12 Apr 2010

Is your direct sourcing justified?

by Alexandra Wedutenko, Georgia Weichert

The decision to use a direct sourcing approach must be justified.

Government agencies are often under pressure to procure goods and services in a short amount of time and in situations where the agency:

  • has a current contract in place but has exhausted all of the options to extend the contract;
  • is amending a contract to add new services; or
  • has no contract in place with any supplier.

All of these options raise direct sourcing issues. Agencies may be attracted to direct sourcing because it is quick. The agency does not need to comply with all requirements of the Commonwealth Procurement Guidelines (CPGs). They can approach the supplier of their choice.

The ANAO has found that "in the majority of cases where direct sourcing was used for procurements, the reason for adopting this approach was not justified and properly documented as required by the CPGs. In addition, many of the contract variations reviewed involved a significant change in scope but were not supported by an assessment to determine that the variation demonstrated value-for-money."[1]

Commonly, existing contracts are amended to add new services. However, that decision should be revisited to confirm whether:

  • the addition is permitted under the original procurement;
  • a direct source decision is being made; and
  • the procurement offers value for money.

When can an agency direct source and what does this involve?

The Department of Finance and Deregulation publication Financial Management Guidance No13: Guidance on the Mandatory Procurement Guidelines (FMGNo13) says that an agency must use open tendering for their procurement unless:

  • the procurement is not a covered procurement (ie.it is less than $80,000 or $9million for construction services);
  • an exemption to the Mandatory Procurement Procedures applies (these are set out at AppendixA to the CPGs); or
  • there are specific mitigating conditions.

The first exception is simple. The CPG exemptions referenced above are limited to a range of "unusual" acquisitions, grants, provision of foreign assistance, leasing or purchase of real property.

The third exception, "mitigating conditions", which are frequently used, are set out in paragraph8.33 of the CPGs. These conditions basically relate to situations where:

  • no responses were received to an approach to the market (including where no responses were received which represented value for money);
  • no responses were received that meet the minimum content and format requirements or conditions for participation as stated in the request documentation;
  • for reasons of extreme urgency brought about by unforeseen events, the goods or services could not be obtained in time under open tendering procedures;
  • the purchase would be made under exceptionally advantageous conditions that only arise in the very short term;
  • the goods or services can only be supplied by a particular business and there is no reasonable alternative or substitute;
  • the goods or services would be additional deliveries by the original supplier or authorised representative and are intended as either replacement parts, extensions or continuing services for existing equipment, software, services or installations and where a change of supplier would compel the agency to procure goods or services that do not meet requirements of compatibility with existing equipment or services;
  • the purchase is on a commodity market;
  • an agency procures a prototype or a "first" good or services;
  • the contract is awarded to the winner of a design contest; or
  • for certain new construction services.

If the procurement is a covered procurement, and no exemption to the Mandatory Procurement Procedures applies, direct sourcing is only permitted if one or more of these conditions is met. That is, if the answer is "Yes" to any of the direct sourcing conditions in paragraph8.33 of the CPGs, direct sourcing can be used.

Relevant considerations

Direct sourcing cannot be used to discriminate between suppliers. To this end, paragraph5.1 of the CPGs says that "competition is a key element of the Australian Government's procurement policy framework. Effective competition requires non‑discrimination in procurement and the use of competitive procurement processes."

So, an agency must not concoct a "Yes" to one of the above mitigating conditions to avoid going to market. If an agency does concoct a "Yes", it risks breaching the CPGs.

From 1July 2009, there is a mandatory requirement to act in accordance with the CPGs when performing duties in relation to procurement (regulation7(4) of the FMA Regulations).[2] However, neither the CPGs nor the FMA Regulations impose a penalty for failing to comply with them (see section64 of the FMA Act). If an agency chooses not to comply with the CPGs (for example, proceeding with an unjustified direct sourcing arrangement), a disgruntled vendor may commence or threaten an action challenging the procurement including for breach of statutory duty or misfeasance in public office. The agency and its chief executive office could also face reputational damage.

Further, the APS Code of Conduct requires employees to comply with all Australian laws when acting in the course of APS employment. As the CPGs are now law, failing to act in accordance with them is a breach of the Code of Conduct which could lead to disciplinary action, including termination of employment.

Points to remember

The decision to use a direct sourcing approach must be justified. The agency must document:

  • the value and nature of the procurement; and
  • the reasons that justify the use of a procedure other than an open or select tender process (see paragraph8.34 of CPGs).

To avoid unjustified direct sourcing, agencies should note that:

  • extending an existing contract could be direct sourcing;
  • direct sourcing can only be used in specific circumstances;
  • a direct sourcing decision must be justifiable and represent value for money; and
  • the general requirements of the CPGs still apply to direct sourcing.

[1] ANAO, Audit Reports 2006-2007, Implementation of the Revised Commonwealth Procurement Guidelines.

[2] The change was effected by Financial Management and Accountability Amendment Regulations 2009 (No4).

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.