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Defence Procurement Policy Manual

1 July 2011

Mandatory Procurement Guidance for Defence and DMO Staff

Defence Procurement Policy Manual Foreword

Foreword
The Department of Defence conducts more procurement than almost any organisation in Australia. It comes as no surprise, then, to realise that procurement policy is an important foundation stone to our operations, particularly within the Defence Materiel Organisation. This role as a significant procuring agency has also been emphasised by the recent release of the 2009 report Defending Australia in the Asia Pacific Century: Force 2030 (The Defence White Paper) and the savings requirements outlined in the Strategic Reform Program. Given the ever increasing demands on Defence at all levels, clear and easily accessible procurement policy is more important than ever. The Defence Procurement Policy Manual (DPPM) is the primary reference document for all Defence officials involved in the procurement process and provides procurement officers and others involved in the procurement process with up to date mandatory policy and guidance. The DPPM is intended to be used in conjunction with other Defence documents such as the Defence and DMO CEIs and contracting templates. The authority for the DPPM comes from the Defence and DMO Chief Executives Instructions (CEIs). The DPPM incorporates guidance from the Financial Management and Accountability Act 1997 (Cth), the Financial Management and Accountability Regulations 1997 (Cth) and the Commonwealth Procurement Guidelines December 2008. Effective management across the procurement lifecycle, from the conception of an idea through contract to project closure, is vital to Defence in delivering projects on time, on budget and to the required quality, capability and safety standards. The development of a mature relationship with industry and the use of sound procurement and contract management principles will assist Defence in achieving superior procurement outcomes, in particular the savings required under the Strategic Reform Program and the requirement to deliver to Government the capability required in the Defence White Paper. Commercial Policy and Practice Branch within the DMO Office of Special Counsel is the sponsoring authority for the DPPM. Under the direction of General Manager Commercial the DPPM is currently being reviewed with the objective of streamlining the information provided and ensuring consistency with updated legislation and policy. The ultimate goal of the current DPPM review process is to ensure that the DPPM is primarily a compliance focused manual which will ensure that key procurement requirements are more easily identified and complied with. The DPPM will now be released on a regular basis to ensure the currency of information. To this end, I am now pleased to release to you this updated version of the DPPM. I trust you will find it a useful and informative resource as you conduct your procurement activities in Defence.

HARRY DUNSTALL General Manager Commercial

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Defence Procurement Policy Manual Notices

Notices
NOTE TO EXTERNAL USERS:

Those users external to Defence should be aware that the Defence Procurement Policy Manual (DPPM) has been prepared for the guidance of Defence staff involved in procurement activities. Nothing in the DPPM should be construed as a representation as to the future conduct of the Commonwealth in any particular procurement activities. The DPPM should not be relied upon as a substitute for independent legal or procurement policy advice. Please note that while the Commercial Policy Help Desk can respond to DPPM policy questions, this service is not available to those outside of Defence. Contractors should, in the first instance, seek guidance from the relevant Contact Officer for their specific procurement.

Commonwealth of Australia 2011 This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. Requests and inquiries concerning reproduction and rights should be addressed to Commonwealth Copyright Administration, Attorney Generals Department, National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca

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Defence Procurement Policy Manual Introduction

Introduction
Commonwealth Procurement Guidance
Procurement conducted within the Commonwealth is governed by the Department of Finance and Deregulations legislative and policy framework comprising: the Financial Management and Accountability (FMA) Act 1997 (Cth); the Financial Management and Accountability Regulations (FMAR) 1997 (Cth); and the Commonwealth Procurement Guidelines (CPGs) and related Department of Finance and Deregulation (DOFD) Finance Circulars.

The FMAR 7(4)) require officials performing duties in relation to procurement to act in accordance with the Commonwealth Procurement Guidelines (CPGs).

Whole of Defence Procurement Guidance


Procurement in the Department of Defence is further governed by a series of policy and procedural documents. These documents have different levels of applicability and enforceability determined by reference to Defence Instruction (General) ADMIN 00-001 - The System of Defence Instructions (SoDI). The SoDI provides the following hierarchy for financial and procurement related policy and procedural documents: Defence and Defence Materiel Organisation (DMO) Chief Executives Instructions (CEIs); and the Defence Procurement Policy Manual (DPPM) - as a Defence Manual.

Defence CEI 2.1 (Procurement) requires officials undertaking procurement to have regard to the DPPM. DMO CEI 2.1 (Procurement) requires DMO officials performing duties in relation to procurement to comply with the DPPM.

Defence Procurement Policy Manual System


The DPPM is the primary reference document for all Defence and DMO officials involved in the procurement process. Unless otherwise specified, a reference to Defence should be interpreted as a reference to Defence and the DMO. The General Manager Commercial DMO (GM Com) is the sponsoring authority for the DPPM as the whole of Defence Business Policy Owner for procurement policy and procurement professionalisation. Within the Office of Special Counsel, the DPPM is maintained by the Directorate of Commercial Policy with assistance from a wide range of specialist areas (which are listed on its website). The guidance provided in the DPPM incorporates mandatory procurement policy drawn from the higher level Commonwealth or Defence procurement guidance, in particular the CPGs. These requirements are mandatory for all Defence officials. The format of DPPM chapters is being progressively updated to highlight mandatory procurement policy at the start of each chapter. Obligations which must be complied with, in all circumstances, are denoted by the use of the term must within the mandatory policy section at the beginning of each chapter. The use of the term should denotes matters of best practice.

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Defence Procurement Policy Manual Introduction Where urgent DPPM updates are required, or procurement related advice needs to be promulgated, Departmental Procurement Policy Instructions (DPPIs) are released. Accordingly, the DPPM must be read in conjunction with all current DPPIs until the relevant DPPI is incorporated into the DPPM and/or cancelled. Further sources of policy and procedure applicable to whole of Defence procurement include: the ASDEFCON suite of tendering and contracting templates and the Infrastructure Division Suite of Contracts. Please note, that where an existing template is appropriate to the type of procurement being undertaken, the use of that template is mandatory; Process Templates when developed, these tools will provide best practice templates for a range of procurement process issues, such as tender evaluation or drafting source evaluation reports; and the Better Practice Guides when and as developed, these guides will provide sound practice guidance for certain procurement related activities. In line with the publication of these guides, the guidance material currently contained in the DPPM may be moved into these guides in order to reduce duplication.

DMO Procurement Guidance


Within the DMO, specific functional level policy falls under the System of Defence Materiel Instructions (SDMI) hierarchy. Compliance with DMO functional policy is mandatory for all personnel working in the DMO. DMO officials performing duties in relation to procurement must be aware of and comply with the requirements of all relevant Defence Materiel Instructions (DMIs). Of particular importance to the procurement process is the DMI(PROC) and DMI(FIN) series of instructions.

DPPM Feedback
All feedback on the DPPM and related suggestions are welcome as the Directorate of Commercial Policy seeks to maintain the quality and currency of the DPPM. Please forward any suggestions to commercial.policy@defence.gov.au in the first instance.

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Defence Procurement Policy Manual Defence and DMO Procurement Support Areas

Defence and DMO Procurement Support Areas


Introduction
Procurement and contracting advice and support is available from a range of sources throughout the Defence portfolio. General Manager Commercial, Defence Materiel Organisation (GM Com, DMO), is the Business Process Owner (BPO) for procurement policy and procurement professionalisation and is responsible for setting and maintaining the procurement policy framework within which all Defence officials and advisors must operate. This policy framework is consistent with the whole of government procurement environment established by the Department of Finance and Deregulation (DOFD) and as promulgated in the Commonwealth Procurement Guidelines. Defence officials requiring procurement support should consult with their Group or Divisional procurement area in the first instance where such support is available. Some of the established procurement support areas are listed below. Where Defence Groups identify a requirement for contracting services, they may submit a request through their Group Head to Special Counsel to Chief Executive Officer (SCCEO) for consideration on a case by case basis.

Defence Materiel Organisation


Office of Special Counsel (OSC), Head Commercial Enabling Services (HCES) and Head Commercial and Industry Programs (HCIP) within Commercial Group aims to assist Defence and DMO to manage contracting, financial, industry, legal and process risk with respect to procurement projects through contract formation and contract management, consistent with Defences accountability and reporting framework. The organisational structure of Commercial Group is detailed below. Further information on the functions and responsibilities of each directorate within Commercial can be found in the Commercial Group Organisational Structure.

Commercial Group
Office of Special Counsel (OSC)
OSC mission is to assist Defence and DMO to manage legal and commercial risk across the capability and procurement life cycle, through the provision of strategic commercial legal and legal policy advice, and commercial policy advice. OSC is comprised of two branches: Commercial Policy and Practice (CPP) and DMO Legal. CPP works to develop, coordinate and communicate Defence-wide best practice commercial policy, innovation and practice, and professionalisation. CPP is comprised of three directorates: Commercial Policy, Commercial Innovation and Practice; and Commercial Professionalisation.

DMO Legal forms part of the OSC as the DMO corporate legal advisor. The role of DMO legal is: the primary source of strategic legal advice for the CEO and DMO executive; to ensure DMO and Defence procurement policies and practices comply with the law and Commonwealth policy; and provision of timely solutions to complex legal issues. DMO Legal is also the IP Policy owner for the whole of Defence. DMO Clients: For DMO clients the Office of Special Counsel provides the following services:

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Defence Procurement Policy Manual Defence and DMO Procurement Support Areas corporate legal advice and assistance, including advice on Intellectual Property policy and practice; engagement of external legal services through the Strategic Commercial Legal Panel; commercial policy and practice advice; and support of the system that allows for engagement of external support services through the DMO Support Services (DMOSS) Panel.

Defence (non DMO) Clients: For Defence (non DMO) clients the Office of Special Counsel provides the following services: legal advice on Intellectual Property policy and practice; commercial policy and practice advice; and support of the system that allows for engagement of external support services through the DMOSS Panel.

Defence (non DMO) clients seeking legal advice and assistance (with the exception of advice on Intellectual Property policy) and seeking to engage the services of external Legal Service Providers should contact the Defence Legal Directorate of External Legal Services dels.defencelegal@defence.gov.au. For contracting advice, Defence clients should contact their Group contracting area (if any) in the first instance.

Head Commercial Enabling Services


Commercial Enabling Services is comprised of two branches: Contracting Support and Capability Delivery Support. Contracting Support is comprised of two directorates: Contracting Services and Financial Investigation Service. Capability Delivery Support is comprised of five directorates: Cost Estimation and Assurance Unit (CEAU), Australian Industry Capability (AIC) Implementation Unit, AIC Audit, Acquisition Strategy Coordination, and Supplier Quality Assurance Service.

Head Commercial and Industry Programs


Commercial and Industry Programs is comprised of two branches: Export Programs and Industry Engagement, and Economic and Commercial Analysis. Export Programs and Industry Engagement is comprised of six directorates: Defence Export Unit, IMC/ITARS, GSC, Industry Programs (excludes GSC), Major Events, and BAO. Economic and Commercial Analysis is comprised of three directorates: Company Profiles, Economic and Commercial Analysis, and Company and Industry Performance.

Commercial Group Business Unit


Tender room management and advertising tenders sits under Business Support within the Commercial Group Business Unit.

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Defence Procurement Policy Manual Defence and DMO Procurement Support Areas Accessing Help Desk services New Commercial Policy Directorate Help Desk Functionality Commercial Policy Help Desk is used as an initial point of contact for all Defence and DMO queries relating to the DPPM and Procurement Policy. The email address is: commercial.policy@defence.gov.au. For those seeking DMOSS support, email: DMOSS.ADMIN@defence.gov.au. Personnel can register and login to DMOSS Business Management System (BMS) available from DMOSS website (http://intranet.defence.gov.au/dmoweb/sites/dmoss/comweb.asp?page=63240). DMO officers requiring access to specialist contracting support are encouraged to approach their respective Executive Director in the Contracting Services Directorate in the first instance. The current DPPI on Requesting professional services from the Office of Special Counsel Defence Materiel Organisation outlines the requirements for accessing contracting and legal services in the DMO. The DMO Chief Finance Officer is the BPO for DMO Financial Policy, including the DMO Chief Executives Instructions and associated financial delegations framework, and are a key contributor in shaping the business management of the DMO. The division has a central role in performance reporting, strategic resource management, financial accounting and the establishment of supporting business systems. The DMO Financial Policy Helpdesk can be contacted by email at mailto:dmofinance.policy@drn.mil.au or by telephone on 03 9282 3959 or 03 9282 5305

Defence
Chief Finance Officer Group
The Directorate of Financial Policy in the Financial Policy, Controls and Skilling Branch is responsible for the collective delivery of effective financial management policy and guidance, provides assurance of comprehensive financial management processes/practices to facilitate compliance with Government legislation and policy, and delivers skills development for a professionalised finance workforce. In particular, the Branch develops and promulgates the Defence Chief Executives Instructions and financial delegations. The Defence Financial Policy Helpdesk can be contacted by email at financial.policy@defence.gov.au or by telephone on (02) 6265 6111. All fax correspondence and forms for Defence Treasury and Banking should be sent to fax number (02) 6265 6592. All mail correspondence should be sent to Defence Treasury and Banking R12 A100. Email queries can be sent to treasury.banking@defence.gov.au.

Defence Support Group


As part of the Defence Support Group, Infrastructure Division manages the development, maintenance and disposal of the Defence estate and comprises six areas; Executive Support; Public Private Partnerships; Property Services; Infrastructure Asset Development; Estate Planning; and Estate Policy and Environment.

Refer to the Infrastructure Management website at http://intranet.defence.gov.au/im/ for a full set of infrastructure related core policies, procedures and business processes that cover the planning, development and delivery of the Infrastructure asset life cycle. Approved by GM Com 1 July 2011 Page Prelim3

Defence Procurement Policy Manual Defence and DMO Procurement Support Areas The Business Services, Procurement and Contracting (BSPC) Branch in DSG is responsible for procurement, contracting, commercial advice and support to DSG. BSPC also provides a broad range of services to Defence including publishing, insurance, accounts payable, accounts receivable and debt management.

Chief Information Officer Group


The ICT Sourcing Centre (ICTSC) is the Chief Information Officer (CIO) Groups centre of expertise on Information and Communications Technology (ICT) contracting policy and procurement support. Across Defence, the procurement of ICT is conducted primarily by CIOG. The Directorate of Procurement and Contracting Services in CIOG is the authority across Defence on all ICT contract and procurement matters and acts as the DMOs delegated agent for ICT procurement. Procurement officers contemplating ICT procurement should contact the ICT Sourcing Service Desk by email at CIOG.ProcurementAdvice@defence.gov.au or by telephone at (02) 6128 7778. For further information refer to the CIOG Website.

Capability Development Group


The Directorate of Capability Support (DCS) provides assistance to Capability Desk Officers in the development and drafting of business cases, capability proposals and other documents that support First Pass approval. The Directorate of Capability Operations and Plans comprises two principal elements: Operations and Governance. The Operations element provides direct support to desk officers to help with the progression of their projects into and through the Defence Capability Plan process, including: cost estimation for program costing, business case and document development and contracting and procurement assistance. The Governance element assures the completeness of operational business process and procedures and encompasses: critical group reporting; decision support; procurement assurance; group level agreements; and general reporting.

Office of the Secretary and Chief of the Defence Force Group


The Defence Export Control Office (DECO) within the Department of Defence is responsible for administering controls on the export of defence and dual use goods, and the granting of authorisations to export, in the form of permits and licences. Defence goods listed on the Defence and Strategic Goods List being exported from Australia, except for operations or training requires a DECO permit or licence. This includes items being returned to the OEM or sent overseas for repair, for demonstration purposes, as well as export of parts and components. DECO also delivers an awareness-raising program called 'Outreach'. Further information on DECO can be found at http://www.defence.gov.au/strategy/deco DECO can be contacted on 1800 66 10 66 and deco@defence.gov.au.

Intelligence and Security Group


Business Operations Directorate provides contracting and financial services to the Defence Signals Directorate, the Defence Intelligence Organisation and the Defence Imagery and Geospatial Organisation.

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Defence Procurement Policy Manual Defence and DMO Procurement Support Areas

Defence Science and Technology Organisation


Science Industry and External Relations Branch develops, promulgates, supports and monitors the Defence Science and Technology Organisations (DSTO) industry and external relations engagement. The DSTO Business and Commercialisation Office within the Science Industry and External Relations Branch provides advice and support on issues associated with DSTOs interaction with industry and is the initial point of contact for contracting matters. The DSTO facilitates business and commercial activities undertaken by the laboratories, including the management of DSTO intellectual property and the formation of agreements with industry, universities, Cooperative Research Centres, and the wider science and technology community.

Navy
Defence Instruction (Navy) LOG 77-4 Navy Procurement and Navy Contract Register states that the Directorate Navy Industry Engagement & Contracting Bureau (DNIECB) is the only specialist contracting organisation within Navy. The DNIECB provides the following roles and functions to Navy: development and management of a national baseline for DSG service delivery to Navy through CSA/SLA arrangements; co-ordination of performance measurement, customer satisfaction and reporting of DSG service delivery to Navy; advice and assistance to Navy managers on all aspects of commercial contracting activities including the review of contracts and contract management practices; guidance on baselining of services, performance measurement and production of statements of work; and administration of assigned contracts.

How to request external legal services


External legal services must be procured in accordance with the Attorney Generals Legal Services Directions 2005. In Defence and the DMO, all external legal services are engaged through the Defence Legal Services Panels that have been established under deeds of standing offer. Defence has Legal Services Panels across 16 areas of legal expertise. DMO Legal is responsible for the dayto-day management of the Strategic Commercial panel. Defence Legal (in particular the Directorate of External Legal Services, DELS) is responsible for the management of the remaining fifteen panels, as well as the overall governance of all sixteen Legal Services Panels. The Legal Services Panels are used for all legal work supporting Defence activities other than those provided by the Defence Legal Service or DMO Legal. To procure external legal services for Defence contact the Directorate of External Legal Services by emailing dels.defencelegal@defence.gov.au. To procure external legal services for DMO refer to Departmental Procurement Policy Instruction (DPPI) 21/2009 Requesting professional services from the Office of Special Counsel Defence Materiel Organisation. Queries regarding the engagement of external legal services providers can be obtained by emailing DMO.LegalPanel@defence.gov.au. Pending the issue of a new Defence Instruction (General) Legal regarding the provision of legal services, procedures for the use of the current Defence Legal Services Panel are set out in DEFGRAM No 681/2009 - Engagement of External Legal Service Providers. Further information on the use of the panel can be obtained by contacting a Legal Services Coordinator. Procurement officers who require external legal advice must not engage external legal service providers directly. External legal advice in relation to procurement of good and services can only be obtained through the Office of Special Counsel (for DMO), and through Defence Legal (for Defence).

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Defence Procurement Policy Manual Defence and DMO Procurement Support Areas Legal Process or Probity Services Procurement officers should note that probity services in Defence are not considered legal services and are not procured under the Legal Services Panel, however DMO officers should approach DMO Legal regarding the engagement of independent legal process or probity advisors in the DMO.

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Defence Procurement Policy Manual Complex Procurement Process Flowchart

Complex Procurement Process Flowchart

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Defence Procurement Policy Manual Simple Procurement Process Flowchart

Simple Procurement Process Flowchart

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Defence Procurement Policy Manual Table of Contents

Table of Contents

Simple Procurement Process Introduction ...............................................................................................................................1 Mandatory Policy.......................................................................................................................1 Operational Guidance ...............................................................................................................3 Simple Procurement Defined ...............................................................................................3 Simple Procurement - A Risk Based Approach ...................................................................3 Conducting Simple Procurement Step by Step ................................................................5 Regular or On Going Requirements ..................................................................................13 Purchasing Card ................................................................................................................13 Defence Travel Card..........................................................................................................14 Delegations, Competencies and Proficiencies ..................................................................14 Key References.......................................................................................................................15 1.1 The Legal Framework ....................................................................................................... 1.11 Introduction ....................................................................................................................... 1.11 Mandatory Policy............................................................................................................... 1.11 Operational Guidance ....................................................................................................... 1.11 Overview ...................................................................................................................... 1.11 Executive Function....................................................................................................... 1.11 Judicial Function .......................................................................................................... 1.12 Legislative Function ..................................................................................................... 1.12 Procurement Framework Hierarchy ............................................................................. 1.13 Key References................................................................................................................. 1.14 Commonwealth Procurement Guidelines ......................................................................... 1.21 Introduction ....................................................................................................................... 1.21 Mandatory Policy............................................................................................................... 1.21 Operational Guidance ....................................................................................................... 1.21 Overview ...................................................................................................................... 1.21 CPG Introduction ......................................................................................................... 1.22 CPGs Division 1 - Procurement Principles .................................................................. 1.22 CPGs Division 2 - Mandatory Procurement Procedures ............................................. 1.23 Policies that Interact with Procurement ....................................................................... 1.26 Finance Circulars and Guidance.................................................................................. 1.27 Key References................................................................................................................. 1.27 Simple, Complex and Strategic Procurement ................................................................... 1.31 Introduction ....................................................................................................................... 1.31 Mandatory Policy............................................................................................................... 1.31 Operational Guidance ....................................................................................................... 1.31 Overview ...................................................................................................................... 1.31 Simple Procurement Defined ....................................................................................... 1.31 Complex Procurement Defined.................................................................................... 1.32 Strategic Procurement Defined.................................................................................... 1.32 Key References................................................................................................................. 1.33 Delegations for Procurement ............................................................................................ 1.41 Introduction ....................................................................................................................... 1.41 Page i

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Defence Procurement Policy Manual Table of Contents

Mandatory Policy............................................................................................................... 1.41 Operational Guidance ....................................................................................................... 1.42 Background .................................................................................................................. 1.42 Defence and DMO Approval Framework..................................................................... 1.44 Specific Delegate Considerations ................................................................................ 1.44 DMO Specific Procedures............................................................................................ 1.45 Financial Management and Accountability Regulation (FMAR) 10 ............................. 1.46 Proposal Approver ....................................................................................................... 1.47 Procurement Approver................................................................................................. 1.48 Contract Approver........................................................................................................ 1.48 Contract Signatory ....................................................................................................... 1.48 Receipt and Spending of Public Money by Outsiders in the DMO .............................. 1.48 Recording of Delegations............................................................................................. 1.48 Splitting a Requirement................................................................................................ 1.49 Additional Approvals .................................................................................................... 1.49 Competency Requirements for Delegates................................................................. 1.410 Contractors Exercising Financial Delegations ........................................................... 1.410 Delegation Requirements for Contract Amendments ................................................ 1.411 Delegation Requirements for Standing Offers and Orders under Standing Offers ... 1.411 Simple and Complex Procurement Competencies .................................................... 1.412 Additional Training ..................................................................................................... 1.414 Key References............................................................................................................... 1.414 2.1 Contract Law and Legal Advice ........................................................................................ 2.11 Introduction ....................................................................................................................... 2.11 Mandatory Policy............................................................................................................... 2.11 Operational Guidance ....................................................................................................... 2.11 Background .................................................................................................................. 2.11 Circumstances in which Contracts are Invalid ............................................................. 2.13 Contract Terms ............................................................................................................ 2.15 Privity of Contract......................................................................................................... 2.16 Interpreting a Contract ................................................................................................. 2.16 Common Law and the Tendering Process .................................................................. 2.16 When to Seek Legal Advice......................................................................................... 2.16 Key References................................................................................................................. 2.17 Types of Contract.............................................................................................................. 2.21 Introduction ....................................................................................................................... 2.21 Mandatory Policy............................................................................................................... 2.21 Operational Guidance ....................................................................................................... 2.21 Background .................................................................................................................. 2.21 Choosing a Contract Type ........................................................................................... 2.21 Firm Price Contracts .................................................................................................... 2.22 Variable Price Contracts .............................................................................................. 2.23 Variable Quantity Contracts ......................................................................................... 2.24 Cost Reimbursement Contracts................................................................................... 2.24 Target Cost Incentive Contracts .................................................................................. 2.25 Other Contracting Methodologies and Contract Types ............................................... 2.26 Key References................................................................................................................. 2.28 Standard Defence Contracting Templates........................................................................ 2.31 Introduction ....................................................................................................................... 2.31 Mandatory Policy............................................................................................................... 2.31 Operational Guidance ....................................................................................................... 2.31 Overview ...................................................................................................................... 2.31 ASDEFCON Suite of Tendering and Contracting Templates ...................................... 2.32 Improvement of ASDEFCON Templates ..................................................................... 2.32 Page ii

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Defence Procurement Policy Manual Table of Contents

Defence Facilities Contracting Templates ................................................................... 2.32 Non Approved Defence Contracting Templates .......................................................... 2.34 Key References................................................................................................................. 2.34 2.4 3.1 Not Used ........................................................................................................................... 2.41 Procurement Methods....................................................................................................... 3.11 Introduction ....................................................................................................................... 3.11 Mandatory Policy............................................................................................................... 3.11 Operational Guidance ....................................................................................................... 3.12 Background .................................................................................................................. 3.12 Procurement Methods.................................................................................................. 3.13 Selecting a Procurement Method...................................................................................... 3.13 Open Tender Process.................................................................................................. 3.13 Select Tender Process................................................................................................. 3.14 Direct Source Tender Process..................................................................................... 3.15 Reporting Methods of Procurement for Standing Offers in the DMO .......................... 3.18 Record Keeping Maintaining an Audit Trail .............................................................. 3.19 Rapid Acquisitions ....................................................................................................... 3.19 Conducting Direct Source Procurement ...................................................................... 3.19 Factors Affecting Procurement Method ..................................................................... 3.110 Key References............................................................................................................... 3.111 Risk Management in Procurement.................................................................................... 3.21 Introduction ....................................................................................................................... 3.21 Risk Management Policy ............................................................................................. 3.21 Definition ...................................................................................................................... 3.21 Risk Issues in Public Sector Procurement................................................................... 3.21 Risk Management Processes ...................................................................................... 3.22 Project Risk Score ....................................................................................................... 3.26 The Contract and Risk Management ........................................................................... 3.26 Australian New Zealand Standard ............................................................................... 3.26 Chapter Summary ............................................................................................................. 3.26 Further Reading ................................................................................................................ 3.27 Financial Policy and Advice in the Procurement Process................................................. 3.31 Introduction ....................................................................................................................... 3.31 Mandatory Policy............................................................................................................... 3.31 Operational Guidance ....................................................................................................... 3.31 Commonwealth Foreign Exchange Policy ................................................................... 3.31 Price Basis and Price Variation.................................................................................... 3.32 Selection of Australian and US Indexes for Contracts - DMO Specific ....................... 3.33 Financial Investigations................................................................................................ 3.34 Financial Investigation Services................................................................................... 3.34 Financial Viability and Capability of Tenderers............................................................ 3.34 When to Seek Financial Advice ................................................................................... 3.36 Financial Evaluation of Offers ...................................................................................... 3.37 Key References................................................................................................................. 3.38 Earned Value Management .............................................................................................. 3.41 Introduction ....................................................................................................................... 3.41 Mandatory Policy............................................................................................................... 3.41 Operational Guidance ....................................................................................................... 3.41 Use of Earned Value Management by DMO ............................................................... 3.41 Application of Earned Value Management to DMO Contracts .................................... 3.42 Contractor Reviews...................................................................................................... 3.43 Data Reporting and Analysis ....................................................................................... 3.43 Page iii

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Defence Procurement Policy Manual Table of Contents

Key References................................................................................................................. 3.43 3.5 Quality Assurance ............................................................................................................. 3.51 Introduction ....................................................................................................................... 3.51 Defence Policy ............................................................................................................. 3.51 Quality Assurance Responsibilities.............................................................................. 3.52 Risk Assessment ......................................................................................................... 3.53 Selecting the Means of Assuring Quality ..................................................................... 3.53 Quality Assurance and the ASDEFCON Templates.................................................... 3.53 Quality Assurance Requirement Type Clauses ........................................................... 3.54 Certification of Contractors Quality System ................................................................ 3.55 Sourcing of Testing and Calibration Services for Measuring Equipment .................... 3.56 Quality Assurance Arrangements with Foreign Governments..................................... 3.56 Quality Assurance Representatives............................................................................. 3.56 Quality Assurance Training.......................................................................................... 3.57 Chapter Summary ............................................................................................................. 3.57 Further Reading ................................................................................................................ 3.57 Intellectual Property .......................................................................................................... 3.61 Introduction ....................................................................................................................... 3.61 Mandatory Policy............................................................................................................... 3.61 Operational Guidance ....................................................................................................... 3.61 What is Intellectual Property ........................................................................................ 3.61 Defence Categories of IP............................................................................................. 3.62 Defence Policy ............................................................................................................. 3.63 Software Licensing....................................................................................................... 3.64 Contractual Provisions ................................................................................................. 3.65 Key References................................................................................................................. 3.65 Defence Procurement and the GST.................................................................................. 3.71 Introduction ....................................................................................................................... 3.71 Mandatory Policy............................................................................................................... 3.71 Operational Guidance ....................................................................................................... 3.71 What is the GST........................................................................................................... 3.71 Charging GST .............................................................................................................. 3.71 Requirement to Issue Tax Invoices.............................................................................. 3.72 GST Transitional Rules................................................................................................ 3.73 GST in Defence Contracts ........................................................................................... 3.73 Reimbursement of Defence Expenses ........................................................................ 3.75 GST Advice .................................................................................................................. 3.75 Further Reading ................................................................................................................ 3.76 Defence Materiel Organisation Company ScoreCards..................................................... 3.81 Introduction ....................................................................................................................... 3.81 Mandatory Policy............................................................................................................... 3.81 Operational Guidance ....................................................................................................... 3.81 Objective ...................................................................................................................... 3.81 Application of Company Scorecards............................................................................ 3.82 Compiling the Company ScoreCard Assessment........................................................ 3.82 Use of Company Scorecards During Tender Evaluation............................................. 3.83 360 View ScoreCard Program.................................................................................... 3.84 Further Assistance ....................................................................................................... 3.84 Key References................................................................................................................. 3.84 Defence Security Requirements ....................................................................................... 3.91 Introduction ....................................................................................................................... 3.91 Mandatory Policy............................................................................................................... 3.91 Page iv

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Operational Guidance ....................................................................................................... 3.91 Role of Procurement Officers....................................................................................... 3.91 Defence Security Manual............................................................................................. 3.92 Defence Industry Security Program ............................................................................. 3.92 Security Clearances..................................................................................................... 3.92 Release of Classified Material ..................................................................................... 3.93 Foreign Tenderers or Contractors................................................................................ 3.93 Security Classification and Categorisation Guides ...................................................... 3.93 Access to Defence Facilities ........................................................................................ 3.93 Facility Security Accreditation and ICT System Security Accreditation ....................... 3.94 Security Clauses in Tendering Documentation............................................................ 3.94 Security Performance during Contract Execution........................................................ 3.94 Further Information ...................................................................................................... 3.95 Key References................................................................................................................. 3.95 3.10 Interacting Policies .......................................................................................................... 3.101 Introduction ..................................................................................................................... 3.101 Mandatory Policy............................................................................................................. 3.101 Operational Guidance ..................................................................................................... 3.102 FMA Regulation 9 ...................................................................................................... 3.102 Australian Industry Participation ................................................................................ 3.102 Coordinated Procurement.......................................................................................... 3.102 Employment and Workplace Relations...................................................................... 3.102 Environmental ............................................................................................................ 3.103 Financial..................................................................................................................... 3.104 Information Communications and Technology (ICT) ................................................. 3.104 International Obligations ............................................................................................ 3.104 Legal 3.105 Security ...................................................................................................................... 3.105 Social Inclusion .......................................................................................................... 3.105 Other Policy Obligations ............................................................................................ 3.106 Key References............................................................................................................... 3.106 3.11 Confidential Information .................................................................................................. 3.111 Introduction ..................................................................................................................... 3.111 Mandatory Policy............................................................................................................. 3.111 Operational Guidance ..................................................................................................... 3.112 Background ................................................................................................................ 3.112 Commercial-in-Confidence Information .......................................................................... 3.112 Treatments of Information in Tenders, Standing Offers and Contracts ..................... 3.112 Disclosure of Commercial-in-Confidence Information ............................................... 3.116 Signing of Non-Disclosure Agreements by Defence Personnel ................................ 3.117 Senate Order.............................................................................................................. 3.119 Confidential Information .................................................................................................. 3.119 Defence to an Action for Breach of Confidence....................................................... 3.1111 Key References............................................................................................................. 3.1111 3.12 Australian Industry Capability ......................................................................................... 3.121 Introduction ..................................................................................................................... 3.121 Mandatory Policy............................................................................................................. 3.121 Operational Guidance ..................................................................................................... 3.121 Australian Industry Participation ................................................................................ 3.121 Defence Industry Policy ............................................................................................. 3.121 Australian Industry Capability (AIC) Program ............................................................ 3.122 AIC Program Requirements....................................................................................... 3.123 Waiver from an AIC Plan ........................................................................................... 3.124 Industry Assistance.................................................................................................... 3.125 Approved by GM Com 1 July 2011 Page v

Defence Procurement Policy Manual Table of Contents

Involvement of New Zealand Industry in AIC............................................................. 3.125 Key References............................................................................................................... 3.126 3.13 Ethics in Procurement ..................................................................................................... 3.131 Introduction ..................................................................................................................... 3.131 Mandatory Policy............................................................................................................. 3.131 Operational Guidance ..................................................................................................... 3.131 Legislative and Policy Framework ............................................................................. 3.131 Probity ........................................................................................................................ 3.133 Probity Auditors.......................................................................................................... 3.134 Conflicts of Interest .................................................................................................... 3.135 Key References............................................................................................................... 3.136 3.14 Legislation Affecting Procurement .................................................................................. 3.141 Introduction ..................................................................................................................... 3.141 Mandatory Policy............................................................................................................. 3.141 Operational Guidance ..................................................................................................... 3.141 Implications for Defence Contracts............................................................................ 3.141 Applicability of State and Territory Legislation........................................................... 3.141 Consumer Protection Legislation ............................................................................... 3.142 Contracts pre-1 January 2011 ................................................................................... 3.143 Superannuation Legislation ....................................................................................... 3.143 Taxation ..................................................................................................................... 3.144 Workers Compensation ............................................................................................. 3.144 Privacy Act Requirements.......................................................................................... 3.145 Anti-Discrimination Legislation................................................................................... 3.147 Occupational Health and Safety and Contractors...................................................... 3.148 Environmental Legislation.......................................................................................... 3.149 Key References............................................................................................................... 3.149 3.15 Indemnities, Limitation of Liability and Insurance ........................................................... 3.151 Introduction ..................................................................................................................... 3.151 Mandatory Policy............................................................................................................. 3.151 Operational Guidance ..................................................................................................... 3.152 Indemnities................................................................................................................. 3.152 Limitation of Liability................................................................................................... 3.153 Insurance ................................................................................................................... 3.156 Key References............................................................................................................. 3.1513 3.16 Environment in Procurement .......................................................................................... 3.161 Introduction ..................................................................................................................... 3.161 Mandatory Policy............................................................................................................. 3.161 Operational Guidance ..................................................................................................... 3.162 Legislative Framework ............................................................................................... 3.162 Key Commonwealth Environmental Policies ............................................................. 3.163 Defence Environmental Policies ................................................................................ 3.164 Key Considerations In Conducting Environmental Purchasing ................................. 3.165 Key References............................................................................................................... 3.168 4.1 Partnering and Teaming Arrangements............................................................................ 4.11 Introduction ....................................................................................................................... 4.11 Partnering Arrangements............................................................................................. 4.11 Teaming Arrangements ............................................................................................... 4.13 Advice on Partnering and Teaming Arrangements...................................................... 4.14 Chapter Summary ............................................................................................................. 4.14 Overseas Procurement ..................................................................................................... 4.21 Page vi

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Introduction ....................................................................................................................... 4.21 Mandatory Policy............................................................................................................... 4.21 Operational Guidance ....................................................................................................... 4.22 Background .................................................................................................................. 4.22 The role of DEFMAT and CONDMAT Offices ............................................................. 4.22 Purchasing through Counsellor Defence Materiel Offices........................................... 4.23 Foreign Military Sales .................................................................................................. 4.25 Export Compliance............................................................................................................ 4.27 Export Licences ........................................................................................................... 4.27 End User Assurances ................................................................................................ 4.210 Banking and Foreign Exchange Arrangements ......................................................... 4.210 Key References............................................................................................................... 4.211 4.3 Whole of Government Procurement Contracts, Arrangements and Initiatives ................. 4.31 Introduction ....................................................................................................................... 4.31 Mandatory Policy............................................................................................................... 4.31 Operational Guidance ....................................................................................................... 4.32 Background .................................................................................................................. 4.32 Coordinated Procurement............................................................................................ 4.32 Cooperative Procurement ............................................................................................ 4.32 Information Communication and Technology (ICT) Procurement ............................... 4.33 Multi-use Lists .............................................................................................................. 4.34 Key References................................................................................................................. 4.34 Public Private Partnerships ............................................................................................... 4.41 Introduction ....................................................................................................................... 4.41 Mandatory Policy............................................................................................................... 4.41 Operational Guidance ....................................................................................................... 4.41 Background .................................................................................................................. 4.41 Public Private Partnership Suitability ........................................................................... 4.42 Interim Business Case ................................................................................................. 4.43 Tendering Process....................................................................................................... 4.44 Financier Due Diligence and Approval ........................................................................ 4.45 Contract Signature ....................................................................................................... 4.45 Contract Management and Performance Reporting .................................................... 4.46 Refinancing Post Construction Phase ......................................................................... 4.46 Advice on Public Private Partnership Arrangements................................................... 4.46 Key References................................................................................................................. 4.47 Evolutionary Acquisition .................................................................................................... 4.51 Introduction ....................................................................................................................... 4.51 Evolutionary Acquisition Defined ................................................................................. 4.51 When to use Evolutionary Acquisition ......................................................................... 4.53 When not to use Evolutionary Acquisition ................................................................... 4.54 Conducting Evolutionary Acquisition ........................................................................... 4.55 Evolutionary Acquisition Contracting Approaches ....................................................... 4.58 Chapter Summary ........................................................................................................... 4.510 Electronic Procurement..................................................................................................... 4.61 Introduction ....................................................................................................................... 4.61 Mandatory Policy............................................................................................................... 4.61 Operational Guidance ....................................................................................................... 4.61 Background .................................................................................................................. 4.61 Use of E-mail in Defence Procurement ....................................................................... 4.62 Electronic Advertising, Tendering and Reporting ........................................................ 4.64 Integrated E-Procurement............................................................................................ 4.64 Page vii

