in an ad hoc and largely uncoordinated manner, or through one-off RFTs.

Here, Defence considered the overall procurement of these items on a planned basis and undertook:

• market analysis of the supplies – including through engagement with potential suppliers and provision of information to them, assessment of their ability to meet required standards and other important requirements (e.g. delivery times), their level of interest and likely degree of competition; 
• grouping of various supplies into categories - depending on types of items, interest of potential suppliers and Defence inventory requirements - with the aim of having manageable categories of items, supply of which could be the subject of competition amongst potential suppliers; 
• ensuring that Navy standards as to ‘fit, form and function’ of the supplies were satisfied - while specifying Australian or other industry standards if they met Navy requirements (rather than e.g. NATO standards which may be expensive for some SMEs to meet); and
• development of a suite of new tender and standard contract documentation for the various supplies, enabling potential suppliers to respond under a single RFT in respect of one or more of the eight categories into which the items were grouped, with Defence to select suppliers meeting specified requirements and tailored evaluation criteria.

This process was reflected in a coordinated approach to market and the undertaking of an efficient and effective series of competitive procurements.

Individual standing offer contracts were negotiated then entered into with little variation. Defence also emphasised in the RFT and contract terms the desire to establish long term collaborative relationships with the successful tenderers to assist the creation and improvement of effective supply chains.

This ‘category management’ approach taken by Defence has resulted in: efficient planning of relevant Defence needs; establishment of new supply chains for various categories of supplies under standard contract arrangements (also accessible by other parts of Defence); and involvement of a number of SMEs with agreed pricing established after competitive tender processes - leading to substantial overall cost reductions for Defence in item costs as well as in ongoing administration of supply arrangements, and the opportunity for continuous improvement through the establishment of collaborative and cooperative relationships.

This has enabled SMEs to participate in processes for procurement of these supplies while providing Defence with significant benefits ranging from pricing to improved supply chains and development of sovereign industry capability.

1.2 DDG Long Term Supply Project

The sustainment of the DDGs requires establishment of supply lines with Original Equipment Manufacturers (OEMs) or other suppliers, for many other items of platform and combat system equipment fitted to the ships. Numerous items are required in Naval stores as spares (or for urgent installation) in order to meet Navy operational requirements for these front-line ships.

Here too the procurement of these supplies involved detailed planning, including identifying the requirements of the Navy and hence the objectives of the process (which were reflected in the RFTs). The supplies were analysed, as were the potential suppliers - who were engaged to enable assessment of the relevant markets, their interest and issues. In some areas only a single OEM was identified - it having the specialist expertise and intellectual property in respect of the particular equipment. In other areas (e.g. air conditioning systems, valves, pumps, electrical equipment and pipes) categories of similar items or Defence specific requirements (e.g. repairable items) could be identified, as could the level of potential competition amongst suppliers, many of whom were SMEs. 

The potential suppliers expressed keen interest in the opportunity of entering long term relationships with Defence for these supplies rather than responding to ad hoc orders.

Given the different markets involved, separate RFTs were developed, but the ‘category management’ approach involving grouping of supplies where possible was also used, and then RFTs were issued on largely uniform terms with new tailored evaluation criteria and contract arrangements. 

The resulting contracts have enabled Defence to make substantial cost reductions as well as establish direct and collaborative relationships with suppliers leading to the development of improved supply chains and sovereign capability in some of the categories. Defence has retained the option to go to other potential suppliers if it considers it is not realising the benefits expected.

Numerous further opportunities exist for disaggregating the procurement of other supplies by Defence and other Commonwealth agencies, but in all cases the potential for benefits, as well as costs should first be analysed as part of the planning of the procurement. Obviously there will be circumstances where a single rather than a disaggregated procurement should be undertaken – e.g. where there is unlikely to be any real competition (maybe because the relevant intellectual property is ‘locked-up’ by one supplier), or the integration risks for the Commonwealth of the equipment and software are high, or the costs of competition offer no obvious benefits, or the resulting administration costs outweigh the benefits. However, there will be many cases where breaking up a large procurement will offer benefits. In all these cases officials need to ensure that to achieve the benefits on offer, the approach taken in disaggregating a project into smaller procurements is well planned, efficient and effective. This can take time so early attention to the options for the process is recommended.

