Complex market engagement methods

The NSW Procurement Board issues this guideline to assist government agencies in using certain market engagement methods.

The following procurement methods are considered ‘complex’ for the purposes of this guideline:

  • reverse auctions
  • direct negotiations/sole sourcing
  • managed services contracts (MSCs)

These methods are considered to be complex on the basis that:

  • value for money can be more difficult to demonstrate
  • in contrast to the ‘non-complex’ methods which tend to involve larger sections of a market, there is a greater risk of unfairness and disadvantage (perceived or real)
  • traditionally these methods have been conducted less frequently by government, meaning there is an absence of good practice guidance, internal controls suitable to managing the risk associated with the method, and an absence of existing accountability measures
  • each has particular sensitivities and risk around process, probity, or suppliers (which are set out below).

Factors to be considered

In all cases, prior to adopting the use of a complex procurement method, the following general factors should be considered:

  • the nature of the goods or services being procured
  • the nature of the procurement method
  • the legislative, mandatory and discretionary policy obligations of government agencies
  • factors specific to the particular procurement method adopted. Where applicable these are set out in the guidelines linked to this document.

Mandatory requirements apply to the use of complex procurement methods.

Reverse auctions

In a reverse auction bids reduce in value as the auction progresses, rather than increase as they do in a traditional auction. These are more typically conducted through an electronic platform. Generally suppliers are prequalified and then gain access to the platform on which to ‘bid’. It is claimed that reverse auctions are becoming increasingly popular in some jurisdictions internationally, although it is noted that adoption has been slow in Australia, at least for government procurement.

Commentary on reverse auctions highlights that while this method is most amenable to price-only evaluation, depending on the nature of the procurement, effort needs to be directed towards broadening the evaluation criteria to take into account, for example, quality and reliability. Commentary also suggests that suppliers may be critical of the process (especially where evaluation is limited to price only, where small suppliers are forced from the market if they cannot compete on price alone, or where access to technology may restrict supplier participation). Reverse auctions are also associated with ‘bid-shopping’, in which a government agency trades-off one supplier’s price against another’s in order to reduce prices. It is for reasons such as the foregoing that the use of reverse auctions has traditionally been approached with caution.

Agencies should consider whether a reverse auction is suitable.

Direct negotiation/sole sourcing

Sole sourcing is the direct arrangement with a single supplier to provide goods or services, without firstly having conducted a competitive process. It can be otherwise referred to as a ‘direct negotiation’, ‘sole supplier’, ‘single-invited’ or ‘non-competed’ arrangement.  It differs to the appointment of a single supplier following the conduct of a competitive process, and does not include the appointment of a sole supplier where the value of the procurement is low (such as procurement in accordance with Board Direction 2012-02 where a government agency may purchase directly below $5,000).

Although the circumstances leading to a sole sourcing arrangement vary, a common reason is that the market consists of a single supplier. Government agencies should exercise a high degree of caution in determining that the market consists of a single supplier, or in artificially constructing a market based on articulation of the agency’s needs.

Agencies should consider whether a direct negotiation/sole source arrangement is suitable. Further guidance on planning and executing this method is available here in the ICAC direct negotiations guidelines for managing risks in direct negotiations.

Managed Services Contracts (MSCs)

The NSW Government ICT Strategy and the Procurement Board’s Strategic Directions Statement both highlight the need for a more flexible approach to the procurement of goods and services to meet current and emerging business needs. In the area of ICT, ‘as a service’ solutions are being considered as a preferable alternative to the traditional buy/build and internally manage procurement process.

Managed Services Contracts (MSCs) are increasingly commonplace in document copying and printing. MSCs bundle and outsource the provision of various services and shift the emphasis to the provision of a total service offering (sometimes incorporating the supply of specific equipment) for a specified term. 

When procuring goods and services by whatever means, all NSW Government agencies are required to ensure value-for-money is obtained. The focus is on ensuring that prudent investment and value for money is demonstrated.

The particular complexities associated with equipment financing arrangements incorporated into MSCs also warrants a rigorous value-for-money assessment when MSCs effectively procure assets within the services offering. 

MSCs need to be consistent with the approach taken in the Procurement Policy Framework and properly assess value-for–money, balance risk, recognise the greater freedoms and responsibilities now assigned to agencies (especially accredited agencies) and be consistent with the Procurement Board’s Value for Money Statement and approach to whole of government arrangements. 

Risks with MSCs can be minimised by ensuring:

  • the full price of the services is explicitly stated in the MSC agreement
  • it can be demonstrated that the full cost of an agreement, over the life of the agreement, is less than the cost of traditional arrangements
  • individual agreements do not diminish the State’s economies of scale achieved through whole of government (or otherwise) purchasing arrangements
  • agreements are required to consider the Public Authorities (Financial Arrangements) Act 1987 No 33, specifically with respect to finance leases, which can be embedded within agreements
  • residual value risks are assessed.

Agencies should give particular scrutiny in proposed MSCs where:

  • the private sector funds the capital acquisition cost of the equipment and the proposed service charges over the committed term of the MSC recoup all or substantially all the equipment’s upfront cost
  • the equipment is effectively dedicated to and used exclusively by the Agency over the equipment life
  • there are terms which result in significant penalty charges applying should the services contract be terminated early.

In these circumstances contractors could be asked to bid on two bases, being:

  1. The provision of services excluding the provision of the dedicated and exclusively used equipment and the direct and unavoidable costs associated  with ownership of the equipment (which may include asset management and insurance costs, and the costs of maintenance and support only provided by the manufacturer and unable to be purchased from the managed service provider).
  2. The provision of services, including the provision of the dedicated and exclusively used equipment.

Under this scenario, MSC bids under basis 2 would not only be considered against the current cost incurred by an agency for the provision of the service and equipment, but also the alternative of the cost of the pure services component in the MSC (basis 1), and the cost of providing the equipment and the direct and unavoidable costs associated with ownership of the equipment (including depreciation) at Government’s cost of funds.