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Use of the Defence/DMO Purchasing Card on the Internet ........................................ 4.64 Further Information ...................................................................................................... 4.65 Key References................................................................................................................. 4.65 4.7 4.8 Not Used ........................................................................................................................... 4.71 Standing Offers ................................................................................................................. 4.81 Introduction ....................................................................................................................... 4.81 Mandatory Policy............................................................................................................... 4.81 Operational Guidance ....................................................................................................... 4.82 Background .................................................................................................................. 4.82 Establishing Standing Offers........................................................................................ 4.82 Compliance Requirements for Standing Offers Established Pre 1 January 2005....... 4.84 Placing Orders under Standing Offers......................................................................... 4.85 Signing a Standing Offer as a Deed ............................................................................ 4.86 Local Business Rules................................................................................................... 4.86 Further Advice on Standing Offers .............................................................................. 4.86 Key References................................................................................................................. 4.86 Staged Procurement ......................................................................................................... 4.91 Introduction ....................................................................................................................... 4.91 Overview ...................................................................................................................... 4.91 Using a Staged Procurement Strategy ........................................................................ 4.91 Request for Information ............................................................................................... 4.92 Invitation to Register Interest ....................................................................................... 4.92 Requests for Proposal (RFP)....................................................................................... 4.94 Activities following the Release of an Invitation to Register or Request for Proposal . 4.95 Project Definition Studies............................................................................................. 4.96 Prototype/Pre-Production Development Stage............................................................ 4.96 Chapter Summary ............................................................................................................. 4.97

4.9

4.10 Services Contracts and Agency Relationships ............................................................... 4.101 Introduction ..................................................................................................................... 4.101 Mandatory Policy............................................................................................................. 4.101 Operational Guidance ..................................................................................................... 4.102 Background ................................................................................................................ 4.102 Employer/Employee Relationship .............................................................................. 4.103 Contracting with a Natural Person ............................................................................. 4.104 Creation of an Agency Relationship with Contractors ............................................... 4.105 Travelling Arrangements for Contracted Personnel................................................... 4.106 Other Issues............................................................................................................... 4.107 Key References............................................................................................................... 4.109 4.11 Not Used ......................................................................................................................... 4.111 4.12 Defence Unsolicited Proposals ....................................................................................... 4.121 Introduction ..................................................................................................................... 4.121 Mandatory Policy............................................................................................................. 4.121 Operational Guidance ..................................................................................................... 4.121 Background ................................................................................................................ 4.121 Definition of UPPO and UIP....................................................................................... 4.122 Submitting Unsolicited Promotional Products Offers (UPPO) ................................... 4.122 Processing Unsolicited Promotional Products Offers (UPPO) .................................. 4.122 Submitting Unsolicited Innovative Proposals (UIP) ................................................... 4.123 Evaluating an Unsolicited Innovative Proposal (UIP) ................................................ 4.124 Reasons for Declining an Unsolicited Innovative Proposal (UIP).............................. 4.124 Protection of Confidential Information and Intellectual Property................................ 4.125 Procurement of an Unsolicited Proposal ................................................................... 4.125 Approved by GM Com 1 July 2011 Page viii

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Audit Requirements ................................................................................................... 4.126 Unsolicited Proposals Help Desk............................................................................... 4.126 Key References............................................................................................................... 4.126 4.13 Not Used ......................................................................................................................... 4.131 4.14 Not Used ......................................................................................................................... 4.141 4.15 The Capability & Technology Demonstrator Program .................................................... 4.151 Introduction ..................................................................................................................... 4.151 Mandatory Policy............................................................................................................. 4.151 Operational Guidance ..................................................................................................... 4.151 CTD Program Background......................................................................................... 4.151 CTD Project Governance Structure ........................................................................... 4.152 CTD Program Lifecycle.............................................................................................. 4.153 Key References............................................................................................................... 4.156 5.0 The Capability Lifecycle .................................................................................................... 5.01 Introduction ....................................................................................................................... 5.01 Mandatory Policy............................................................................................................... 5.01 Operational Guidance ....................................................................................................... 5.01 Background .................................................................................................................. 5.01 Definitions and Phases ................................................................................................ 5.01 First and Second Pass................................................................................................. 5.02 Key References................................................................................................................. 5.03 Planning Complex & Strategic Procurements................................................................... 5.11 Introduction ....................................................................................................................... 5.11 Mandatory Policy............................................................................................................... 5.11 Operational Guidance ....................................................................................................... 5.11 Overview ...................................................................................................................... 5.11 Planning for Procurement ............................................................................................ 5.11 Procurement Plan Components................................................................................... 5.12 Review of the Procurement Plan ................................................................................. 5.13 Record Keeping Maintaining an Audit Trail .............................................................. 5.13 Key Reference .................................................................................................................. 5.14 Not Used ........................................................................................................................... 5.21 Selecting a Procurement Process..................................................................................... 5.31 Introduction ....................................................................................................................... 5.31 Mandatory Policy............................................................................................................... 5.31 Operational Guidance ....................................................................................................... 5.31 Choosing a Procurement Method ................................................................................ 5.31 Contracting Methodologies .......................................................................................... 5.31 Request for Tender Process ........................................................................................ 5.32 Staged Procurement .................................................................................................... 5.32 Standing Offers ............................................................................................................ 5.33 Coordinated Procurements .......................................................................................... 5.33 Foreign Military Sales .................................................................................................. 5.33 Key References................................................................................................................. 5.33 Request Documentation.................................................................................................... 5.41 Introduction ....................................................................................................................... 5.41 Mandatory Policy............................................................................................................... 5.41 Operational Guidance ....................................................................................................... 5.42 Background .................................................................................................................. 5.42 Request Documentation for Simple Procurement ....................................................... 5.43 Page ix

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Request Documentation for Complex and Strategic Procurement.............................. 5.43 Covering Letter or Other Form of Request for Tender Introduction............................. 5.43 Conditions of Tender.................................................................................................... 5.44 Draft Conditions of Contract......................................................................................... 5.44 Draft Statement of Work .............................................................................................. 5.44 Request Documentation for Covered Procurements ................................................... 5.44 Request Documentation for Single Supplier Direct Source Procurements (Sole Source)5.46 Evaluation Criteria........................................................................................................ 5.47 Tender Evaluation Plans.............................................................................................. 5.49 Legal Process and Probity Plans ............................................................................... 5.410 Advertising Business Opportunities ........................................................................... 5.411 Record Keeping Maintaining an Audit Trail ............................................................ 5.411 Industry Briefings ....................................................................................................... 5.411 Communication with Potential Suppliers and Tenderers........................................... 5.412 Amendments to Request Documentation .................................................................. 5.412 Re-Tendering ............................................................................................................. 5.412 Cancelling a Procurement.......................................................................................... 5.413 Reimbursement of Re-Tendering Costs .................................................................... 5.413 Key References............................................................................................................... 5.414 5.5 Tender Advertising, Submission and Receipt................................................................... 5.51 Introduction ....................................................................................................................... 5.51 Mandatory Policy............................................................................................................... 5.51 Operational Guidance ....................................................................................................... 5.51 Defence Policy ............................................................................................................. 5.51 Minimum Time Limits for Covered Procurements........................................................ 5.52 Tender Closing Date, Time and Place......................................................................... 5.52 Procedures for Advertising Tenders ............................................................................ 5.53 Tender Room Requirements........................................................................................ 5.54 Tender Lodgement Procedures ................................................................................... 5.54 Tender Collection and Opening Procedures................................................................ 5.55 Extension of Closing Date and/or Time ....................................................................... 5.55 Late Tenders ................................................................................................................ 5.55 Key References................................................................................................................. 5.57 Evaluation of Tenders ....................................................................................................... 5.61 Introduction ....................................................................................................................... 5.61 Mandatory Policy............................................................................................................... 5.61 Operational Guidance ....................................................................................................... 5.62 Checklist of Activities Occurring Prior to Evaluation .................................................... 5.62 Resources Required for Evaluation ............................................................................. 5.62 Evaluation Objectives and Principles........................................................................... 5.63 Evaluation Process ...................................................................................................... 5.66 Conduct of a More Complex Evaluation ...................................................................... 5.66 Evaluation Methodologies............................................................................................ 5.67 Use of Weightings in Tender Evaluations.................................................................... 5.69 Normalising .................................................................................................................. 5.69 Assessing Risk........................................................................................................... 5.610 Determining Value for Money .................................................................................... 5.610 Evaluation of Whole of Life Costs .............................................................................. 5.611 Cartels and Tenderer Collusion ................................................................................. 5.611 Offer Definition ........................................................................................................... 5.612 Source Selection Recommendation .......................................................................... 5.614 Source Evaluation Report .......................................................................................... 5.614 Early Notification of Tender Outcome........................................................................ 5.615 Preparing for Negotiations ......................................................................................... 5.615 Tenderer Substitution................................................................................................. 5.615 Key References............................................................................................................... 5.615 Page x

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5.7A Negotiation and Contract Formation ................................................................................. 5.71 Introduction ....................................................................................................................... 5.71 Mandatory Policy............................................................................................................... 5.71 Operational Guidance ....................................................................................................... 5.72 Negotiation ................................................................................................................... 5.72 Awarding of Contracts for Covered Procurements ...................................................... 5.76 Contract Formation ...................................................................................................... 5.77 Public Announcement of Preferred Tenderer or Contract Award ................................ 5.78 Debriefing Tenderers ................................................................................................... 5.78 Key References............................................................................................................... 5.710 5.7B Procurement Complaints Handling ................................................................................... 5.71 Introduction ....................................................................................................................... 5.71 Mandatory Policy............................................................................................................... 5.71 Operational Guidance ....................................................................................................... 5.71 Background .................................................................................................................. 5.71 Internal Procedures for Handling Procurement Complaints ........................................ 5.72 External Grievance Mechanisms Available to Tenderers............................................ 5.74 Key References................................................................................................................. 5.75 5.8 Reporting Requirements ................................................................................................... 5.81 Introduction ....................................................................................................................... 5.81 Mandatory Policy............................................................................................................... 5.81 Operational Guidance ....................................................................................................... 5.82 AusTender.................................................................................................................... 5.82 Interim Defence Contracts Register............................................................................. 5.87 Consultant, Professional Service Provider and Contractor Reporting......................... 5.88 Other Reporting Requirements .................................................................................... 5.89 Key References................................................................................................................. 5.89 In-Service Support ............................................................................................................ 5.91 Introduction ....................................................................................................................... 5.91 In-Service Support Considerations .............................................................................. 5.91 Integrated Logistic Support .......................................................................................... 5.91 Procurement of In-Service Support ............................................................................. 5.92 Chapter Summary ............................................................................................................. 5.93 Further Reading ................................................................................................................ 5.93

5.9

5.10 Disposal of Defence Assets ............................................................................................ 5.101 Introduction ..................................................................................................................... 5.101 Mandatory Policy............................................................................................................. 5.101 Operational Guidance ..................................................................................................... 5.101 Background ................................................................................................................ 5.101 Disposal Policy Documents ....................................................................................... 5.101 Disposal Methodology................................................................................................ 5.102 Further Information .................................................................................................... 5.103 Key References............................................................................................................... 5.103 6.1 Contract Management Role .............................................................................................. 6.11 Introduction ....................................................................................................................... 6.11 Overview ...................................................................................................................... 6.11 Contract Management in the Defence Environment.................................................... 6.11 Contract Documentation .............................................................................................. 6.12 Roles and Responsibilities........................................................................................... 6.12 Contract Management Plan ......................................................................................... 6.14 Establishing Contract Management Systems .............................................................. 6.15 Page xi

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Relationship Management ........................................................................................... 6.15 Chapter Summary ............................................................................................................. 6.17 Further Reading ................................................................................................................ 6.17 6.2 Performance Management................................................................................................ 6.21 Introduction ....................................................................................................................... 6.21 Performance Management .......................................................................................... 6.21 Key Performance Indicators......................................................................................... 6.22 Management of Risk .................................................................................................... 6.23 Financial and Performance Guarantees ...................................................................... 6.24 Quality Assurance........................................................................................................ 6.25 Managing Subcontractor Performance ........................................................................ 6.26 Contract Performance Reviews ................................................................................... 6.27 Company Scorecard System ....................................................................................... 6.28 Access to Contractor Premises and Records .............................................................. 6.28 Chapter Summary ............................................................................................................. 6.29 Further Reading .............................................................................................................. 6.210 Provision of Commonwealth Assistance........................................................................... 6.31 Introduction ....................................................................................................................... 6.31 Government Furnished Material .................................................................................. 6.31 Government Furnished Facilities ................................................................................. 6.33 Government Furnished Services ................................................................................. 6.34 Provision of Defence Staff / Members Required in Uniform ........................................ 6.34 Contractor Access to Commonwealth Premises ......................................................... 6.35 Access to and Use of Defence Equipment .................................................................. 6.35 Chapter Summary ............................................................................................................. 6.35 Further Reading ................................................................................................................ 6.36 Delivery, Acceptance, Payment and Ownership............................................................... 6.41 Introduction ....................................................................................................................... 6.41 Mandatory Policy............................................................................................................... 6.41 Operational Guidance ....................................................................................................... 6.41 Overview ...................................................................................................................... 6.41 Delivery ........................................................................................................................ 6.41 Acceptance .................................................................................................................. 6.42 Milestones .................................................................................................................... 6.43 Postponement .............................................................................................................. 6.43 Ownership .................................................................................................................... 6.44 Payment Policy ............................................................................................................ 6.45 Key References................................................................................................................. 6.48 Exercising Contractual Remedies..................................................................................... 6.51 Introduction ....................................................................................................................... 6.51 Common Contractual Remedies.................................................................................. 6.51 Liquidated Damages .................................................................................................... 6.51 Termination for Default ................................................................................................ 6.54 Withholding Payment ................................................................................................... 6.55 Financial Securities...................................................................................................... 6.56 Deed of Substitution and Indemnity............................................................................. 6.56 Warranties.................................................................................................................... 6.57 Chapter Summary ............................................................................................................. 6.59 Further Reading ................................................................................................................ 6.59 Preserving the Commonwealths Position ........................................................................ 6.61 Introduction ....................................................................................................................... 6.61 Awareness of Contractual Rights and Obligations ...................................................... 6.61 Page xii

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Waiver .......................................................................................................................... 6.62 Estoppel ....................................................................................................................... 6.62 Development of Revised Schedules............................................................................ 6.62 Assignment and Innovation.......................................................................................... 6.63 Legal Professional Privilege......................................................................................... 6.64 Chapter Summary ............................................................................................................. 6.65 Further Reading ................................................................................................................ 6.66 6.7 Contract Amendments ...................................................................................................... 6.71 Introduction ....................................................................................................................... 6.71 Mandatory Policy............................................................................................................... 6.71 Operational Guidance ....................................................................................................... 6.71 Background .................................................................................................................. 6.71 Contract Amendments ................................................................................................. 6.71 Review of Proposed Contract Amendments................................................................ 6.74 Delegation Requirements ............................................................................................ 6.75 Reporting Contract Amendments................................................................................. 6.76 Key References................................................................................................................. 6.76 Dispute Resolution ............................................................................................................ 6.81 Introduction ....................................................................................................................... 6.81 Dispute Resolution....................................................................................................... 6.81 Keeping an Audit Trail.................................................................................................. 6.83 Other Alternative Dispute Resolution Processes......................................................... 6.84 The Litigation Process ................................................................................................. 6.87 Chapter Summary ............................................................................................................. 6.89 Contract Closure and Evaluation ...................................................................................... 6.91 Introduction ....................................................................................................................... 6.91 Discharging the Contract ............................................................................................. 6.91 Contract Closure .......................................................................................................... 6.93 Survivorship ................................................................................................................. 6.94 Evaluation .................................................................................................................... 6.94 Conversion and Disposal of Quotation, Tender and Contract Records....................... 6.95 Chapter Summary ............................................................................................................. 6.96 Further Reading ................................................................................................................ 6.96 Value for Money Checklist ................................................................................................ 1.A1 Short-Term Considerations.......................................................................................... 1.A1 Medium-Term Considerations...................................................................................... 1.A2 Longer-Term Considerations ....................................................................................... 1.A3 Risk Management Matrix .................................................................................................. 3.A1 Introduction .................................................................................................................. 3.A1 Methods of Risk Management ..................................................................................... 3.A1 Intellectual Property Summary.......................................................................................... 3.B1 Foreign Exchange Risk Management............................................................................... 3.F1 Introduction .................................................................................................................. 3.F1 Adhering to No Win No Loss Policy No Hedge Rule.............................................. 3.F1 Audit Requirements ..................................................................................................... 3.F2 Sample Partnering Agreement.......................................................................................... 4.A1 Examples of Commonly Used Evaluation Criteria ............................................................ 5.B1 Contract Management Principles...................................................................................... 6.A1 Contract Management - Practical tips, tricks and pitfalls .................................................. 6.B1 Contractor Default Checklist .............................................................................................6.C1 Page xiii

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1.A

3.A

3.B 3.F

4.A 5.B 6.A 6.B 6.C

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6.D 6.E

Supplies Acceptance Certificate Form (SG001) ...............................................................6.D1 Guidelines for use of the Supplies Acceptance Certificate..........................................6.D1 Contract Change Proposal Checklist ................................................................................ 6.E1

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Defence Procurement Policy Manual Simple Procurement Process

Simple Procurement Process


Introduction
1. 2. This chapter applies to all procurement undertaken in Defence and the Defence Material Organisation (DMO). This chapter provides guidance on Simple procurement including:

a definition of Simple procurement; guidance on assessing risk in Simple procurement; a step by step guide to conducting Simple procurement; and additional information on the Defence Purchasing Card, Defence Travel Card, Eprocurement, delegations and procurement competencies.

3.

Business Units may establish their own local procedures for conducting Simple procurement provided that all such arrangements are consistent with the Financial Management and Accountability (FMA) Act 1997 (Cth), FMA Regulations, Commonwealth Procurement Guidelines (CPGs), the Defence and DMO Chief Executives Instructions (CEIs) (as appropriate) and the mandatory policy contained in this chapter. In this chapter, the Defence Purchasing Card and the DMO Purchasing Card are referred to collectively as the Defence Purchasing Card (DPC). In this chapter a reference to Procurement Approver is a reference to the Procurement Method Approver in the DMO. For consistency with the standard ASDEFCON templates used for a Simple procurement the term supplier has been used in place of the term contractor. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

4.

5.

Mandatory Policy
Procurement officers must undertake a risk assessment before conducting any procurement to properly assess the risks associated with the procurement and accurately categorise the procurement as either: Simple, Complex or Strategic. The relevant approval documentation must document the results of the risk assessment and reference any risk mitigations that have been proposed. The Procurement Approver must validate the risk assessment and subsequent categorisation of the procurement. A procurement must be treated as at least a Complex Procurement in the following circumstances:

where integration, design or development work will be required; where additional scoping or requirements definitions work is required; where limitation of liability or liquidated damages clauses are included in the contract; where specific intellectual property rights are to be acquired; or where there is a requirement for financial or other securities.

Where any risk is assessed as extreme, advice from a Procurement officer or delegate Page SP1

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Defence Procurement Policy Manual Simple Procurement Process holding a Complex procurement competency must be sought to determine whether the procurement can be treated as a Simple procurement. Procurement officers must comply with the CPGs, including the Mandatory Procurement Procedures (MPPs) for all covered procurements. Where a covered procurement will be conducted as a Simple procurement, advice from a Procurement officer or delegate holding a Complex procurement competency must be sought prior to approaching the market and at the point of source selection regarding compliance with the MPPs. Where a standing offer exists that meets the procurement requirement, the standing offer must be used in the first instance unless there are valid reasons for not doing so For covered procurements an open tender procurement method must be used unless the MPPs permit the use of a select or direct source procurement method or an exemption to the MPPs applies in accordance with chapter 1.2 and this procurement method has been approved by the Procurement Approver. Where direct sourcing is used, the reasons for doing so must be recorded. All written procurement contracts valued up to A$1million (GST inclusive) with small businesses must contain clauses which provide that Defence must pay interest where payments are not made within 30 days (or shorter period as specified in the contract) of receipt of a correctly rendered invoice Evaluation criteria must be determined and agreed upon prior to seeking quotes or going to tender. Before signing the contract (releasing a purchase order such as the SP020 Purchase Order and Contract for the Supply of Goods and Repair Services (SP020 form)), the Contract Signatory delegate must ensure that the Proposal Approver, Procurement Approver and Contract Approver delegations have been duly exercised. Where the SP020 form or DPC is used for the formation of a contract, the person issuing the purchase order to the supplier through ROMAN, MILIS or using the DPC must hold the Contract Signatory delegation and comply with the delegation requirements, Where the DPC or SP020 form is not used for the formation of a contract, the SP020 General Conditions of Contract for the Supply of Goods and Repair Services must not be provided to the supplier. A record of all important correspondence with the supplier must be kept in accordance with Defence record keeping policy and procedures. In accordance with Defence Chief Executives Instruction 2.3 - Defence Credit Cards and the DMO Chief Executives Instruction 2.3 - Corporate Cards, the DPC must be used for purchases of $5,000 or less unless there are valid reasons for not doing so. Officers using the DPC must undertake the training and hold the competencies outlined in paragraph 78. Where the DPC is not used, a purchase order must be raised. Prior to booking and undertaking travel, a travel budget must be drafted for approval by an authorised delegate. DMO Procurement officers must comply with Defence Materiel Instruction (Procurement) DMI(PROC)) 130002 - Mandatory Procurement Policy Requirements for Contract Changes.

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Operational Guidance
Simple Procurement Defined 6. Simple procurement is a procurement category where the overall level of risk and complexity is assessed as low after a suitable risk assessment has been conducted. Some of the risks that should be considered when making such an assessment are listed and discussed below, but will vary across procurements. Once a procurement has been categorised as a Simple procurement, it can then be conducted by officials holding the Simple procurement Competency, noting the level of documentary rigour will be less than for a Complex procurement 1 . Guidance on the differentiation between the different categories of Simple, Complex and Strategic procurement is contained in chapter 1.3.

Simple Procurement - A Risk Based Approach 7. Procurement officers must undertake a risk assessment before conducting any procurement to properly assess the risks associated with the procurement and accurately categorise the procurement as either: Simple, Complex or Strategic. The risk assessment should identify all relevant risks and the probability of those risks occurring. It should also assess the impact such events would have on the procurement and how such risks might be treated (risk management). The types of risks that should be considered include legal, commercial, financial, political, project management (including schedule), technical or logistics. The extent and rigour of the risk assessment should be commensurate with the size and complexity of the procurement as determined by the official conducting the procurement. For most low value, low risk, low complexity procurements, minimal or no risk documentation may be required, particularly where pre-existing arrangements such as a standing offer are used. For larger or more complicated procurements, a more formal methodology may be appropriate. In such cases, the level of risk should be identified by referring to risk evaluation criteria and then identifying where the risk sits in the risk matrix. Risks may then be categorised as low, medium, high or extreme 2 . Chapter 3.2 provides further information on risk assessment. Only where the overall level of risk is determined to be low should the procurement be categorised as a Simple procurement. Importantly, the existence of a risk does not necessarily raise the risk profile of the procurement where there is a clear and effective method for treating or managing that risk. For example, specialist advice from a Procurement officer holding a Complex procurement competency can often be used to treat risks as they arise, thus keeping the overall risk profile of a procurement low. The relevant approval documentation must document the results of the risk assessment and reference any risk mitigations that have been proposed. The Procurement Approver is responsible for validating the risk assessment and subsequent categorisation of the procurement.

8.

9.

Risk Factors for Consideration 10. When assessing the overall level of risk in a procurement that is proposed to be treated as a Simple procurement, the following questions should be answered with either a Yes or a No (please note, although this list is intended to be comprehensive, it is not exhaustive):

Can the procured goods/services be delivered WITHOUT the need for any design development or integration work to be undertaken? Can the procurement be undertaken WITHOUT any additional scoping or requirements definition work? Is the procurement NOT a covered procurement (i.e. is the procurement exempt from Division 2 (MPPs) of the CPGs)? 3 Is the procurement for standard commercial-off-the-shelf goods and/or services?

DMO Procurement officers must comply with the additional restrictions on exercising delegations as outlined in chapter 1.4. As defined in the DMO Project Risk Management Manual, page 23, Table 3.5. 3 Procurements valued at $80,000 or more which are not the subject of an exemption will be subject to the MPPs (CPGs para 8.4). Refer to paragraph 13 and chapter 1.2 for further information.
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Is the procurement for a part from an Original Equipment Manufacturer? Can the requirement be described WITHOUT drafting a Statement of Work? Will standard Defence terms and conditions be used with little or no alteration or negotiation (particularly in relation to limitation of liability and intellectual property)? Will the contract NOT require limitation of liability, liquidated damages or additional intellectual property clauses? Is the procurement an order against an existing standing offer in accordance with the preagreed terms and conditions of the standing offer and where the only variables are quantity and delivery point? 4 Can value for money considerations be restricted to price, quality, fitness for purpose and compliance with required timeframes and delivery needs? Will a single stage procurement process be employed? Is the proposed method of payment simple and straightforward, i.e. payment on delivery (or acceptance), or payment using the DPC at the point of sale? Will the contract be performed WITHOUT the need for any Defence-owned assets, government furnished facilities, equipment, data, information or services to be provided to the supplier? Can the procurement be conducted with only minimal need for specialist advice on legal, commercial, financial, project management (including schedule), technical and/or logistic aspects? Is the procurement low in monetary value e.g. less than $1 million?

11.

Yes answers to the above questions will generally indicate lower levels of risk. If you answered Yes to all of the above questions, then the procurement in question is almost certainly a Simple procurement. No answers to the above questions will generally indicate higher levels of risk and will require further consideration, but will not automatically make the procurement in question a Complex procurement. A procurement must be treated as at least a Complex procurement in the following circumstances:

12.

13.

where integration, design or development work will be required; where additional scoping or requirements definitions work is required; where limitation of liability, or liquidated damages clauses are included in the contract; where specific intellectual property rights are to be acquired; or where there is a requirement for financial or other securities.

14.

Where any risk is assessed as extreme, advice from a Procurement officer or delegate holding a Complex procurement competency must be sought to determine whether the procurement can be treated as a Simple procurement. As a general rule, where more risks are assessed as medium or where the official conducting the procurement is unsure about the risk assessment, this increases the probability that the procurement is not a Simple procurement and advice should be sought from a Procurement officer holding a Complex procurement competency. There is no monetary threshold for Simple procurement. However, the value of the procurement should be considered when assessing risk and when categorising a procurement as Simple or Complex. In some cases, a large dollar value (e.g. more than $1 million) may be enough to make the procurement a Complex procurement even if other risks are low.

15.

16.

Refer to the Standing Offer Notice Section on AusTender for a list of Standing Offers

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Defence Procurement Policy Manual Simple Procurement Process Covered Procurements and the MPPs Specialist Advice Needed 17. Covered Procurements are those valued at $80,000 or more and subject to the Mandatory Procurement Procedures (MPPs) set out in the CPGs - Division 2 and which are not subject to an exemption under CPGs, Appendix A or DPPM chapter 1.2. Procurement officers must comply with the MPPs, including the specific process requirements for all covered procurements. Although these requirements increase the level of process risk involved in the procurement, covered procurements do not necessarily need to be treated as Complex Procurements. For more information on covered procurements, please refer to the CPGs, chapter 1.2 or contact the relevant Defence and DMO Procurement Support Area listed at the beginning of this manual.

Conducting Simple Procurement Step by Step 18. In cases where there is no existing approved supply arrangement (e.g. a standing offer) the following steps should be followed, generally in the specified order. Further guidance on each of the steps is provided below:

identify the requirement; plan the procurement; conduct the risk assessment and determine how risks will be managed; decide on the method of procurement and obtain Procurement Approval; select the appropriate tendering and contracting template; if necessary, obtain FMAR 10 approval; obtain Proposal Approval including Funds Availability; assess the market; seek and receive an offer or offers (approach the market); evaluate the offer or offers; select a supplier (source selection); prepare an appropriate contract and/or purchase order; obtain Contract Approval; execute the contract by signature of an official with appropriate Contract Signatory delegation; raise a purchase order; comply with AusTender and Senate Order on Departmental and Agency Contracts reporting requirements (where applicable) (see chapter 5.8); manage the contract, including ensuring delivery of the contracted goods and/or services; make payment; ensure appropriate records have been retained; and evaluate the procurement briefly capture lessons learnt.

Where an existing arrangement does exist (e.g. a standing offer) the standard terms and conditions of the arrangement usually details the process for using the arrangement. If a standing offer arrangement is to be utilised, the processes outlined in the arrangement must be followed. Define the Requirement, Plan Procurement and Assess Risk 19. A clear, unambiguous description of the requirement is important for all procurements. For off the shelf procurement, a brief description, part or catalogue number may be all that is required. In other cases, it may be necessary to detail specifications or develop a draft Statement of Work Page SP5

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Defence Procurement Policy Manual Simple Procurement Process as the basis for seeking offers. The development of a Statement of Work and/or specifications will normally indicate a medium or high level of risk and may make the procurement a Complex procurement. This issue should be considered in the initial risk assessment and while the Procurement officer is responsible for developing the risk assessment and associated documentation, it remains at the discretion of the Procurement Approver to determine the overall risk level and categorisation of the procurement. In all cases, the description must provide sufficient information to allow all potential suppliers to quote for the work while at the same time allowing the contract to be enforced once executed. 20. While all procurement requires some planning, Simple procurement does not generally require detailed planning or detailed documentation. Documentation of the planning process can be concise but must clearly show the reasoning for the procurement. The preparation of a Proposal Approval submission should provide sufficient evidence of planning. Refer to the Office of Special Counsel (OSC) Intranet site for a template Proposal Approval submission. As a minimum, Procurement officers will need to determine:

how the requirement will be satisfied; whether funding is available and where it will come from; when the requirement needs to be delivered; and the delegates who will be providing Approvals.

Selecting the right Tendering and Contracting Template 21. Simple procurements may be undertaken using different tendering and/or contracting templates and consideration should be given to which template is most appropriate. Most Simple procurements will use the AC565 Request for Quotation form for seeking quotes and the SP020 form as the subsequent contract. The characteristics of these forms are discussed in more detail below. In some cases, it may be appropriate to use another approved Simple Procurement template. Where this is the case, the template package may include conditions of tender and response requirements which should be used. If a more detailed template is selected, and documentary requirements become too significant, the procurement category may need to be reviewed and re-categorised as a Complex procurement.

22.

ASDEFCON Shortform Series 23. ASDEFCON (Shortform Goods) is based on Form SP020. ASDEFCON (Shortform Goods) contains the same standard terms and conditions as Form SP020 with the exception that ASDEFCON (Shortform Goods) includes a clause limiting the liability of the supplier (clause 23). The inclusion of the limitation of liability clause in ASDEFCON (Shortform Goods) means any procurement which uses ASDEFCON (Shortform Goods) will be a Complex procurement. ASDEFCON (Shortform Goods) has been drafted in a manner that makes it suitable for a wide range of procurements which, but for the inclusion of a limitation of liability clause, would otherwise be classed as Simple Procurements. ASDEFCON (Shortform Services) has been developed specifically for those service requirements that are low risk and low value, and therefore categorised as Simple Procurements. Its use may be appropriate following an approach to the market using Form AC565. Examples of when it may be appropriate to use ASDEFCON (Shortform Services) include straightforward, short term work such as clerical or administrative services, basic trade services, ad hoc services such as gardening or cleaning services and basic consultancy services. More information on selecting templates generally can be found in the ASDEFCON Template Selection Guide and in chapter 2.3. It is also important to note that the SP020 form comprises both General Conditions of Contract and a Purchase Order. This means that it operates as a contract with the supplier and also acts Page SP6

24.

25.

26. 27.

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Defence Procurement Policy Manual Simple Procurement Process as a mechanism for raising funds within the Resource and Output Management and Accountability Network (ROMAN), or solely to raise funds in ROMAN. In cases where the General Conditions of Contract are not used and an alternative template is used for the formation of a contract with the supplier (such as ASDEFCON), the SP020 (Purchase Order) form will only operate internally to raise funds in ROMAN. In these circumstances, when providing the supplier and Purchase Order to the contractor, the SP020 General Conditions of Contract must not be provided. Funds Availability and Proposal Approval 28. 29. The next step in the Simple procurement process is to provide a cost estimate and identify the source of the funding (Cost Centre and General Ledger Account Code). Funds Availability must then be confirmed by an appropriate officer, normally a business manager or finance officer with access to the current financial records of the business unit. The spending proposal may need FMAR 10 approval. Further guidance on FMAR 10 is contained in chapter 1.4. Proposal Approval should then be obtained. (Note, however, if FMAR 10 approval is required, this must be obtained before Proposal Approval.) Further guidance on obtaining approval from the Proposal Approver and the responsibilities of the Proposal Approver delegate are contained in chapter 1.4.

30.

Assess the Market 31. Knowledge of the market is important when conducting a successful procurement as it allows procurement officials to make informed decisions on value for money and the promotion of efficient and effective competition. Knowledge of the market also assists when determining the method of procurement and in exercising Procurement Approval. The level of effort expended to understand the market should be commensurate with the value and risk of the procurement. Appropriate market research may include review of potential supplier publications, internet search, making use of Defence and other Government procurement networks and use of print resources, such as the Yellow Pages.

32.

Method of Procurement and Procurement Approval 33. After developing knowledge of the market assessed against the requirement, a method of procurement must be selected for consideration by the Procurement Approval delegate. Further guidance on obtaining approval from the Procurement Approver and the responsibilities of the Procurement Approval delegate are contained in chapter 1.4. Simple procurement is a category of procurement not a method of procurement. As such, a procurement designated as a Simple procurement may still be conducted under a variety of procurement methods, including direct sourcing, select tender and open tender. The use of an existing standing offer that was established through an open approach to the market is considered to be an open source procurement for AusTender reporting purposes. Further guidance on methods of procurement for standing offers is contained in chapter 3.1 In all cases, the method of procurement and the level of competition used should be commensurate with the size and risk profile of the particular procurement. However, the obligation remains to ensure that value for money is achieved and that the use of public money is efficient, effective and ethical. For non covered procurements, there is some discretion as to how many quotes or responses are sought. As such, a procurement method of direct sourcing, select tender or open tender can be used. If market intelligence justifies the use of direct sourcing after seeking only one quote, this course of action is open to the official conducting the procurement. Where direct sourcing is used, the reasons for doing so must be recorded. If it is not clear how many quotes are needed, seeking three quotes may be a useful compromise, but it is not a mandatory requirement. Again, in all cases, it is a decision to be made after having regard to the nature of the procurement and the circumstances of the market and the obligation remains to ensure that

34.

35.

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Defence Procurement Policy Manual Simple Procurement Process value for money is achieved and to ensure that the use of public money is efficient, effective and ethical. 36. For covered procurements an open tender procurement method must be used unless the MPPs permit the use of a select or direct source procurement method or an exemption to the MPPs applies in accordance with chapter 1.2, and this procurement method has been approved by the Procurement Approver. Further details of when to use these methods of procurement can be found in chapter 5.3. Please note that the method of procurement does not refer to the template or mechanism used to formally execute the subsequent contract.

37.

Standing Offers 38. Where a standing offer exists that meets the procurement requirement, the standing offer must be used in the first instance unless there is a valid reasons for not doing so (refer to chapter 5.3 for further information). The Standing Offer Notice Section of AusTender contains a current list of available standing offers. If a suitable standing offer panel is not available, an alternative procurement method will be necessary. Guidance on establishing and placing orders under standing offers is contained in chapter 4.8.

Seeking and Receiving Offers 39. Where the method of procurement chosen for a Simple procurement involves approaching the market to seek offers from one or more suppliers, it is best practice to obtain quotes in writing. Where oral quotes are sought, Procurement officers should ensure that the same kind of information is obtained from all suppliers, the Defence standard terms and conditions are agreed to, and the decision is documented. Quotes will normally be obtained using the AC 565 Request for Quotation form. As discussed in paragraph 19, some Simple procurements may employ a different template and it may be appropriate to use the conditions of tender and annexes contained in that template to seek offers. For direct sourcing and select tendering, the AC565 form or other request documentation can be provided directly to the relevant parties and it is not mandatory to use the AusTender system for procurement advertising in these cases. Once the request has been issued, supplier(s) must be given sufficient time to prepare and lodge their response. Refer to chapter 5.5 for the minimum response periods required for covered procurements. Where an open tender is employed (and even where the procurement is not a covered procurement governed by the MPPs), the procurement must be published on AusTender in accordance with Financial Management Guidance No 15 - Guidance on Procurement Publishing Obligations, July 2007 and chapter 5.5. For any covered procurement involving an open approach to market the same minimum response times as discussed above in paragraph 39 apply to the procurement. For further information on covered procurements and the MPPs, please refer to the CPGs and chapter 1.2. Covered procurements must also comply with the tender receipting and opening procedures contained in chapter 5.6. For Simple procurements conducted using a standing offer, a pro-forma document (usually a tasking statement and official order) from the standing offer itself will normally be used.

40.

41.

42.

Evaluate Offers and Select a Supplier 43. All offers received in response to a Simple procurement request process must be treated fairly and equitably and only evaluated on the basis of criteria declared in the request documentation. Evaluation criteria will vary from one procurement to another but the following should be considered:

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compliance with delivery schedules; quality of the supply; fitness for purpose and technical suitability; whole of life cost, including ongoing maintenance, renewable licensing fees and the cost of consumables; and total price and any discount arrangements.

44.

For Simple procurements Procurement officers will usually make a value for money judgement on the basis of the price offered, quality, fitness for purpose and compliance with delivery requirements and any mandatory requirements. Evaluation criteria must be determined and agreed upon prior to seeking quotes or going to tender. Simple procurements do not require complicated evaluation processes, although the process should be documented. A detailed written Tender Evaluation Plan will not normally be needed for a Simple procurement. A simple matrix can be used for the evaluation of low value procurements. More detail should be included in the matrix for higher value Simple procurements. In all cases, the general principles in evaluation should be applied, in particular that offers must be assessed against the requirement or evaluation criteria stated in the request documentation. A detailed Source Evaluation Report will not normally be needed for a Simple procurement. A simple documented summary of the tender evaluation results with a recommendation to select a supplier would generally be sufficient. Procurement officers should refer to chapter 5.4 where mandatory (essential) criteria are included in request documentation.

45.

Prepare an Appropriate Contract 46. Defence has established a set of standard terms and conditions, in the SP020 form, under which Simple Procurement is normally conducted. The SP020 form was designed to be used in conjunction with the AC565 form. Procurement officers should not deviate from these standard terms and conditions when dealing with Simple procurements without seeking specialist legal advice or except as allowed by the template itself (see chapter 2.3). The need to deviate from the standard terms and conditions may indicate that it is not a Simple procurement. A copy of the terms and conditions is available on the Commercial Policy and Practice website Both the SP020 and AC565 forms are also available from the Defence Financial System ROMAN and the Military Integrated Logistic Information System (MILIS), as well as the Web Forms facility on the Defence Intranet. For external users the SP020 form is available via the Contracting link on the DMO website. There may be occasions when special conditions need to be included in the SP020 form when dealing with Simple procurements. These special conditions may relate to specific packaging requirements, shelf life of the goods being purchased, etc. When including any special conditions, Procurement officers should seek assistance from an officer with the Complex procurement competency to assess if the inclusion of the special conditions changes the procurement from Simple to Complex. Inclusion of clauses relating to limitation of liability, liquidated damages, intellectual property or a requirement for financial or other securities will elevate a procurement to the Complex level and in which case the SP020 form cannot be used. Refer to paragraphs 22 26 for further information on the ASDEFCON (Shortform) series of templates. Other approved Simple procurement templates may also be appropriate for use when conducting Simple procurement. Where anything more than minimal advice from a Procurement officer holding a Complex procurement competency becomes necessary to use such templates, the procurement category should be reviewed. In all cases of contract preparation for a Simple procurement, it is assumed that contract negotiations will not be necessary, except at the most basic level. If the procurement involves the need for significant negotiations necessitating specialist advice, the risk level will have risen to medium and the categorisation of the procurement as Simple procurement should be reviewed. Page SP9

47.

