Failure to launch: Defence misses contract savings


A new contract model to provide services on Department of Defence bases is not just unlikely to meet its target of $1.1 billion in savings, but may not lower costs at all, an audit report has found.

If expenditure continues on its current path, two years into the ten-year contracts, it is likely that spending under the new model will prove no different to the former contracts, according to the Australian National Audit Office.

The ANAO report, released Wednesday, outlines shortfalls across a wide range of aspects of Defence’s handling of the decision to replace 21 regional contracts for base services via a single tender process, resulting in 10 consolidated contracts.

The process included a projected $1.1 billion budget reduction over 10 years for base services. But actual expenditures have been higher than estimated — Defence spent 23% more on base services than the negotiated amount last financial year. It was unable to explain the reasons for the cost blowout to the auditors.

Governance frameworks unfinished

Many of the contract management and governance frameworks to help guide implementation are still not in place, despite the contracts already being in operation for two years, leaving staff to figure out their own ways of managing some parts of the contracts.

There were “shortcomings” in training arrangements for staff involved with the base services contracts “resulting from poor communication and implementation by Defence and failure by responsible staff to proactively access the training resources provided”, the auditor notes.

Defence also “has not fully implemented a consistent and structured approach to assure itself over contractor performance.” Performance assurance instructions for contract management personnel remain in draft form, for example.

In the absence of clear instructions and guidance for implementing the contracts, managers have developed their own, local approaches to assuring contractor service performance, but an internal Defence audit this year concluded that existing processes do not provide adequate assurance that the self-assessment results provided by contractors are a fair and reasonable reflection of the actual performance standards delivered.

The deployment of a new estate management IT system, intended to support contract administration at Defence’s 700 leased or owned properties, is also running a full third over budget and five years late. The interim IT system “has limited functionality” and does not support service providers to effectively communicate the status of work orders to Defence customers or enable Defence to collect and analyse relevant data, the auditor argues.

Transition botched

The department’s management of the “complex” transition to the new contract model was “not effective”, says the ANAO report, noting that Defence is unable to demonstrate how the new model has achieved its objective of saving money.

The transition was poorly handled. “There was a 12-month delay in finalising the tender but the completion date for transition was not adjusted accordingly. As a consequence the transition times were reduced from 18 months to three months,” the auditor argues.

There was a failure to learn from problems and apply that knowledge, with issues identified by Defence in the initial roll out phase recurring in subsequent phases. Examples include new contract standards being interpreted locally and inconsistently, communications materials containing incorrect information about the provision of services under the new contracts, and new contractors not being staffed to the required numbers.

It didn’t help that Defence did a bad job at assisting tenderers to plan.

“Defence was aware of the risk that data in its tender data packs might not accurately reflect ongoing changes to the Defence estate, and this risk was realised when inaccurate data caused difficulties for successful tenderers during the transition and subsequently. The full scope of the services expected to be delivered often differed from the basis on which firms had made their bids,” says ANAO.

Demand surge raised costs, says Defence

Defence does not agree with ANAO that the new contracts have failed to achieve any savings, arguing that increased demand is responsible for the lack of a fall in costs:

“The changing strategic context of the Defence business directly impacts the demand on base services, and consequently, the costs of these services. For example, the program for future capability builds, demands an increased service delivery capability response. This places increasing demand on our services and bottom line expenditure,” the department says.

“Defence is of the view that the Base Services contracts have resulted in a lower cost to Defence for the increased base service demands than if this increased output had occurred under previous arrangements.”

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