Procurement insurance requirements

CPR 8 refers to the Commonwealth Risk Management Policy,¹¹  including giving effect to it through the allocation of risks in contracts awarded as part of a procurement (‘As a general principle, risks should be borne by the party best placed to manage them’).

In addressing risks and their allocation in contracts relevant entities will generally include a contractor obligation to effect and maintain a range of insurance policies. Some of these are likely to be standard policies that contractors will already have, while others will be established (or existing ones varied) to cover particular risks allocated to the contractor under the contract (e.g. transit insurance or public and products liability).

Updated CPR 8.4 provides that insurance requirements should be limited to reflect the actual risk borne by suppliers in contractual liability caps.
This amendment may seem minor. However, in the Foreword the then Minister stated that the updated CPRs require entities to ‘limit the extent of insurance and liability requirements, to reflect sufficient risk sharing while not imposing unreasonable or disproportionate risk transfer’.

Relevant entities will need to note the emphasis on the need to give effect to the existing wording in the CPRs i.e. ‘when a relevant entity is best placed to manage a particular risk, it should not seek to inappropriately transfer that risk to the supplier’. The Minister referred to entities limiting not only insurance, but also liability requirements of contractors to reflect appropriate risk sharing and to avoid ‘unreasonable or disproportionate risk transfer’.

Wholesale risk transfer and excessive insurance requirements can restrict the number of suppliers able to bid, which can negatively impact competition and run up project costs for the Commonwealth. Such approaches in contract terms may also lead over time to poor relationships between the Commonwealth and contractors who regard the risk burden they bear and the costs involved as unfair. In the context of particular issues they may become unwilling to share information and cooperate.

Extension of supplier pay on-time or pay interest policy

From 1 July 2022, non-corporate Commonwealth entities must make all payments to suppliers within the maximum payment terms under the Pay On-Time Policy - 5 calendar days for electronic invoicing (eInvoicing) or 20 calendar days in all other invoices following acknowledgement of delivery.

CPR 5.8 has been amended to remove the application of the Pay On-Time Policy to only contracts valued up to $1milion. This will ensure timely payment to SMEs, particularly by assisting with cash flows from head contractors to sub-contractors.

Exemption for Department of Defence

The updated CPRs will now exempt Department of Defence officials from being obliged to comply with Division 2 of the CPRs where the procurement of relevant goods or services is from an SME and is of a value up to $500,000. Otherwise, the general exemption for procurement from SMEs in respect of goods and services valued up to $200,000 still applies for other non-corporate Commonwealth entities. Division 1 obligations (except CPRs 4.7, 4.8 and 7.26) will still remain despite this exemption applying and the requirements of the Indigenous Procurement Policy must be satisfied before the exemption can apply.

Increasing this threshold exclusively for the Department of Defence is intended to assist with addressing national security concerns around Australian sovereign capability and supply chain resilience.

Compliance with procurement-connected policies

The updated CPR 4.9 will now make compliance with procurement-connected policies mandatory for non-corporate and prescribed Commonwealth entities where the policy is applicable to the procurement process. The procurement-connected policies are:¹²

• Payment Times Procurement Connected Policy;
• Black Economy Procurement Connected Policy – Increasing the integrity of government procurement;
• Indigenous Procurement Policy;
• Workplace Gender Equality Procurement Principles and User Guide;
• Australian Industry Participation Plans for Government Procurement; and
• Code for Tendering and Performance of Building Work 2016 (Building Code 2016).

Next steps

Relevant entities should start transitioning to the updated CPRs ahead of 1 July 2022.  Internal policies and procurement approaches should be reviewed to reflect these changes to the CPRs with a view to encouraging engagement of SMEs for procurements.

These changes follow from previous measures focused on promoting SMEs for procurements and building Australia’s sovereign capability. We expect that this focus will continue to be reinforced by the Australian Government in the future development of its procurement requirements.