48.

49.

50.

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Defence Procurement Policy Manual Simple Procurement Process Source Selection Approval and Contract Approval 51. Contract Approval is obtained after the following has occurred:

the proposal to spend public money has been approved (Proposal Approval); the method of procurement has been approved (Procurement Approval); a preferred supplier has been determined; the source selection has been approved; and a draft contract has been prepared.

52.

Source selection approval, which does not involve exercising of a financial delegation, is usually sought in the form of a written submission, including a comparative statement (a written summary detailing the significant features of each quote together with a clear statement of the relative merits of each in relation to the criteria). It is important for accountability, as a means of informing others involved with managing and monitoring the procurement, to record evaluation and selection decisions, together with their rationale. Contract Approval must be provided prior to contract signature. Further guidance on the approvals necessary for any procurement is contained in chapter 1.4.

53.

54.

Contract Signature and Raising a Purchase Order 55. Once approval from the Contract Approver delegate has been obtained the supplier may be contracted to provide the goods or services. Where a purchase order (such as the SP020 form or MILIS orders) or the DPC are used, ,the person releasing the purchase order to the supplier through ROMAN, MILIS, or using the DPC must hold the Contract Signatory delegation and comply with the delegation requirements. Before signing the contract (that is releasing a purchase order such as the SP020 form or MILIS orders), the Contract Signatory delegate must ensure that Proposal Approver, Procurement Approver and Contract Approver delegations have been duly exercised. For purchase orders issued from ROMAN and MILIS, the exercise of the Contract Signatory delegation may not involve the delegate physically signing their name. Instead the electronic release of an order from ROMAN and MILIS exercises this delegation. For manual (ie printed) MILIS orders which contain a signature block, the Contract Signatory should sign their name to avoid supplier confusion. The contract document to be signed will depend on the contracting template originally selected. For low value purchases there often will not be a formal written contract that is signed by both parties. In this case, the issue of a purchase order will generally create a contract. If a formal written contract is to be used and the Procurement officer has concerns regarding the suppliers nominated representatives authority to sign the contract, specialist contracting advice should be sought. The final contract (original plus duplicate) should be signed first by the supplier and then by the Defence representative in order to reflect the final agreement reached by the parties. The supplier is given a copy of the final contract and Defence retains the original contract. Where a written contract has been exchanged, it is not necessary to also provide the supplier with a copy of the ROMAN or MILIS purchase order, however, a purchase order record must still be raised in ROMAN or MILIS, as applicable, to establish visibility of commitment to price, quantity and delivery date. Unsuccessful suppliers should be informed of the final decision as soon as possible after a final decision is made regarding their responses, but no later than 48 hours after the award of the contract (posting of the purchase order). The method of informing unsuccessful suppliers should be the same as the method used to obtain the offers, e.g. if offers were sought by fax or email, unsuccessful suppliers should be similarly advised. Refer to chapter 5.7.A for information that can be provided to unsuccessful suppliers in a debrief. The extent of the debrief should reflect the complexity and value of the procurement. For Simple procurements, standard form Page SP10

56.

57.

58.

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Defence Procurement Policy Manual Simple Procurement Process debriefs may be used. Please note that for any covered procurement, unsuccessful suppliers have a right under the MPPs to seek reasons for why they were not successful. Contract Reporting and other Reporting Requirements 59. All procurements of $10,000 or more, including purchases utilising the DPC, are required to be reported on the AusTender website within six weeks of the signing of the contract (release of the purchase order). This reporting requirement is undertaken via automatic data transfer from the ROMAN and Card Management System to the AusTender system. Where supplies are purchased through MILIS, the contract must be manually loaded onto AusTender. This requires the user to have AusTender CN/SON access. Where the monetary value of procurement exceeds $100,000 there are additional reporting requirements. Procurement officers may need to refer to a Procurement officer possessing the Complex Procurement competencies. Additional reporting requirements include reporting the procurement on the Interim Defence Contracts Register. Refer to chapter 5.8 for further information on the reporting of procurement activities. When determining if a procurement meets the financial thresholds for reporting purposes, the GST component of the procurement price is to be included.

60.

61.

Contract Management 62. Ensuring that the obligations of both parties are complied with is the essence of good contract management. In this context, progressing a contract through regular contact with the supplier is an essential part of the procurement cycle. In most cases, this can be accomplished by telephone, with a record of the conversation placed on file. Where issues materialise in the course of the contact, these should be dealt with in accordance with the provisions of the contract i.e. dispute resolution, exercise of warranties, contract change or possibly contract termination. A record of all important correspondence with the supplier must be kept in accordance with Defence record keeping policy and procedures. Where necessary, specialist contract management advice should be sought.

Delegation Requirements for Contract Changes 63. The financial delegations requirements for contract changes are detailed in chapter 6.7. DMO Procurement officers must comply with Defence Materiel Instruction (Procurement) DMI(PROC)) 130002 - Mandatory Procurement Policy Requirements for Contract Changes when processing contract changes.

Delivery, Acceptance and Payment 64. On delivery, goods need to be inspected for compliance with the purchase order and contract and receipted on the financial system where appropriate. In the case of services, appropriate steps should be taken to ensure that the services were provided in accordance with the contract. Where the requirements are met, the goods/services should be accepted in accordance with the contract. Defence is contractually obliged to pay for Supplies (goods and services) which have been delivered and accepted in accordance with any purchase order (or other request) that was issued for the Supplies. Payment conditions are detailed in the procurement contract. Defences standard terms of payment are within 30 days after the acceptance of the goods or services AND the receipt of a correctly rendered tax invoice. In accordance with Finance Circular 2008/10, all written procurement contracts valued up to A$1million (GST inclusive) with small businesses must contain clauses which provide that Defence must pay interest where payments are not made within 30 days (or shorter period as specified in the contract) of receipt of a correctly rendered invoice. Interest for late payments requires receipt of a separately rendered invoice. Refer to chapter 6.4 for further information on how interest is calculated.

65.

66.

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Defence Procurement Policy Manual Simple Procurement Process 67. Where an incorrectly rendered tax invoice is received, that tax invoice should be returned to the supplier for amendment. Defence does not have any authority to amend another partys invoice. Procurement officers involved in payment of accounts should refer to Defence Chief Executives Instruction (CEI) 2.4 Payment of Accounts and DMO CEI 2.4 - Payment of Accounts. Where a procurement is made utilising the DPC, payment to the supplier will occur under their normal credit card arrangements. Defence will make payment directly to the DPC provider. On occasions Defence may receive invoices for Supplies (goods and services) where no purchase order or contract has been raised. These invoices need to be checked carefully to ensure that the goods or services were actually requested and properly authorised. The practice of ordering Supplies other than through raising a purchase order, a contract, or using the DPC is a breach of Defence and DMO 5 policy and should be reported to the appropriate manager. Notwithstanding, Defence is contractually bound to pay for all requested Supplies.

68. 69. 70.

Record Keeping in Simple Procurement 71. Throughout the Simple procurement process, Defence officials should ensure that appropriate records and documentation are generated at the correct times and retained in accordance with Defence record keeping policy and procedures. For procurements conducted under standing offers, the pro-forma tasking statements (usually an official order and a tasking statement) of the standing offer will normally meet the requirements for record keeping, while use of the standing offer will allow some steps in the process to be abbreviated or skipped, such as assess the market. For other Simple procurements, the use of the standard AC565 and SP020 forms will also create important records, but these documents will not provide evidence of how risk was assessed or treated, nor will they explain why a procurement was categorised as Simple and who made this decision. To ensure complete records are kept, it is recommended that a delegate submission be prepared, consistent with the templates found on the OSC Website. Such a submission will address many of the record keeping requirements discussed throughout this chapter, including: procurement planning, identification of risks, justification for the method of procurement and recording of delegations. Once a contract has been executed, it is important that a copy of the original contract can always be produced, as well as the current working version of the contract that incorporates all changes (if any) that the parties have agreed post signature.

72.

73.

Evaluating the Procurement Capturing Lessons Learnt 74. After the procurement has been completed i.e. acceptance of the goods or services and payment has been made, Procurement officers should conduct a brief evaluation of the procurement to capture any lessons that may have been learnt. The following checklist identifies some questions which should be considered when evaluating a procurement:

Was the identified need satisfied (did we get what we needed)? Was the quality satisfactory? Were the goods or services delivered on time? Was the service of the supplier satisfactory? Were communication lines between Defence and the supplier satisfactory? Were communication lines within Defence satisfactory? Was payment made on time? Was the deliverable over-specified?

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Is there anything that could be improved? Was the level of effort, risk assessment and documentation within Defence appropriate to the procurement, given its risk and cost? Was the method of procurement used the most appropriate to obtain overall value for money? Was value for money achieved from the Commonwealths perspective? Was the procurement activity worthwhile from the perspective of Industry? Were appropriate records kept, including the original contract?

Regular or On Going Requirements 75. Where Procurement officers recognise that the same or similar items are being procured on a regular and frequent basis, it may be appropriate to establish a standing offer for the supply of those goods or services. Further information on establishing standing offers is contained in chapter 4.8. The establishment of a standing offer is a Complex procurement and should be conducted by a Procurement officer with the appropriate experience and Complex procurement competency.

76.

Purchasing Card 77. The DPC is a payment mechanism that can be used as an alternative to other methods of payment, such as cheque, direct credit and petty cash. The DPC offers a number of advantages over these other payment methods in terms of convenience, the potential to reduce paperwork (particularly claims for payment) and the prompt payment of suppliers. It is an alternative to raising a purchase order. In accordance with Defence CEI 2.3 Defence Credit Cards and the DMO CEI 2.3 Corporate Cards the DPC must be used for purchases of $5,000 or less unless there are valid reasons for not doing so. Reasons for not using the DPC could include, but are not restricted to:

78.

procurement under a standing offer; procurement made through MILIS; procurements that require the agreement of terms and conditions that differ from those that are normally available; procurements where the preferred tenderer does not accept payment by the DPC; and procurements where standard payment terms under a purchase order represent better value for money, e.g. where a premium is imposed by the supplier for use of a credit card.

79.

The DPC can be used, on a case by case basis, for purchases of $5,000 or more. The DPC must not be used for procurement made through MILIS. Where the DPC is not used, a purchase order must be raised. When undertaking Simple procurement using the DPC as a method of payment the following training and competency requirements apply:

80.

For purchases of $5,000 or less the card holder must successfully complete the DPC elearning course on CAMPUS (on-line training) http://lms.dcb.defence.gov.au/logon.asp to exercise delegations associated with the purchase; and For purchases greater than $5,000, the card holder must undertake the online training and hold the Simple procurement competency to exercise the delegations associated with the purchase.

81.

A card holder is considered to have undertaken the on-line training or hold the appropriate competency when it is reflected on the individuals PMKeys training record.

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Defence Procurement Policy Manual Simple Procurement Process 82. 83. Further guidance on the DPC, including the procedures for obtaining a DPC, can be obtained from the Defence CEI 2.3 - Defence Credit Cards and the DMO CEI 2.3 - Corporate Cards. Defence policy, including the requirement for contract and other reporting of procurements of $10,000 and over, apply to the use of the DPC as if the procurement was being conducted against a purchase order.

Use of Purchasing Card on the Internet 84. Procurement of goods or services with the DPC via the Internet can only be undertaken if all the following criteria are satisfied:

the Internet payment site is secure; the procurement is low-value and low-risk, i.e. a Simple procurement; there is no other way of ordering and paying for the specialist item; and appropriate risk mitigation strategies have been put in place.

85. 86.

Satisfaction of each of the above criteria must be met before the release of DPC numbers and cardholder details via the Internet. Risk mitigation strategies that could be adopted, depending upon the circumstances, include:

being confident that the on-line supplier is a reputable business; the web site is a bona fide website (do not access sites via indirect web links/unsolicited emails etc) and secure (i.e. https); read and be aware of the terms and conditions (particularly returns/cancellation policies etc); and place a low financial limit on the DPC to minimise the consequences of fraudulent misuse.

Defence Travel Card 87. In this section the Defence Travel Card and the DMO Travel Card are referred to collectively as the Travel Card (TC). The TC is a corporate credit card intended for use by Defence personnel to pay for official travel expenses. Prior to booking and undertaking travel, a travel budget must be drafted for approval by an authorised delegate. The delegate should, in approving the travel budget, ensure it fulfils the requirements of a proposal to spend public moneys and must have regard to Defence travel policy. The budget then provides guidance to the traveller as to the allowable expenses during the trip. The TC should be used in accordance with the policy and process contained in the ADO Travel Manual and the Card Management System Manual. Further information can be obtained by visiting the Defence Travel website.

Delegations, Competencies and Proficiencies 88. Once the procurement is categorised as a Simple procurement, an official holding the Simple procurement competency may complete the procurement, subject to local arrangements and management requirements. Except for where the DPC is used for purchases under $5,000, delegates exercising financial delegations for Simple procurement are required to hold only the Simple procurement competency. Except for Simple procurements valued at $5,000 or less, delegations must be exercised by a minimum of two separate delegates. The three delegations of Proposal, Procurement and Contract Approver cannot be exercised by the same delegate. For DMO procurements greater than $5,000, a single DMO delegate must not exercise both Proposal Approver and Contract Approver delegations. Refer to the Mandatory policy in chapter 1.4 for further guidance on exercising delegations and any restrictions which may apply. Although there is no monetary threshold for Simple procurement, where it is proposed that a procurement valued at $80,000 or more be treated as a Simple procurement, the decision to do so must be done in accordance with paragraph 13. Once the decision has been made to treat a procurement valued at $80,000 or more as a Simple procurement, the procurement can be Page SP14

89.

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Defence Procurement Policy Manual Simple Procurement Process completed, including exercise of delegations, by an officer(s) holding only the Simple Procurement competency. 90. It is recommended that all staff involved in the Simple procurement process, including those involved with the receipt of goods and payment of invoices, obtain the Simple procurement competency. The Simple procurement competency may be obtained by the successful completion of the Simple procurement training (see chapter 1.4 or the CAMPUS website ). For Simple procurement, delegates may send the approval by email in the following circumstances:

91.

the delegates are not co-located and are separated by a reasonable distance; and in-person approval would unreasonably delay the process.

92.

Where the above conditions are satisfied, the delegate may forward approval (Proposal, Procurement and/or Contract Approver) by email to the processing area for action. The delegate should print a copy of the email that they have sent, sign it and place it in their physical filing system, or scan it and store it in the Defence Record Management System, and destroy the original (if the delegate makes this a practice under the General Disposal Authority). The processing area should also file a copy of the received email. It is the responsibility of the processing area to forward approvals by email or physically to any other delegates as required. (This is in accordance with POLMAN3 (third edition) and General Disposal Authority 2002/05249910 for source records that have been copied, converted or migrated.) The email version of the document provides authority and may be acted upon. However, the signed document or the scanned approval will be regarded as the official record of the approval. Where a procurement activity which commenced as a Simple Procurement is elevated to a Complex Procurement, all future delegations will need to be exercised by delegates who hold Complex competencies. Delegate approvals exercised prior to the elevation will not be affected.

93. 94.

Key References
Commonwealth Procurement Guidelines Defence Chief Executives Instruction 2.1 - Procurement DMO Chief Executives Instruction 2.1 - Procurement Defence Chief Executives Instruction 2.3 Defence Credit Cards DMO Chief Executives Instructions 2.3 - Corporate Cards Defence Chief Executives Instructions 2.4 - Payment of Accounts DMO Chief Executives Instructions 2.4 - Payment of Accounts FINMAN 5 POLMAN 3 General Disposal Authority 2002/05249910 Form AC565 Request for Quotation Form SP020 - General Conditions of Contract for the Supply of Goods and Repair Services Practical Procurement & Prompt Payment (P4) Manual Defence Materiel Instruction (Procurement) DMI(PROC)) 130002 - Mandatory Procurement Policy Requirements for Contract Changes

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Defence Procurement Policy Manual 1.1 The Legal Framework

1.1
Introduction
1. 2.

The Legal Framework

This chapter applies to procurement undertaken within Defence and the DMO. This chapter outlines the legal framework governing Commonwealth procurement.

Mandatory Policy
There is no mandatory policy for this chapter.

Operational Guidance
Overview 3. The Australian Constitution provides a legal framework for the exercise of Commonwealth powers. This legal framework is divided into three functions:

Executive; Judicial; and Legislative.

Executive Function Role of the Governor-General 4. The Executive power of the Commonwealth is vested in the Queen and is exercisable by the Governor-General as the Queen's representative. When exercising the Executive power of the Commonwealth, the Governor-General acts on the advice of Ministers who are responsible to the Parliament. That advice is conveyed through the Federal Executive Council. The GovernorGeneral presides at meetings of the Executive Council which are attended by at least two Members of the Executive Council.

Role of the Australian Public Service 5. The Executive function is also performed by the Australian Public Service (APS). The role of the APS is to:

provide advice and support to the Government and Ministers; and effectively and conscientiously implement Government decisions and programs.

6.

Ministers are responsible for the overall management of their portfolios and are accountable to the Parliament for the exercise of those responsibilities. APS officers are accountable in turn to their relevant Minister. APS officers are held accountable for the advice they provide to the Government as their work plays a substantial role in shaping Government policy decisions. The role of the APS policy adviser is to give:

7.

honest, accurate and practical advice to Government; and full and accurate information about the factual and technical background of policies and their administration to the Parliament.

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Defence Procurement Policy Manual 1.1 The Legal Framework 8. APS officers responsible for implementing policy should ensure that the Governments intentions are both understood and carried out.

Government policy and procurement decisions 9. Policies are intended to strike a balance between prescription and empowerment. The focus is on the achievement of results or outcomes rather than imposing instructions and the observance of detailed procedures. An emphasis is placed on best practice and the benefits of planning, good management, and justifying decisions taken. Procurement policies focus on certain principles that must be observed in the procurement process. Procurement areas retain discretion to decide how best to handle their agencys specific needs. Procurement areas should take account of the following when making procurement decisions:

10.

the applicable legislation; the applicable procurement policies; their own particular circumstances; the nature of the markets in which they are buying; and the obligation to obtain best value for money.

Judicial Function 11. The Judicial function is performed by the courts. Courts interpret and apply legislation and common law. Federal matters are normally heard in the Federal Court. Appeals from decisions made in this court may be heard in the High Court. The High Court is the highest court in Australia and any determination made by the High Court is final. Parliament has also created a merit review system applicable to a range of administrative decisions. The primary agency for such reviews is the Administrative Appeals Tribunal (AAT). Other review agencies include the Merit Protection and Review Agency, the Privacy Commissioner and the Australian Human Rights Commission. It is the role of the Judiciary to interpret the meaning and application of both statutes and delegated legislation. The Judiciary also has responsibility for interpreting and applying the common law. Common law is based on the progressive development of legal principles which have emerged through the judgments of decided cases. The Judiciary must adhere to the doctrine of precedent ie. a decision of a higher court in an earlier case must be followed. Policy decisions are determined by legislation and often their scope is also determined, and sometimes limited, by common law. APS officers therefore need to be aware of the applicable legislation that may have an impact, directly or indirectly, on their activities. Legal advice may need to be sought in certain circumstances to determine the effect such legislation or common law has on procurement activities (see chapter 2.1).

12.

13.

14.

Legislative Function 15. The Legislature consists of both Houses of Parliament: the House of Representatives and the Senate. The role of the Legislature is to pass legislation. Legislation includes those statutes passed by Parliament as well as delegated legislation including regulations, by-laws and statutory instruments.

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Defence Procurement Policy Manual 1.1 The Legal Framework

Procurement Framework Hierarchy Financial Management and Accountability Act 1997 16. The Financial Management and Accountability Act 1997 (Cth) (FMA Act) provides the framework for the proper management of public money and public property by the Executive arm of the Commonwealth. Sections 53 and 62 of the FMA Act and Financial Management and Accountability Regulations 1997 (Cth) (FMAR) 24-26 provide the Finance Minister, the Treasurer and Chief Executives with wide powers of delegation of their powers and functions to officials. The FMA Act enables both the Defence and DMO Chief Executives to delegate some of these powers and functions to appropriate officials. In order for any person within Defence or DMO to exercise a power or function assigned or delegated to the Defence or DMO Chief Executive, must delegate the power or function to that person. The Secretary is the Chief Executive for Defence and CEO DMO is the Chief Executive for DMO.

17.

18.

Commonwealth Procurement Guidelines 19. The Commonwealth Procurement Guidelines (CPGs) are issued by the Department of Finance and Deregulation. The CPGs flow down from the FMA Act and FMARs 1 . Further information on the CPGs is contained in chapter 1.2.

Defence and DMO Chief Executives Instructions 20. FMAR 6 enables both the Defence Chief Executive (Secretary of Defence) and DMO Chief Executive (CEO DMO) to issue lawfully binding instructions on financial administration matters to all employees of Defence including Australian Defence Force members and Australian Public Service officers. The authority of the Secretary of Defence and CEO DMO relates only to financial administration and does not affect normal command arrangements. The Defence Chief Executives Instructions (CEIs) and the DMO CEIs incorporate the requirements of the FMA Act, FMARs and the CPGs. Further information on the Defence CEIs and the DMO CEIs relating to procurement is contained in chapter 1.4. It is important to note that the two sets of CEIs are not the same and may continue to change independently of each other.

21.

Defence Procurement Policy Manual 22. The Defence Procurement Policy Manual (DPPM) is the primary reference document for Procurement officers undertaking procurement at all levels within Defence. The Introduction contains further information on the authority of the DPPM. Other key sources of Defence procurement policy for purchasing officers undertaking procurement within Defence include:

23.

for Complex and Strategic procurements within the DMO, the Quality and Environmental Management System (QEMS); Defence Procurement Policy Instructions (DPPIs) and Defence Materiel Instructions (DMIs); for information on the development of proposals for major new Defence capabilities, the Defence Capability Development Hand Book ; and for procurement relating to infrastructure the Infrastructure Management website.

24.

Within individual purchasing areas there may also be local procurement instructions and standard procedures that must be followed.

The Commonwealth Procurement Guidelines are issued pursuant to FMAR 7.

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Defence Procurement Policy Manual 1.1 The Legal Framework

Key References
Financial Management and Accountability Act 1997 (Cth) Financial Management and Accountability Regulations 1997 (Cth) Commonwealth Procurement Guidelines Defence Chief Executives Instructions DMO Chief Executives Instructions Defence Capability Development Hand Book

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines

1.2
Introduction
1. 2.

Commonwealth Procurement Guidelines

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter gives an overview of the Commonwealth Procurement Guidelines (CPGs) issued by the Department of Finance and Deregulation (DOFD) as of 1 December 2008 and their impact on Defence procurement. This chapter does not detail all of the requirements of the CPGs, particularly the Mandatory Procurement Procedures specified in Division 2 of the CPGs (MPPs) that apply to covered procurements. Each mandatory CPG obligation is detailed in the chapter that is relevant to the particular obligation, for example, chapter 5.5 details the requirements and process for dealing with late tenders and direct sourcing restrictions are detailed in chapters 3.1 and 5.3. Procurement officers should refer to the Definitions section for the definitions of the terms non-covered procurements, covered procurements and Defence/DMO exempt procurements. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

Mandatory Policy
Defence officials must comply with the CPGs when undertaking procurement in accordance with Financial Management and Accountability Regulation 1997 (FMAR) 7(4). In accordance with FMAR 9, a Defence official must not approve a proposal to spend public money unless satisfied, after reasonable inquiry that giving effect to the spending proposal would be a proper use of Commonwealth resources. Defence officials must have regard to and comply with the mandatory requirements in Finance Circulars and Commonwealth Procurement Circulars when undertaking procurement. The Procurement Approver must ensure that the reasons supporting a determination that an exemption from the MPPs is available are documented and appropriately filed. Any request to CEO DMO for an exemption based on paragraph 2.7 of the CPGs must be endorsed by either SCCEO DMO or GM Com before forwarded to CEO DMO. Proposal approver delegates must not approve a proposal to spend public money that is inconsistent with the terms of any Australian Government approval or decision relevant to the procurement.

Operational Guidance
Overview 3. The CPGs provide all agencies governed by the Financial Management and Accountability Act 1997 (FMA Act) and certain Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies with the procurement policy framework for conducting procurement activities. Amendments to the FMA Act and FMARs on 1 July 2009 have resulted in a change to the status of the CPGs. FMAR 7(4) now states that An official performing duties in relation to the procurement of property or services must act in accordance with the Commonwealth Procurement Guidelines. The former FMAR 8(2) which previously allowed for an official to act contrary to the CPGs provided a written record was made containing the reasons for doing so Page 1.21

4.

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines has now been deleted. In addition, subsection 64(3) of the FMA Act has been inserted into the FMA Act to give FMAR guidelines, including the CPGs, status as legislative instruments, making them part of the law of the Commonwealth. 5. The CPGs state that requirements that are to be complied with in all circumstances are denoted by the use of the term must. The use of the term should in the CPGs denotes matters of sound practice. A similar approach will also be adopted throughout the DPPM. The CPGs are divided into an Introduction, two Divisions and the Appendices. Division 1 applies to all Commonwealth procurements and Division 2 (the MPPs) applies to all covered procurements.

6.

CPG Introduction 7. The Introduction covers the purpose, scope and legislative and policy framework of the CPGs. Of particular significance to Defence is the information on Coordinated Procurement Contracting Arrangements, and the policies that interact with procurement. Further information on these subjects can be found in DPPIs 5/2008, 29/2009, 17/2010, and DPPM chapter 3.10 respectively.

CPGs Division 1 - Procurement Principles 8. 9. All procurements undertaken in Defence and the DMO must comply with Division 1 of the CPGs Division 1 of the CPGs establishes value for money as the core principle governing Commonwealth procurement. Value for money is enhanced by three other key principles:

encouraging competition by ensuring non-discrimination in procurement and the use of competitive procurement processes; promoting the use of resources in an efficient, effective, economical and ethical manner, in accordance with section 44 of the FMA Act; and ensuring that decision-making by officials occurs in an accountable and transparent manner.

Note: The term economical has been added to the definition of proper use in section 44 of the FMA. The CPGs have not been updated to reflect this change to the definition. For further guidance on the term economical refer to Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12). 10. Value for money should be evaluated on a whole-of-life basis and cost is not the only factor in determining value for money. It is influenced by a number of factors including:

fitness for purpose; the performance history of each tenderer; the relative risk of each proposal; the flexibility to adapt to possible change over the lifecycle of the property or service; financial considerations including all relevant direct or indirect benefits and costs over the whole procurement cycle; and the evaluation of contract options (for example, contract extension options).

11.

Division 1 of the CPGs contains further information on value for money and the key principles mentioned above. Other factors that influence value for money in the Defence context are provided in chapter 5.6. Procurement officers should be aware that the overall goal of the procurement process is to provide a value for money recommendation to the delegate. The requirement to consider and achieve value for money is not limited to procurement delegation considerations. Each step in

12.

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines the procurement process requires the application of value for money principles to ensure the procurement achieves overall value for money. 13. The following are examples of steps over the life cycle of a procurement process where Defences ability to achieve value for money can be affected:

Planning. Planning helps define objectives and methods and helps in assessing, monitoring and directing the progress of the procurement; Market Research. Find out what potential suppliers there are, what price is fair and reasonable and how well potential suppliers perform; Requirement Development. Develop requirements/specifications which focus on the outcome expected from the purchase rather than specifying a particular way of meeting the requirement; Selection of Procurement Method. Make effective use of competition in the market place; Tender and Contract Development. Ensure that the terms and conditions of contracts are clear and precise, reflect the intent of the parties and optimise achievement of value for money; Negotiation. Negotiate with one or more preferred tenderers to clarify ambiguities in a tenderers offer, optimise risk allocation, agree pricing arrangements and other commercial terms to the mutual satisfaction of both parties; Relationship management. Develop and maintain a good relationship with the contractor and preserve the mutual interest you initially achieved; Contract Management. Monitor, evaluate and manage the transaction over its operating life; and Retendering. Reconsider supply arrangements at the contract completion or at the time of exercising options if they no longer offer value for money.

14.

Further guidance on determining value for money is contained in Annex 1A.

CPGs Division 2 - Mandatory Procurement Procedures 15. Division 2 of the CPGs outlines the Mandatory Procurement Procedures (MPPs) that must be followed by agencies when conducting covered procurements. See the definition of covered procurements in the Definitions section and as further explained in paragraph 19. The MPPs complement the general principles set out in Division 1 of the CPGs and are not to be interpreted or applied in a manner that diminishes or negates those general principles. This chapter will not outline all of the MPPs applicable to covered procurements, as the specific requirements are detailed in the relevant chapter. For example, chapter 5.5 outlines the application of the MPPs when dealing with Late Tenders. While the MPPs do not represent mandatory policy for non-covered procurements, they are generally considered to represent best practice in the conduct of tender processes and should be complied with where possible consistent with achieving a value for money procurement outcome. Further guidance on the application of the MPPs is contained in the DOFD publication Financial Management Guidance (FMG) 13 - Guidance on the Mandatory Procurement Procedures.

16.

17.

18.

Definition of Covered Procurement 19. In accordance with the CPGs, a procurement, except a procurement which is specifically exempt in accordance with Appendix A of CPGs, is a covered procurement if the estimated value of the property or services being procured is above the relevant threshold:

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines

for procurements (other than for construction services) by FMA Act agencies, such as Defence and DMO, the procurement threshold is $80,000; for procurements (other than for construction services) by relevant CAC Act bodies, such as Defence Housing Authority, the procurement threshold is $400,000; or for procurements of construction services by FMA Act agencies and relevant CAC Act bodies, the procurement threshold is $9 million.

20.

If a procurement is categorised as a covered procurement, it may be exempt for the operation of the MPPs for essential security reasons if it is a Defence/DMO Exempt Procurement in accordance with paragraphs 23-27.

Valuing Procurements 21. The procurement value is the maximum anticipated value of a contract, including options, extensions, renewals or other mechanisms that may be executed over the life of a contract. The estimated value includes:

all forms of remuneration, including any premiums, fees, commissions, interest, anticipated travel costs and other revenue streams that may be provided for in the proposed contract; the total maximum value of the property or services being procured, including the value of any options in the proposed contract; and any taxes or charges (including GST).

For further information on valuing procurements, particularly for valuing a lease or rental procurement, refer to paragraphs 8.5 8.10 of the CPGs. Exemptions 22. The CPGs provide for certain exemptions from the MPPs. These exemptions are specified in Appendix A to the CPGs and are as follows:

leasing or purchase of real property or accommodation. The procurement of construction services is not exempt; procurement of property or services by an agency from other Commonwealth, State, Territory or Local Government entities where no commercial market exists or where legislation or general government policy requires the use of a government provider (e.g. tied legal services); purchases funded by international grants, loans or other assistance, where the provision of such assistance is subject to conditions inconsistent with the CPGs; purchases funded by grants and sponsorship payments; procurement for the direct purpose of providing foreign assistance; procurement of research and development services, but not the procurement of inputs to research and development undertaken by an agency; the engagement of an expert or neutral person, including engaging counsel or barristers, for any current or anticipated litigation or dispute; procurement of property or services (including construction) outside Australian territory, for consumption outside Australian territory; acquisition of fiscal agency or depository services, liquidation and management services for regulated financial institutions, and sale and distribution services for government debt; procurement of motor vehicles; procurement, by the Australian Reward Investment Alliance (ARIA) or the Future Fund Management Agency, of investment management, investment advisory, or master custody and safekeeping services for the purposes of managing and investing the regulated

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines superannuation assets under the trusteeship of ARIA or for the purpose of investing the assets of the Future Fund;

procurement of blood plasma products or plasma fractionation services; procurement of government advertising services; procurement of property or services by, or on behalf of, the Defence Intelligence Organisation, the Defence Signals Directorate, or the Defence Imagery and Geospatial Organisation; contracts for labour hire but not to contracting with an intermediary (for example, a personnel firm) for the provision of an individual to supply labour (other than an intermediary that is a firm which primarily exists to provide the services of only that individual). This includes the appointment of an eminent individual to a special role by a Chief Executive, or the appointment of a person or persons by a Chief Executive to a governance committee (for example, an audit, ethics or steering committee) but does not include the engagement of consultants; and procurement of property or services from a business that primarily exists to provide the services of persons with a disability.

Defence and DMO Specific Exemptions 23. In Defence and the DMO, a covered procurement may be exempt from the operation of the MPPs if it is a Defence/DMO Exempt Procurement. Paragraph 2.7 of the CPGs permits the Chief Executive of an agency to determine that a measure is necessary for, among other things, the protection of essential security interests. The Secretary of Defence is considering which specific Defence procurements should be exempt from the operation of the MPPs as such a measure. In relation to the DMO, the CEO DMO has determined that certain DMO specific procurements should be exempt from the operation of the MPPs as such a measure. The Procurements which are subject to these Chief Executive measures are categorised as Defence/DMO Exempt Procurements. In the interim for Defence, as well as for the DMO, procurement of the following goods or services are Defence/DMO Exempt Procurements: Goods The procurement of goods that fall within the following US Federal Supply Codes (FSC):

24.

FSC 10 Weapons; FSC 12 Fire Control Equipment; FSC 13 Ammunition and Explosives; FSC 14 Guided Missiles; FSC 15 Aircraft and Airframe Structural Components; FSC 16 Aircraft Components and Accessories; FSC 17 Aircraft Launching, Landing, and Ground Handling Equipment; FSC 18 Space Vehicles; FSC 19 Ships, Small Craft, Pontoons and Floating Docks; FSC 20 Ships and Marine Equipment; FSC 23 Ground Effect Vehicles, Motor Vehicles, Trailers and Cycles; FSC 28 Engines, Turbines, and Components; FSC 29 Engine Accessories; FSC 31 Bearings; FSC 46 Water Purification and Sewage Treatment Equipment; Page 1.25

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines


FSC 48 Valves; FSC 49 Maintenance and Repair Shop Equipment; FSC 54 Prefabricated Structures and Scaffolding; FSC 58 Communication, Detection, and Coherent Radiation Equipment; FSC 59 Electrical and Electronic Equipment Components; FSC 60 Fiber Optics Materials, Components, Assemblies, and Accessories; FSC 61 Electric Wire, and Power and Distribution Equipment; FSC 63 Alarm, Signal and Security Detection Systems; FSC 66 Instruments and Laboratory Equipment; and Specialty Metals.

Services The procurement of the following kinds of services:

Design, development, integration, test, evaluation, maintenance, repair, modification, rebuilding and installation of military systems and equipment; The operation of Government-owned Facilities; Space services; and Services in support of military forces overseas.

25.

If a procurement of goods or services by the Department of Defence (as opposed to DMO) is not listed above, but an exemption is sought, it should be raised on a case by case basis with the Secretary in the first instance, pending a final determination by the Secretary as to which specific procurements should be exempt from the operation of the MPPs as such a measure. If a procurement of goods or services by the DMO is not listed above, but an exemption is sought, it should be raised on a case by case basis with SCCEO DMO or General Manager Commercial (GM Com) in the first instance as to whether a measure could be made to exempt a particular procurement from the operation of the MPPs. Any request to CEO DMO for an exemption based on paragraph 2.7 of the CPGs must be endorsed by either SCCEO DMO or GM Com before forwarded to CEO DMO. An exemption is unlikely to be available for a procurement that is the result of a failure to properly plan the procurement process (e.g. a failure or inability to undertake an open tender process prior to expiry of the previous contract). Procurements which are exempt from the MPPs must still be undertaken in accordance with Division 1 of the CPGs. Refer to the Procurement and Contracting Branch website for further information on whether a Defence specific exemption applies.

26.

27.

Determining Whether a Defence or DMO Specific Exemption Applies 28. It is the responsibility of the Procurement Approver delegate to determine whether an exemption applies to a particular Defence or DMO procurement. Where a determination is made that an exemption is available, the Procurement Approver must ensure that the reasons supporting that determination are documented and appropriately filed.

Policies that Interact with Procurement 29. FMAR 9 provides that An approver must not approve a spending proposal unless the approver is satisfied, after reasonable inquiries, that giving effect to the spending proposal would be a proper use of Commonwealth resources [within the meaning given by subsection 44(3) of the Act]. Subsection 44(3) of the FMA Act defines proper use to mean efficient, effective and ethical use that is not inconsistent with the policies of the Commonwealth. The policies of the Commonwealth in section 44 of the FMA Act is not a defined term and should be interpreted broadly applying its ordinary dictionary meaning. Among other things, it is Page 1.26

30.

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Defence Procurement Policy Manual 1.2 Commonwealth Procurement Guidelines likely that any Cabinet decision relevant to a spending proposal will constitute a Commonwealth policy, though the terms of that decision will be relevant. If that decision establishes a course or line of action it will generally be a policy for the purposes of section 44 and FMAR 9. Accordingly, Proposal approver delegates must not approve a proposal to spend public money that is inconsistent with the terms of any Australian Government approval or decision relevant to the procurement. 31. Procurement officers should be aware that the overall goal of the procurement process is to provide a value for money recommendation to the delegate. Further guidance on determining value for money is contained in Annex 1A. Other factors that influence value for money in the Defence context are provided in chapter 5.6. Officials with procurement duties are responsible for informing themselves of the legislation and policies that apply to the particular procurement that is being conducted. External Service Providers must also comply with relevant legislation and policies. This requirement should be appropriately reflected in tender documents and contracts (see chapters 3.9, 3.10, and 3.1216). The DOFD publication FMG10 - Guidance on Complying with Legislation and Government Policy in Procurement provides further assistance on policies that interact with procurement.

32.

33.

Finance Circulars and Guidance 34. Finance Circulars are released by DOFD to implement interim policy updates and guidance. From January 2004, Commonwealth Procurement Circulars are issued as Finance Circulars. Procurement officers must have regard to all Finance Circulars and Commonwealth Procurement Circulars. Current Finance and Commonwealth Procurement Circulars can be accessed on the DOFD website. DOFD has also developed procurement guidance to assist Procurement officers to understand their policy obligations when undertaking procurement activities. The full listing of publications is available on the DOFD website.

35. 36.

Key References
Commonwealth Procurement Guidelines Commonwealth Procurement Circulars Department of Finance and Deregulation Finance Circulars Department of Finance and Deregulation Financial Management Guidance (FMG) 10 Guidance on Complying with Legislation and Government Policy in Procurement. Department of Finance and Deregulation FMG 13 - Guidance on the Mandatory Procurement Procedures Department of Finance and Deregulation Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12).

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Defence Procurement Policy Manual 1.3 Simple, Complex and Strategic Procurement

1.3
Introduction
1. 2.

Simple, Complex and Strategic Procurement

This chapter applies to procurement undertaken in Defence and the DMO. This chapter provides guidance on the Simple, Complex and Strategic procurement categories to ensure that procurements are categorised in a logical and consistent manner. An awareness of the differences between these categories will assist Procurement officers to identify the appropriate form of contractual template to be used for a procurement 1 . The procurement category will also determine the appropriate level of documentation and approval delegations required.

