PC 03/3 - Evaluating Options in Procurement Contracts
Purpose
This Circular confirms that the core principle of value for money in procurement applies to the consideration of options in materially important procurement contracts.
Background
The Commonwealth Procurement Guidelines (CPGs) are issued by the Minister for Finance and Administration, under Regulation 7 of the Financial Management and Accountability Regulations 1997 (FMA regulations), about matters relating to the procurement of property and services, including ‘matters affecting Commonwealth contracts or agency agreements'. Officials performing duties in relation to the procurement of property or services must have regard to the CPGs under FMA regulation 8 [
].
The CPGs require agencies to achieve value for money in all aspects of their procurement. Value for money is evaluated on a whole-of-life basis, and takes into consideration factors such as:
- the procurement method adopted;
- the relative risk of the proposal;
- the maturity of the market;
- the performance history of the prospective suppliers;
- financial considerations, taking into account all relevant benefits and costs over the whole procurement cycle;
- the anticipated price that could be obtained at the point of disposal; and
- the evaluation of contract options.
Value for money and the consideration of options
For the purposes of this Circular, an option is a right, exercisable by one or more of the parties to a contract, to demand fulfilment of the right under certain specified conditions. In order for the right to be invoked, the option must be ‘exercised' in accordance with the terms specified in the contract. The terms of a specific option will determine precisely what the parties may or may not do.
In general, the opportunity to exercise an option in an existing contract is a procurement related decision creating potential economic benefits and costs. As such, the core procurement principle of value for money applies.
When considering whether or not to exercise an option, officials should conduct a process appropriate to the size, scope and risk profile of the procurement to:
- assess the value of exercising the option and the value of sufficient alternative procurement outcomes to select the outcome that represents best value for the Australian Government; and
- identify and compare, as far as possible, all relevant risks, costs and benefits on a common basis over the whole procurement cycle.
When managing contracts with options, agencies should ensure that sufficient time is allowed to consult with all relevant parties, gather the information required and conduct an appropriate value for money assessment. Where Ministerial involvement is required, agencies should ensure they provide advice on exercising options to Ministers giving sufficient time for consultation and consideration of that advice.
Responsibilities of Agency Chief Executives
Chief Executives are required by section 44 of the Financial Management and Accountability Act 1997 [] to manage the affairs of their agencies in a way that promotes the efficient, effective and ethical use of the resources for which they are responsible. A Chief Executive may address elements of the framework through the Chief Executive's Instructions (CEIs) if there is a need for additional guidance, whether or not the matter is referenced in the CPGs.
Chief Executives should consider providing advice to their agencies on the specific procedures to be followed when considering options in contracts and developing, within agency contract registers, a schedule of contract options to assist in the effective and timely assessment of those options.
Further information
Australian Government procurement policy is detailed in the Commonwealth Procurement Guidelines.
Information on the specific practices and procedures to be followed when engaged in duties related to procurement will be found in the relevant agency's CEIs.
Contacts
For assistance regarding Australian Government procurement policies and the assessment of value for money please visit Finance's website at www.finance.gov.au (under the Government Finances menu).
Mike Loudon
Branch Manager
Procurement Branch
Financial Management Group
Department of Finance and Administration
13 October 2003
Contact for information on this page: Procurement Agency Advice