This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In 2018, Australia’s Auditor-General released three reports that found weak long-term life cycle planning in major procurements that involved government office leasing, patrol ships, and fighter jets.
In its October 2018 report entitled Management of Commonwealth Leased Office Property, the Auditor-General found that the government needed to implement better tracking systems to monitor the savings associated with transitioning from owned to leased government offices under a program known as “Operation Tetris”. As the report noted, in the government’s non-military domestic property portfolio, “94 per cent of office accommodation is leased rather than owned” and that in 2016 to 2017, the “expenditure on leased office property (excluding capital costs) was around $2 billion.” While the Auditor-General found that Operation Tetris saved the government money, it also found that the government needed to improve its method of tracking those savings:
Finance’s program of work on leased office property has reduced surplus office space, established coordinated procurement arrangements for property services and improved the collection of property data. It is evident that efficiencies and savings have been realised from this work, but Finance’s approach to estimating and tracking savings was not robust.
Operation Tetris has been effective in delivering better utilisation of existing Commonwealth office space, mainly in the Australian Capital Territory. The reported $300 million in savings to entities was not supported by a sound methodology.
In fact, the report found that the government was unable to reliably substantiate whether it was achieving its targeted savings through the new rental program:
The analysis undertaken by the ANAO and the data supplied by Finance reinforces that there would have been merit in more robust tracking and verification of moves as they occurred. This would have informed advice to the Minister on the extent to which the publicised savings estimates were being realised. As a case in point, Finance’s original savings estimate for DVA’s move into the ATO’s leased premises in Canberra ($49 million over ten years) was higher than the savings indicated by the ANAO’s analysis ($33.1 million) and by Finance’s subsequent estimate provided in September 2018 ($35.5 million). All three estimates were also significantly lower than the $84 million in efficiencies announced for this move in March 2014.15 The announced efficiencies of $84 million was based on a 17 year lease term, which included two optional five-year extension periods.
While Operation Tetris has now concluded, the ANAO has recommended that Finance ensure its ongoing program of work to deliver savings and efficiencies on Commonwealth leased office property is supported by a robust and transparent savings methodology. This includes verifying estimates when actual data is available — a key task that was not done well on Operation Tetris.
The Auditor-General also found that the government’s methods for tracking savings were established retroactively after the program was implemented, rather than being proactively integrated into the initial planning of the procurement process:
Finance’s advice to government was not supported by robust analysis and evidence during the main decision-making process to establish a coordinated procurement for property services. In particular, Finance did not test the savings claims made by industry against entities’ property arrangements. A more structured approach for allocating the specified total quantum of savings was developed after the new arrangements were implemented, although the estimated savings used for allocative purposes relate largely to changes in market rents and reflecting the occupational density target rather than from the aggregation of government purchasing power.
As this report illustrates, the failure to proactively plan long-term contract monitoring practices undermines the government’s ability to prove whether it achieved its original program objectives.
In its December 2018 report entitled Cape Class Patrol Boat — In Service Support Arrangements, the Auditor-General found weak post-delivery contract management practices for Australia’s fleet of patrol boats. By way of background, the report noted that “the government provided $573.6 million over 10 years for the acquisition and operating costs (including crew, maintenance and fuel) for a fleet of eight larger and more capable patrol boats to replace the ageing Bay Class vessels” and that these vessels were required to “perform strategic patrols and provide tactical surveillance and enforcement capabilities to address maritime security threats within and beyond Australia’s 200 nautical mile Exclusive Economic Zone”.
While it found that the government successfully managed a high volume of final acceptance issues after taking delivery of the ships, the Auditor-General also found that the government failed to implement a contract management framework to properly transition to the post-delivery phase of the project:
However, in early 2018, the department established a remediation program to improve contract management arrangements, and has made progress in each of these categories. Notwithstanding this, the department has further work to do before contract management could be considered to be effective. Performance management processes have been designed to broadly align with those set out in the contract, however the performance management framework has not been implemented as set out in the contract. As at October 2018, the application and calculation methodology of the abatement regime is being reviewed as part of an ongoing dispute resolution process.
The department’s arrangements to provide support to operations are partially effective. The department is developing but has not yet implemented appropriate workforce arrangements, contract management requires improvement, and the effectiveness of budget management has been constrained as the department is not yet well placed to accurately estimate, forecast, and control costs to operate and provide in-service support to the Cape Class patrol boats.
As the Auditor-General advised, public institutions embarking on long-term procurements should proactively plan for the life cycle management of their requirements by taking “a proactive role in contract management to ensure that the expected benefits are realised throughout the life of the project”. Furthermore, the Auditor-General advised that government institutions “should ensure that performance monitoring and reporting arrangements meet the needs of stakeholders” so as to better support effective service delivery.
Finally, in its December 2018 report entitled Joint Strike Fighter – Introduction into Service and Sustainment Planning, the Auditor-General determined that the government’s management of the F-35 fighter jet program remained a work-in-progress. As the report noted, Australia’s “Department of Defence (Defence) anticipates the arrival in Australia of the first two of 72 F-35A Joint Strike Fighter (JSF) aircraft in December 2018” and that these new fighter jets “will replace the Royal Australian Air Force’s ageing F/A-18 A/B Classic Hornet aircraft” by 2023. However, the report raised concerns about long-term maintenance plans for the fighter jets, the availability of spare parts, and related costs, concluding that the “JSF sustainment cannot be fully costed until the Global Support Solution further matures”. In other words, the strategy to ensure the availability of spare parts for the fighter jets remained a work-in-progress:
To sustain its JSF aircraft, Defence is dependent on a spare parts supply system that is not fully developed, and is currently experiencing shortages due to competition for parts as the global JSF aircraft fleet increases. Defence expects that these shortages will continue beyond the transition of JSF Aircraft into Australian service. Defence has recognised that supply shortages are a risk to the JSF aircraft’s introduction into Australian service, and is largely dependent on the solutions the F-35 JPO is putting in place to increase the availability of spare parts for the global JSF aircraft fleet.
To mitigate against similar future risks, the Auditor-General recommended that public institutions establish project teams that include personnel with the necessary skills and experience to help mitigate risks involved in the planning and delivery of complex projects. The report also stated that “early planning, particularly for complex programs, supports decision makers to identify and implement the most effective ways to achieve outcomes.”
As this case study illustrates, rather than waiting until after delivery to establish ad hoc strategies to mange their long-term assets, project teams should integrate long-term life cycle planning into their initial procurement planning to better mitigate the risks associated with the maintenance of expensive assets.