Mandatory Policy
Procurement officers must assess the risks associated with a proposed procurement and appropriately categorise the procurement as Simple, Complex or Strategic.

Operational Guidance
Overview 3. Procurement is the process of acquiring the resources needed to undertake the business of Commonwealth agencies. It is the entire process by which all classes of resources (personnel, materiel, facilities and services) are obtained for a specific project or procurement outcome. This process can include such capability life cycle activities as: needs, requirements, acquisition, in-service, disposal and related tasks. Defence procurement is divided into the following three broad categories: Simple, Complex and Strategic. The indicative characteristics of each procurement category are discussed below. A flowchart depicting the sequential steps in Simple and Complex procurement is located at the front of the DPPM. Before conducting a procurement, Procurement officers must assess the risks associated with the proposed procurement and appropriately categorise the procurement as Simple, Complex or Strategic. The risk assessment should identify all relevant risks and the probability of those risks occurring. It should also assess the impact such events would have on the procurement and how such risks might be treated (risk management). The types of risks that should be considered include legal, commercial, financial, political, project management (including schedule), technical and logistics risks. The rigour of the risk assessment should be commensurate with the size and complexity of the procurement and is at the discretion of the official conducting the procurement. Chapter 3.2 provides further information on conducting risk assessment.

4.

5.

Simple Procurement Defined 6. Simple procurement is a procurement category where the overall level of risk and complexity is assessed as low after a risk assessment commensurate with the size and complexity of the procurement has been conducted. The primary Defence reference for Simple procurement is the Simple Procurement chapter in the DPPM. Other useful references for simple procurement include:

7.

The Simple Procurement competency training courses outlined in chapter 1.4;

The ASDEFCON Template Selection Guide, located on the Office of Special Counsel intranet website, can also assist Procurement officers with identifying the appropriate form of ASDEFCON template.

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Defence Procurement Policy Manual 1.3 Simple, Complex and Strategic Procurement

AC565 Request for Quotation Form; and Form SP020 - General Conditions of Contract for the Supply of Goods and Repair Services.

Complex Procurement Defined 8. Complex procurement is a procurement category where the overall level of risk and complexity is assessed as medium to high after a risk assessment commensurate with the size and complexity of the procurement has been conducted. Chapter 3.2 provides further information on the conduct of risk assessments. Complex procurement usually involves the purchase of more complex supplies (comprising goods and/or services) where:

the monetary value of the purchase is high; and broader value for money considerations apply including whole of life costing, supplier support capabilities, contractual conditions, fitness for purpose and supplier past performance.

9.

In addition, the following characteristics may apply to a Complex procurement:


comprehensive planning and risk assessment may be required; some design, development, or integration may need to be undertaken; some non-standard terms and conditions may need to be negotiated; the method of procurement may be more complex (i.e. where a staged procurement approach has been adopted, such as when an Invitation to Register Interest is conducted prior to a Request for Tender); a more complex price basis is required (e.g. variable by formula or by exchange rate, payment in source (foreign) currency); more complex payment mechanisms may be adopted (e.g. mobilisation payments, progress milestones, or performance payments); detailed probity plans, evaluation criteria, tender evaluation processes, and a Source Evaluation Report are required; government furnished facilities, equipment, data, information or services may be required to be provided to the contractor; specialist advice on legal, commercial, financial or technical considerations may be required, such as on limitation of liability or intellectual property issues; and the procurement is on the critical path of a related Strategic procurement.

10.

The primary Defence reference for Complex procurement is the DPPM. Other useful references for complex procurement include:

the ASDEFCON suite of tendering and contracting templates; and the Infrastructure Management website: http://intranet.defence.gov.au/im/.

Strategic Procurement Defined 11. Strategic procurement is a procurement category where the overall risk and complexity is high to extreme after a risk assessment commensurate with the size and complexity of the procurement has been conducted. The following characteristics are indicative of a strategic procurement:

the procurement is critical to Defences ability to meet its core objectives; the procurement is linked to corporate level planning decisions; the procurement requires First Pass and Second Pass approval (refer to Chapter 5.0 for further detail);

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Defence Procurement Policy Manual 1.3 Simple, Complex and Strategic Procurement

the procurement is likely to be directed by a Government policy decision; the monetary value of the procurement is $20 million or more; there is a significant level of project management and contractual complexity; there is a medium to high level of hardware and/or software development; there is a significant level of schedule complexity; there is a significant level of technical difficulty; significant operational and support issues are involved in the procurement; strategic value for money considerations apply; there is significant political risk; there may be significant economic and regional impacts; innovative contracting approaches may be required such as alliancing or evolutionary acquisition; and specialist advice on legal, commercial, financial or technical considerations may be required during each stage of a Strategic procurement.

12.

Strategic procurement requires the application of specialised procurement knowledge and the exercise of considerable judgement in decision making. The nature of the procurement activity is very complicated and often requires coordination of multiple and concurrent activities. Delegates exercising approvals for Strategic procurements must have at minimum the required Complex procurement competencies. Chapter 1.4 provides further information on delegations for procurement. Within the Strategic procurement category the DMO uses the Acquisition Category (ACAT) framework contained in Defence Materiel Instruction (DMI) (Acquisition) 1/2006 V2.4 Acquisition Categorisation Framework to provide a consistent methodology for categorising acquisition and sustainment projects. DMOs ACAT framework is based on four Acquisition categories that provide a graduated scale from the most demanding Strategic projects to the least demanding. The largest, most demanding projects are categorised as ACAT I or ACAT II; while less demanding projects are categorized ACAT III and ACAT IV. For further information on the ACAT framework please refer to DMI (Acquisition) 1/2006 v2.4- Acquisition Categorisation Framework which is available in DMO QEMS. The primary Defence reference for Strategic procurement is the DPPM. Other useful references for Strategic procurement include:

13.

14.

15.

16.

Defence Capability Development Handbook; ASDEFCON (Strategic Materiel); and ASDEFCON (Support).

Key References
Commonwealth Procurement Guidelines Defence Capability Development Handbook ASDEFCON suite of tendering and contracting templates AC565 Request for Quotation Form SP020 - General Conditions of Contract for the Supply of Goods and Repair Services Defence Materiel Instruction (Acquisition) - 1/2006 V2.4 Acquisition Categorisation Framework

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Defence Procurement Policy Manual 1.3 Simple, Complex and Strategic Procurement ASDEFCON Selection Guide Infrastructure Management website.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement

1.4
Introduction
1. 2.

Delegations for Procurement

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter:

outlines the key policies that must be adhered to when exercising delegations for procurement; and provides an overview of the required competency based procurement training for Defence and DMO officers.

3.

Defence and DMO are governed by two separate sets of Chief Executives Instructions (CEIs) and financial management frameworks, including delegations. While there are similarities between the two systems, it is important to distinguish between Defence and DMO for the purposes of exercising delegations. Defence and DMO officers hold and exercise their delegation on behalf of a separate Chief Executive, that is, the Secretary and the DMO Chief Executive Officer respectively. Please note that for the purposes of this chapter only, a reference to the Defence Portfolio is a reference to both Defence and DMO. Additionally, in this chapter only, a reference to Defence does not include the DMO and a reference to the DMO does not include Defence.

Mandatory Policy
For an official in the Defence Portfolio to exercise a power assigned or delegated to the Defence or DMO Chief Executive, that official must have the delegated authority of the relevant Chief Executive. For Defence officers those delegations are contained within FINMAN 2 Financial Delegations Manual (FINMAN 2) and for DMO officers those delegations are contained in the DMO Chief Executives Instruction (CEI) 2.1 - Annexes A E. Delegates must comply with the Financial Management and Accountability Act 1997 (Cth) (FMA Act), the Financial Management and Accountability Regulations 1997 (Cth) (FMARs), mandatory policy issued by the Department of Finance and Deregulation (DOFD) (including the Finance Ministers Orders for Financial Reporting and Finance Circulars), the Commonwealth Procurement Guidelines (CPGs), the Defence CEIs and/or the DMO CEIs and their Annexes, FINMAN 2, FINMAN 5, the DPPM, and any other relevant Defence Portfolio policy. DMO officers (and Defence officers exercising delegations on behalf of the DMO Executive) must comply with DMI(FIN) 01-0-025 Engagement of External Service Providers, DMI(FIN) 01-0-024 FMA Regulation 10 and DMI (FIN) 01-0-029 Financial Delegations Management Framework in the DMO. Officials conducting procurement in the Defence Portfolio must obtain a minimum of four delegation approvals prior to the purchase of goods and services. Delegates exercising financial delegations for procurement must meet the competency or proficiency requirements detailed in chapter 1.4. In the rare circumstances where a quote or tender may commit the Commonwealth to spending public money, Proposal Approval must be exercised for the anticipated commitment prior to release of the request documentation.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement

Procurement Approval must be obtained prior to seeking quotes or tenders. Contract Approval must be obtained prior to entering into a contract, agreement or arrangement under which public money is, or may become, payable. Except for Simple procurements valued at $5,000 or less, delegations must be exercised by a minimum of two separate delegates. The three delegations of Proposal, Procurement and Contract Approver delegations cannot be exercised by the same delegate. Defence officers must not exercise a Defence delegation for DMO appropriated funds and DMO officers must not exercise a DMO delegation for Defence appropriated funds. For DMO procurements greater than $5,000, a single DMO delegate must not exercise both Proposal Approver and Contract Approver delegations. For procurements undertaken in Defence, if FMAR 10 is triggered, written agreement from the Finance Minister, or their delegate, must be obtained before the Proposal Approver can approve a spending proposal under FMAR 9. For procurements undertaken in the DMO, if FMAR 10 is triggered, written agreement from the Finance Minister, or their delegate, must be obtained prior to obtaining Contract Approval. Where the extent, scope or funding of the contract does not accord with the terms (or limits) of the Proposal Approval, a new Proposal Approval must be approved prior to Contract Approval. In the DMO, prior to entering into a contract, agreement or arrangement that could involve the contractor receiving or making payments of public money, delegate approval must be sought under Annex A and/or Annex B to DMO CEI 3.1 To authorise the payment of public money by outsiders. Details of the conditions for receipt and spending of public money by outsiders must be incorporated into the relevant contract. A delegates decision must always be recorded in writing which may include electronic format. Delegates not holding the appropriate competencies must ensure that a person holding those competencies has been consulted (Competent Adviser). The name and position of the Competent Adviser must be recorded. For DMO contracts valued at $2m or more when there is to be an increase in the value of the contract exceeding $20m or 20% of the contract value the requirements detailed in this chapter relating to the 20/20 rule must be complied with. DMO Procurement officers must use the DMOSS panel where the required specialist skills are available through that panel. DMO Procurement officers must comply with Defence Materiel Instruction (Procurement) DMI (PROC)) 130002 - Mandatory Procurement Policy Requirements for Contract Changes.

Operational Guidance
Background 4. The Financial Management and Accountability Act 1997 (Cth) (FMA Act) provides the framework for the management of public money and public property. Public money and public property is money and property in the custody or control of the Commonwealth. Since DMO became a prescribed Agency in 2006, for the purposes of the FMA Act, there are two agencies Page 1.42

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Defence Procurement Policy Manual 1.4 Delegations for Procurement within the Defence portfolio Defence (which includes the Australian Defence Organisation) and DMO. The Defence Chief Executive is the Secretary and the DMO Chief Executive is CEO DMO. Relevant to all Defence Portfolio procurements is the approval process contained in the FMA Act, the Financial Management and Accountability Regulations 1997 (Cth) (FMAR). 5. The FMA Act enables the Secretary and CEO DMO to delegate some of their powers to appropriate officials. For an official in the Defence Portfolio to exercise a power assigned or delegated to the Defence or DMO Chief Executive, that official must have the delegated authority. A key provision of the FMA Act is section 44. This section places a positive obligation on the Secretary and the CEO DMO to manage the affairs of Defence and DMO in a way that promotes the efficient, effective economical and ethical use of Commonwealth resources for which they are responsible and in a manner that is not inconsistent with the policies of the Commonwealth. Section 44 also confirms that Chief Executives have the power (which may be delegated) to enter into contracts, on behalf of the Commonwealth, with respect to the affairs of their agency. Before any Chief Executive or official enters into a contract involving a spending proposal, this expenditure must be approved in accordance with the requirements of the FMARs. Compliance with the FMARs is an important part of ensuring the efficient, effective and ethical use of public money, as required by section 44.

6.

7.

FMA Regulations applicable to the Approval Framework 8. FMAR 3 defines a spending proposal as a proposal that could lead to entering into an arrangement. A spending proposal is therefore separate and distinct from the contract, agreement or arrangement under which public money is or may become payable. FMAR 7, specifically FMAR 7(2) states that an official performing duties in relation to the procurement must act in accordance with the Commonwealth Procurement Guidelines. FMAR 8 prohibits a person from entering into a contract, agreement or arrangement under which public money is, or may become payable, unless the associated spending proposal is approved under FMAR 9 and, if necessary, written agreement has been given under FMAR 10. FMAR 9 states that An approver must not approve a spending proposal unless the approver is satisfied, after reasonable inquiries, that giving effect to the spending proposal would be a proper use of Commonwealth resources. In determining whether the expenditure would be a proper use, s 44 of the FMA Act defines proper use to mean efficient, effective, economical and ethical use that is not inconsistent with the policies of the Commonwealth. Refer to chapter 3.10 for further guidance on policies of the Commonwealth. FINMAN 2 and the Annexes to DMO CEI 2.1 provide officials (other than the Minister, the Secretary and the CEO DMO) with the delegated authority (delegates) to approve proposals under FMAR 9. Further information regarding compliance with the FMARs when making commitments to spend public money is contained in Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12). FMAR 10 is triggered by 'unfunded' future spending proposals i.e. proposals with an estimated total value in excess of the uncommitted balance of all relevant appropriations. Further information is provided at paragraphs 29 35. FMAR 11 requires an official to have the authority of the Minister, Chief Executive or an Act of Parliament to approve a spending proposal. FMAR 12 requires approvals that have not been given in writing to be documented as soon as practicable after the approval has been given.

9. 10.

11.

12.

13.

14. 15.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement Defence and DMO Approval Framework 16. Defence and DMO have two separate sets of CEIs and financial delegation frameworks which incorporate the requirements of the FMA Act and the FMARs. The delegations frameworks are established under the respective CEIs to ensure Defence Portfolio procurements comply with the requirements of the FMA legislation and regulations. Officials conducting procurement in the Defence Portfolio must obtain a minimum of four approvals prior to the purchase of goods and services and these approvals must be exercised by suitably qualified delegates. The four financial delegations for procurement are:

Proposal Approver (FMARs 9, 10, 11 and 12); Procurement Approver (FMARs 7 and 9); Contract Approver (FMARs 7, 8 and 9); and Contract Signatory (FMARs 8, 9, and 10).

Note: In the DMO, the Procurement Approver delegation is referred to as the Procurement Method Approver. For DMO officers, any reference to Procurement Approver in the DPPM should be construed as Procurement Method Approver. 17. The following additional delegations or approvals may need to be exercised in the procurement process:

FMAR 10; liability approvals (see chapter 3.15); exemption of notification of Contract details (see chapter 5.8); and hospitality (Defence CEI 2.2 Official Hospitality, Special Events and Working Meals and DMO CEI 2.2 Hospitality).

Specific Delegate Considerations 18. The following policies apply and must be considered by all delegates when exercising any of the four financial delegations for procurement:

delegates must comply with the FMA Act, the FMARs, mandatory policy issued by DOFD (including Financial Management and Accountability Orders and Finance Circulars), the Commonwealth Procurement Guidelines (CPGs), the Defence and/or the DMO CEIs (and their Annexes), FINMAN 2, FINMAN 5, the DPPM and any other relevant Defence Portfolio policy; delegations are ex officio; they are issued to a specific position or class of positions; delegations may be exercised by the holder of the position, or an official occupying or performing the duties of the position; delegates exercise their authority in their own right and cannot be directed to do so; financial limits can be imposed on a delegates authority; delegates are to satisfy themselves that the total requirement has not been separated into two or more separate requests in order to fall within a financial limit placed on their delegation; where a financial limit has been imposed on a delegates authority, the limit includes any GST component of the purchase; failure by a delegate to observe the financial limits imposed on their delegation would be a breach and may result in disciplinary action; except for Simple procurements valued at $5,000 or less, all three delegations must be exercised by a minimum of two separate delegates, however Proposal, Procurement and Contract Approver delegations can not be exercised by the same delegate;

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Defence Procurement Policy Manual 1.4 Delegations for Procurement

the delegate should record the basis of their authority, through a signature block, comprising the delegates signature, printed name, position number and title and date. For DMO delegates, the delegates PMKeys Employee Identification Number should also be included. The signature block should also include the capacity in which the delegate is approving the submission, that is, either a delegate of the DMO CEO or the Secretary of Defence; where an oral contract is entered into, the Contract Signatory delegation need not be in writing; and for Simple procurement where manual approval would unreasonably delay the process, delegates may provide approval by e-mail, where they are not co-located and are separated by a reasonable distance (see the Simple Procurement chapter).

19.

For Simple procurements equal to or less than $5,000, one delegate may exercise all four delegations. For procurements greater than $5,000, while an official can hold all four approval delegations, they must not exercise all three of Proposal, Procurement and Contract Approver. It is permissible for a single Defence delegate to exercise any two of these delegations and the Contract Signatory delegation. DMO delegates have greater restrictions on exercising Proposal, Procurement and Contract Approver as detailed in paragraph 23. In addition, more stringent provisions may be made at the local level, subject to operational requirements. Delegation submission process templates for the Proposal, Procurement and Contract Approver delegations can be found on the Office of Special Counsel intranet site. Use of process templates is not mandatory, but they provide best practice guidance on content of submissions. Defence officers must not exercise a Defence delegation for DMO appropriated funds. DMO officers must not exercise a DMO delegation for Defence appropriated funds.

20.

21.

DMO Specific Procedures 22. DMO has specific procedures that must be complied with in regard to financial delegations. The procedures relate to:

exercising delegations (DMI (FIN) 01-0-029 Financial Delegations Management Framework in the DMO); mandatory use of the FMAR 10 Tool to prepare submissions seeking FMAR 10 authorisation under the DMO Delegation (DMI (FIN) 01-0-024 FMA Regulation 10); engaging external service providers (DMI (FIN) 01-0-025 Engagement of External Service Providers); and domestic and overseas travel (DMO CEI 2.5 Official Travel).

23.

For DMO procurements over $5,000 a single DMO delegate must not exercise both Proposal Approval and Contract Approval. They can still exercise Proposal Approval and Procurement Approval, or Procurement Approval and Contract Approval (DMO CEI 2.1).

Increases to the Value of a Contract The 20-20 Rule 24. Where there is to be an increase through a contract change in the value of a contract (including an FMS case) exceeding $20m or 20% of the contract value the Contract Approver must be:

the relevant Branch Head where the officer who exercised the original Contract Approval was below Branch Head level; or the relevant Divisional Head.

25.

Proposal Approval must also be exercised for the additional amount and Procurement officers must adhere to the DMO requirement that the Proposal Approver and Contract Approver delegations be exercised by different officers. This policy does not apply to DMO contracts valued at less than $2m, or where discrete taskings are progressed against a Standing Offer as Simple procurements to achieve the Page 1.45

26.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement outcome negotiated at the signing of the Standing Offer. However, the policy does apply where a contract change is being proposed that will raise the value of the contract above the $2m threshold and increase the value of the contract by more than 20%. DMO Support Services (DMOSS) Panel 27. The DMOSS panel provides projects, sustainment offices and other business units with simple access to a broad range of preferred service providers for the provision of short term specialist support. DMO procurement officers must use the DMOSS panel where the required specialist skills are available through that panel.

Official Hospitality 28. For the DMO, in accordance with DMO CEI 2.2 Hospitality, official hospitality proposals must be given approval in writing by the relevant DMO Branch Head or higher level prior to seeking Proposal Approval.

Financial Management and Accountability Regulation (FMAR) 10 29. FMAR 10 states if a person proposes to enter into an arrangement and the relevant Agency has an insufficient appropriation of money, under the provisions of an existing law or a proposed law that is before Parliament, to meet expenditure that might be payable under the arrangement the person must not enter into the arrangement unless the Finance Minister has agreed, in writing, to the expenditure that might become payable under the arrangement. FMAR 10A provides that agreement under FMAR 10 is not required in relation to certain contingent liabilities. These are liabilities that fall below the remoteness and materiality thresholds prescribed by that Regulation. Under FMAR 10A, an event is considered remote if the likelihood of it occurring is assessed at less than 5%; and not material if the most probable expenditure that would need to be made in accordance with contingent liability is assessed at less than $5 million. The intent of FMAR 10 is to enable the Government to manage the extent to which Commonwealth agencies enter into commitments to spend public money in the absence of an appropriation, and thereby potentially lock-in future Budgets. FMAR 10 applies when there is insufficient unspent or uncommitted appropriation (or proposed appropriation in a Bill before Parliament) available to satisfy the total obligations arising under a spending proposal at the time the Proposal Approver is considering approving a spending proposal. Total obligations include those obligations potentially arising from any indemnities or other contingent liabilities. While liability caps are not generally considered obligations for FMAR 10 purposes there are some circumstances where a liability cap may constitute a contingent liability. For further information and guidance see Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12). For procurements undertaken in Defence, if the requirement for FMAR 10 agreement is triggered, written agreement from the Finance Minister, or their delegate, must be obtained before the Proposal Approver can approve a spending proposal under FMAR 9. For procurements undertaken in the DMO, if the requirement for FMAR 10 agreement is triggered, written agreement from the Finance Minister, or their delegate, must be obtained prior to requesting Contract Approval. The FMAR 10 delegation is detailed in FINMAN 2 Schedule F2-1 (for Defence delegates) and DMO CEI 2.1 - Annex A (for DMO delegates), including the Finance Ministers Directions and a list of FMAR 10 delegates. For general guidance on when FMAR 10 agreement is required refer to Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12) and (for DMO officers) DMI (FIN) 01-0-024 - FMA Regulation 10. Defence officers can also obtain further guidance on FMAR 10 by contacting the Directorate of Financial Policy in the Chief Finance Page 1.46

30.

31.

32.

33.

34.

35.

36.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement Officer Group on (02) 6265 6111 or email financial.policy@defence.gov.au and DMO Officers can contact their relevant FMAR 10 delegate or Director of Financial Management (DFM). DFMs may obtain further guidance from DMO Financial Policy Helpdesk on (03) 9282 4809 or email DMOFinance.Policy@defence.gov.au. Proposal Approver 37. Proposal Approval is normally the first step in the procurement process for the control and management of expenditure by the Defence Portfolio. Proposal Approval should be obtained as soon as there is sufficient information to consider the spending proposal, ideally prior to seeking quotes or tenders. If Proposal Approval is not exercised prior to seeking quotes or tenders, Procurement officers should consider consulting with the relevant delegate who will ultimately exercise Proposal Approval for the procurement prior to release of the request documentation. In the rare circumstances where a quote or tender may commit the Commonwealth to spending public money (eg where a procurement process contemplates funded trials), Proposal Approval must be exercised for the anticipated commitment prior to release of the request documentation. Proposal Approver delegates must only approve a spending proposal if they are satisfied that there are sufficient funds available to cover the full cost, that will or may become payable, including GST (where applicable), of the spending proposal. DMO Procurement officers should refer to (DMI)(PROC)-13-0-001 for further guidance on obtaining Proposal Approval for Major Capital Equipment procurement subject to the First and Second Pass Approval process. The Proposal Approver delegation requirements are outlined in FINMAN 2 Schedule F2-2 (for Defence) and DMO CEI 2.1 Annex B (for DMO), including a list of Proposal Approval delegates and any limits placed on their delegation. Directions relating to the exercising of the delegation are also provided. Tolerances or any other mechanisms that allow for expenditure of public money in excess of the total amount approved in the Proposal Approval are not permitted. For procurements valued at $80,000 or less where the amount of the spending proposal or expenditure is uncertain, the Proposal Approval may include flexibility to allow the Contract Approver to approve a contract that is in excess of the estimate in the Proposal Approval subject to the following:

38.

39.

40.

41.

the flexibility contained in the Proposal Approval must be specific, for example, up to $x, or an amount including any extras up to a not to exceed limit of $x; and the not to exceed amount or flexibility contained in the Proposal Approval must not be more than 5% of the estimated spending proposal. In these cases, the Proposal Approver is approving the not to exceed amount.

42.

For the DMO, spending proposal approvals can be conditional on certain events. For example if the spending proposal is consistent with the purpose for which the funds are allocated, but FMAR 10 agreement has not yet been obtained, a spending proposal can be approved on the condition that if FMAR 10 agreement is required it will be obtained prior to Contract Approval. Where Proposal Approval (verbal or written) has not been exercised before a contract is entered into, this will constitute non-compliance with the FMA Regulations and the delegation cannot be retrospectively obtained. For further information on breaches and reporting of breaches, Defence officers should refer to the Certificate of Compliance section of the Finance in Defence intranet site and DMO officers should refer to DMI(FIN) 01-0-029 Financial Delegations Management Framework in the Defence Materiel Organisation.

43.

Statement of Funds Availability 44. A delegate may only approve a spending proposal if there are sufficient funds available to cover the full cost of the expenditure. Therefore, it is important that they are satisfied that sufficient Page 1.47

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Defence Procurement Policy Manual 1.4 Delegations for Procurement funds remain available in their budget allocation (DMO officers should refer to DMO CEI 2.1) to cover the approximate expenditure (which excludes any options). It is in this context that submissions to a Proposal Approver should contain a statement of funds availability. Procurement Approver 45. 46. Procurement Approval must be obtained prior to seeking quotes or tenders. The Procurement Approver delegation requirements are outlined in FINMAN 2 Schedule F2-3 (for Defence) and DMO CEI 2.1 Annex C (for DMO), including a list of delegates and relevant limits and directions. For further information on whether a procurement is covered and if any DMO or Defence specific exemption applies, refer to chapter 1.2 of the DPPM and paragraph 8.4 of the CPGs.

47.

Contract Approver 48. Contract Approval must be obtained prior to entering into a contract, agreement or arrangement under which public money is, or may become, payable. Contract Approver delegates must only approve a spending proposal if they are satisfied that there are sufficient funds available to cover the full cost, including GST (where applicable), of the spending proposal. The Contract Approver delegation requirements are outlined in FINMAN 2 Schedule F2-4 (for Defence) and DMO CEI 2.1 Annex D (for DMO), including a list of Contract Approver delegates and the relevant limits and directions. Except for procurements where a Proposal Approver has agreed to flexibility in the Proposal Approval in accordance with paragraph 41, where the extent, scope or funding of the contract does not accord with the terms (or limits) of the Proposal Approval, a new Proposal Approval must be approved prior to Contract Approval. If Contract Approval is provided for an amount in excess of that given by Proposal Approval, and a contract is subsequently entered into, it is a breach of the FMA Regulations and must be reported through the Certificate of Compliance process.

49.

50.

51.

Contract Signatory 52. 53. The Contract Signatory delegate is responsible for entering into a contract, agreement or arrangement under which public money will become payable. The Contract Signatory delegation requirements are outlined in FINMAN 2 Schedule F2-5 (for Defence) and DMO CEI 2.1 Annex E (for DMO), including a list of Contract Signatory delegates and the relevant directions.

Receipt and Spending of Public Money by Outsiders in the DMO 54. Section 12 of the FMA Act, permits outsiders to receive, hold or make a payment of public money where the Finance Minister (or delegate) has given written authorisation for the relevant arrangement or it is expressly authorised by the FMA Act or any other Act. An Outsider means any person other than the Commonwealth, an official or a Minister. Prior to entering into a contract, agreement or arrangement that could involve the contractor receiving or making payments of public money (e.g auction house or conference organiser) delegate approval must be sought under Annex A and/or Annex B to DMO CEI 3.1 To authorise the payment of public money by outsiders. Details of the conditions for receipt and spending of public money by outsiders must be incorporated into the relevant contract.

55.

Recording of Delegations 56. A delegates decision must always be recorded in writing, which may include electronic format. Verbal delegation approvals should not be given unless an urgent or emergency situation arises Page 1.48

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Defence Procurement Policy Manual 1.4 Delegations for Procurement where no delegates are available to provide written approval and the decision cannot be deferred. While verbal approval is acceptable in limited circumstances, in accordance with FMAR 12 and DMO CEI 2.1.6 (for DMO), the approver of the proposal to spend public money must record the terms of the approval in a document as soon as practicable after giving the proposal. Where verbal approval is given, the delegate is still required to exercise their delegation within the legal and policy requirements associated with the relevant approval. 57. A delegates judgement may be open to internal or external scrutiny. Therefore, a delegate must always document their decision and the basis on which it was made, and be prepared to justify it.

Splitting a Requirement 58. Where a requirement exists, the proposal submitted to a delegate is to indicate the full financial implications of the proposal. Where a single requirement is to be sourced gradually (i.e. delivery will occur over a long period), the full requirement is to be advised to the delegate in the initial proposal submission. A procurement must not be divided or split into separate parts for the purpose of either avoiding a procurement threshold or to enable a delegate to exercise approvals within the financial limitations of their delegations (See chapter 1.2 for information on valuing a procurement).

59.

Additional Approvals 60. Procurement of Major Capital Equipment requires first and second pass approval. Please refer to chapter 5.0 for information regarding this process. Procurement officers undertaking infrastructure procurements should refer to the approval process outlined in the Infastructure Management website. The following project approvals are also required for projects which meet the specified thresholds:
Policy Area and Policy Construction Public Works Policy Reference Parliamentary Standing Committee on Public Works Relationship with Procurement and Threshold Defence and DMO must refer public works valued in excess of $15 million to the Parliamentary Standing Committee on Public Works (unless exempted) for approval before contract award, and must notify medium works with an estimated value of between $2 million and $15 million to the Committee.

61.

(refer Manual of Procedures for Departments and Agencies) Refer to DPPI 7/2008

Note all amounts are GST inclusive

Project Approval Threshold

The following approval thresholds apply to Defence and DMO projects:

Department (CDF/Secretary or their delegates) approval for projects less than $5 million; Defence Ministers approval for Projects more than $5 million but less than $20 million; Joint Ministers (Defence and Finance ministers) approval for Projects more than $20 million and less than $100 million; Cabinet approval for Projects greater than $100 million.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement Competency Requirements for Delegates 62. 63. 64. For Defence, financial delegations are detailed in FINMAN 2 and for DMO, the Annexes to DMO CEI 2.1. All delegates must comply with the directions issued with the delegations. Delegates exercising financial delegations for procurement must meet the competency or proficiency requirements as detailed at the end of this chapter. Delegates not holding the appropriate competencies must ensure that a person holding those competencies has been consulted (the Competent Adviser). Competent Advisers must be satisfied that, if they were exercising the delegation in their own right, the delegation submission includes sufficient information to satisfy the requirements of the delegation being exercised. While having separate Competent Advisers for each delegation is best practice, in areas where this is impractical, e.g. regional areas, it is permissible for the same Competent Adviser to advise the relevant delegates as long as the respective delegations are being exercised by different individuals, e.g. separate delegates for Proposal Approval and Contract Approval. A Competent Adviser provides independent advice and cannot be directed to change their advice. The name and position of the Competent Adviser must be recorded. Where a Competent Adviser provides advice on a submission it should be included in the submission, and the relevant delegation submission should include a Competent Adviser signature block, comprising the Competent Adviser signature, printed name, position number and title and date. Where the advice of a Competent Adviser is not followed by the delegate, the delegate should document their reasons for not following the advice. Delegates should note that the responsibility for exercising the delegation continues to rest with the delegate. Delegates holding competencies issued by training organisations other than the Defence Portfolio should consult the Simple and Complex Procurement Competencies section later in this chapter. Information on training and assessment of competencies providing for delegations is available in the Simple and Complex Procurement Competencies section later in this chapter. In exercising delegations, delegates should also continue to follow any local requirements and/or Quality Management System procedures. Contract Signatory delegates are not required to meet a specified competency standard.

65.

66.

67. 68. 69.

Contractors Exercising Financial Delegations 70. The Defence and DMO Financial Delegation frameworks provide for contractors to exercise financial delegations for procurement. To be able to exercise a financial delegation a contractor must be an official according to the FMA Act. A contractor is deemed to be an official if the contract with the contractor stipulates that the performance of a financial task involving the spending of public money is a requirement of the contract. A contractor who is an official is subject to the FMA Act, the FMARs, CPGs, Defence and DMO CEIs, FINMAN 2, FINMAN 5, this Manual and any other relevant Defence Portfolio policy. The provision of financial delegations to contractors (where the contractor is a natural person) or a contractors employees should be minimised consistent with effective and efficient use of resources, as the Commonwealth retains minimal control over the procurement, while remaining fully accountable for the expenditure of the public monies involved. Providing a financial delegation to a contractor or its employees will allow that person (the delegate) to approve the spending proposal or the liability to pay public money. In such a case, this means that the commitment and spending of public moneys would be entirely at the discretion of the contractor (or contractor employee), within the limits of the delegation. Delegations for a contractor can only be issued by the Delegations Manager after approval by an official of at least Senior Executive Service (Band 2 level for the DMO) or equivalent level. The Directions to Delegate will outline any financial limits applicable to the contractors delegation. Page 1.410

71.

72.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement 73. Where a contractor is granted a financial delegation it will be subject to the same competency requirements as Defence and DMO delegates (see paragraphs 58 65- Competency requirements for Delegates). Where financial delegations are provided to a contractor (where the contractor is a natural person) or its employees, the arrangement should be reviewed at regular intervals and time limits should be imposed on the operation of the delegation that are consistent with the duration of the contractors task. To enable the Commonwealth to monitor performance and to ensure public accountability, the contract between the Commonwealth and the contractor should include provisions enabling the Commonwealth, including the Australian National Audit Office, to access the premises, records and accounts of the contractor. Further guidance and mandatory policy on Commonwealth access to a contractors premises, records and accounts is detailed in chapter 6.2. Further guidance on granting of financial delegations to contractors is detailed in chapter 4.11.

74.

75.

Delegation Requirements for Contract Amendments 76. The financial delegations requirements for contract amendments are detailed in chapter 6.7. Where the draft contract change proposes an increase in the scope of the contract, including orders under a standing offer (for example the purchase of additional supplies or services) and that increase is not an option in the existing contract, the procurement method is likely to be a Single Supplier Direct Source and should be fully justified in the Procurement Approval documentation accordance with chapter 3.1. The Procurement Approver should be satisfied that not re-tendering the requirement will achieve better value for money. DMO Procurement officers must comply with Defence Materiel Instruction (Procurement) (DMI(PROC)) 130002 - Mandatory Procurement Policy Requirements for Contract Changes when processing contract amendments.

77.

Delegation Requirements for Standing Offers and Orders under Standing Offers 78. The following paragraphs are intended to clarify the delegations that must be exercised prior to the establishment of standing offer arrangements and any order placed under a standing offer. Refer to chapter 4.8 for more detailed guidance on standing offers.

Approval of the establishment of standing offer arrangements 79. The following delegations must be exercised (in this order) for the establishment of a deed of standing offer:

Proposal Approver; Procurement Approver; Contract Approver; and Contract Signatory.

FMAR 10 Agreement 80. Generally, FMAR 10 agreement will not be required for the establishment of a standing offer, provided the arrangement for which approval is being sought does not commit the Defence Portfolio to any expenditure (actual or contingent), and that the Defence Portfolio has full control over the orders that are placed under the arrangement. FMAR 10 agreement is required if the deed contains a form of spending commitment on behalf of the Commonwealth, such as an uncapped Commonwealth indemnity or a contractor liability cap with respect to third party claims.

81.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement Approval of orders placed under a standing offer 82. The following delegations must be exercised for the placement of an order under a standing offer:

FMAR 10 (if triggered); Proposal Approver; Procurement Approval (for DMO only); Contract Approval; and Contract Signatory.

83.

Within Defence, there is no requirement for Procurement Approval for individual orders placed under a standing offer. However, when an individual order is placed under an established standing offer, it is best practice for the Proposal Approval submission to verify that the procurement method i.e. use of the standing offer, represents value for money. The Proposal Approval delegate must also confirm that the standing offer which is being used to purchase the goods/services constitutes an appropriate contractual framework for the sourcing of the relevant goods/services. This requires that the delegate confirm that the goods/services covered by the order are of a type or range described in the relevant deed of standing offer as goods/services available to be sourced under the arrangement. A standing offer cannot be used to purchase goods/services that fall outside the scope of the arrangement. In addition, the Proposal Approver delegate must also confirm that the number of quotes being sought under the arrangement is appropriate and contributes to the requirement to achieve value for money.

Funds Availability 84. Officers are required to confirm Funds availability whenever seeking Proposal Approval for an order under a standing offer. Funds availability is not required to establish a standing offer if the standing offer contains no spending commitments, such as minimum spend clauses, fees for early terminations, contingent liabilities or other guarantees.

Simple and Complex Procurement Competencies 85. Nationally recognised qualifications for Simple and Complex procurement competencies may be obtained through face-to-face training, distance learning, recognition or a combination of these processes. From March 2005, the only Complex Procurement courses considered acceptable for meeting Defences competency requirements for the exercise of financial delegations are those that have been developed by Defence to meet the Public Sector Training Package 2004 requirements. The Directorate of Procurement Policy within Office of Special Counsel DMO is responsible for the content of Defence Portfolio procurement courses. The Defence Learning Services Network (DLSN), situated within the Directorate of Education and Training Enabling Services (DETES) manage procurement competencies within the Defence Portfolio and oversee the provision of procurement training and assessment by the Directorate of Corporate Training Administration and Delivery (CTAD). The DLSN is the issuing authority for procurement training facilitated by CTAD, as the Registered Training Organisation. Defence and DMO staff can obtain further information by contacting the Program Manager for Procurement at Ctad.trainingfacilitation@defence.gov.au or on 02 6266 5160 or the DLSN Manager on 02 6266 5286. The procurement training courses in the Defence Portfolio have been developed to align with the Public Service Training Package. Details of the courses available can be found at http://intranet.defence.gov.au/dsg/sites/CTAD/. The following qualification requirements can be a current or a previous qualification.

86.

87.

88.

89.

