The NSW Procurement Board aims to ‘ensure best value for money in the procurement of goods and services by and for government agencies’ under section 171 of the Public Works and Procurement Act 1912 (the Act),
Achieving value for money underpins responsible financial management and is an important element in the NSW Government’s procurement scheme.
Using this Statement
This Statement is provided to assist procurement decision-makers, at the procurement planning stage, to make informed and supportable decisions on what constitutes ‘value for money’.
It is recognised that it is not always possible to identify or quantify all benefits and costs associated with a procurement activity. Decision-makers may build value for money assessments on assumptions using available information, such as past performance or usage, if benefits and costs cannot be immediately quantified.
The examples provided in this Statement should be used for guidance only. Each procurement activity is unique and decision-makers should exercise judgment in considering individual value for money considerations.
Agencies will achieve greatest value for money if procurement planning involves a rigorous approach to the determination of benefits and costs.
What is value for money?
Value for money is the difference between the total benefit derived from a good or a service against its total cost, when assessed over the period the goods or services are to be used.
Value for money = Total lifetime benefit – total lifetime cost
Benefits, costs and risks include money and non-monetary factors. A key challenge in the planning stage of every procurement activity is identifying benefits and costs and then estimating an equivalent monetary amount or other value weighting. Most non-monetary factors can be translated into monetary amounts, while others cannot. These factors still remain relevant to the assessment of value for money.
Achieving value for money does not always mean that the ‘highest quality’ good or service is selected. A lower cost option that meets quality requirements may be appropriate where an agency has limited funds available for a particular procurement. Value for money is achieved when the ‘right sized’ procurement solution is selected to meet an agency’s need.
Identifying benefits, costs and risks when determining value for money
There are at least three broad types of benefits, costs and risks which should be considered at the procurement planning stage when assessing value for money. These are:
- after-purchase and
Up-front benefits, costs and risks
These benefits, costs and risks are often the easiest to identify. However, focusing solely on upfront benefits, costs and risks does not provide a robust understanding of value for money.
Beyond an assessment of the initial price being paid for a good or service, agencies should also consider:
- Savings – Verifiable reductions in existing expenditure if a procurement action proceeds. If savings are claimed, they must be clearly identified so that any later review can determine whether they have been achieved.
- Revenue changes – Incremental revenues resulting directly or indirectly from a particular procurement action. Revenue changes which would have occurred regardless of the procurement cannot be included.
- Avoided costs – Incremental costs that are unavoidable if nothing is done to solve a particular problem, but may be avoided if a procurement action is taken.
- Transitioning-in costs – This includes direct and indirect commissioning and technical costs associated with the purchase.
- Risks – This includes risks of the procurement activity itself, in addition to commercial, delivery and business continuity risks.
After-purchase benefits, costs and risks
These types of benefits and costs are sometimes called whole-of-life, whole-of-contract or total benefit/cost of ownership. They are often easier to identify when procuring services, rather than goods.
Beyond an assessment of recurrent costs (such as rentals, license fees etc), agencies should also consider:
- Contract period – The anticipated benefits and costs are not guaranteed to remain constant throughout the term of a contract. Benefits in absolute and relative terms may reduce if technologies or agency preferences change throughout the period of the contract.
- Transactional costs associated with performance of the contract – Agencies should consider ongoing costs associated with inspections or verifications that the goods and services are being delivered according to the contract’s terms.
- Transitioning-out– This includes remediation costs and residual benefits accruing to an agency after completion of the contract.
- Contingency costs – This includes early termination fees, and costs associated with remedying any failure of the supplier to perform the contract.
- Contract management risks – This includes failure to supply, business continuity risks and reputational risks.
Fitness-for-purpose benefits, costs and risks
These are usually the least well-considered in procurement activities. Many fitness-for-purpose benefits and costs are considered to be ‘non-price’ elements of the assessment of value for money.
When assessing fitness-for-purpose, agencies should consider:
- Applicable government-wide procurement policies. Procurement of goods and services should not be inconsistent with these policies (for example, the promotion of competition).
- The capability of the good or service to meet the precise identified need. Assess whether adjustments are required to the good or service and the associated costs. Goods or services should not deliver more than what is required to meet the precise identified need.
- Compliance with specifications and/or standards associated with the goods or services being purchased.
- The capacity of the supplier to deliver the good or service. Agencies should consider a supplier’s reputation, availability and performance history. Be careful not to double count benefits or costs in this category that have already been assessed as contingency benefits and costs.
- The flexibility and adaptability in the goods and services over the life cycle of the procurement. This includes the scope for benefits and costs to arise from process improvement, plus adaption and innovation during the delivery of the goods or services.
Assessing benefits, costs and risks when determining value for money
Once benefits and costs are identified, it is necessary to assess the equivalent money value where practicable.
Agencies should be aware that:
- Every procurement activity has an opportunity cost. What opportunities are forgone by this procurement to apply scarce resources to another need or issue?
- All relevant benefit and cost items that can be identified, quantified or estimated must be included.
- Agencies should not concentrate on the benefits and ignore the costs when considering benefits and costs that cannot be valued or quantified.
- Benefits and costs should be assessed for the entire period of expected use of the good or service.
- Benefits to the broader community from a procurement activity may only be included in the assessment of value for money if:
- there is a clear community benefit that aligns with government policies or programs
- the value to the NSW economy can be assessed, which primarily occurs on large value procurements.
- Benefits and costs are not always commodity-based. For example, value for money may be achieved if purchasing webcams and/or teleconferencing equipment reduces an agency’s travel expenditure. However, attempts should be made to quantify such benefits wherever possible during the procurement planning process.
Citizen engagement strategies can assist in assessing value for money
Agencies often procure goods and services that are used or consumed by our citizens. In these cases, agencies should consider consulting with customers when determining the relative value of competing goods or services.
Citizen engagement can gather informed feedback on a range of shortlisted goods or services. This feedback can then be used in the procurement assessment, balanced with other factors.
Citizen engagement must be undertaken in a valid and robust manner. The agency must be satisfied that there is no realistic opportunity for a potential supplier to influence the outcome. Agencies should test a number of options (not just the preferred alternative) against pre-set criteria. A control group should be considered in all market tests to set baseline data for assessment.
Assessing value from innovation and the collaborative economy
Collaborative economy services and other emerging, disruptive technologies have the potential to provide flexible, cost effective and convenient alternatives to traditional procurement activities. When assessing the value for money, agencies should consider:
- Innovative solutions presented by collaborative economy goods and services (or other disruptive digital platforms) and whether they have the potential to increase benefits and reduce costs over the period the goods or services are to be utilised.
- How purchasing goods and services through collaborative economy platforms may be an alternative to traditional purchasing arrangements.
- How the collaborative economy has potential to extend the value of underutilised assets.
This Statement is provided to help procurement decision-makers to make informed and supportable decisions about value for money when planning procurement of goods and services.
Identifying value for money is sometimes a complex task. Agencies should consider at least three broad types of benefits, costs and risks during the planning stage: up-front, after-purchase, and fitness-of-purpose.
It is necessary to assess the equivalent money value of identified risks, costs and benefits (where practicable). Value for money is more likely to be achieved by making an informed and supportable decision about these benefits, costs and risks.
This document should be used in conjunction with other relevant policies and guidelines, including but not limited to:
NSW Government Guide to Cost-Benefit Analysis (TPP17-03) (PDF,1.4MB)
Total Asset Management (TPP13-03)
The following documents may provide further insight into the concept of value for money: