Consultant procurement system is not working, says NSW auditor general

By David Donaldson

Wednesday September 5, 2018

NSW Procurement claims big savings for taxpayers, but compliance and reporting for the procurement of consultants in New South Wales is a mess according to Auditor General Margaret Crawford.

Spending is being under-reported, the rules are hard to follow, and the body tasked with overseeing the complex system — which includes a board, a direction, a circular, a portal and a framework — is doing a poor job, says the report released on Tuesday.

It examines 12 agencies’ compliance with procurement and reporting obligations for consultancy services.

“No participating agency materially complied with procurement requirements when engaging consultancy services,” Crawford concluded, adding that agencies define ‘consultants’ differently.

Big money

Consultancies are worth significant money — $1.4 billion was spent on the top 20 business advisory services suppliers in the last five years; $1.2 billion of that went to the top six.

Annual spending on consultants has increased by 83% over that period, as far as we know — it is difficult to quantify total government expenditure on consultants as agencies define ‘consultants’ differently, a problem that has been raised in the federal inquiry on consultants as well.

It’s sometimes difficult to know the difference between a consultant and a contractor (in case you’re wondering, the circular most agencies have been working from states that “generally, it is the advisory nature of the work that differentiates a consultant from other contractors”).

Transport for NSW was the biggest single spender, racking up $462 million in five years, which it puts down to its responsibilities delivering an “unprecedented” government infrastructure spend.

Deloitte was the highest earner, making $342 million over the five years, followed by Accenture and PwC on $256m and $242m respectively.

However, under the new system, NSW Procurement estimates savings of $19 million per annum based on expenditure data provided by suppliers, with a further $5 million per annum from category and demand management activities.

Difficulty complying

Those estimates may not be accurate however, as under-reporting is widespread, the auditor argues.

“We found that eight agencies under-reported consultancy expenditure in their 2016-17 annual reports,” said Crawford.

“Three agencies did not disclose consultancy fees capitalised in asset costs. One agency did not report consultancy expenditure incurred by its subsidiaries.”

The agencies responded that they found the Standard Commercial Framework, which was put in place to ensure value for money in the use of consultants, difficult to understand and comply with, and time-consuming to apply. Compliance was made more difficult by consulting firms either not providing all the necessary information, or not providing it in the right format.

Finance, Services & Innovation Secretary Martin Hoffman noted however, there are more than 1000 suppliers who have accepted framework, and only three non-compliant suppliers.

Both Boston Consulting Group and McKinsey are deemed “non-compliant” suppliers under the framework as they “do not comply with the standard terms and conditions, e.g. capped rates and discounts”, the auditor says — though BCG still made it into the top six by agency spend.

Steps in the right direction

Hoffman added the framework “has introduced a consistent approach to the procurement of services for the first time across NSW government agencies” and four key elements were identified and implemented as best practice by the Procurement Benefits Program:

  • Standardised definitions for engagement types and resource types;
  • Capped resource rates – a matrix of daily rates by engagement type and resource type;
  • Discount structure – a matrix of discount percentages by project duration and team size; and
  • Capped expenses – a table of expense types with maximum fees payable and a 7% total expenses cap for any individual project.

Oversight lacking

The report reviewed the effectiveness of the NSW Procurement Board, tasked with overseeing the system.

The auditor argues that the board, chaired by Hoffman, “is not fully effective in overseeing and supporting agencies’ procurement of consultancy services.” Its compliance monitoring and data reporting has been hampered by agencies’ need to self-report non-compliance, as well as a lack of quality data and systems limitations.

Hoffman, in his reply, says the DFSI agrees with the findings and the recommendations.

The agencies involved all argued that NSW Procurement could better support their procurement decisions by providing timely and tailored guidance.

Mark Scott, secretary of the Department of Education, wrote in his response to the auditor that “the department has endeavoured to adhere to implementing effective internal controls” but that the major consultancy portal used for reporting “was not a fit for purpose tool”. The direction on approval and reporting of consultancies “has had several changes in a short time frame”, which had made it difficult to communicate and implement in a large agency, Scott added.

Tim Reardon, head of the Department of Premier and Cabinet, committed to aligning the definition of consultant across government’s procurement and reporting, noting that some existing engagement types that are advisory in nature would likely fall outside the new definition.

The report recommends that NSW Procurement better understand agencies’ business needs and assist them to improve capability and accountability for procurement.

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