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Defence Procurement Policy Manual 1.4 Delegations for Procurement Qualification requirements for Simple Procurement (no Defence Purchasing Card used)
Proposal, Procurement and/or Contract Approvers Current Qualification

Previous qualifications

PSPPROC Unit 302A Undertake Basic Procurement

Certificate IV in Public Sector Procurement OR Graduate Certificate in Strategic Procurement OR Unit 301A Procure Goods and Services OR Statement of Competency Simple Procurement

Qualification requirement for Simple Procurement with Defence Purchasing Card (Less than $5,000)
Proposal, Procurement and/or Contract Approvers Current Qualification

Previous qualifications

Defence Purchasing Card e-learning proficiency

Qualification requirement for Simple Procurement with Defence Purchasing Card (More than $5,000)
Proposal, Procurement and/or Contract Approvers Current Qualification

Previous qualifications

Defence Purchasing Card e-learning proficiency AND Simple Procurement Competency (as for no Defence Purchasing Card)

Qualification requirements for Complex/Strategic Procurement by Proposal and/or Procurement Approver


Proposal and/or Procurement Approver Current Qualification

Previous qualifications

PSPPROC Unit 302A Undertake Basic Procurement AND PSPPROC Unit 407A/408A Establish Procurement Need and Develop Request Documentation

Unit 301A Procure Goods and Services AND Unit 401A Plan Procurement OR Certificate IV in Public Service Procurement (Complete) OR Statements of Competency in Simple Procurement AND Unit 2 (Specify, Define and Clarify Requests) AND Unit 3 (Plan Procurement) from Certificate IV in Public Sector Procurement OR Graduate Certificate in Strategic Procurement (Complete)

Qualifications for Complex/Strategic Procurement by a Contract Approver


Contract Approver Current Qualification

Previous qualifications

PSPPROC Unit 302A Undertake Basic Procurement AND PSPPROC Unit 407A/408A

Statement of Competency Simple Procurement AND Unit 4 (Implement a

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Establish Procurement Need and Develop Request Documentation AND PSPPROC Unit 409A Receive and Select Offers Procurement) from Certificate IV in Public Sector Procurement* OR

Certificate IV in Public Sector Procurement (Complete) OR Graduate Certificate in Strategic Procurement (Complete) OR Unit 301A Procure Goods and Services AND Unit 402A Request and Receive Offers AND 403A Award Contracts

* Unit 4 consists of four training modules: Module 4: Introduction to Contracts and the Law Module 5: Developing a Request Module 6: Negotiation in Procurement Module 7: From Offer to Contract Officers need to have attained competency in each of the modules to exercise Contract Approval

Additional Training 90. Additional courses are available for officials who exercise financial delegations and their managers. Procurement officers should consult the DETD Explorer website at http://intranet.defence.gov.au/dsg/sites/DETDExplorer/ComWeb.asp?page=55654 for available courses. DMO Procurement officers should also consult the DMO Institute.

Key References
Financial Management and Accountability Act 1997 (Cth) Financial Management and Accountability Regulations Commonwealth Procurement Guidelines Department of Finance and Deregulation Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12) Defence Chief Executives Instruction - 2.1 Procurement DMO Chief Executives Instruction - 2.1 - Procurement (including the Annexes) FINMAN 2 - Financial Delegations Manual FINMAN 5 Financial Management Manual DMI (FIN) 01-0-024 - FMA Regulation 10 DMI(FIN) 01-0-025 Engagement of External Service Providers DMI(FIN) 01-0-029 Financial Delegations Management Framework in the DMO DMI(PROC) 130001 - Mandatory Procurement Policy Requirements for all Defence Materiel Organisation Acquisitions (Including Sustainment Procurements) to Contract Signature. DMI(PROC) 130002 - Mandatory Procurement Policy Requirements for Contract Changes

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Defence Procurement Policy Manual 2.1 Contract Law and Legal Advice

2.1
Introduction
1. 2.

Contract Law and Legal Advice

This chapter applies to all procurement undertaken in Defence and the DMO. As the procurement of goods and services is achieved through the formation of contracts, Procurement officers should be familiar with the key aspects of contract law. This chapter addresses:

the essential elements of a contract; contract terms and conditions; major cases affecting the procurement process; and requirements for obtaining legal advice.

Mandatory Policy
There is no mandatory policy for this chapter

Operational Guidance
Background Essential Elements of a Contract 3. Contract law is a complex body of law which is primarily based on common law principles but aspects of contract law are regulated by Commonwealth and State and Territory legislation. A contract is an agreement made between two or more parties which details the parties legal rights and obligations. In general terms, for a contract to be legally enforceable, each of the following elements must be satisfied:

Offer - the tenderer has made an offer to Defence; Acceptance - Defence has accepted the tenderers offer; Consideration - both parties have provided consideration for entry into the contract; and Intention - there is an intention to create legal relations.

4.

There are other factors that will render a contract legally unenforceable despite compliance with the rules of contract formation. These factors include:

non-compliance with required formalities (for example, dealings involving land are required to be in writing); one or both of the parties does not have the legal capacity to contract; the contract is void on the grounds of illegality; and there is no genuine agreement between the parties.

Offer 5. An offer is where one party indicates to another party of their willingness to enter into a contractual relationship on certain terms. As a general rule, if the offeree accepts the offer, a legally binding agreement between the parties will be formed. It is necessary to distinguish an offer from an invitation to treat.

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Defence Procurement Policy Manual 2.1 Contract Law and Legal Advice 6. An invitation to treat, is an expression by the person making that invitation that he or she is willing to receive offers. The display of goods on a shelf is an invitation to treat. A mere invitation to treat does not give rise to contractual obligations, although it may give rise to obligations to act fairly. When Defence seeks a quote or tender, whether orally or in writing, it invites potential suppliers to make an offer. The request for quote or tender by Defence is known as an invitation to treat. This process provides details of the proposed terms and conditions which are the basis on which Defence intends to do business. A response from a tenderer in the form of a quote/tender is an offer. Formal rules govern the validity of an offer, the rules most applicable to Defence include:

7.

8.

an offer may be conditional; an offer may be accepted at any time before it is withdrawn or expires. A legally valid offer is available for acceptance until the receiver is informed that the offer has been withdrawn or the predetermined period for acceptance (known as a validity period) has expired; an offer may be withdrawn at any time prior to its acceptance even if it has been stated that an offer will remain open for a specified period; an offer may lapse where a tenderer loses contractual capacity, if the offer is not accepted within the specified time limit or there is a failure to comply with a condition of the offer; an offer may be rejected. Once an offer is rejected, it may not subsequently be accepted; where the receiver of the offer makes amendments to the offer, this is known as a counter offer. A counter offer is a complete rejection of the initial offer. The party that made the original offer has to then decide whether to accept the counter offer, reject the counter offer or make another counter offer; and a request for information is not a counter offer. A request for further information or clarification does not indicate an intention to reject or vary the original offer. It indicates an interest in an offer where insufficient or unclear information has been given.

Acceptance 9. Acceptance occurs when agreement is reached on the contract terms, including the contract price, and acceptance is communicated to the person who made the offer. Formal rules govern acceptance of an offer, the rules most applicable to Defence include:

acceptance of an offer means that a contract will be formed; the offer and acceptance must correspond exactly. This means that the acceptance must be unconditional, i.e. the offer must be accepted in its entirety. If a person wishes to modify or accept part of an offer, then this is a counter offer rather than acceptance of the original offer; acceptance must be communicated in accordance with the notice requirements specified in the offer or, where none are specified, in a reasonable manner; the person making the offer cannot impose an agreement by default. An offer is not valid legally if it states that acceptance will be inferred by inaction or silence on the part of the person receiver; an acceptance that is specified to be subject to contract is not a counter offer. Provided that no different terms are stipulated, the acceptance is unconditional. The phrase subject to contract creates a presumption that, while parties may have finalised the contract details, there is no binding agreement until a formal written contract is entered into. However, this presumption can be rebutted depending upon the circumstances of the case and the conduct of the parties; and

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the postal acceptance rule. Where an offer is made and accepted by letters sent through the post, acceptance is effective the moment the letter accepting the offer is posted, even though it may never reach its intended destination. Unless the parties otherwise agree, the applicable law will be the law of the place where the acceptance was posted. When acceptance is communicated by telephone or fax, communication is deemed to be effective upon receipt. This means that, unless the parties otherwise agree, the applicable law will be the law of the place where the fax or phone call was received. It appears that email acceptance is only deemed to have occurred upon receipt. This is consistent with when receipt is deemed to have occurred under the Electronic Transactions Act 1999 (Cth). In any case, this is subject to what the parties may otherwise agree.

Consideration 10. 11. Not all promises are legally enforceable in a court of law. For a promise to be enforceable in a court of law, it must be supported by consideration. Consideration is something of value that is given by each of the parties in return for a promise being made. For example, when Defence signs a contract on behalf of the Commonwealth, it promises to purchase an item from the seller for an agreed price. The seller promises to transfer ownership of the item to the Commonwealth. While in most commercial situations consideration is evidenced in the form of the promise to pay money, strictly speaking, the element of consideration may be satisfied by something other than money provided it is of some ascribable value even if the economic value of this consideration is minimal. If one of the parties will not be providing consideration, for example, as is the case with a contractors confidentiality assurances or entry into a deed of undertaking, the agreement should be drafted in the form of a deed rather than a contract as this does not require consideration.

12.

13.

Intention to Create Legal Relations 14. There must be an express or implied intention by both parties that the contract should give rise to legal rights and obligations. Such an intention is generally implied where the contract is of a commercial nature. Notwithstanding this, in certain commercial situations the question whether the parties intended to create a contract may still arise, particularly if the parties have acted in a way which is ambiguous or have used a document the status of which is unclear e.g. a heads of agreement or a letter of intent. Ambiguity can be avoided by being clear in any correspondence between Defence and its potential suppliers. Defence personnel should not provide any undertakings to a tenderer indicating a contract may result from the tender activity, including a letter of intent/comfort or any correspondence that is subject to contract without complying with the requirement for approval of a letter of comfort in accordance with DMO Chief Executives Instruction 8.6 Contingent Liabilities and Defence Chief Executives Instruction 8.6 Contingent Liabilities seeking advice from specialist legal or contracting officers. For further information on financial approvals required prior to issuing letters of comfort or intent refer to Financial Management Guidance No 6 - Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort. Use of the words subject to contract can be used to create a presumption that there is no contractual relationship until a formal written contract has been signed by the parties. However, if this expression is used inconsistently during contract negotiations it may be that the parties have in fact formed a contract.

15.

16.

Circumstances in which Contracts are Invalid Consequences of an Invalid Contract 17. When the requirements for the formation of a contract are not present or are subsequently found by a court to be invalid, the contract will be either: Page 2.13

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Void: this means that the agreement is regarded as having had no legal effect whatsoever from the beginning. Neither party can take any legal action under the contract; or Voidable: this gives the innocent party the discretion to elect whether to continue the contract.

18.

The consequences of a contract being void or voidable may be costly and may cause delay to Defence operations. It is important therefore to ensure that all formalities have been complied with when preparing and entering into contracts.

Legal Capacity to Contract 19. A contract is only valid where each of the parties has the legal capacity to enter into a contract. Legal capacity requires legal personality. A corporation has legal personality. If Defence enters into a contract with an individual person, that person must be over eighteen and must have legal capacity (i.e. the person must not be intoxicated, have brain damage or have a mental disorder). Prior to entry into a contract, Defence should ensure that it is, in fact, contracting with the correct legal entity. Particular complications may arise where Defence is purporting to contract with small corporation or with a company that is part of a corporate group. It is important to note that a company is identified by its ACN and not by its trading name and Procurement officers should:

20.

conduct a search on the ASIC register to check the company name and ACN; and ensure that these are the details which are included on any resulting contract.

21.

It is also important to note that an unincorporated association does not have the legal capacity to enter into a contract. The problem of legal capacity will be overcome if an unincorporated association registers under the Associations Incorporation Act of the relevant state or territory. However, it would be unlikely that Defence would be seeking to contract with associations. The Commonwealth is a single legal entity and Commonwealth agencies act on behalf of the Commonwealth and it is important to remember that it is not possible for a legal entity to contract with itself. Accordingly, different parts of the Commonwealth cannot contract with each other. Neither the Department of Defence nor the DMO is a separate legal entity for the purposes of entering into a contract. Where Commonwealth agencies wish to enter into an arrangement for the provision of goods and services, Procurement officers could use a memorandum of understanding, service delivery agreement or similar but these agreements are not legally enforceable. The Department of Defence has its own Australian Business Number (A.B.N.) (see chapter 3.7) and in most standard contracts the entity signing the contract is the Commonwealth of Australia represented by the Department of Defence. This approach remains applicable after prescription of the DMO, despite the creation of a new agency for the purposes of the FMA Act. It should be noted that failure by Defence to ensure the necessary financial delegations have been exercised does not affect the validity of the contract.

22.

23.

24.

Illegality 25. Any contract that has an illegal purpose or is supported by illegal consideration is void i.e. as if no contract has ever existed. A contract contrary to public policy may be treated similarly to a contract for an illegal purpose e.g. a contract to defraud revenue, a contract in restraint of trade or a contract expressly or impliedly prohibited by legislation. A contract must also not conflict with any Federal, State, or local Government by-laws or regulations. The legality of a contract will be determined from the subject matter of the contract rather than aspects of its performance or particular terms and conditions related to Commonwealth policy.

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Defence Procurement Policy Manual 2.1 Contract Law and Legal Advice Genuine Agreement 26. There must be genuine agreement between the parties for a contract to be legally enforceable. Factors which may compromise whether a valid contract exists include:

Fraud; Duress; Misrepresentation; Undue influence; Unconscionable conduct; and Mistake.

27.

If a person is induced to enter into a contract because of any of these factors that contract may not be binding on the parties and may be set aside. The ability to have a contract set aside may arise from either common law principles or legislation e.g. the Competition and Consumer Act 2010 (Cth).

Contracts in Writing 28. In virtually all instances contracts entered into on behalf of the Commonwealth will be in writing. Care should be taken by Procurement officers when making statements to potential suppliers/tenderers that could later be interpreted as being elements of an oral contract. In general, Procurement officers will be dealing with standard form written contracts (see chapter 2.3). Written contracts help to remove ambiguity that can provide the basis for disputes between the parties and provide evidence of the formation of a contract. Contracts relating to land must be evidenced in writing.

Contract Terms 29. The word term is used to describe every clause in the contract whether it be expressed as a clause, provision, stipulation, obligation, covenant, condition, warranty or innominate (sometimes referred to as intermediate) term. Contractual terms may be express or implied. Express terms are those terms in the written contract which the parties have expressly agreed. The parties usually discuss the terms of the contract prior to execution of the contract. Courts generally require the parties to be bound by the express terms of the contract. It is essential that the parties clearly state and record express terms that accurately reflect the intention of the parties agreement. Statements made by the parties during negotiations may be considered to be terms of the contract if a reasonable person would have concluded that the parties intended to be bound by the statements. Although most standard contracts include an Entire Agreement clause that states that the terms of the contract supersede all prior representations, communications, agreements, statements and understandings whether oral or in writing such clauses are not absolutely effective. An entire agreement clause cannot:

30.

preclude recourse to prior negotiations if a party is alleging misleading conduct; necessarily preclude recourse to prior negotiations for an argument of estoppel, although this is not settled. On balance it has been concluded that it cannot, provided the necessary ingredients of estoppel are present (chapter 6.6); prevent the incorporation of implied terms; and preclude subsequent variation of the contract after it has been executed.

31.

Implied terms are those which the parties have not set out in the written contract, but are regarded as being an implicit part of the contract in order to allow the contract to work. In order to allow some flexibility, a court may imply a term into a contract where the implied term will allow the reasonable and effective operation of the contract.

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Defence Procurement Policy Manual 2.1 Contract Law and Legal Advice Privity of Contract 32. Privity of contract is a rule by which only the parties to a contract can legally be bound by and entitled to enforce its terms. One exception to this is that where clauses are expressed to be for the benefit of a third party then in particular circumstances that third party may be able to enforce the obligation. In all other circumstances, only the parties to the contract have the ability to enforce the provisions of the contract against each other. Defence should therefore ensure that any third party obligations are provided by way of a deed e.g. a guarantee provided by a bank to secure performance by a contractor, a deed to novate a contract to a third party or a Subcontractor IP Deed.

Interpreting a Contract 33. When interpreting a contract, courts will generally give effect to how the parties words and conduct ought reasonably to have been understood by the other, rather than on the subjective states of mind of the parties. The intent of any statements or agreements between the parties should be clearly understood by both parties in order to minimise the potential for disputes or claims of mistake to arise during the contract.

Common Law and the Tendering Process 34. Until recently, contract formation under a tender process has been based upon the understanding that request documentation constitutes a pre-contractual invitation or an invitation to treat to another party or parties to make an offer. Until that offer is accepted and a formal contract entered into, no contractual obligations arise between the parties. This traditional model has been substantially modified in recent times in relation to Government tenders as the courts have recognised:

35.

that a tender can create a process contract or preliminary contract which constitutes both an invitation to treat and an offer that is capable of being accepted by a tenderer; and a duty for Government officials to afford procedural fairness to tenderers during a tender process in certain circumstances.

36.

As a result, Procurement officers should ensure that the request documentation:


clearly establishes that Defence is not legally bound until it signs a written agreement; sets out the rules by which the tender process is to be conducted and those rules must then be followed fairly and meticulously, especially those relating to the evaluation criteria; and includes sufficient background information for potential tenderers to prepare, price and lodge a tender. Procurement officers should ensure that the information given is accurate and consistent. At the same time it should be clearly stated that tenderers are to rely on their own information and investigations. The intent of this is to exclude the potential for a preliminary contract to be created.

37.

The ASDEFCON suite of tendering and contracting templates have been drafted to include these requirements.

When to Seek Legal Advice 38. The law relating to contracts is complex and it is not always easy to be fully aware of all of the issues relating to tendering, negotiation, entering into contractual commitments and contract management. Procurement officers should seek legal advice in the following instances:

39.

if there doubt whether a contract has been formed;

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actual or potential claims arising out of Defence procurements and contracting made against the Commonwealth (this includes letters of demand, threatened litigation and counter claims); contractual disputes; and the exercise of a contractual remedy against the contractor.

DMO Specific Requirements 40. To ensure the proper management of the Commonwealths legal risks, it is expected that DMO personnel responsible for procurements and contract management will normally seek legal advice in relation to the following kinds of matter:

contracting models and structures; contract change proposals valued at $2 million or more which alter the existing contract terms and the Commonwealths risk profile; complex intellectual property matters; any arrangement that presents a significant legal risk(s) to the Commonwealth arising out of DMO activities; advice on foreign and domestic legislation or arrangements (including regulations and legislative instruments) related to DMO procurement and processes; probity; legal policy; and activities for acquisition and sustainment projects valued at $20 million or more.

41.

In DMO, the following Defence Materiel Instructions set out circumstances in which Procurement officers must seek legal advice:

DMI (PROC) 13-0-001 Mandatory Procurement Policy Requirements for all DMO Acquisitions (including Sustainment Procurements) to Contract Signature; and DMI (PROC) 13-0-002 Mandatory Procurement Policy Requirements for Contract Changes.

42.

For further information about how to seek internal or external legal services, see the Defence and DMO Procurement Support Areas section at the front of this manual.

Key References
Competition and Consumer Act 2010 (Cth) DMO Chief Executives Instruction 8.1 Provision of Legal Services DMO Chief Executives Instruction 8.6 Contingent Liabilities Defence Chief Executives Instruction 8.6 Contingent Liabilities Department of Finance and Deregulation Financial Management Guidance No 6 - Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort Departmental Procurement Policy Instruction No 21/2009 Requesting Professional Services from the Office of Special Counsel Defence Materiel Organisation Defence Materiel Instruction (Procurement) DMI(PROC) 13-0-003 - Mandatory Procurement Policy Requirements for the engagement of the Office of Special Counsel (OSC) in DMO Contract Management Activities

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Defence Procurement Policy Manual 2.2 Types of Contract

2.2
Introduction
1. 2.

Types of Contract

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter outlines the types of contracts that should be considered by Procurement officers prior to soliciting responses from the market. Use of an appropriate contractual mechanism will assist the achievement of value for money and best practice in procurement.

Mandatory Policy
In order for the Contract Approver to confirm funds availability, the contract must specify the maximum amount payable under the contract, including the value of any contingent liabilities, incentive payments or cost reimbursement payments (if any).

Operational Guidance
Background 3. There are three categories of Defence procurement: Simple, Complex and Strategic (see chapter 1.3). At the Complex and Strategic procurement levels, Procurement officers will need to choose from the full range of available contract types. In some cases it may be appropriate to use a combination of contract types within the one contract. Defences standard contracting templates (see chapter 2.3) enable contracting under one or a combination of the contract types outlined below. Templates for alliance contracting, evolutionary acquisition and private financing are not available and require specialist contracting and legal advice to develop.

Choosing a Contract Type 4. The types of procurement methods available are open tender process, select tender process or direct source (including single supplier direct source) tender process. Further detail on selecting the appropriate procurement method is set out in chapter 3.1. Following the selection of the appropriate procurement method, Procurement officers should determine the most appropriate contracting methodology for the procurement being undertaken. The contracting methodology incorporates the process to be used to solicit responses from the market and determines the documentation or type of contract to be used. Further detail on selecting the appropriate contracting methodology is set out in chapter 5.3. Having chosen a procurement method and contracting methodology, consideration needs to be given to the type of contract adopted. Choices can be made from:

5.

6.

conventional contracts that adopt a firm price, variable price basis; contracts incorporating a wholly or partly cost reimbursement payment regime; target cost incentive contracts; alliance contracts; Public Private Partnerships; Evolutionary Acquisition approaches; and a contract formed by placing an order under a standing offer (see chapter 4.8).

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Defence Procurement Policy Manual 2.2 Types of Contract 7. Procurement officers should select a contract type that reflects the circumstances and risks associated with their project. A significant factor to be considered when selecting an appropriate type of contract is the risk inherent in the procurement and how this risk will be allocated between the contractor and Defence. Further detail on assessing levels of risk is set out in chapter 3.2. The purpose should always be to select the contract type(s) that best accommodate the full range of risks associated with the procurement and facilitate the most appropriate risk sharing between the contractor and Defence. Other issues to be considered when selecting the most appropriate contract type include:

8.

9.

the broad characteristics of the requirement; the complexity of the requirement; the asset/service mix of the requirement; the level of knowledge of the requirement already contained within Defence; the certainty of the requirement; the state of development of the required technology; and GST issues (for example, a contract that provides for milestone payments for the ongoing and repetitive procurement of a service or product may be a periodic or progressive supply contract see chapter 3.7).

Firm Price Contracts 10. In a firm price contract, the contract price is unalterable in all respects for the duration of the contract, except where the parties agree to a contract amendment which alters the contract price. Firm price contracts are sometimes referred to in Australia as fixed price contracts. This can cause confusion when dealing with overseas contractors particularly those from the United States. The term fixed price contract in the United States usually refers to a contract where the price can be varied within certain parameters. Firm price contracts provide maximum incentive for contractors to perform because the contractor bears any cost overrun. The cost-risk allocation to the contractor should not come at an excessive contingency premium to Defence when there is high reliability of the cost estimate (such as for off-the-shelf items or standard services) and when the market is competitive.

11.

12.

Use of a Firm Price Contract 13. Unless there are special circumstances, a firm price contract is appropriate for all standard consumable goods and services and any other Simple, Complex and Strategic procurement where delivery will occur within two years and exchange rate variation is not applicable. A firm price basis may also be used for contracts of more than two years duration where an exchange rate variation is not applicable and it is unlikely that the cost of labour and materials to be provided under the contract will increase or decrease within the contract period. It should be noted that industry exposure to cost escalation in firm price contracts includes the period from the base date to contract completion, not just for the duration of the contract. For this reason it is important to quickly evaluate tenders and enter into a contractual arrangement. The base date from which exchange rate variation is usually calculated is the date one month prior to the tender closing date.

14.

15.

16.

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Defence Procurement Policy Manual 2.2 Types of Contract Variable Price Contracts 17. Variable price contracts provide for the contractor to be paid a fixed fee for performance of the contract, regardless of the costs actually incurred, subject to certain variations detailed in the contract. Variable price contracts may allow for variations in:

exchange rates; and labour and/or material costs.

18.

An example of a variation clause is in ASDEFCON (Strategic Materiel) draft Conditions of Contract, clause 7.4.1, which provides for the variation of Milestone payments on account of changes to the cost of labour and materials in accordance with a formula contained in an attachment to the contract. Where variations in exchange rate may occur and the foreign currency component is not sufficient to justify payment in source currency, a contract allowing for variations in exchange rate should be used. Variable price contracts are normally used where there is an expectation that contract costs will vary due to factors beyond the reasonable control and responsibility of the contractor. The advantages and disadvantages of using variable price contracts are similar to using a firm price contract except that the contractor offsets some risk and, therefore, may be able to offer lower prices by avoiding unnecessary contingency.

19.

20.

Contracts that allow for Exchange Rate Variation 21. If the component of the total price payable in source currency is significant, the contract should be written in source currency. In this context significant generally means more than $1 million. Where the component of the total price payable in source currency is insignificant (i.e. generally less than $1 million) the contract should be written in Australian currency. Such contracts may be written to allow for variation in the price due to exchange rate movements as follows:

22.

Standard exchange rate variation option - This option is used for Strategic and higher value Complex procurements which will not be completed within 12 months of the base date and allows the contractor, in relation to imported components of the supplies, to be compensated for exchange rate variation which occurs between: the base date and the relevant date for delivery of the supplies; or the date on which the contractor settles the overseas subcontractors account; and 14 day exchange rate variation option - This option is used for lower value Complex procurements that will be completed within 12 months of the base date and allows the contractor, in relation to imported components of the supplies, to be compensated for exchange rate variation which occurs between the base date and the date 14 days after signature of the contract.

23. 24.

An example of an exchange rate variation clause is in ASDEFCON (Complex Materiel) draft Conditions of Contract, clause 6.4.1. When using ASDEFCON (Strategic Materiel) where the Contract Price will be payable in Australian dollars only, Procurement officers should utilise a clause that enables claims to be made for adjustments caused by exchange rate fluctuations. Defence is supplemented by the Department of Finance and Deregulation (DOFD) for exchange rate losses provided that the criteria stipulated in the Australian Government Foreign Exchange Risk Management Guidelines issued by DOFD are met. Groups determine their own arrangements for managing non-supplemented losses. Where the acquisition involves source currencies and the contract is intended to be written in Australian dollars, the contracting entity should check the applicable rules for managing non-supplemented losses in the DPPM Annex 3F with their Group Budget Manager.

25.

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Defence Procurement Policy Manual 2.2 Types of Contract 26. 27. Further guidance on the application of exchange rate variation is available in chapter 3.3, Annex 3F and from the Financial Investigation Service (FIS). DMO staff should also refer to Defence Materiel Instruction (DMI) (FIN) 4/2005 - Management of indexation and exchange variations to the project approval in Major Capital Equipment Projects.

Contracts that Allow for Variations in the Cost of Labour and/or Materials 28. Where the contract period exceeds two years and it is expected that contract costs may vary due to factors outside the contractors reasonable control, a contract allowing for variations in the cost of labour and materials may be appropriate. Defence uses standard price variation formulae and indices to determine variations in the cost of labour and materials under its contracts. Information on the price variation formulae and indices used by Defence can be obtained:

29.

for Strategic procurements, in ASDEFCON (Strategic Materiel); and for Complex procurements, in ASDEFCON (Complex Materiel).

30. 31.

DMO Procurement officers should refer to chapter 3.3 for guidance regarding the selection of appropriate indexes. Further guidance on the application of price variation formulae and indices is also available from Financial Investigation Service using the contact details at the front of this Manual.

Variable Quantity Contracts 32. A variable quantity contract may be used to agree fixed or variable labour rates, overheads, and in some cases profit, where the amount of labour required under a contract is unknown. By paying the contractor against agreed rates, Defence will only pay for the actual amount of effort expended under the contract and the risk to the contractor will be reduced. The agreed rates may be firm or variable. A maximum contract price must also be agreed in order for the Contract Approver to certify funds availability for the amount payable under a variable quantity contract.

Cost Reimbursement Contracts 33. Cost reimbursement contracts are cost sharing arrangements used in circumstances where the contract costs cannot be accurately determined due to high risk and uncertainty associated with the required supplies. Under this type of arrangement, Defence agrees to reimburse the contractor for the actual costs properly incurred in performing the contract, together with an agreed fee. The contractors fee may be a pre-agreed amount or determined as a percentage of actual costs. By reimbursing the contractor for the costs actually incurred in performing the work, risk allocation is shifted so that it is predominantly borne by Defence and not the contractor with this shift in risk to Defence being greatest where fee is calculated as a percentage of costs. As these contracts are virtually risk free to the contractor and provide Defence with significant cost risk and uncertainty, they should only be considered for high risk or developmental procurements and where they are used, they should be coupled with the following forms of cost control mechanisms:

34.

reimbursing only defined categories of allowable costs (and excluding certain costs); imposing limits on the recoverability of certain cost categories; specifying unit pricing for certain inputs (for example, fixed hourly labour rates); and controlling the scope of work through specific tasking arrangements.

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Defence Procurement Policy Manual 2.2 Types of Contract Types of Cost Reimbursement Contracts 35. A cost reimbursement arrangement can be structured in the following way:

Cost plus Margin. A Cost plus Margin contract can be converted into an incentive or a firm or variable price contract; Cost plus Fixed Fee; Cost plus Award Fee; and Cost plus Incentive Fee.

36.

As with target cost incentive contracts, it is not common practice in Defence procurement to use contracts that provide for payment to be made solely on a cost reimbursement basis.

Defence use of Cost Reimbursement Contracts 37. From Defences perspective, agreeing to pay the contractor on a cost reimbursement basis can have the following disadvantages:

the contractor has no incentive to keep costs down because all costs are paid by Defence; and Defence faces an increased administrative burden due to the need to manage the increased risk it faces, and to determine the integrity of the actual costs claimed by a contractor against the contract.

38.

Due to the increased risk to Defence, cost reimbursement payments should only be made in relation to high risk elements of work. Where a contract involves high cost risk or developmental aspects, it may be appropriate to pay for those aspects on a cost plus basis. To minimise the risk to Defence, and in order for the Contract Approver to certify funds availability for the amount payable under a cost reimbursement contract, the contract must specify the maximum amount payable under the contract as cost reimbursement payments. In addition, elements of the contract to be performed on a cost reimbursement basis must be clearly stated in the contract and fully understood by both Defence and the contractor.

39.

Target Cost Incentive Contracts 40. The target cost incentive contract is a variant of the traditional cost reimbursement contract but with further explicit cost controls and incentives designed to provide Defence with greater cost control and cost certainty. The primary incentive component of this contract type involves the pain share/gain share mechanism that operates to adjust the contractors fee according to its performance against an agreed target cost. An incentive contract is usually appropriate where there is a high degree of uncertainty in determining costs such that it would not be possible to utilise a firm or variable price contract, although not sufficiently uncertain to necessitate a cost reimbursement contract. Target cost incentive contracts should also avoid the need for the contractor to build major contingencies into the contract price. The essential elements of a target cost incentive contract are:

41.

a target cost - which should be the best estimate determined mutually by Defence and the contractor of what the costs will be when the work is completed; a target fee - which is the amount of profit payable without adjustment if the costs come out at target cost 1 ; and a pain share/gain share formula - which determines how the excess cost (over-run) or savings in cost (under-run) in relation to the target cost will be shared between the Defence and the contractor.

Target fee will generally represent the contractors profit margin plus an agreed amount on account of corporate overhead (ie overhead expenses not directly attributable to the contract). However, for some procurements, it may be appropriate for target fee to equal only profit.

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Defence Procurement Policy Manual 2.2 Types of Contract 42. If the actual cost exceeds the target cost, the contractor is paid its actual costs plus target fee less its proportion of the over-run (determined in accordance with the share formula). If the actual costs are less than the target, the contractor gets its costs plus target fee plus a proportion of the under-run. The sharing formula is normally expressed as a percentage ratio. For example, a 75/25 cost sharing formula means that the Defence will pay 75% and the contractor 25% of the costs in excess of the target cost. Conversely, if costs turn out less than the target cost, Defence and the contractor will share the savings in the same ratio. There is ample scope for variation in the terms to suit the circumstances and objectives of a particular procurement. For example:

43.

different share ratios may apply 2 : depending on the extent of the cost overrun or underrun; or according to whether a cost overrun or underrun and/or the type of costs (eg fixed or variable costs); there may be a buffer above and below the target cost before the pain share gain share mechanism applies; a price ceiling may be specified, above which one party (eg the contractor) bears 100% of the cost risk; or a price floor may be specified, below which one party (eg Defence) retains 100% of the cost savings.

Other Contracting Methodologies and Contract Types 44. In addition to firm price, variable price, cost reimbursement and target cost incentive contracts, Defence is employing more innovative and flexible contracting methodologies in its Strategic and certain complex procurements including through the use of performance based contracting, alliance contracting, private financing and evolutionary acquisition methodologies.

Performance Based Contracting 3 45. Performance based contracts (PBC) encourage contractors to meet the technical, schedule, cost and/or quality requirements detailed in their respective contracts. This is achieved through linking measurement of contractor performance to specified performance measures and/or accepting greater levels of risk. Contractor performance is measured in accordance with assessment (or performance) periods and by application of (generally weighted) key performance indicators (KPIs) 4 . If specified performance targets for the KPIs are not met then the contractor may forgo fee and/or suffer other consequences under the contract (for example, reduced contract term). From Defences perspective, a PBC is any contract that;

46.

has clearly defined and measureable outcomes directly traceable to users needs and aligned with Defences strategic objectives; focuses on the achievement of outcomes, rather than performance of individual activities ie what must be delivered, rather than how it is delivered;

The sharing of cost and risk through the pain share gain share mechanism should reflect the relative risk levels of the parties, the incentives that Defence considers should be provided to the contractor in the context of the projects goals and the extent to which the contractor may be entitled to reflect from contract requirements (eg under excusable delay mechanism). 3 Defence is currently embarking on a staged development / implementation of what have been termed new generation PBCs, commencing with the anticipated December 2010 release of ASDEFCON (Support) v3.0, and following which release this Chapter will be updated to include more expanded guidance on PBCs. Note, also, the reference to new generation PBCs recognises that while PBCs have been used in DMO for a number of years (particularly within the aerospace domain) the focus / design of these PBCs will likely be different to those implemented under this current reform initiative. To date, PBCs have primarily (and often exclusively) focused on achieving capability outcomes, whereas DMOs new generation PBCs will have the dual focus of (i) enhancing Defence preparedness requirements and (ii) reducing the total cost of ownership of the relevant material system. For further detailed discussion refer to Next Generation Performance-Based Support Contracts Achieving the Outcomes that Defence Requires (Dec 09) which is available from the Defence intranet. 4 KPIs used to measure performance should be specific, measureable, aligned, attainable relevant and timely and also generally limited in number to somewhere between 3 5 KPIs. Further guidance on setting appropriate KPIs is contained in chapter 6.2.

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Defence Procurement Policy Manual 2.2 Types of Contract

incentivises contractor achievement of outcomes through an integrated and aligned package of rewards / remedies (which may be financial or non-financial); specifies performance standards (KPIs) for measuring and assessing the contractors performance of outcomes; and contains clear lines of responsibility / accountability for the delivery of outcomes.

47.

The adoption of PBC concepts is not limited to any specific contract type ie all contracts (whether a firm price, variable price, cost reimbursement or target cost incentive contract) can effectively be structured as a PBC in the above described sense. If effective, PBCs will assist Defence achieve better value for money when acquiring, maintaining and enhancing military equipment including by achieving lower prices while successful contractors benefit through more reliable profits and greater continuity of work as a result of a series of rolling contract extensions (or award terms). In all cases, however, the PBC elements of a contract (eg at risk performance payments, technical KPIs and/or contract extensions) must appropriately reflect the risks, circumstances and objectives of the procurement such that the benefits / opportunities made available through the use of a PBC outweigh the costs / risks to Defence of establishing and implementing such an arrangement. For further guidance on the use of PBCs for Defence procurements of military equipment refer to the PBC discussion paper: Next Generation Performance-Based Support Contracts Achieving the Outcomes that Defence Requires (December 2009).

48.

Alliance Contracting 49. Alliance contracting is a non-traditional contracting methodology that allows a high degree of flexibility in achieving project outcomes. Alliance contracts are characterised by no-dispute clauses, except for specific events of default. The emphasis in alliance contracts is on building strong commercial relationships and aligning the interests of all participants so that the contract structure, including payment regime, motivates them to achieve a shared objective. The underlying premise is that open communication and trust between alliance participants enables:

early identification of risks; early resolution of issues; cost reduction through continuous improvement and innovation; and the provision of quality project outcomes with reduced costs of doing business for all participants.

50.

An alliance contracting approach should only be considered when the risks in a project are such that a traditional contracting approach is unworkable, and a cost-benefit analysis demonstrates that the benefits of managing risks and opportunities in an alliance contracting arrangement outweigh the costs of establishing and supporting the alliance. The costs of establishing an alliance are significant, sometimes prohibitive, and as such an alliance structure is rarely suitable for projects valued at less than $80 million. Before proceeding with an alliance acquisition strategy, specialist legal advice should be sought. For further information on alliance contracting refer to the Defence and Industry Policy Statement 2010 - Building Defence Capability: A Policy for a Smarter and More Agile Defence Industry Base.

51.

Private Financing 52. Private financing contracts are long-term services contracts, typically over 15 years duration, where Defence has decided that better value for money can be obtained through industry rather than Defence having ownership and lifecycle maintenance responsibility for major capital assets required to achieve a Defence output. Further information on the private financing procurement process is contained in chapter 4.4. Detailed guidance on private financing is also contained in the Private Financing Manual.

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Defence Procurement Policy Manual 2.2 Types of Contract Evolutionary Acquisition 53. Evolutionary acquisition involves the acquisition and early fielding of a well defined basic or initial system with a limited capability, followed by a series of enhancements that incorporate planned additional capability as well as improvements based on feedback from users. Further information on evolutionary acquisition is contained at chapter 4.5.

Key References
Financial Management and Accountability Act 1997 (Cth) Department of Finance and Deregulation, Australian Government Foreign Exchange Risk Management Guidelines Private Financing Manual DMI (FIN) 4/2005 - Management of indexation and exchange variations to the project approval in Major Capital Equipment Projects. Financial Management Guidance No.10 Guidance on Complying with the policies of the Commonwealth in procurement National Public Private Partnership Policy Framework and Guidelines ASDEFCON suite of tendering and contracting templates Defence and Industry Policy Statement 2010 - Building Defence Capability: A Policy for a Smarter and More Agile Defence Industry Base. Defence Procurement Policy Instruction 7/2010 Advice to Defence Materiel Organisation Staff Regarding Price Variation Indexes. Next Generation Performance-Based Support Contracts Achieving the Outcomes that Defence Requires (December 2009)

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Defence Procurement Policy Manual 2.3 Standard Defence Contracting Templates

2.3
Introduction
1.

Standard Defence Contracting Templates

The aim of this chapter is to outline the policy relating to the common templates used for procurement in Defence and the Defence Material Organisation (DMO).

Mandatory Policy
Where an approved Defence contracting template exists for the type of procurement being undertaken, Defence staff must use that template as the basis for developing request documentation. The Infrastructure Division suite of contracting templates must be used for construction procurements. Where Defence staff intend to use a contracting template other than an approved template referred to in this chapter, they must ensure that the template meets all of the mandatory Commonwealth and Defence procurement requirements and has been reviewed by a legal practitioner prior to tender release.

Operational Guidance
Overview 2. The aim of developing templates is to standardise, to the maximum extent practicable, the structure and the terms used by Defence when acquiring goods, services and facilities. This has the benefit of reducing administrative costs for both the Department and its contractors. It also enables Defence to adopt a standard portfolio approach to contracting in line with Industry and Government best practice. Defence has developed a range of tendering and contracting templates to suit most of the procurement situations encountered. Two particular Defence contracting template suites will be referred to in this chapter:

3.

the ASDEFCON (Australian Defence Contracting) suite of tendering and contracting templates (ASDEFCON suite), managed by Commercial Policy and Practice Branch within Office of Special Counsel, DMO; and the Facilities suite of contracts, managed by Infrastructure Division, Defence Support Group (DSG).

4.

Where an approved Defence contracting template exists for the type of procurement being undertaken, Defence staff must use that template as the basis for developing request documentation. These templates conform to policy and legal requirements. Where an official template is used in its approved form, it can be assumed to be legally sound and to conform to policy requirements for the purposes for which it was developed. While the ASDEFCON suite is designed to be used as is, tailoring of the clauses to meet project specific requirements is often necessary. Tailoring is allowed for project specific reasons but should generally be kept to a minimum and only undertaken in consultation with the contracting staff specialists identified for each of these contract suites. For further information on requesting professional services please refer to the current Defence Procurement Policy Instruction on Requesting professional services from the Office of Special Counsel Defence Materiel Organisation.

5.

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Defence Procurement Policy Manual 2.3 Standard Defence Contracting Templates ASDEFCON Suite of Tendering and Contracting Templates 6. Due to the dynamic nature of the ASDEFCON suite, including the number and type of templates that have and are continuing to be developed, this chapter will not summarise the available templates. The complete and current ASDEFCON template suite can be accessed online via the links listed in the Key References section at the end of this chapter. The ASDEFCON suite of tendering and contracting templates seek to:

7.

standardise Defence's business practices and procedures by providing documents that: support Commonwealth and Defence policies; reflect 'best practice'; and provide a framework for obtaining value for money and ensuring accountability; and lead contracting reform in Defence by taking into account the use of contracting options and strategies that reward performance.

8.

The ASDEFCON templates must not be used for construction procurements as they do not comply with the Australian Government Implementation Guidelines (Guidelines) for the National Code of Practice for the Construction Industry. Simple Procurement form AC565 Request for Quotation and form SP020 General Conditions of Contract for the Supply of Goods and Repair Services are the forms used to set out the conditions under which Defence conducts Simple Procurement. An ASDEFCON Template Selection Guide has been developed to assist Defence staff to choose the most appropriate ASDEFCON template. This Guide can be accessed on line on the Commercial Policy and Practice Branch intranet page.

9.

10.

Improvement of ASDEFCON Templates 11. 12. The ASDEFCON suite are dynamic documents that are updated to reflect the latest policy and other developments concerning tendering and contract law. Changes to an ASDEFCON template can be suggested by completing an ASDEFCON Document Change Proposal form, which can be accessed online via the links listed in the Key References section at the end of this chapter. Defence and industry personnel are invited to submit document change proposals using the proforma available on the Internet.

Defence Facilities Contracting Templates 13. Infrastructure Division has developed and manages a suite of contracting templates that complies with the Australian Government Implementation Guidelines (Guidelines) for the National Code of Practice for the Construction Industry (the Code). The Code sets out the responsibilities of all parties on construction projects funded by the Australian Government. The Guidelines for the National Code of Practice (the Guidelines) have been developed to assist in the interpretation and implementation of the Code. The Code defines the construction industry as including all organised activities concerned with demolition, building, landscaping, maintenance, civil engineering, process engineering, mining and heavy engineering. Activities which fall within the scope of the Code and Guidelines include:

14.

building refurbishment or fit out; installation of building security systems; fire protection systems; air conditioning systems; computer and communication cabling; and building and construction of landscapes.

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Defence Procurement Policy Manual 2.3 Standard Defence Contracting Templates 15. Activities which do not fall within the scope of the Code and Guidelines include:

mining operations; the maintenance of building systems; landscaping such as lawn mowing, pruning and other horticultural activities; and cleaning buildings.

Further information about the code and appropriate tendering and contracting templates can be obtained from the Infrastructure Division, or from http://www.deewr.gov.au/WorkplaceRelations/Policies/BuildingandConstruction/AusGovAgencie s/Pages/CodeandGuidelineselines.aspx 16. Infrastructure Division sponsors the Infrastructure Management website, and this website should be used when contracting for the delivery of Defence Facilities. The Infrastructure Management (IM) Suite of Contracts User Guide, including attachment A Risk Matrix, should be used to determine the best contract to use. This decision should be based on which contract is best suited to manage and mitigate the projects risk. The Infrastructure Division suite includes the following contracts:

Head Contract (HC1-2003); Managing Contractor Contract (MCC-1-2003); Medium Works Contract (MW-2-2004); Short Form Minor Works Contract; and Design Services Contract (DSC-1-2003).

17.

Defence adopts one of the above standard delivery methods at the inception of a project in order to effectively manage issues such as Life Cycle Costing, Ecologically Sustainable Development, Relationship Contracting and Risk Management.

Head Contract (HC-1-2003) 18. HC-1-2003 represents a flexible standard form which can be used for:

construct only delivery; documents and construct delivery; full design and construct delivery; lump sum or schedule of rates delivery; and major or medium works.

Managing Contractor Contract (MCC-1-2003) 19. The Infrastructure asset development model involves a two pass strategy for determining the viability of projects:

strategic business case; and detailed business case.

It is against this backdrop that MCC-1-2003 has been developed. MCC-1-2003 involves a two phase delivery method comprising an initial preliminary contract in the planning phase and a subsequent consolidated contract in the delivery phase. More specifically, under contract, Defence engages a Contractor to:

plan and design works in the planning phase; and complete the design of, commence, construct, commission, complete and handover the works in the delivery phase.

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Defence Procurement Policy Manual 2.3 Standard Defence Contracting Templates Medium Works Contract (MW 2-2004) 20. This contract was developed as a plain English flow chart contract, primarily for the delivery of construction work. This form of contract can be used either for the Head Contract, Design and Construct Contract, or Document and Construct Contract methods of delivery.

Short Form Minor Works Contract 21. This contract was developed as a plain English flow chart contract, primarily for the delivery of construction work to maximum value of $250,000. This form of contract can be used either for the Head Contract, Design and Construct Contract, or Document and Construct Contract method of delivery.

Design Services Contract (DSC 1-2003) 22. Design services will be procured by a dedicated Design Services Contract with Design Consultants.

Non Approved Defence Contracting Templates 23. Where Defence staff intend to use a contracting template other than an approved template referred to in this chapter, they must ensure that the template meets all of the mandatory Commonwealth and Defence procurement requirements (notably mandatory template advice contained in relevant DPPIs) and has been reviewed by a legal practitioner prior to tender release.

Key References
ASDEFCON suite of tendering and contracting templates available on the internet and through the Commercial Policy and Practice Branch intranet website. Infrastructure Management Defence Procurement Policy Instruction - Requesting professional services from the Office of Special Counsel Defence Materiel Organisation

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Defence Procurement Policy Manual 2.4 Not Used

2.4

Not Used

The contents of this chapter have been included where appropriate in chapter 5.4 Request Documentation.

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Defence Procurement Policy Manual 3.1 Procurement Methods

3.1
Introduction
1. 2.

Procurement Methods

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). The term procurement method is used to describe the manner by which Defence invites potential suppliers to participate in a particular procurement process. These procurement methods are consistent with the procurement process categories outlined in the Commonwealth Procurement Guidelines (CPGs). This chapter provides guidance on the following procurement methods:

open tender process; select tender process; and direct source tender process,

and the factors that should be considered when deciding which method should be used. 3. The term procurement method should not be confused with the contracting methodology that is selected to approach the market and engage the potential supplier. For example, the procurement method chosen may be open tender while the contracting methodology may be issuing a Request For Tender (RFT). Refer to chapter 5.3 for further information on contracting methodologies and refer to chapter 2.2 for further information on types of contracts. A reference to Procurement Approval should be construed as a Procurement Method Approval in the DMO. For further guidance on Covered Procurements, Non-covered Procurements and Defence/DMO Exempt procurements refer to the Definitions section and chapter 1.2. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

4.

Mandatory Policy
The Procurement Approval delegation must be exercised prior to releasing request documentation. Procurement officers must ensure that all procurement method decisions are documented in accordance with the requirements in chapter 1.4. The method of procurement must consider the elements of Value for Money (VFM). In accordance with the CPGs, an open tendering process must be used for all covered procurements unless the conditions for direct sourcing or select tendering can be satisfied. The Defence Purchasing Card must not be used in place of a written contract and purchase order for complex procurements of any value. All open tenders must be published on AusTender. For all procurements, a select tendering process must only be conducted in three specific circumstances:

selecting suppliers from a multi-use list; issuing a request for tender to a list of suppliers that have responded to a request for expressions of interest; or issuing a request for tender to all suppliers that have been granted a specific licence Page 3.11

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Defence Procurement Policy Manual 3.1 Procurement Methods or comply with a legal requirement where the licence or compliance with the legal requirement is critical to the conduct of the procurement. Covered procurements must not be direct sourced (including single source direct sourcing) unless the circumstances in paragraph 8.33 of the CPGs apply. Where a decision is made to conduct a direct source procurement process, Procurement officers must ensure that a written report is prepared and appropriately filed within the central filing system. The report must include:

the value and kind of property or services procured; and a statement indicating the circumstances and conditions that justify the use of a procedure other than an open or select tender process.

When using a direct sourcing tender approach the process must be non-discriminatory and ensure that a sufficient number of potential suppliers are invited to participate so as to ensure a sound value for money outcome. When approving a direct source tender recommendation based solely on the urgency of the requirement, the Procurement Approver must be satisfied that the urgency is genuine and unforeseen. Genuine urgency must not be confused with a lack of forethought or planning. All instances of single supplier direct sourcing must be fully justified. Where a direct source tender is conducted any offers received must still be examined to determine whether or not it provides the Commonwealth with value for money. Prior to accepting an offer from a tenderer, the Contract Approver must be satisfied that value for money will be achieved. When conducting a direct source tender process, the source evaluation report and recommendation must be supported by comprehensive documentation of the process that was undertaken and a clear audit trail of the reasons and justification for direct sourcing. Procurement officers must comply with Defence Instruction (General) Logistics 4-1-008 -

Rapid Acquisition of Technologies when undertaking rapid acquisitions. (DI(G)LOG - 4-1008).

Operational Guidance
Background 5. In Defence and the DMO, the selection of a suitable procurement method is necessary for satisfying:

the legislative requirement to comply with the CPGs; and the Defence and the DMO Chief Executives Instruction (CEI) requirement to obtain Procurement Approval.

Further information on the requirements for Procurement Approval are contained in chapter 1.4. 6. In order to comply with the CPGs, the method of procurement must consider the elements of Value for Money (VFM). Elements which enhance VFM are:

encouraging competition by ensuring non-discrimination in procurement and using competitive procurement processes; promoting the use of resources in an efficient, effective and ethical manner; and making decisions in an accountable and transparent manner.

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Defence Procurement Policy Manual 3.1 Procurement Methods 7. In Defence and the DMO, the Procurement Approval delegation must be exercised prior to releasing request documentation. The requirements of Procurement Approval are derived from Regulation 9 of the Financial Management and Accountability Regulations (FMARs). FMAR 9 provides that an approver must not approve a spending proposal unless satisfied after making reasonable inquiries, that the proposed expenditure will make proper use of Commonwealth resources (i.e an efficient, effective and ethical that is not inconsistent with the policies of the Commonwealth). This requires consideration of Commonwealth policies including those contained in the CPGs. Further information on the CPGs can be found in chapter 1.2. Further information on the requirements for Procurement Approval, including the contents of a Procurement Approval submission, is contained in chapter 1.4.

8.

Procurement Methods 9. Procurement methods available are:

open tender process this generally involves publishing a RFT inviting all potential suppliers that satisfy the conditions for participation to submit a tender; select tender process is an approach to the market that involves selecting suppliers from: a multi-use list; a list of suppliers that have responded to a request for expressions of interest; or a list of all potential suppliers that have been granted a specific licence or comply with a legal requirement, where the licence or compliance with the legal requirement is essential to the conduct of the procurement, and direct source tender process - this involves inviting a potential supplier or suppliers of Defences choice to submit tenders. There are strict conditions contained in paragraph 8.33 of the CPGs which apply to the use of direct sourcing for covered procurements.

Direct sourcing includes procurements previously referred to within Defence and DMO as restricted tenders (if the requirements for a select tender process are satisfied, this would also have previously constituted a restricted tender). Procurements previously referred to as sole source also fall within this category. 10. The CPGs encourage the use of competitive procurement processes and in many cases mandate the use of an open approach to the market. Consideration should be given to the scale, scope and relative risk of the procurement when determining an appropriate procurement method. The MPPs impose more onerous rules in relation to the selection of a procurement method for covered procurements. Refer to chapter 1.2 for further information. Use of the Defence Purchasing Card is not a method of procurement. The Defence Purchasing Card is a payment method and for Simple procurement it is an alternative to the use of a contract and purchase order. The Defence Purchasing Card must not be used in place of a written contract and purchase order for complex procurements of any value. Payment is made after determining the procurement method and will be necessary regardless of the method of procurement used.

11. 12.

Selecting a Procurement Method


Open Tender Process 13. An open tender process is used when maximum competition is sought or the market is unknown and is usually sought using a RFT. Open tenders must be published on AusTender. Refer to chapter 5.8 for further information on AusTender reporting requirements. While an open tender provides the most open and transparent method of procurement, the expense incurred by both Defence and industry needs to be taken into account when considering an appropriate method of procurement. Page 3.13

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Defence Procurement Policy Manual 3.1 Procurement Methods 15. In accordance with the CPGs, an open tendering process must be used for all covered procurements unless the conditions for direct source or select tender process can be satisfied. Refer to chapter 1.2 for information on determining whether a procurement is a covered procurement. All tenders received prior to the nominated closing date must be evaluated from any tenderers who satisfy the conditions for participation in the tender process and who meet any minimum content and format requirements.

16.

Select Tender Process 17. For all procurements, a select tender process must only be conducted in three specific circumstances:

selecting suppliers from a multi-use list; issuing a request for tender to a list of suppliers that have responded to a request for expressions of interest; and issuing a request for tender to all suppliers that have been granted a specific licence or comply with a legal requirement where the licence or compliance with the legal requirement is critical to the conduct of the procurement.

18.

The first two methods of select tendering require that an initial open approach to the market has been undertaken to identify suppliers eligible and interested in participating in the select tender process.

Selecting from a Multi-Use List 19. 20. 21. A multi-use list is a list, intended for use in more than one procurement activity, of pre-qualified suppliers who have satisfied the conditions for participation for inclusion on the list. Suppliers in a select tender process may be chosen from a multi-use list provided that the supplies sought are consistent with those described in the notice advertising the multi-use list. In these circumstances, a select request for tender may be released to some or all of the listed suppliers. The number of suppliers selected from the list should be consistent with an efficient procurement process. The multi-use list itself must:

22.

have been established through an open approach to the market; have been advertised on AusTender; be open to suppliers continuously or opened at least annually; and include all suppliers that have satisfied the conditions for participation as soon as practicable after such conditions have been met.

23.

Further guidance on multi-use lists is contained in chapter 4.3.

Selecting from an expression of interest 24. Where an expression of interest, invitation to register interest or request for proposal is released as an open approach to the market, the list of potential suppliers who lodge compliant submissions in response to that process may be used as the basis for subsequently inviting potential suppliers to submit tenders under a select tendering process. Where the expression of interest, invitation to register interest or request for proposal contains relevant requirements and evaluation criteria, responses received in relation to it may be used to:

25.

assess the extent to which a tenderers response meets the technical and performance specifications of the procurement; and Page 3.14

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limit the number of potential suppliers subsequently invited to submit a tender having regard to the rating of each submission. The number of suppliers selected in this manner must be consistent with an efficient procurement process.

26.

If relevant requirements and evaluation criteria have not been specified in the expression of interest, invitation to register interest or request for proposal, then all suppliers who respond and that meet the conditions for participation must be invited to submit tenders. Further guidance on developing expressions of interest, invitations to register interest and requests for proposal is contained in chapter 4.9.

27.

Selecting on the basis of a licence or specific legal requirement 28. A select tendering approach may also be adopted by issuing a request for tender to a list of suppliers that have been granted a licence or who comply with specific legal requirements that exist independent of the procurement process, provided that:

the requirement for a licence or compliance with specific legal requirements is essential to the conduct of the procurement; and a complete list of these suppliers is maintained and available to be used for sourcing prospective suppliers.

29.

Under these circumstances, all suppliers identified on the list must be invited to submit tenders.

Direct Source Tender Process 30. Direct sourcing refers to a procurement process in which Defence has invited either a single potential supplier or a number of potential suppliers to submit a response without using an open procurement process. The circumstances in which direct sourcing may be used vary depending on whether or not the procurement is a covered procurement or non covered procurement. A direct source tender process should only be used under specifically defined circumstances, as detailed below and consistent with achieving best value for money. Where there are a number of potential suppliers for a Defence procurement, the Statement of Work and specifications for the procurement should not be developed in such a way as to effectively limit Defences procurement options to a direct sourcing tender process. There are some situations where the currently approved procurement process may need to be varied. An example is rapid acquisition, where goods or services are required within a short time frame due to unforeseen operational requirements. Where this is the case, a direct source procurement may be appropriate. All instances of direct sourcing must be fully justified.

31.

32.

33.

Direct Sourcing v Single Supplier Direct Sourcing (previously referred to as Sole Source) 34. Single supplier direct sourcing (the process formerly referred to as sole sourcing) is used in this chapter to refer to the situation where a single supplier is invited to tender. Accordingly, single supplier direct sourcing is a subset of direct sourcing, and the additional requirements outlined in paragraphs 38 - 40 apply in respect of approving the procurement method for these types of procurements. Unless otherwise specified, references to direct sourcing also include single supplier direct sourcing.

Direct Sourcing Non Covered Procurements or Defence/DMO Exempt Procurements 35. In some circumstances it may be appropriate to limit the number of potential suppliers to whom a Request for Tender (RFT) is released. Direct sourcing should only be used where there is a sound basis for identifying interested and eligible potential suppliers. When using a direct sourcing approach the process must be non-discriminatory and ensure that a sufficient number of potential suppliers are invited to participate so as to ensure a sound VFM outcome. This process has been previously referred to in Defence as restricted tendering. Page 3.15

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Defence Procurement Policy Manual 3.1 Procurement Methods 36. Circumstances that may justify the adoption of a direct sourcing approach for a non covered procurement or a Defence/DMO Exempt Procurement (refer to chapter 1.2), include:

the existence of only a few known potential suppliers who can supply the required goods or services; a genuine urgency in the requirement; the existence of only a few known potential suppliers meeting Defence security requirements; or where VFM in the procurement process would not be achieved by using an open tender process, due to the expense involved.

37.

When approving a direct source tender recommendation based solely on the urgency of the requirement, the Procurement Approver must be satisfied that the urgency is genuine and unforeseen. Genuine urgency must not be confused with a lack of forethought or planning.

Additional Requirements for Single Supplier Direct Sourcing (previously referred to as Sole Source) - Non-Covered Procurements and Defence/DMO exempt Procurements 38. In the first instance, Procurement officers should apply the considerations listed in paragraph 8.33 of the MPPs to determine whether direct sourcing to a single supplier is justified. The following additional and specific grounds may also be used to justify a single supplier direct source procurement method in the case of a non-covered procurement or any Defence/DMO Exempt Procurement:

where a recent competitive approach to the market identified a clear winner and there are no reasons to believe the outcome would be different in a new approach to the market; where a potential supplier is recognised by Defence, from recent previous approaches to the market, as the only potential supplier of a Defence requirement; a genuine urgency in requirement i.e. goods or services are required to be delivered in a short timeframe to meet operational requirements and Defence is aware based on previous approaches to the market or market knowledge that a specific potential supplier is able to meet the requirement. This does not include the situation where poor planning has led to procurement delay; the need for compatibility with existing services and equipment; where Intellectual Property restrictions limit Defence to a specific potential supplier; where the cost of conducting a competitive process is excessive when compared to the scale, scope and relative risk and benefits of the procurement including any savings that would or could be made by conducting a competitive process; 1 where a requirement must be met by a specific potential supplier under existing warranty provisions, or other contractual arrangements exist which require the use of goods or services from a specific potential supplier; and where a purchasing area wishes to piggyback or otherwise procure supplies from a contractor selected under a tender process conducted by another area of Defence or another Commonwealth agency. In such a case, the purchasing area must be satisfied that its requirements are sufficiently similar to those set out in the tender documentation so that it can be satisfied that it is receiving value for money. The other Defence area or Commonwealth agency will also need to be satisfied that any piggybacking arrangement does not give rise to probity concerns (i.e. expanding their contract requirement beyond that indicated in the tender process).

39.

Utilising a single supplier direct sourcing method of procurement, by definition, limits a Procurement officers ability to ensure value for money is being obtained. Care should be taken to monitor the costs and conditions agreed in these procurements, with comparable services within the same or similar market place. Procurement officers should consult the Financial

Commonwealth Procurement Guidelines, para 5.7

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Defence Procurement Policy Manual 3.1 Procurement Methods Investigation Service (FIS) in Commercial Enabling Services, DMO (in accordance with DMH(PROC) 13-0-001 Mandatory Engagement of Financial Investigation Services), for price and cost analysis in single supplier direct source procurements. Guidance on FIS may be found in the latest Departmental Procurement Policy Instruction on Requesting Professional Services from the Office of Special Counsel Defence Materiel Organisation. 40. The increased risk of a single supplier direct source procurement may move an otherwise Simple procurement to a Complex procurement, requiring appropriate (Complex) delegate approval.

Direct Sourcing Covered Procurements 41. Defence must not direct source (including single source direct sourcing) a covered procurement (other than a Defence/DMO exempt procurement) unless the circumstances in paragraph 8.33 of the MPPs apply. For guidance on whether a procurement is a covered procurement or a Defence/DMO Exempt Procurement refer to chapter 1.2. A procurement process for a covered procurement that is consistent with the grounds for direct sourcing, is not required to meet the requirements for request documentation or time limits imposed by the MPPs. When direct sourcing due to an absence of competition for technical reasons in accordance with paragraph 8.33(d)(iii) of the MPPs, Defence would be expected to demonstrate the following:

42.

43.

that the requirements and specifications for the procurement have been developed based on a sound and unbiased understanding of market capabilities and commercial practices (more information regarding functional requirements and specifications is detailed in paragraphs 8.46 to 8.50 of the MPPs); and a comprehensive knowledge of the specific market has been gained through market research.

44.

If it is found, following comprehensive market research, that more than one potential supplier can provide the property or services required, then an open approach to the market should be undertaken. Where a decision is made to conduct a direct source procurement process for a covered procurement, paragraph 8.34 of the MPPs requires that for each contract awarded through direct sourcing Procurement officers must ensure that a written report is prepared which includes:

45.

the value and kind of property or services procured; and a statement indicating the circumstances and conditions that justify the use of a procedure other than an open or select tender process.

The Procurement officer must ensure that the report is appropriately filed within the central filing system. Financial Investigation of Single Supplier Direct Source Procurements All Procurements 46. Financial investigation is necessary for ensuring value for money in single supplier direct source tender processes. The objective of these investigations is to determine the reasonableness of the suppliers costings. Procurement officers should consult with FIS for price and cost analysis in direct source procurements (see para 39 for guidance on engaging FIS). DMO costing issues that need to be investigated include:

47.

the estimated labour and materials components; the labour rates proposed; overheads;

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the method of calculation used by the tenderer for the prices offered; whether the margins for contingencies and profit are reasonable; and the total price offered.

48.

The financial aspects of a tenderers offer should be compared with alternative product prices (if any) and with prices offered by the supplier to other customers. Advice can be sought by contacting FIS.

Value for Money in Direct Source Procurements 49. Where a requirement is confined to a single potential supplier or a limited number of potential suppliers, any offers received must still be examined to determine whether or not it provides the Commonwealth with VFM. Prior to accepting an offer from a tenderer, the Contract Approver must be satisfied that VFM will be achieved (see chapters 1.2 and 1.4). The source evaluation report and recommendation must therefore be supported by comprehensive documentation of the process that was undertaken and a clear audit trail of the reasons and justification for direct sourcing. To ensure objectivity and demonstrate VFM in direct sourcing, a number of strategies may be employed. These strategies include the use of independent advisers (eg legal, probity, financial); review teams (either internal or external to Defence); or seeking the assistance of the Office of Special Counsel, DMO. Further advice on determining VFM in a direct sourcing procurement process can be obtained by contacting the contracting specialists at the front of this Manual.

50.

51.

Reporting Methods of Procurement for Standing Offers in the DMO 52. The Procurement Approval for a contract raised under a standing offer may be different to the procurement method that is reported for the purposes of AusTender. For AusTender reporting, contracts formed under a standing offer arrangement are reported in the Contract Notice section of AusTender. For example, a decision to invite one supplier under a standing offer to quote may be approved as a direct source procurement for the purposes of Procurement Approval. However, if the standing offer was created following an open source tender process, then for the purposes of reporting on AusTender, the procurement method for any order placed under that standing offer arrangement (i.e the resultant contract) should be reported as open. The below table provides examples of circumstances where the DMO procurement method approval and AusTender Reporting Procurement Methods for purchases using a Standing Offers may differ.
Scenario Seeking quotes from all members of a Standing Offer. Internal Procurement Method Open Tender Procurement Method for AusTender Reporting The method that was used to establish the Standing Offer. For example, where the panel was established using an open process, the procurement method reported would be open. The method that was used to establish the Standing Offer. The method that was used to establish the Standing Offer. The method that was used to establish the Standing Offer.

53.

Seeking quotes from more than 1 member of a Standing Offer Seeking a quote from 1 member of a Standing Offer Seeking a quote from a Standing Offer comprising one supplier.

Direct Source

Direct Source Single Supplier Direct Source Open Tender (if the standing offer was established using an open process).

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Direct Source (if the standing offer was not established using an open process)

54.

The above table is not comprehensive and is intended to demonstrate how procurement method approval needs to be considered independently of AusTender reporting requirements. There will be instances where the Procurement Method approved is the same as the method reported on AusTender. Where the requirement can be satisfied by the scope of more than one Standing Offer Panel, the Procurement Approval submission should justify the use of the Standing Offer Panel selected to seek quotes from. This justification should be based on value for money considerations. Procurements officers should note that the obligation to obtain Procurement Approval is not a mandatory requirement for Defence procurements raised against an existing Standing Offer.

55.

56.

Record Keeping Maintaining an Audit Trail 57. The level of accountability and record keeping requirements are identical for all procurement methods and Procurement officers must ensure that all procurement method decisions are documented in accordance with the requirements in chapter 1.4. In particular, a decision to direct source should be based on a clear audit trail which sets out the reasons and justification for a determination that direct sourcing constitutes value for money. The justification for the direct source decision should be recorded in writing to allow the delegate to make a decision based on sound value for money principles (see chapter 1.2). For Complex and Strategic procurements, the justification for direct sourcing should be included in the endorsed Acquisition Strategy or other planning document for the project. Where such reasons do exist, this should be recorded on file in accordance with paragraph 8.34 of the CPGs. Consistent with the devolved procurement framework in Defence and Government, the Department of Finance and Deregulation has advised that determination of such justifications is by self assessment by the agency. In practical terms, this means the delegate must be satisfied with the justification for the purposes of the public record.

58.

59.

Rapid Acquisitions 60. Rapid acquisition is not a method of procurement, but a justification for compression of the timeframe that a procurement process would normally require and is a justification that is usually only available for a procurement in support of current operations. Submissions for a rapid acquisition must be made to a Proposal Approver at the Division Head level, including the reasons for the operational urgency. When exercising delegations for rapid acquisitions, delegates must assure themselves that there is a genuine operational urgency that the goods or services could not be obtained in time under open tendering procedures and that the shortening of the process will provide VFM. Rapid acquisition must not be used as a means of circumventing the normal Commonwealth and Defence procurement process or policy requirements. Procurement officers must comply with DI(G) - LOG 4-1-008 when undertaking rapid acquisitions. Guidance on the rapid acquisition process can be found in the Quality and Environment Management System (QEMS) at C.2.3 - Rapid Acquisition. Further detailed guidance on rapid acquisitions can also be obtained from DMO Operations Support on the DMO Intranet.

61.

Conducting Direct Source Procurement 62. Where it is determined that a direct source procurement is appropriate and justified, the Procurement officer should prepare standard request documentation as though the requirement

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Defence Procurement Policy Manual 3.1 Procurement Methods were going to open tender. For further information on contracting methodologies for direct source procurements refer to chapter 5.3. Factors Affecting Procurement Method 63. When deciding which method of procurement should be used, a variety of factors may be considered. These factors fall into three categories:

Government Procurement Policy (discussed in chapter 1.2); Market Related Factors; and Operational Related Factors.

64.

Each procurement is unique. Requirements vary in value, complexity, quantity, time available and location. Markets vary depending on the type of goods or services required and their location. This means that there are a variety of tests or criteria relevant to the choice of the procurement method for each requirement. The relevant Government Procurement Policy requirements are outlined in chapters 1.2 and 3.10. A selection of Market and Operational Factors are outlined in the table below.
Market Related Factors Extent of effective competition Specialisation Distribution, location of potential suppliers Potential supplier reliability Technical capacity and customer support systems Quality management and product reliability Bidding costs How wide is the market supplying your requirements? Does the whole market cater to your specialised requirements? Will your requirement need to be specially developed? Are you operating in a remote or regional location? Do all potential suppliers deliver to your location? Which potential suppliers can meet your requirements within required time frames? Can you get life of product support/spares, servicing, maintenance and repair? What are your quality control/assurance requirements? Can potential suppliers meet them? What will be the administrative cost of implementing the procurement method chosen for both Commonwealth and tenderers? Will savings generated by wider competition outweigh those costs? A low price is of little benefit if you dont get what you want when you want it

65.

Product availability Operational Related Factors Nature of supplies required/complexity

Are your requirements: commercial/commercial-off-the-shelf? To be imported? Made to specification local or offshore? Are there special terms and conditions required to protect the Commonwealths interests? Substantial negotiations anticipated? Research and development involved? etc. Do your requirements have to be compatible with any in service equipment? Do you want 1, 10 or 10 million? You may adopt different methods for each. Do you have a short or long delivery lead-time? Which potential suppliers can meet these requirements? Is it appropriate to standardise on a particular product? If so, widest possible competition should be obtained to achieve the best possible deal over the standardisation period. Which potential suppliers can meet your requirements? Are there any security implications which will limit the number of potential suppliers able to tender?

Compatibility Quantity, volume, scale Timing and planning objectives Standardisation policies

Operating and maintenance standards Security

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Defence Procurement Policy Manual 3.1 Procurement Methods Sources of Market Knowledge 66. Knowledge of the market is a critical factor in deciding the method of procurement. Sound market knowledge:

widens the choice of sources of supply; helps choose the right contractor; facilitates two way communication with potential suppliers; identifies opportunities for Australian and New Zealand industry involvement and development; and improves access for small and medium enterprises.

67.

By identifying potential suppliers and being aware of their capabilities, effective competition is assisted, therefore helping obtain value for money. Market research can range from a quick visit to local retail outlets, to hiring a consultant to undertake a specialist market survey. Sources of market information which should be utilised by Procurement officers include:

DMO Business Access Offices; Quality Assurance Representatives (see chapter 3.5); Industry Division within the DMO, which conducts a survey on a biannual basis to ascertain the business to business relationship between Defence and Industry; the Industry Assessment Branch of the Industry Division which operates the Defence Company ScoreCard System which provides information on company performance (chapter 3.8); networking with other Defence procurement areas or other agencies; telephone directories e.g. Yellow Pages; supplier catalogues, brochures and advertisements; Industry source books, indexes and associations; sales personnel; trade journals exhibits, fairs, and meet the buyer events; online inquiry e.g. supply systems using stock number; Defence standing offer arrangements (listed on AusTender); State Government departments; visits to potential suppliers; historical records retained in purchasing sections; and Defence Materiel (London) (CONDMAT ) and Defence Materiel Branch (Washington) (DEFMAT) market intelligence (see chapter 4.2).

Key References
Commonwealth Procurement Guidelines Department of Finance and Deregulation - Financial Management Guidance 13 - Guidance on the Mandatory Procurement Procedures Defence Instruction (General) Logistics-4-1-008 - Rapid Acquisition of Technologies DMH(PROC) 13-0-001 Mandatory Engagement of Financial Investigation Services AusTender website: www.tenders.gov.au DMO Operations Support Intranet site Page 3.111

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Defence Procurement Policy Manual 3.2 Risk Management in Procurement

3.2
Introduction
1.

Risk Management in Procurement

This chapter examines the management of risk in Defence procurement. In the Defence context, risk is concerned with the things that can go wrong to Defence projects and that may prevent the project from being a success. The Government considers that a successful project is a project that delivers a fit-for-purpose capability, as approved by Government, within the approved budget and schedule.

Risk Management Policy 2. Division One of the Commonwealth Procurement Guidelines (CPGs) state that effective risk management is integral to efficiency and effectiveness, enabling agencies to proactively identify, evaluate and manage risks, opportunities and issues arising out of procurement related activities. Risk management involves the systematic identification, analysis and treatment, and, where appropriate, acceptance of risks. Risk is a part of the environment within which agencies operate and proper risk management is an important element in achieving successful outcomes. Defence is committed to a comprehensive, coordinated and systematic approach to risk management. The resources expended in managing risk should be commensurate with the likelihood of a loss or benefit. In contracts, the risk should lie with the party best able to manage that risk. This may be the Commonwealth, the contractor or both.

3. 4.

Definition 5. Risk is defined as the chance of something happening that will have an impact upon objectives. A Project risk is a chance of something happening that could impact on the achievement of a successful project. Risk is measured in terms of the probability of an event occurring and its consequences.

Risk Issues in Public Sector Procurement 6. Sound risk management is an essential element of good corporate governance. A well developed and managed risk management plan will lead to informed decision-making to ensure the desired result is achieved. Access to electronic copies of HB254-2005 Governance, risk management and control assurance can be obtained via the Defence Library website. Public sector risk management involves making decisions that are capable of standing up to public scrutiny and Commonwealth accountability mechanisms. This requires that decisions are documented and that the processes for arriving at decisions are both transparent and visible. Procurement officers need to manage risk through all stages of the procurement cycle. If procurement is conducted in a high risk environment, this may compromise the achievement of value for money, both in terms of contract cost and the Commonwealth resources required manage the risk.

7.

8.

Simple Procurement and Risk Management 9. The level of risk in a Simple procurement should be minimal. The identification of a major risk may convert an otherwise Simple procurement into a Complex procurement. Written risk management strategies are not usually required for Simple procurements. For Simple procurements, the main risks are that the requirements are not well understood or articulated, and that the risks have not been adequately considered. Page 3.21

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Defence Procurement Policy Manual 3.2 Risk Management in Procurement Complex and Strategic Procurement and Risk Management 10. As significant risks may occur during Complex and Strategic procurements a documented risk management plan is required. Failure to adequately identify the risks and develop adequate strategies to manage those risks may result in:

the selection of a contractors not capable of delivering the required outcome; contract cost overrun; delays in the delivery schedule leading to an overall time overrun on contract completion; failure to meet the desired quality of contract deliverable; non-achievement of identified requirement; and/or not meeting the sponsor/client's expectations.

11.

Some of the factors to be examined when identifying risk exposure include:


the maturity of the technology; the complexity of the requirement; is the requirement heavily dependant on Information Technology (IT); the extent of integration with other systems or services; can the requirement be met by Commercial off the Shelf (COTS) or Military off the Shelf (MOTS) products; inadequate or poorly written selection/evaluation criteria; poorly defined, outdated, or over defined, specifications; staff skills; is the contractor heavily dependent on a small number of key personnel; breach of ethics and probity in the tender evaluation process; ability of the contractor to meet the requirement; the timeframe identified for development/delivery (the longer the timeframe, the greater the risk); inadequate acceptance criteria; and in-service support requirements/costs.

Risk Management Processes 12. The risks identified, and the strategies to manage them, will be peculiar to the circumstances of each procurement. Using a formal risk management process will assist in the identification of the risks likely to be encountered and will document the appropriate strategies to manage those risks. This information is incorporated into a Risk Management Plan which is a dynamic document requiring regular review and updates. Below is a diagrammatic representation of the risk management processes.

13.

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Defence Procurement Policy Manual 3.2 Risk Management in Procurement

Establish the Context

Communicate and Consult

Analyse Risks Assess Risks Evaluate Risks

Treat Risks

Establish the Context 14. Establishing the context for procurement risk management involves the identification and consideration of the objectives and the environment in which they are to be achieved. The risk management context should include the following steps:

set the scope and boundaries for the application of the risk management process by: defining the procurement objectives, constraints, and tolerances; defining the critical success factors for the procurement; defining the extent of the procurement in time, location and organisation; and defining the scope and schedule for the risk management activities to be carried out; define the structure for dealing with risk including: the roles and responsibilities of the various organisations participating in managing risk; the relationships between the activity and other activities or agencies; and the mechanisms to be used; develop criteria for risk analysis and evaluation. These should be clear statements of how identified risks will be assessed/rated, what level and type of risks can be tolerated and what needs to be treated. These should be based on the objectives and relate to the critical success factors for the specific procurement. These can be, but are not limited to the issues of safety, performance, cost, schedule and supportability. These criteria should reflect relevant policy as well as the interests of stakeholders; and establish/update the Risk Log to record and communicate risks and their associated assessment results and treatment decisions. The Risk Log provides a central database for information capture, collation and communication of risk related information to assist with the understanding and management of procurement risks while providing a documented record of risk related analysis and decisions.

Risk Identification 15. Risk can be identified using a variety of methods including:

risk management matrices (as set out in Annex 3A); process flow charts; application of risk analysis software; Procurement officer knowledge and experience; experience in similar procurements undertaken in the past;

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Identify Risks

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consultation with users or subject matter experts; fault tree analysis; scenario planning; an understanding of the tenderers/contractors administrative and technical background; checklists; and risk workshops (brainstorming).

Risk Analysis 16. Procurement officers should analyse all possible areas of risk and assess the likelihood of an identified risk actually occurring and the possible consequences against applicable critical success factors if it does. The level of risk should be identified by referring to the risk evaluation criteria and then identifying where the risk sits in the risk matrix. Risks may then be categorised as extreme, high, medium or low. Individual Procurement areas must develop and use their own criteria to determine the level of risk associated with their own procurement projects. Criteria which may be adopted include:

17.

cost; schedule; performance; safety; supportability; environmental impact; security; and reputation.

18.

Individual Procurement areas should identify the key stages in the procurement process in order to determine when the benefits of the procurement significantly decline or may be outweighed by the risks.

Risk Evaluation 19. It is not possible to treat or reduce all risk to zero as no project/Defence area has limitless resources to devote to risk treatment. It is necessary to draw the line somewhere in terms of the level of risk that will be accepted or tolerated. Each identified risk needs to be evaluated to determine if it acceptable, unacceptable, to be treated or not to be treated. The previouslydeveloped evaluation criteria are used to determine the acceptability of a risk. In general, if a risk is not going to be treated, it is deemed to be accepted ie resources and effort will not be directed at actively managing the risk. Risks that are evaluated as acceptable are still important and should be retained in the Risk Log. Those risks that are not acceptable are then prioritised for treatment. Prioritising risks will assist to plan what risks will be treated first. Ideally this should be a simple process of listing risks in order of risk level from Extreme through to Low, with multiple risks at one level being considered as equal. Ongoing monitoring and review of these risks should be conducted to detect any change in their status. HANDY HINT Further guidance on risk management plans is contained in the Defence Materiel Organisation Quality and Environmental Management System (QEMS). Treating Risk 21. The outcome of the risk-evaluation step will be a prioritised list of risks that require treatment. In this step, projects/Defence areas need to consider what can be done to treat these risks, select Page 3.24

20.

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Defence Procurement Policy Manual 3.2 Risk Management in Procurement a suitable treatment strategy, and implement it as an integrated project activity. There are a number of generic treatment options available, all of which should be considered in the initial deliberations. Be aware that a risk-treatment strategy might also introduce new risks that also need to be managed. 22. The treatment of risk encompasses the following steps:

determine Risk Treatment Options; appraise and Select Preferred Option/s; develop Risk Treatment Plans; integrate into Project/Contract Management Plans; and analyse Residual Risk Exposure.

23.

The management of risk is a continuing process, requiring re-evaluation of risks throughout the various stages of the procurement process. Risk may be effectively treated by:

identifying areas of risk in the procurement process and choosing appropriate methods of procurement; inserting appropriate contract clauses; producing and following through on a risk management plan; technical reviews; audits; systems design reviews; quality assurance; and enhanced communication with the tenderer/contractor.

Document, Monitor, and Review 24. It is imperative that a specified level of monitoring and review of risks be undertaken. This should include management review as well as periodic re-visiting of all risks and potential risk areas on a regular basis. This step consists of:

documenting risk management activities and decisions; monitoring and review; management review; and reporting.

25.

The purpose of risk monitoring and review is to ensure that:

the details of risks, including the assessment of their likelihood and consequences are current; any new risks are identified and subsequently managed, as early as possible; risk treatments have been implemented and are effective; and the risk-management processes are effective.

26.

Depending on the size of the procurement, monitoring and review processes may be as simple as setting a time for staff to review risks or as complex as requiring an external organisation to perform audits against established performance measurements. Risk management should not be viewed solely as a negative activity. Risk analysis assesses opportunities and accepts the risk when it is worth taking. In deciding whether to accept and manage a risk, a Procurement officer should consider possible gains to be made; and the loss that would be the consequence of taking the action or of not taking the action.

27.

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Defence Procurement Policy Manual 3.2 Risk Management in Procurement 28. Further guidance on risk management can be obtained from the DMO Risk Management Website.

Project Risk Score 29. The project risk score was introduced by the CEO Defence Materiel Organisation as a way of simply communicating the level of risk in a project over its lifecycle. The project risk score measures risk in major projects in two stages, the first is up to second pass approval and the second is the in-contract phase. Project risk score documentation includes Project Risk Scores Descriptors and Interpretation, Project Risk Scores Guidance Information and Benchmark Risk Scores at Lifecycle Gates. These documents can be found in the Key References section of QEMS.

30.

The Contract and Risk Management 31. Contracts can include several risk management mechanisms to assist in ensuring the contractors performance. Options available to assist the Defence protect itself against risk include:

indemnities and insurance (see chapter 3.15); and financial and performance guarantees (see chapter 3.15).

32.

The contract may also include specific clauses to ensure that what is delivered will satisfy the identified requirement. These clauses might relate to:

dispute resolution (see chapter 6.8); contract amendment (see chapter 6.7); quality assurance provisions (see chapter 3.5); Earned Value Management techniques (see chapter 3.4); compliance with standards; inspection and acceptance testing (see chapter 6.4); warranties (see chapter 6.5); environmental damage (see chapter 3.16); or requirements for the performance of the contract by specified contractor personnel.

Risk sharing 33. 34. In arranging contracts between Defence and tenderers each party should accept responsibility for the risks that they can best manage. In cases where it is not clear who is best able to manage the risk, it may be appropriate that the management of the risk is shared between Defence and the contractor. This is driven in part by a recognition of the fact that where the contractor takes on the risk this can equate with a higher premium passed onto Defence by the contractor in the form of a higher contract price.

Australian New Zealand Standard 35. Standards Australia, in conjunction with Standards New Zealand, has produced a number of risk management standards. Copies of these standards are available on the Standards Australia website.

Chapter Summary
Managing risk is an essential part of good management and is fundamental in procurement.

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Defence Procurement Policy Manual 3.2 Risk Management in Procurement Identification, analysis and treatment of risk in procurement will contribute significantly to successful outcomes. Risk management is as much about identifying opportunities as avoiding and mitigating losses. Risk should be considered at the earliest stages of procurement planning. Risk and its treatment should be monitored on a systematic basis throughout the procurement process. Risk management involves making decisions that are capable of standing up to public scrutiny and Commonwealth accountability mechanisms. Defence and contractors should accept responsibility for the risks that each can best manage. In cases where the risks are not clearly the responsibility of one party, the parties involved should agree to share them. The costs incurred in managing risk should be commensurate with the identified level of risk. Excessive effort and resources applied to risk avoidance may compromise the value for money objective. Defence may, where appropriate, obtain insurance coverage to cover risk.

Further Reading
The Defence Materiel Organisation Quality and Environmental Management System (QEMS) AS/NZS 4360: 2004 Risk Management Defence Risk Management Policy Comcover Policy Manual Commonwealth Procurement Guidelines Defence Chief Executives Instructions (CEIs), Part 8, Instruction 6 Indemnities and Instruction 7 Insurance Defence Environmental Policy (refer to chapter 3.16) Finance Circular 2003/02 Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letter for Comfort.

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process

3.3

Financial Policy and Advice in the Procurement Process

Introduction
1. 2. This chapter applies to all procurement conducted in Defence and the Defence Materiel Organisation (DMO). This chapter addresses Commonwealth and Defence financial policy and some of the issues involved in seeking financial advice during the procurement cycle. Policy regarding financial viability and capability assessments and the use of the Financial Investigation Service does not apply to Infrastructure Division projects. Procurement officers using Infrastructure contracts should refer to the Infrastructure Management homepage for further guidance.

Mandatory Policy
Contractual or other arrangements must not be entered into that fix or otherwise alter the effects of changes in foreign exchange rates on the price of goods or services. Hedging of foreign currency exposure is prohibited by Commonwealth policy. Procurement officers must ensure that tenderers providing goods or services from overseas quote in the respective foreign currency for the overseas-sourced component of the contract. Procurement officers must comply with the mandatory requirements in Annex 3F when dealing with overseas tenderers and contractors. Procurement officers must ensure that financial viability and capability assessments of tenderers are undertaken for:

all major capital equipment acquisitions, including where sourced from overseas; all minor capital equipment acquisitions where the contract is considered strategically important; and any other purchase where there is a significant risk that the financial viability or capability of the preferred tenderer is or may become an issue.

DMO Procurement officers must seek the approval of FIS prior to inclusion in request documentation or contracts of Australian and United States (US) indexes outside the approved FIS lists referred to in Defence Procurement Policy Instruction (DPPI) 7/2010 Advice to Defence Materiel Organisation Staff Regarding Price Variation Indexes.

Operational Guidance
Commonwealth Foreign Exchange Policy 3. The Government has an overarching foreign exchange risk management framework that applies to foreign exchange exposures arising from Government entities. Under the framework, the proper management of foreign exchange is to be viewed from a whole of government perspective. That is, the Government has taken a decision to self insure its foreign exchange exposures and does not wish its entities (e.g. Departments) to breach this policy by hedging (except in special circumstances). Broadly, this means that Government entities must identify, measure, report and review their exposures. In September 2006 the Department of Finance and Deregulation (DOFD) issued Finance Circular 2006/06, Australian Government Foreign Exchange Risk Management Guidelines to be used as a policy directive by agencies in implementing the Governments framework.

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process 4. It is Commonwealth policy that contractual or other arrangements must not be entered into that fix or otherwise alter the natural effects of changes in exchange rates on the price of goods or services. Hedging of foreign currency exposure is prohibited by Commonwealth policy. In special circumstances, the Minister for Defence may seek exemption from the hedging restriction from the Minister for Finance and Deregulation (Finance Minister). The Finance Minister, in consultation with the Treasurer, is able to grant an exemption from the hedging restriction, either on a case-by-case or a general basis. Where there is such a proposal, the Assistant Secretary, Financial Operations Branch, Defence CFO Group, should be contacted in the first instance.

5.

Entitlement to Supplementation 6. Overseas purchases introduce practical considerations for Government entities as budget appropriations (i.e. the purchase decision) are often made well in advance of the actual purchase. This gives rise to a foreign currency exposure, so that a purchases actual cost can be either higher or lower than the budgeted cost. Defence will be supplemented by DOFD for exchange rate losses provided that the criteria stipulated in the Guidelines for the Management of Foreign Exchange Risk are met. Where there is either supplementary funding or a return to the budget, the actual foreign exchange rate will be deemed to be the rate at which the foreign exchange funds payment occurred. A checklist for foreign exchange risk management is contained at Annex 3F. Further guidance on foreign exchange risk management policy can be obtained from the Defence CFO Group website or by contacting the Finance Operations Branch in the Defence CFO Group.

7.

8.

Price Basis and Price Variation Price Basis 9. The price basis of a contract provides the terms on which the contractor will be paid the contract price. Guidance on the types of price bases commonly used in Defence contracts may be found in chapter 2.2. A firm price basis does not allow for any variations in the contract price. A variable price basis allows for price variation as a result of variations in exchange rate and/or the cost of labour and materials. Where price variation for exchange rate will be allowed, appropriate clauses will need to be included in the contract. Clauses that can be used for:

10.

11.

Strategic procurements of supplies are contained in ASDEFCON (Strategic Materiel); Complex procurements of supplies are contained in ASDEFCON (Complex Materiel); and Strategic and Complex procurements of maintenance and through life support services are contained in ASDEFCON (Support).

12.

Where price variation for variations in the cost of labour and/or materials will be allowed, appropriate clauses, price variation formulae and price variation indices will need to be included in the contract. Defence uses standard, approved price variation formulae and indices and prefers broad-based output indices. However, specific recommended input indices may also be used. Clauses, price variation formulae and price variation indices for:

Strategic procurements of supplies are contained in ASDEFCON (Strategic Materiel); Complex procurements of supplies are contained in ASDEFCON (Complex Materiel); and Strategic and Complex procurements of maintenance and through life support services are contained in ASDEFCON (Support).

13.

Procurement officers should be cautious of any substitute price variation formulae proposed by a tenderer. If accepted, they may be difficult to compare with tenderers who have accepted Page 3.32

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process standard Defence formulae. Moreover, commercial price variation formulae are not drafted to protect the Commonwealths interests. 14. Where a tenderer proposes a non-Government index, Procurement officers should seek advice from the Financial Investigation Service. If an index is not independently compiled or objective, it should not be used. Procurement officers need to be aware that following the 2009-10 Budget, Defence projects will receive a fixed level of supplementation for cost escalations. Procurement officers should ensure that where indices for variation in the cost of labour and/or materials are proposed to be included in their contracts, the project has sufficient contingency in their budget to cover future increases in their agreed labour and materials indices. The Australian Government has made it clear that no additional funding will be allocated for projects. To assist with managing the risks associated with these new budgetary arrangements, DMO Procurement officers must comply with the requirements specified in paragraphs 21 24. Further guidance on exchange rate variation, variations in labour in materials, price variation formulae and price variation indices can be obtained from the Financial Investigation Service. Advice on price variation indices is also available from the Australian Bureau of Statistics on telephone 1300 135 070 or on the ABS website.

15.

16.

Late Payments 17. In accordance with Finance Circular 10/2008, for all written procurement contracts valued up to A$1million (GST inclusive) with small businesses, Defence must pay interest on late payments following receipt of a separate correctly rendered invoice. Chapter 6.4 contains more detailed information on Late Payments. Where interest on late payments is allowed, appropriate clauses must be included in the contract. The ASDEFCON suite of tendering and contracting templates includes the clauses necessary to comply with this requirement.

Overseas Contractors 18. Contractors providing goods or services from overseas must quote in foreign currency for the overseas-sourced component of the contract. Where the overseas-sourced component of a contract is of significant value, i.e. more than A$1 million, the contract price in relation to the overseas-sourced component should be paid in the applicable foreign currency. Contractors providing goods or services from overseas may, where a variable price basis is allowable, use the Defence-preferred Australian Bureau of Statistics indices or an equivalent authoritative overseas Producer Prices Index or Chain Price Index, Domestic Final Demand. Guidance on the suitability of proposed overseas indices can be obtained from Financial Investigation Service. Annex 3F details the mandatory requirements that must be met by Procurement officers when dealing with overseas tenderers and contractors.

19.

20.

Selection of Australian and US Indexes for Contracts - DMO Specific 21. FIS have approved a shortlist of Australian and US indexes to provide DMO Procurement officers with direction and guidance on appropriate indexes and to achieve consistency across DMO on the use of contract indexes. Indexes nominated by tenderers but not on the shortlist must be justified to the delegate as appropriate and representing value for money. Prior to the delegate exercising their delegation, any indexes not included in the FIS approved list of indexes will need to be reviewed and cleared by FIS prior to inclusion in a Request for Tender (RFT) or Contract. This is to prevent the proliferation of exotic and inappropriate indexes. The applicability and appropriateness of an index should be considered during the procurement strategy stage of a proposed procurement. The RFT price variation clause should be tailored as far as practicable to fit the requirements of the procurement. The nomination and application of Page 3.33

22.

23.

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process indexes outside the approved FIS lists referred to below must be approved by FIS prior to inclusion in an RFT or a contract. 24. For further information, DMO Procurement officers should consult Defence Procurement Policy Instruction (DPPI) 7/2010 Advice to Defence Materiel Organisation Staff Regarding Price Variation Indexes.

Financial Investigations 25. Financial information is one of the factors a Procurement officer should take into account when making a procurement decision. It will assist Procurement officers to make a value for money judgment, to assess the long-term financial viability of the tenderer and to identify areas of financial risk. A financial investigation provides a snapshot in time of financial issues and the findings may be inconclusive. Interpretation of financial information should be undertaken with care, as it may be incomplete, not directly comparable with other financial information, out of date or not indicative of long term trends. The normal rules of proper and ethical conduct, including the protection of commercial-inconfidence information, apply to all financial information contained in offers or obtained in a financial investigation.

26.

27.

Financial Investigation Services 28. Professional staff from the Financial Investigation Service in Commercial Enabling Services, DMO should undertake any detailed or complex financial investigation. The Financial Investigation Service should be engaged as early as possible in the procurement process.

Risks of not seeking advice from the Financial Investigation Service 29. The risks of not seeking timely professional financial advice may include:

unwarranted contract cost escalation; delays in delivery of the contracted requirement or failure to meet specifications; contractor default, for example which could be caused by bankruptcy during contract performance; errors in payments made to the contractor, particularly under price variation applications; adverse impact on the contracted requirement; failure in the comparative tender evaluation process leading to a poor selection of the contractor; failure to identify areas of contractual risk which prevents implementation of appropriate risk management strategies; forfeiture of entitlement to foreign exchange related no win/no loss supplementation; and not achieving best value for money in the procurement.

30.

The Commonwealth should not provide advice or assistance to tenderers on financial matters (e.g. calculations of quotations or hourly staffing rates) during a tender process. This is an improper use of Commonwealth resources and the Commonwealth may be held liable for any error made.

Financial Viability and Capability of Tenderers 31. An evaluation of the financial viability and capability of a tenderer is an assessment of the financial affairs of the tenderer undertaken for the purposes of a tender process and is not an investigation of the costs of performing a contract. Financial viability and capability in the context of Defence contracts refers to the ability of a tenderer, if it is to be awarded the contract, Page 3.34

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process to satisfactorily perform the contract to completion, on schedule, and without any reduction in the contract requirement. Undertaking a Financial Viability and Capability Assessment 32. Financial viability and capability assessments must be undertaken for:

all major capital equipment acquisitions, including where sourced from overseas; all minor capital equipment acquisitions where the contract is considered strategically important; and any other purchase where there is a significant risk that the financial viability of the preferred tenderer is or may be brought in to question.

33.

A financial viability and capability assessment should be conducted using the most practicable method available in the context of the particular procurement. Any assessment should be authoritative and as conclusive as possible with the information available, so that it will assist the Procurement officer to decide the course of action to be taken. Assessments based on financial ratios or computer based systems are acceptable, although where data input is required before a report can be generated the advice of the Financial Investigation Service should be sought. A financial viability and capability investigation may involve an examination of a tenderers:

34.

financial accounts over a number of years including financial ratio analysis and comparison with industry averages; funds statements, cash flows and working capital statements; liquidity and long term solvency position; management control systems, for example budgetary control and inventory management; cost estimating process; internal control provisions; organisational structure, ownership and related companies; legal situation, including current legal action against the tenderer; contingent liabilities; or finance facilities.

35.

In order to give Defence the right of access to a tenderers financial records to ascertain the ability to fulfil their responsibilities under any resultant contract, suitable clauses should be included in all request documentation. The contracting specialists listed at the front of this Manual can provide guidance on the inclusion of suitable clauses. Procurement officers should make reasonable enquiries to ensure that current financial information on the company is not already held, i.e. a recent financial investigation has been conducted by Financial Investigation Service.

36.

Use of Financial Viability and Capability Assessment Outcome 37. If an adverse financial viability and capability assessment is made, then Procurement officers should consider whether to:

seek advice from the Financial Investigation Service (if this has not already occurred); seek legal advice on the option to select another tenderer if appropriate; include a financial or parent company performance guarantee in the contract (where a financial guarantee will cover the risk); include provisions for liquidated damages; or

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process

proceed with the contract if the risk is judged to be acceptable in light of the overall importance of the contract.

38.

If a decision is taken not to award a contract to a tenderer on the basis of a financial viability risk, then this decision should be supported by an objective, professional and well documented assessment based on sound commercial best practice principles. Conversely, if a contract is awarded when there is a financial viability risk, then this decision must be fully documented to the same standard. Any assessment should be weighed against the risks of awarding/not awarding the contract to the assessed tenderer.

When to Seek Financial Advice 39. Simple Procurement does not require the services of the Financial Investigation Service as value for money judgements can be made largely on the basis of purchase price and compliance with delivery requirements. As contracts increase in value, risk and complexity, financial issues assume greater importance. In most Complex and Strategic Procurements, professional financial advice will be required. Professional financial advice can be sought at any stage of the procurement cycle. It is strongly recommended that the advice of the Financial Investigation Service be sought when:

40.

assistance is required for the establishment of capability funding; a high value and/or high risk single supplier direct sourcing process is the approved procurement method; a public private partnership is the approved procurement method; developing suitable price basis clauses and pricing schedules in request documentation that reflect the requirements of the Statement of Work and overall financial outcomes, and ultimately assist the evaluation of prices and any subsequent contract management issues; the tender evaluation stage requires advice to evaluate the financial aspects of an offer as part of a financial Tender Evaluation Working Group; an assessment of the appropriateness of non-standard price variation formulae, indices or price bases is required; there is little known about the tenderer or there are doubts about the tenderers long-term financial viability; the tenderer is seeking a substantial mobilisation payment; a common costing base is required in the comparative evaluation and assessment of offers; pre-negotiation cost investigation of competitive tenders is required; charge out rates need to be established for the use of Defence services, facilities and equipment; Defence is exposed to areas of high financial risk in the contract; the contract has a variable rather than firm price basis which exposes Defence to the risk of price escalation; the contract is over an extended period and/or the requirement evolves due to technological change, making it difficult to accurately estimate costs; the contract involves complex exchange rate variation or price variation claims; analysing foreign exchange considerations and alternatives; an alliance contract is established where all project transactions and costings are completely open book and subject to audit; the contract contains cost reimbursement clauses where actual costs require verification;

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process

the contract contains incentive contracting clauses (such as target cost estimate); contract change proposals vary the requirement or shift risk. This would include an investigation of issues such as the fairness and reasonableness of the price, the impact on other aspects of the contract and effect on required cash flow and delivery schedule; the contractor is experiencing difficulty in meeting contractual commitments; the contract is terminated or in dispute. Financial investigation helps establish the position of both parties; or arbitration or litigation require establishment of contract costs.

Financial Evaluation of Offers 41. In conducting a financial assessment of offers it is necessary to compare them against a common price basis. This allows the total cost of each offer to be calculated so that the offers can be compared. The Financial Investigation Service should be consulted when complex financial assessments of offers are being conducted. To achieve a common price basis, adjustments are necessary when:

42.

firm and variable prices are quoted, e.g. a variable price appears lower until allowance is made for cost movements in the price variation formula; offers submitted have different price components or indices in the price variation provisions; offers submitted have different overseas contents and exchange rate movements are expected to have a material effect on price adjustment for price variation; or proposed mobilisation and progress payments differ between offers. To evaluate offers on a consistent basis it may be necessary to use discounted cash flow techniques to calculate the value of the offer in todays dollars.

43.

It should not be necessary to adjust prices for comparison purposes where:

an offer is non compliant or excluded on grounds other than price, e.g. technical unsuitability; a variable price is higher than any firm price; or a variable price is significantly less than any firm price and would still be less after any adjustment.

44.

Prices should be quoted in base date dollars. The base date' is usually defined in the draft conditions of contract and should be the date one month prior to the date on which tenders close. Where pricing is available in foreign currencies, Procurement officers should select the best Australian dollar outcome at that time, using current rather than forecast foreign exchange rates. Contracts, agreements and arrangements that offer Australian dollar pricing but are impacted directly by movements in exchange rates should be considered foreign currency exposures and be managed in accordance with the guidance provided in paragraphs 3 to 8 above and Annex 3F. To determine whether an offer represents value for money, a comparison of relevant benefits and costs on a whole of life basis needs to be undertaken (see chapter 5.6). Financial investigation is necessary for ensuring value for money in single supplier direct sourcing procurement processes.

45.

46. 47.

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Defence Procurement Policy Manual 3.3 Financial Policy and Advice in the Procurement Process

Key References
Guidelines for the Management of Foreign Exchange Risk issued by the Department of Finance and Deregulation ASDEFCON (Complex Materiel) ASDEFCON (Strategic Materiel) ASDEFCON (Support) Defence Procurement Policy Instruction 7/2010 Advice to Defence Materiel Organisation Staff Regarding Price Variation Indexes

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Defence Procurement Policy Manual 3.4 Earned Value Management

3.4
Introduction
1. 2. 3.

Earned Value Management

This chapter applies to all procurement undertaken in the Defence Materiel Organisation (DMO) and is available for use by other Defence Groups. Earned value management (EVM) represents a set of best practice project management principles that integrate cost, schedule and technical performance. EVM should be applied from the beginning of the Project. When properly applied, EVM provides an early warning of performance problems, improves the definition of project scope, prevents scope creep, communicates objective progress to stakeholders, and keeps the project team focused on achieving progress. EVM may be used in contracts to gain an objective understanding of a contractors technical and managerial performance throughout the life of the contract.

4.

Mandatory Policy
The use of EVM is mandatory for DMO acquisition contracts valued at $20 million or more unless:

the procurement has been categorised as low risk; and the Division Head has approved the decision not to use EVM.

The percentage of the contract price to be paid by earned value must not exceed 30% without Division Head approval. DMO staff must comply with the following policy documents, which are available on the DMO Earned Value Management intranet site:

Earned Value Management System Review Handbook; Integrated Baseline Review Handbook; Guide to Earned Value Payments; AS 4817 Project performance measurement using Earned Value; and DMO Supplement to AS 4817.

Operational Guidance
Use of Earned Value Management by DMO 5. An EVM system provides both DMO and contractors with performance data that:

illustrates performance against a detailed plan of the entire contractual scope of work; reflects an objective measure of contract progress; aids in forecasting future cost and schedule outcomes; and assists informed and timely decision-making by providing an early indication of possible problem areas.

6.

EVM encourages better planning by contractors and focuses both DMO and contractors on contract performance.

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Defence Procurement Policy Manual 3.4 Earned Value Management Application of Earned Value Management to DMO Contracts 7. A projects EVM requirement, if any, will appear in its Equipment Acquisition Strategy or equivalent planning documentation. Projects must apply EVM to all DMO acquisition contracts valued at more than $20 million. The main driver for using earned value is risk. The use of EVM is mandatory for all DMO acquisition contracts valued at $20 million or more unless:

8.

the procurement has been categorised as low risk; and the Division Head has approved the decision not to use EVM.

The relevant information to support the decision should be provided in a submission which outlines the type of contract (e.g. production), an assessment of the schedule, technical and cost risks, and an assessment of the contractors alternative method for measuring, monitoring and managing performance. 9. For the purposes of this chapter 'production contracts' means acquisition contracts where design or integration work is not required, For example, the procurement of COTs or MOTs equipment that is constructed using an established production process and modification is not required. The criticality of the procurement, the anticipated contract duration and the project risk profile are to be considered when deciding whether earned value requirements should be applied to a contract or subcontract(s). With regards to the risk profile, the risk items to be considered should include: contract cost, duration, capability importance, schedule, technical issues, payment method, reporting requirements and project resources. The higher the risk assessment, the greater the need to implement a earned value management system that will facilitate early notification of departures from the contracts technical, schedule and cost requirements. Even in projects of low technical complexity, there are schedule risks to deliver capability by the prescribed in-service date, or cost risks associated with pressures to complete within the current project budget. EVM may not need to be applied to certain production contracts. In some cases, the contract may be for a large quantity of similar products, constructed using an established production process that would not warrant the implementation of an alternative performance measurement system. In instances such as these, alternative objective performance measures could be considered. Projects should seek formal advice from the Director Program Management Office in instances where the policy threshold is met or exceeded but an earned value management requirement is not considered to be necessary.

10.

11.

Earned Value Management Requirements in Request Documentation 12. ASDEFCON (Strategic Materiel) and ASDEFCON (Complex Materiel) Volume 2 contain conditions of tender response requirements and Statement of Work provisions relating to earned value. Further guidance on these provisions can be obtained from the Earned Value Management FAQs for Tender Evaluation and the Earned Value Management System Review Handbook available on the DMO EVM intranet site.

Payment by Earned Value 13. The preferred method of payment is milestone payments and this should be pursued in preference to a mix of payment by earned value and milestone payments. However, ASDEFCON (Strategic Materiel) does contain options for projects subject to EVM requirements to elect to base contract payments on a mix of earned value payments and milestone payments. If used, the ratio of earned value payments to milestone payments requires careful consideration to ensure the appropriate balance between technical achievement and cash flow requirements. The percentage of the contract price to be paid by earned value must not exceed 30% without Division Head approval.

14.

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Defence Procurement Policy Manual 3.4 Earned Value Management 15. Guidance on payment by earned value may be found in the Guide to Earned Value Payments available on the DMO EVM intranet site. It also describes the steps to be followed in order to verify a contractors earned value payment claims. The assessment includes in-depth review and verification of supporting evidence, earned value performance reports, control accounts and performance data.

Tender Evaluation and Contract Negotiation 16. Guidance can be obtained from the Earned Value Management FAQs for Tender Evaluation available on the DMO EVM intranet site.

Contractor Reviews The Integrated Baseline Review 17. Once the project is in contract, project managers are responsible for the conduct of the Integrated Baseline Review in order to review the technical merits and resourcing of the plan and to assess the risk associated with the baseline. Guidance on the conduct of integrated baseline reviews is available from the Integrated Baseline Review Handbook available on the DMO EVM intranet site.

The Earned Value Management System Review Process 18. Assessment of compliance with the contractual requirements and acceptance of the contractors EVM system is the responsibility of the project manager. Guidance on the conduct of EVM system reviews is available from the Earned Value Management System Review Handbook available on the DMO EVM intranet site.

System Assurance Activities 19. Once the contractors EVM system is assessed as compliant it is important that a program be instigated to ensure that the system continues to maintain compliance. Project managers are responsible for determining, based on a risk assessment, the frequency and scope of System Assurance Reviews. Further information on the risk factors to consider and the methods of conducting the assurance can be found in the Earned Value Management System Review Handbook.

Data Reporting and Analysis 20. Contract performance information, in the form of earned value performance reports, should be provided by the contractor at mutually agreed intervals (monthly as a minimum). All relevant project office personnel are responsible for reviewing contractor earned value performance reports (including the contractors written analysis). Detailed guidance on the analysis of earned value performance reports can be found in the Earned Value Data Analysis Guide.

21.

Key References
ASDEFCON (Strategic Materiel) ASDEFCON (Complex Materiel) Volume 2 AS 4817 Project performance measurement using Earned Value DMO Supplement to AS 4817 Earned Value Management System Review Handbook Integrated Baseline Review Handbook

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Defence Procurement Policy Manual 3.4 Earned Value Management Guide to Earned Value Payments Earned Value Data Analysis Guide Project Performance Management Guide Earned Value Management FAQs The EVM references in the Chapter are all available on the DMO EVM intranet site.

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Defence Procurement Policy Manual 3.5 Quality Assurance

3.5
Introduction
1.

Quality Assurance

This chapter outlines the Quality Assurance mechanisms employed by Defence to mitigate risk in the procurement of goods and services and to ensure that contractors meet their contractual obligations in relation to quality.

Defence Policy 2. Responsibility for the development of Defence Quality Assurance policy lies with the Defence Quality Assurance Forum chaired by Director Policy and Process Improvement within the Defence Materiel Organisation. Defence Quality Assurance policy is detailed in Defence Instruction (General) Logistic 02-1 Defence Quality Assurance and Departmental Quality Assurance Instructions. It is consistent with the Commonwealth procurement policy of incorporating risk assessment to the application of Quality Assurance. The principal objective of the policy is to ensure that quality is planned for and then designed and built into the supplies. Quality Assurance requirements need to be monitored throughout the contract process to ensure compliance. They should also be verified prior to final acceptance of the supplies. Quality Assurance is in place to ensure that supplies are fit for the stated purpose and pose no hazard to personnel, public safety or the environment in accordance with Service Technical Regulations. This is achieved by:

3.

4.

5.

ensuring all quality requirements leading to the acceptance of supplies have been achieved; ensuring the Statement of Work including contract specifications are adhered to; managing the risks associated with the supplies; ensuring that there is clear evidence of contractor management process controls in place, including subcontractor control; and ensuring confidence in the contractors quality management and quality control performance.

6.

By maintaining quality, buyers and suppliers increase the likelihood that supplies will conform to requirements, thereby reducing the risks arising from non-conformance. The means by which quality can be assured include:

a quality system certified to the AS/NZS ISO 9001:2000; quality plans; special conditions of contract; product inspection and testing; customers audit and surveillance activities; contractor guarantees; and normal commercial practices such as warranties.

7.

Procurement officers should carefully consider the type of Quality Assurance required before specifying it in tenders and contracts as both under and over specification of quality requirements can be costly. In determining how quality should be assured, Procurement officers

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Defence Procurement Policy Manual 3.5 Quality Assurance should take into account the level of risk arising from the likelihood and consequence of nonconformance, as well as the value of the procurement. 8. Quality Assurance is part of an overall risk strategy that reduces the risk of receiving noncompliant supplies and Procurement officers should seek guidance from appropriate technical and design approval authorities. Regulatory and safety requirements will also affect the assessment of risk and may prescribe specific Quality Assurance procedures. Procurement officers should also seek advice from an authorised Quality Assurance Representative. Authorised Quality Assurance Representatives are Defence staff who posses the necessary competencies to undertake Quality Assurance related activities. Procurement officers who are not aware of their local area authorised Quality Assurance Representative should contact their Defence Group Quality Assurance Representative. A list of Defence Group Quality Assurance Representative is available from the Directorate of Policy and Process Improvement Quality Assurance within the Defence Materiel Organisation.

9.

Quality Assurance Responsibilities 10. The Directorate of Policy and Process Improvement within DMO has responsibility for the formulation and promulgation of Defence Quality Assurance policy.

Quality Assurance Representatives 11. Quality Assurance Representatives are delegated the authority to undertake required Quality Assurance tasks. They are responsible for:

providing Quality Assurance advice and services in accordance with Defence Quality Assurance policy and Departmental Quality Assurance Instructions; and actioning, when delegated the management of non-conforming supplies.

Procurement officers 12. Procurement officers are responsible for applying the Defence policy for Quality Assurance by:

undertaking a risk assessment based on the complexity, criticality, likelihood and consequence of failure, value of the procurement and considering environmental and safety issues in order to determine the most appropriate Quality Assurance requirements to be included in Defence procurement contracts; selecting tenderers who can be expected to satisfy contractual requirements for quality, Quality Assurance requirements and management of subcontractors quality; managing the requirements for quality audits, and quality surveillance of the contractors activities relating to the contracted supplies; ensuring that Quality Assurance tasks are conducted by suitably qualified staff; and accepting supplies when satisfied that all quality management requirements have been met.

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Guidance on the development of Quality Assurance tasking statements can be obtained from Departmental Quality Assurance Instruction No. 006 -Developing a Quality Assurance Tasking Statement.

Defence Contractors 14. Contractors are ultimately responsible for the quality of their supplies and those of their subcontractors provided under a Defence contract. This is achieved by:

applying all aspects of their operations so as to satisfy quality management of the contract; providing evidence that supplies conform to the contracted specified requirements;

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Defence Procurement Policy Manual 3.5 Quality Assurance

ensuring subcontractors adhere to quality management requirements prescribed under the subcontract and ensuring that all work performed under a subcontract meets the requirements of the quality system to be applied by the contractor; and providing supplies that conform to the specified contract requirements.

Risk Assessment 15. In selecting the means for assuring quality of supplies, the focus of the risk assessment is based on the likelihood and consequences of failure. Factors contributing to risk assessment include:

technical complexity of supplies; design, production and delivery processes; maturity of the technologies involved; capability and maturity of the tenderer; and operational criticality of the supplies.

Selecting the Means of Assuring Quality 16. There are a number of options available to the Procurement officer for assuring the quality of supplies and the particular option chosen must be based on the risk assessment undertaken. For example, an ISO 9001:2000 certified quality system for low value-low risk procurements (such as office stationery supplies) is not cost effective. However, when procuring maintenance services for an operationally critical piece of equipment of moderate value, it would be appropriate for the Procurement officer to require an ISO 9001:2000 certified quality system as a minimum requirement.

Quality Assurance and the ASDEFCON Templates 17. Guidance on determining the different levels of procurement is contained in chapter 1.3.

ASDEFCON (Strategic Materiel ) 18. ASDEFCON (Strategic Materiel) contains clauses for the conditions of tender and conditions of contract that detail the quality requirements including that both tender and contract deliverables be provided.

ASDEFCON (Complex Materiel ) 19. Care should be taken when using ASDEFCON (Complex Materiel) for the procurement of supplies. The quality assurance clauses contained in ASDEFCON (Complex Materiel) should be read in conjunction with the Quality Assurance Type clauses detailed in this chapter to ensure that the appropriate clauses are used. The type of goods or supplies being procured may require the replacement of the existing clauses with a more appropriate quality assurance type clause.

Standard Conditions of Contract for the Procurement of Goods and Services 20. Standard Conditions of Contract for the Procurement of Goods and Services are used for most Simple procurements. These conditions include a Quality Assurance requirement at clause 7. Depending on the Quality Assurance requirements of the procurement activity specific Quality Assurance clause types may be included with the Standard Conditions of Contract for the Procurement of Goods and Services. Care should be taken when including additional Quality Assurance requirements to an otherwise Simple Procurement, as the inclusion may change the procurement from a Simple to a Complex one.

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Defence Procurement Policy Manual 3.5 Quality Assurance Selection and Modification of Quality Assurance Type clauses 22. Assistance in determining the appropriateness of the quality assurance type clauses can be gained from an authorised Quality Assurance Representative within the Procurement officers local area. If this resource is not available Procurement officers should contact their Defence Group Quality Assurance Representative who will be able to provide advice or support. A list of Defence Group Quality Assurance Representatives is available from the Directorate of Policy and Process Improvement Quality Assurance within DMO. The assistance of a Quality Assurance Representative should be sought where there is a requirement to tailor the Quality Assurance type clauses to the specific needs of projects.

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Quality Assurance Requirement Type Clauses 24. Quality Assurance requirement clauses have been developed for use in applying Quality Assurance to contracts other than ASDEFCON (Strategic Materiel). The clauses are available on the DEFWEB.

Quality Assurance Requirements Clauses Types 25. Each clause type has been developed to satisfy different procurement requirements. The core features of each of the Quality Assurance requirements clause type are outlined in the following paragraphs: Type 1: the Type 1 clause is for procurements that require new or re-design with a follow-on production phase. Type 1 specifies Certification to IS0 9001:2000 including design and development capability that is applicable to work involving design, development and production. These Quality Assurance requirements are typically applicable to procurements where the successful outcome of a requirement specified in functional or performance terms is largely dependent on the processes used by the contractor. The contractor is required to submit a quality plan detailing how the management system is to be applied to the contracted work. Type 2: the Type 2 clause is used where there is an established design that requires a production or repeatable overhaul type of activity and specifies Certification to ISO 9001:2000 excluding design and development capability (a permissible exclusion under ISO 9001:2000). The contractor is required to submit a quality plan detailing how the management system is to be applied to the contracted work. Type 3: this Quality Assurance requirement is applicable to supplies where quality can be ensured through Final Inspection and Test but where adequate evidence of the required inspection and test cannot be provided with the procurement but is established after production. The contractor is required to submit a Final Inspection and Test Plan based on the contracted work. Type 4: this type of Quality Assurance requirement is applicable to those supplies that must be certified as complying with a particular standard, for example, results of laboratory analysis, certified marine or aerospace parts, etc. The contractor is required to submit a Certificate of Conformance certifying that the supplies conform in all respects with the contracted requirements and provide with the supplies any Test Certificates nominated in the contract, traceable to a testing organisation accredited by the National Association of Testing Authorities. Type 5: this Quality Assurance requirement is used in lieu of Type 2 requirements where there are mitigating reasons why the selected contractor does not have Certification to ISO 9001:2000 (excluding design and development capability). Type 5 requires the development of a quality plan detailing how quality is to be managed in relation to the contract work. As an example, this Quality Assurance requirement can be used for those small to medium enterprises carrying out repetitive repair and overhaul work for Defence. It is important that an authorised Quality Assurance Representative be involved in the assessment and approval of the contractors quality plan.

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Defence Procurement Policy Manual 3.5 Quality Assurance 31. Type 6: this Quality Assurance requirement is typically applicable to low value-low risk procurements, such as commercially available supplies when used for non-critical applications. Normal commercial practices and warranties are acceptable.

Contractor delivered quality plan 32. An important contract deliverable of Quality Assurance requirement types 1, 2 and 5 is a Quality Plan. The Quality Plan details how the contractors quality system is to be applied to the processes involved in the provision of the supplies being procured. The requirements for the content of a Quality Plan are included within the Quality Assurance requirement type clauses. The Quality Plan should be specific in setting out the quality practices, resources, activities and responsibilities relevant to a particular contract. The contract work should be linked with the relevant quality system procedures, instructions and standards/specifications.

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Assistance with the selection and/or tailoring of quality requirements 34. Assistance with quality requirements selection and tailoring should first be sought from an authorised Quality Assurance Representative in the Procurement officers local area. If this resource is not available Procurement officers should contact their Defence Group Quality Assurance Representative who will be able to provide advice or support. A list of Defence Group Quality Assurance Representatives is available from the Directorate of Policy and Process Improvement Quality Assurance within the Defence Materiel Organisation. Further information on Quality Assurance Requirements Type Clause Templates is contained in Departmental Quality Assurance Insurance number 002 Quality Assurance Requirements Type Clause Templates .

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Certification of Contractors Quality System Recognition of Certification 36. Where the Quality Assurance requirements call for the contractor to operate a certified quality system, the system must be certified by an approved certification body acceptable to the Commonwealth. Within Australia and New Zealand, this is a third party certification body accredited under the Joint Accreditation System of Australia and New Zealand. In other cases, advice on the acceptability of the certifying body should be sought from Directorate Policy and Process Improvement Quality Assurance within DMO. A register of Joint Accreditation System of Australia and New Zealand accredited certification bodies can be found at http://www.jasanz.com.au. The certification process does not, however, ensure the contractors quality management system is applied to a particular contract or that the certification scope is appropriate for a specific contract. The purchasing area is responsible for ensuring:

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the appropriateness of the certification scope to the contract work; and that the contractors quality system is applied to the contract.

Scope of Certification 38. Recognition of a certified quality system is conditional on the scope of the certification meeting the contract requirements. That is, the certification must:

meet the quality system standard required by the contract; cover the type of supplies sought by the contract; and include the site at which the contract work is to be undertaken.

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Defence Procurement Policy Manual 3.5 Quality Assurance Security Clearances for Certifying Bodies 39. The access arrangements for third party certification bodies for auditing Defence contractors who possess national security classified information are detailed in an agreement between the Defence Security Authority and Joint Accreditation System of Australia and New Zealand dated March 1997. Should third party certification body auditors require access to security classified information the provisions of the agreement are to be observed. Details of the agreement are available from the Defence Security Authority.

Complaints about Third Party Certified Systems 40. Departmental Quality Assurance Instruction No. 004 - Application of Third Party Certification to Defence Contracts details the process to be followed regarding complaints.

Sourcing of Testing and Calibration Services for Measuring Equipment 41. Under the conditions of the Memorandum of Understanding between the Commonwealth and the National Association of Testing Authorities, Australia, Defence is required, to the maximum extent possible, to use National Association of Testing Authorities, Australia accredited laboratories or laboratories accredited by organisations with which National Association of Testing Authorities, Australia has a mutual recognition agreement, to satisfy its testing needs. The Defence Test and Evaluation and Calibration policies contained in Defence Instruction (General) Operational 43-1 Defence Test and Evaluation Policy and Defence Instruction (General) Logistics 08-7 Calibration Policy respectively, provide guidance on specific areas of testing services. All products and services are required to be evaluated for conformance and where such conformance requires written test data as a precondition to acceptance, or forms part of a Certificate of Conformance, the data is required to be presented, to the maximum extent possible, in an endorsed report from a Testing Facility accredited by National Association of Testing Authorities, Australia for the classes of test undertaken. For overseas sourced products or services, an endorsed Test Report from a Testing Facility accredited by an agency or association with which National Association of Testing Authorities, Australia has a mutual recognition agreement is acceptable. There are circumstances when the National Association of Testing Authorities, Australia requirements cannot be complied with. For example, where the ADF is operating under contingency arrangements it may not always be able to have its deployable calibration facilities fully comply with National Association of Testing Authorities, Australia requirements due to poor environmental conditions in the area of operations. Similarly, products such as fuel purchased overseas in support of operations may not meet our testing requirement obligations.

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Quality Assurance Arrangements with Foreign Governments 45. When Defence supplies are purchased in another country, either directly or by subcontract, Quality Assurance at source may be necessary. In some cases it may be economical and/or expedient to negotiate with the Quality Assurance Authority of the Defence organisation in the source country to perform or arrange the performance of Quality Assurance services. This is generally referred to as Government Quality Assurance. The policy and process to request and receive Government Quality Assurance is documented in Departmental Quality Assurance Instruction No. 003 - Establishing Quality Assurance Services with Foreign Governments.

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Quality Assurance Representatives 47. Individuals may be appointed as Quality Assurance Representatives by their managers, subject to those individuals having the required skills and completing the required training detailed in Departmental Quality Assurance Instruction - Quality Assurance Prerequisites and Training.

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Defence Procurement Policy Manual 3.5 Quality Assurance Quality Assurance Training 48. All Defence staff involved in Quality Assurance audit and surveillance of procured supplies shall meet the mandatory prerequisites for the Quality Assurance activities for which they are involved. These requirements, along with details of recommended training courses, are stated in Departmental Quality Assurance Instruction - Quality Assurance Prerequisites and Training.

Chapter Summary
Quality Assurance is an important tool in the management of procurement risk. Quality Assurance requirements should be stipulated in contracts on a case-by-case basis commensurate with the assessed risk of the procurement. Appropriate Quality Assurance clauses are built into the ASDEFCON suite of tendering and contracting templates and additional clauses are also available.

Further Reading
Further reading on the application of quality assurance to procurement is available from the following sources: Defence Instruction (General) Logistics 02-1 Defence Quality Assurance Defence Instruction (General) Logistics 08-7 Calibration Policy Defence Instruction (General) Operational 43-1 Defence Test and Evaluation Policy Departmental Quality Assurance Instructions

The following standards and guides for quality systems and quality plans should be applied as appropriate AS/NZS ISO 9000:2000, Quality management systems Fundamentals and vocabulary AS/NZS ISO 9001:2000, Quality management systems Requirements AS/NZS 9004.5:1998, Guidelines for quality plans AS 3925.1-1994 (ANSI/IEEE 730.1-1989), Software quality assurance plans AS ISO 10006:2003, Quality management systems Guidelines for quality management in projects HB 90.9-2000: Software Development Guide to ISO 9001:2000

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Defence Procurement Policy Manual 3.6 Intellectual Property

3.6
Introduction
1. 2.

Intellectual Property

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). Intellectual Property (IP) will be a consideration in almost all Complex and Strategic procurements in Defence. Defence and Australian industry need IP to access and use technologies that enable them, jointly or separately, to:

develop a capability edge and a strategic advantage for Australia; sustain self-reliance through the effective and efficient operation, repair, maintenance and development of capabilities; and minimise the costs of operation, support and development.

Mandatory Policy
Procurement officers must seek legal advice before entering into an arrangement for joint ownership of Foreground IP. Where Defence elects to retain ownership of Foreground IP, appropriate clauses must be included in the request for tender documentation and the negotiated contract. Where Defence does not own Foreground IP, Procurement officers must obtain appropriate licensing rights, including the right to sub-license Foreground IP. Procurement officers must ensure that Defence obtains access to all technical data that is required in order to exercise its IP rights under the contract. Procurement officers must comply with the Defence IP Policy 2008. Procurement officers must not download freeware or shareware software from the internet or use software purchased over the counter during Defence time and/or on Defence assets without first seeking specialist legal or contracting advice on the impact of acceptance of the licensing terms and obtaining written approval of the licence terms.

Operational Guidance
What is Intellectual Property 3. 4. IP is a group of statutory, common-law and equitable rights that afford protection to intellectual and creative effort. The main types of IP recognised under Australian law are:

patents; copyright; trademarks; designs; plant breeders rights; circuit layouts; and domain names. Page 3.61

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Defence Procurement Policy Manual 3.6 Intellectual Property 5. Of these, copyright and patents are the most commonly encountered in delivering Defence capability. Additional information on the forms of IP can be found in the Defence Intellectual Property Manual. Like any other type of property, IP can be owned, bought, sold (assigned) or licensed. The existence of IP that is not owned by Defence may prevent Defence from undertaking certain activities unless permission is obtained from the owner of the IP. IP may be embodied in (and its relevant protections applicable to) technical data, Confidential Information, inventions, or other supplies. For example, IP may be embodied in reports and notes, computer software, data, specifications, designs, drawings, models, photographs or other images. It is necessary to ensure that Defence not only obtains sufficient and appropriate IP rights to undertake certain activities, but that Defence has the ability to undertake such activities by having a physical copy of the technical data. For example, the right to copy a report (a licence to the copyright) is significantly less valuable where Defence does not possess a copy of the report (the technical data) to which the IP relates.

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Defence Categories of IP 9. In the context of Defence procurement, IP is often categorised as being Background, Foreground or Third Party.

Background Intellectual Property 10. Background Intellectual Property (Background IP) is IP which is embodied in or relates to the supplies that exists prior to the commencement of the contract or is brought into existence other than in performance of the contract. For example, the IP associated with unmodified off-theshelf equipment is Background IP because such equipment is already developed before Defence enters the contract.

Foreground Intellectual Property 11. Foreground Intellectual Property (Foreground IP) is IP which is created under or otherwise in connection with the contract. For example, if the contract involved development or design work, then the IP resulting from such work would be Foreground IP. Third Party Intellectual Property 12. Third Party Intellectual Property (Third Party IP) is IP which is embedded in or is necessary to the supplies, but which is owned by a party other than Defence, the contractor or one of the contractors major subcontractors. Third Party IP may be necessary in order to support (use, maintain, modify, develop, manufacture and dispose of) Defence capability. For example, the IP needed could be copyright, that is, rights to copy documentation and software, and rights to copy and build equipment components or even the whole equipment. When evaluating tender responses, tender evaluation teams should be aware of the risks associated with tenderers that rely heavily on third party products and IP. If a successful tenderer does rely on third party IP, the Commonwealth representative should ensure that the necessary Third Party IP rights have been acquired prior to contract signature.

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Confidential Information 15. While Confidential Information is not strictly a form of IP, IP and other information (such as trade secrets) can be classed as confidential in order to protect that material from unauthorised disclosure to others. Confidential Information is often information which is sensitive or has commercial significance and which is not publicly available. Company technical data is often in this category. Such information is best protected by a written confidentiality agreement. Page 3.62

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Defence Procurement Policy Manual 3.6 Intellectual Property Confidential Information may be used by or disclosed to third parties only if the owner of that information has agreed to such an arrangement. 16. A draft IP Deed of Confidentiality is available in the ASDEFCON (Strategic Materiel) template at Annex B to Attachment I.

Defence Policy 17. The Defence Intellectual Property Policy 2008 (Defence IP Policy 2008) is the current IP policy and replaces the previous policy, Developing and Sustaining Defence Capability: Defence Intellectual Property Policy 2003. The Defence IP Policy 2008 is consistent (and aligns) with the whole of government approach to IP management for Financial Management and Accountability Act agencies, contained within the Statement of IP Principles for Australian Government Agencies. The current Defence IP policy promotes continuous improvement in IP management practices throughout the whole of Defence. The policy sets out the general responsibilities for managing IP across Defence. A copy of the policy is available electronically at http://intranet.defence.gov.au/dmoweb/sites/DMOLegal/comweb.asp?page=69111&Title=Intelle ctual%20Property

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Ownership of Intellectual Property 19. Procurement officers should determine the ownership of Foreground IP on a case by case basis in acquisition and support contracts. In most instances, Defence will not require ownership of Background IP and Third Party IP but will instead seek appropriate licensing rights. An Intellectual Property Needs Analysis (IPNA) may be required to identify the IP needs (including ownership) of complex and strategic procurement. The IPNA outlines any Background IP owned by the Commonwealth, how IP acquired under the proposed procurement will be managed and any potential IP issues. The IPNA may also include an assessment of what IP may be required compared to the IP rights that may be available. An IPNA Process Template is available on the Commercial Policy and Practice Branch website. Factors that should be considered when determining who is best placed to own Foreground IP include:

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identification of the party in the best position to exploit the Foreground IP; consideration of national security issues; estimation of the technological maturity of the supplies; analysis of future applications for the supplies; recognition of existing legal obligations; and assessment of value for money.

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Circumstances in which it may be appropriate for Defence to own Foreground IP include where:

national security and strategic objectives may demand strict control over dissemination of IP provided by ownership if other measures such as control of export licences and limited access according to security classifications are considered to be insufficient; the technology is immature. Defence may need to retain ownership to keep its options open for the future development and application of the technology. As the technology and its application matures, it may become beneficial to assign IP ownership to industry as part of developing particular applications; IP has multiple applications. Defence may wish to retain ownership of the IP to ensure exploitation of the full range of possible or desirable applications of the technology. In this case, Defence might license suitable licensees to commercialise particular applications of the technology; and Page 3.63

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Defence Procurement Policy Manual 3.6 Intellectual Property

prior obligations regarding joint or other ownership of IP and its commercialisation may preclude the vesting of IP ownership by Defence to any other parties.

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Where Defence elects to retain ownership of Foreground IP, appropriate clauses must be included in the request for tender documentation and the negotiated contract. Where appropriate, these clauses may allow for the contractor or major subcontractors to be granted a licence to Defence owned Foreground IP. It is strongly recommended that ownership of Foreground IP created under Defence contracts vest in one party upon its creation (i.e. Foreground IP should be owned by either the Commonwealth or the contractor). Joint ownership of IP complicates management and administration of the IP and involves greater potential for disputes over IP rights. Joint ownership should be avoided and legal advice sought before entering any such arrangement.

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Licensing of Intellectual Property 26. Where Defence does not retain ownership of Foreground IP, appropriate licensing rights, including the right to sub-licence Foreground IP, must be secured to ensure that the capability can be developed and sustained. A license for IP allows the licensee to do certain things with the IP as described in the licensing agreement. A broad licence should also be sought, including the right to sublicense, for Background IP. The scope of the licence for both Foreground IP and Background IP required by Defence will vary based upon the particular needs of the project and circumstances of the procurement. For Third Party IP, a licence on the best available commercial terms should be obtained.

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Technical Data 29. Procurement officers must ensure that Defence obtains access to all technical data that is necessary to enable it to exercise its IP ownership and licensing rights under the contract. Defence contracts should nominate the delivery requirements for technical data including the form in which the data should be provided.

Commercialisation of Intellectual Property 30. Defence Science and Technology Organisations (DSTOs) Business and Commercialisation Office has responsibility for managing the Department of Defences Patent Portfolio and associated database.

Defence Intellectual Property Manual 31. The Defence Intellectual Property Manual (Defence IP Manual) is the principal reference document for the management of IP issues for the whole of Defence. The Defence IP Manual provides a whole-of-life IP Management Framework and offers practical guidance for improved implementation of IP issues. This manual is currently being updated to align with the Defence IP Policy 2008. A draft version of this manual is available at: http://intranet.defence.gov.au/dmoweb/sites/DMOLegal/docs/DefIPManual122009V1_12.pdf

Software Licensing 32. Software licences can often be a useful means of securing appropriate IP rights. Many software products are readily available over the counter or the internet by way of Shrink Wrap, Click Wrap or online Web Wrap licences. These forms of mass-market licence agreements involve many legal issues and should be avoided. Defence employees must not download freeware or shareware software from the internet or use software purchased over the counter during Defence time and/or on Defence assets without first seeking specialist legal or contracting advice on the impact of acceptance of such licensing terms and obtaining written approval to commit Defence to the licensing terms and conditions.

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Defence Procurement Policy Manual 3.6 Intellectual Property 34. Procurement and Contract Approvers should only approve the procurement of software products or services by way of these types of licences in exceptional cases and after the Directorate of Contracting Policy and Support Services, Business Management Branch, Chief Information Officer Group (CIOG) has been consulted. Procurement officers should also be aware that within Defence the use of Information and Communications Technology (ICT) facilities is also governed by policy and guidelines issued from the Directorate of Procurement and Contracting Services, CIOG. The Department of Finance and Deregulation also has developed a wealth of guidance and model templates for procurement of Information Technology. Refer to chapter 4.3 for further information.

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Contractual Provisions 37. The ASDEFCON suite of tendering and contracting templates contains a variety of IP clauses to suit the particular requirements for which each template is designed. The ASDEFCON templates and guidance on selecting the correct template (the Template Selection Guide) can be found on the Commercial Policy and Practice Branch website.

Methods of Protecting Intellectual Property through Contract 38. Contractors may protect their IP by proposing options such as:

escrow, which involves Defence and the contractor entering into a written legal undertaking to keep items (e.g. technical data) in the custody of a neutral party until certain pre-defined conditions are met. Such arrangements are used in limited situations such as where the technical data is commercially sensitive at the time of contract signature but becomes less sensitive over time; a sunrise clause, which is a clause that allows Defence to exercise IP after a certain date or after the occurrence of a pre-defined condition; and a right of first offer clause, which allows the original contractor to submit an offer for a new Defence requirement that involves the original contractors IP prior to offers being requested from other potential suppliers who would then have access to the original suppliers IP. The contract sets out the circumstances in which the contractor has the right of first offer and the criteria against which the suppliers offer will be assessed.

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If these options are proposed, Procurement officers should seek legal advice.

Key References
Attorney-Generals Department - Statement of IP Principles for Australian Government Agencies Defence Intellectual Property Manual Defence Intellectual Property Policy 2008

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Defence Procurement Policy Manual 3.7 Defence Procurement and the GST

3.7
Introduction
1. 2.

Defence Procurement and the GST

This chapter applies to all procurements undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter provides general information about the operation of the Goods and Services Tax (GST) in the context of Defence procurement. It describes the basic concepts associated with the operation of the GST and outlines some common GST issues that may arise in Defence procurement. Further detailed information on the application of the GST to Defence is contained in the Department of Defence Tax Handbook Goods and Services Tax.

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Mandatory Policy
The GST on taxable supplies must be taken into account when developing tender and contract documentation for Defence procurements. Procurement officers must ensure that taxation issues are appropriately addressed in contracts. To ensure that the legal and financial implications are considered, the Australian Defence Organisation Customs Office must be contacted where any variations are made to standard GST clauses which require the supplier to be the importer and be responsible for all duties and taxes associated with importation.

Operational Guidance
What is the GST 4. The GST is an indirect broad-based consumption tax of 10% imposed on most supplies of goods and services, as well as a broad range of other things. The GST is essentially a tax on the end-consumer of supplies. It is applied at every stage of the supply chain and is remitted to the Australian Taxation Office (ATO) by entities registered for the GST, including Commonwealth agencies. Registered suppliers, including Commonwealth agencies, can obtain input tax credits for the GST paid on acquisitions made in carrying on their enterprise, provided they hold a valid tax invoice. As the GST is a consumer-based tax, it is the end consumer (individuals or unregistered business) that ultimately incurs the GST. Procurement officers must ensure that the GST on taxable supplies is taken into account when developing tender and contract documentation for Defence procurements. Defence is liable to pay GST on most goods and services it purchases (except those deemed to be GST-free, input taxed or out of scope); and is able to claim input tax credits for the GST it pays in relation to creditable acquisitions or creditable importations. Defence is also required to charge GST on any taxable supplies which may involve the supply of goods, services, intellectual property, real property and many other transactions where Defence receives consideration (monetary or non monetary).

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Charging GST 7. In order to charge GST, suppliers must have an Australian Business Number (ABN) and be registered for GST with the ATO.

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Defence Procurement Policy Manual 3.7 Defence Procurement and the GST Australian Business Number 8. Entities that carry on an enterprise in Australia, including Commonwealth agencies, are entitled to have an ABN. Each Commonwealth agency has been allocated a separate ABN that is used to identify which government agency has entered into a particular transaction. The Department of Defence ABN is 68 706 814 312. The DMO also uses this ABN. The GST Act requires a supplier of goods and services to quote its ABN on invoices in all business dealings. Most suppliers that Defence uses have registered for an ABN and the GST. The provision of a suppliers ABN on an invoice or other relevant documentation can be used to verify whether they are registered for GST through checking the Australian Business Register.

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Goods and Services Tax Registration 10. 11. In practice, contractors cannot charge GST or claim an input tax credit on GST unless they are registered for GST. All businesses with an ABN are entitled to register for GST. Although it is possible to have an ABN and not be registered for GST, businesses with an annual turnover of $75,000 or more and non-profit organisations with an annual turnover of $150,000 or more must register for GST. The Australian Business Register is an online database that contains certain information provided by businesses when they register for an ABN. The database can be searched to verify GST details for ordering and invoicing. This includes information pertaining to an entitys GST registration status. Where a contractor fails to quote an ABN on an invoice submitted in relation to a Defence contract, they may be able to provide Defence with a Statement by a supplier (NAT 3376) form as an alternative. Without either an ABN or a Statement by a supplier form, Defence may come under a legislative obligation to withhold 46.5% from any payments due and remit this amount to the ATO. It should be noted that there are several reasons why a contractor may not quote an ABN and the Defence Tax Management Office should be contacted on 1800 806 053 or via e-mail at taxation.management@defence.gov.au to confirm that Defence is required to withhold 46.5% in the circumstances of a particular payment. Contractors that are registered for GST must charge GST at every point in the supply chain and forward the collected amount to the ATO. In the case of most supplies of goods and services, suppliers are refunded the GST from the ATO in the form of an input tax credit. At the final point in the supply chain, i.e. the sale to a consumer, GST is charged and is not refundable.

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Taxation Codes in ROMAN 16. All relevant codes for processing GST and ABN Withholding Tax have been identified for ROMAN and are available for use. For Cost Centre Code and Account Code information please refer to the appropriate CFO authorised documentation. Tax codes are available at:http://intranet.defence.gov.au/find/tax/gst/index.html#codes.

Requirement to Issue Tax Invoices 17. To obtain payment which includes GST from the Commonwealth, a supplier is required to submit a valid tax invoice with each claim for payment. The GST Act outlines the requirements that must be met in order for an invoice to be a valid tax invoice. The requirements in this regard were changed and simplified in 2010. Guidance on the requirements for a valid tax invoice can be found in the Tax Handbook - Goods and Services Tax. The GST amount identified on the tax invoice represents the amount of GST that Defence will be entitled to claim as an input tax credit from the ATO when it lodges its monthly Business Page 3.72

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Defence Procurement Policy Manual 3.7 Defence Procurement and the GST Activity Statement. It should be noted that a valid tax invoice must be held by Defence before it lodges its Business Activity Statement in order for it to claim an input tax credit for the amount of GST paid. Therefore, the tax code P1 should only be used to enter a payment into the ROMAN System where a valid tax invoice is held. GST Transitional Rules 20. For Defence personnel involved in larger, longer-term Defence projects, it is important to note that transitional arrangements for the GST are in place for transactions that span beyond 1 July 2000. The transitional rules mean that some pre-8 July 1999 contracts were GST-free until 30 June 2005 (or an earlier review opportunity arose). From 1 July 2005, those contracts will generally attract GST unless the supplies are input taxed or GST-free within the meaning of the GST Act. Defence personnel managing contracts predating the implementation of GST into Australia where the contracts have not been reviewed to incorporate GST clauses should seek specialist advice from the Defence Tax Management Office.

GST in Defence Contracts 21. In accordance with Defence Chief Executives Instruction (CEI) 1.3 Meeting Tax Obligations and DMO CEI 2.9 Tax Management, Procurement officers must ensure that taxation issues are appropriately addressed in contracts.

Standard GST clauses 22. Standard Defence contracting templates for the procurement of goods and services contain clauses that set out the procedure and obligations associated with the payment of GST under the contract. In particular:

to obtain payment of a GST amount from Defence, the supplier is required to submit a valid tax invoice with each claim for payment; the supplier is required to identify the amount of GST claimed on the tax invoice as a separate line item; where the supplier incorrectly states or otherwise revises the amount of GST paid or payable by Defence, the supplier may be required to issue Defence with an adjustment note in accordance with the GST Act; and in the event that either party is assessed by the ATO as having made a taxable supply under or in connection with the contract, the recipient will be entitled to recover from the supplier the amount of GST paid or payable to the ATO upon presentation of a valid tax invoice.

23.

The standard clauses also ensure that Defence is able to recover GST from the supplier if Defence makes a taxable supply to the supplier in connection with the contract. This provision is required because, although the GST Act makes the provider of a taxable supply liable to account for GST, it does not provide the provider with a statutory right to collect GST from the recipient of the supply.

GST Inclusive and Exclusive Contracts 24. Some contracts will be entered into on a GST inclusive basis in Defence, while other contracts will be entered into on a GST exclusive basis. Regardless of whether a contract is entered into on an inclusive or exclusive basis, it should clearly state which basis applies. Standard GST clauses contained in ASDEFCON (Strategic Materiel) adopt a GST exclusive basis as it allows tender prices submitted from overseas and Australian suppliers to be more easily compared during tender evaluation. For Complex and Simple procurements, relevant Defence contracting templates (including ASDEFCON (Complex Materiel), ASDEFCON (Services) and Form SP20) provide for contracts to be entered on a GST inclusive basis, in line with standard practice for most commercial transactions.

25.

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Defence Procurement Policy Manual 3.7 Defence Procurement and the GST GST and Imports 26. 27. The importation of goods into Australia is generally subject to GST. For further information, refer to the Tax Handbook Good and Services Tax, chapter 8. The GST is payable by Defence if it is the importer of the goods, and not by the overseas supplier. However, Defence will be able to claim GST input tax credits for the GST paid on all creditable importations. The GST is generally paid in the same way and at the same time as customs duty. Defence is approved to defer payments of GST on imports. Therefore deferral of GST will occur automatically when the Defence ABN is included on the customs entry form. As Defence has been given approval to defer GST, the Australian Customs Service (Customs) will release the goods after payment of any customs duty or charges. Customs will record the deferred GST liability on each shipment as it is cleared. The standard GST clauses contained within the ASDEFCON suite of tendering and contracting templates often require the supplier to be the importer and be responsible for all duties and taxes associated with importation. The ADO Customs Office must be contacted where any variations are made to these clauses to ensure that the legal and financial implications are considered. The ADO Customs Office can be contacted on (03) 9282 6937 or via e-mail at ado.customs@defence.gov.au.

28. 29.

30.

Resident Agent 31. Despite Defence preference not to have an agent interposed between itself and a contractor, the GST Act allows a non-resident (that is, an overseas GST registered entity) to appoint a resident agent to act on its behalf in relation to GST matters under a contract. Where such an arrangement is in place, it is the resident agent who is liable to pay GST to the ATO on taxable supplies made by the non-resident. The appointment of a resident agent will not relieve a supplier from registering in its own capacity for an ABN and for GST where it satisfies the registration requirements of the GST Act. The primary reason that the GST Act allows an overseas entity to appoint a resident agent is the view held by the ATO that it is easier to enforce Australian taxation legislation upon a resident of Australia as opposed to a non-resident. ASDEFCON (Strategic Materiel) and ASDEFCON (Support) include a standard resident agent clause that provides a mechanism by which the resident agent appointed by a supplier is recorded in the contract. The clause is also designed to clearly indicate to the supplier that the appointment of a resident agent will not relieve it of its liabilities or obligations under the contract, including responsibility for ensuring the resident agent complies with the suppliers contractual GST requirements. Where a resident agent is appointed, this clause provides for Defence to make all payments due to the supplier through the resident agent.

32.

33.

Procurements made on a Progressive or Periodic Basis 34. Under the normal rules relating to the attribution of GST payments, an entity accounting for GST on a non cash basis is required to account for the entire amount of GST payable on a taxable supply when:

any of the consideration for the supply is received; or an invoice is issued for the supply,

whichever occurs in the earlier tax period. 35. These normal rules may not apply where a supply is made on a progressive or periodic basis and consideration is made on a progressive or periodic basis. In these circumstances, each progressive or periodic component of the supply is treated as a separate supply. The supplier is liable to pay only the portion of the GST amount that has accrued on each progressive or periodic component, when each tax invoice is issued or part consideration is received. This Page 3.74

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Defence Procurement Policy Manual 3.7 Defence Procurement and the GST means that where a contract involves a number of milestones or other payments, Defence is only required to pay the GST associated with each progressive claim for payment. Defence is not required to pay the entire amount of GST applicable to the contract when the first payment falls due. Reverse Charge Arrangements 36. The GST Act provides a mechanism by which the parties to a contract can agree that the GST payable on a taxable supply is reverse charged to the recipient of that supply (which, under Defence contracts, would normally be the Commonwealth). However, this mechanism has risks for Defence, which unless managed properly, could expose the Commonwealth to additional liability. Accordingly, before entering into a reverse charge agreement the Defence Tax Management Office should be consulted.

GST and Foreign Military Sales 37. Defence Materiel Manual (Finance) (DMM (FIN)) 01-0-004 Foreign Military Sales Financial Management Manual provides further information regarding the application of GST to FMS cases.

Other GST Considerations 38. Defence may be liable for withholding tax on payments to non-residents where intellectual property or know-how is provided to the Commonwealth. This cost of up to 11.1% should be factored into the cost of the project and the Defence Tax Management Office should be notified to ensure amounts are appropriately remitted to the ATO. Where the provision of IP and knowhow occurs in conjunction with the provision of services, an allocation of the consideration between the IP/know-how and the service components may be appropriate. Care should be taken to ensure that appropriate tax clauses are inserted into the contract. Other withholding tax obligations could arise where a non-resident company performs construction activities in Australia on an installation or construction project. This will usually involve satisfying certain compliance obligations only. The Defence Tax Management Office should be notified to ensure that the appropriate documentation is provided to the ATO.

39.

Reimbursement of Defence Expenses 40. Defence is able to claim an input tax credit where:

an employee of Defence incurs expenses in connection with the carrying on of the enterprise of the Australian Defence Organisation; such expenses are reimbursed; and the employee obtains a tax invoice where the GST exclusive value of the supply is greater than $75 (if the GST exclusive value of the supply is less than $75, evidence of the acquisition, such as a cash register docket, will be required).

41.

If the employee acquires GST-free supplies, no input tax credits will be available to Defence in relation to these acquisitions, as no GST will have been paid. Common GST-free supplies include fresh food and medical supplies.

GST Advice 42. As a matter of policy, Defence personnel should not provide advice to potential suppliers, including non-resident potential suppliers, on GST issues including the requirement to register for an ABN and for GST. Suppliers should seek independent advice from a third party advisor with respect to their obligations, if any, under the GST Act. Defence personnel who require specialist GST advice should contact the Defence Tax Management Office on 1800 806 053 or via e-mail at: taxation.management@defence.gov.au.

43.

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Further Reading
Australian Taxation Office, Statement by a supplier form (NAT 3376) Defence Chief Executives Instruction 1.3 Meeting Tax Obligations DMO Chief Executives Instruction 2.9 Tax Management Department of Defence Tax Handbook - Goods and Services Tax Defence Materiel Manual (Finance) (DMM (FIN)) 01-0-004 Foreign Military Sales Financial Management Manual ASDEFCON suite of tendering and contracting templates Defence Tax Management Office website

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Defence Procurement Policy Manual 3.8 Defence Materiel Organisation Company ScoreCards

3.8
Introduction
1. 2.

Defence Materiel Organisation Company ScoreCards

This chapter applies only to procurement undertaken in the Defence Materiel Organisation (DMO). The purpose of this chapter is to provide guidance on the objective, application and operation of the DMO Company ScoreCard Program. The DMO Company ScoreCard Program is a contractor performance measurement tool issued by DMO to contractors which have DMO contracts meeting particular threshold requirements.

Mandatory Policy
Project Managers must report the performance of their prime contractor and significant subcontractors against the Company ScoreCard Program where the contract meets one of the following conditions:

a DMO capital acquisition contract (including contractual cost and options) that has a value that exceeds $10 million; a DMO in-service support contract or standing offer that has a value of $5 million or greater in a single contract or cumulatively over the life of the contract, including any extensions provided for in the initial contract; or a DMO contract, valued at less than the above thresholds, that is considered to be operationally sensitive, militarily significant or may lead to subsequent contracts.

The DMO Company ScoreCard Program information must not be used to prevent a company from participating in a tender process.

Operational Guidance
Objective 3. 4. 5. The objective of the Company ScoreCard Program is to provide DMO with an understanding of a contractors performance in the delivery of DMO contracts. A Company ScoreCard measures a contractors performance as either the prime contractor or a significant subcontractor for specific contracts within a six-month reporting period. Company ScoreCards are aimed at:

formalising corporate knowledge of a particular contractors performance; encouraging better performance through active dialogue between contractors and DMO; and improving the ability of DMO procurement staff to make informed source selection decisions during tendering processes.

6.

A significant subcontractor is defined in terms of:


size and complexity of deliverables; cost and risk to DMO; being a key element of a projects critical path; or delivering key capabilities to the Australian Defence Force. Page 3.81

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Defence Procurement Policy Manual 3.8 Defence Materiel Organisation Company ScoreCards Application of Company Scorecards 7. Project Managers must report the performance of their contractor against the Company ScoreCard Program where the contract meets one of the following conditions:

a DMO capital acquisition contract (including contractual cost and options) that has a value that exceeds $10 million; a DMO in-service support contract or standing offer that has a value of $5 million or greater in a single contract or cumulatively over the life of the contract, including any extensions provided for in the initial contract; or a DMO contract, valued at less than the above thresholds, that is considered to be operationally sensitive, militarily significant or may lead to subsequent contracts.

8.

For Requests for Quote, Requests for Proposal or Requests for Tender, where the expected value of the contract will exceed the financial thresholds specified above, the Company ScoreCard provisions for the Conditions of Tender and the Statement of Work should be included. These provisions can be found in the relevant clauses in the ASDEFCON suite of tendering and contracting templates. For each six-month reporting period, Project Managers are responsible for populating the Company ScoreCard database with contractor performance assessments. The information provided is cleared by the System Program Office Director and the relevant Director-General. Relevant Division Heads are responsible for endorsing the assessments included in a Company ScoreCard within 10 working days of the scheduled completion date of the round.

9.

Contractor Review of Company ScoreCards 10. The DMO provides contractors with their respective Company ScoreCards bi-annually. Each contractor is given the opportunity to reflect on its performance report and to provide comments to the DMO within 20 working days. Contractor comments will be incorporated into the ScoreCard database to form the final version of the Company ScoreCard.

Use of Company ScoreCard information 11. Information contained in a Company ScoreCard should only be used for tender evaluation and source selection purposes. If a Procurement officer wishes to use the information for another purpose advice should be sought from DMO Legal. The information must not be used to prevent a company from participating in a tender process, for example, by using ScoreCard data to develop a list of potential suppliers that a direct source tender will be issued to. Company ScoreCard information can be used from the date the ScoreCard is released by the CEO DMO. Release of the ScoreCard data will be advised by DEFGRAM. Information contained in a Company ScoreCard remains valid for a period of three years to allow performance to be trended over time.

12.

Compiling the Company ScoreCard Assessment 13. DMO uses the Company ScoreCard system to monitor, assess and report contractor performance in areas considered fundamental to the successful delivery of supplies. Company ScoreCard assessments occur over two six-monthly reporting periods per year (April September and OctoberMarch).

Performance Parameters 14. Performance is measured against the categories and criteria set out in the following documents:

Company ScoreCard Performance Measurement Worksheets Acquisition; and Company ScoreCard Performance Measurement Worksheets - Sustainment.

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Defence Procurement Policy Manual 3.8 Defence Materiel Organisation Company ScoreCards 15. The Company ScoreCard Performance Parameters address the following five critical areas of contractual performance:

Technical Performance; Cost; Schedule; Contracting; and Relationships.

16.

Further information regarding the parameters can be found in the Worksheets.

Assessment Ratings 17. Contractor performance is assessed against the Company ScoreCard Performance Parameters criteria using ratings that range from Very Good to Unsatisfactory. The Company ScoreCard analysis is illustrated by a traffic light colour rating which also includes commentary on the contractors performance. The traffic light rating system colour code is as follows:

18.
Assessment Ratings Very Good Indications Contractor performance meets all contracted requirements and exceeds some or all requirements providing benefit to DMO.

As Contracted

The contractor is meeting all contractual requirements.

Marginal

The contractor is not meeting some contractual requirements.

Unsatisfactory (showing improvement) Unsatisfactory

The contractor is failing to meet contractual requirements, but there is improvement and the possibility of recovery. The contractor is failing to meet contractual requirements and there is a low likelihood of recovery. This indicates that the assessment category is not applicable to the project or contract.

Not Applicable

19.

Additional information on the operation of the Company ScoreCard Performance Parameters can be obtained from:

the Company ScoreCard Program website, located in the Industry Resources section (Policy or Business link) of the DMO Internet site; or by contacting the Company and Industry Performance Directorate located within DMO General Manager Commercial Group.

Use of Company Scorecards During Tender Evaluation 20. DMO and Defence may use all available information sources to assess the current and past performance of a tenderer and the significant proposed subcontractors, where identified in the tender, during tender evaluations and source selection considerations. These sources include:

tenderers and significant proposed subcontractors Company ScoreCards or reference sites; other past performance information provided by the tenderer in its tender; and

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Defence Procurement Policy Manual 3.8 Defence Materiel Organisation Company ScoreCards

company information held by the Australian Securities and Investments Commission (ASIC), such as any registered debts or securities that may effect the performance of tenderers.

21.

Official copies of Company ScoreCards, to be used for tender evaluation purposes, may be obtained from the Company and Industry Performance Directorate.

New Players 22. Where a tenderer or a proposed significant subcontractor is not known to DMO or does not have a Company ScoreCard history, a referee report/references are to be requested through the request for tender and provided in the tender response. For the referee report/reference provided by an entity external to both DMO and the tenderer, to have relevance and value for evaluation purposes, it should be able to give feedback about the tenderers performance in delivering the specified contract. Following consultation and examination of the referee report/reference a Company ScoreCard will be developed based on the information provided by the reference site. The tenderer is to be offered 20 working days to comment on these ratings. Guidance on reviewing the performance of nominated reference sites can be obtained from the Company ScoreCard Program website in the Industry Resources section (Policy or Business link) of the DMO Internet site.

23.

24.

360 View ScoreCard Program 25. The 360 View ScoreCard is a separate but related performance monitoring, reporting and improvement tool administered by the Company and Industry Performance Directorate for industry to report on its relationship with DMO. DMO uses the 360 View ScoreCard Program to promote and support a culture of evaluation and business improvement. The DMO will use the 360 View ScoreCard Program to provide a consolidated view of its project management and contract performance from an Industry perspective, and as a measurement tool to assist in the development and management of its people, policies and practices. The 360 View ScoreCard cycle of measurement and reporting DMOs performance covers two six-month periods: October-March and April-September. This cycle aligns with the Company ScoreCard reporting process.

26.

27.

Further Assistance 28. Assistance on the policy underpinning the Company ScoreCard and 360 View ScoreCard Programs can be obtained from the Company and Industry Performance Directorate. The Directorate also provides training, associated with the use of the Company ScoreCard database, for Project and Systems Program Office staff involved in assessing and reporting contractor performance.

Key References
Company ScoreCard website

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Defence Procurement Policy Manual 3.9 Defence Security Requirements

3.9
Introduction
1. 2.

Defence Security Requirements

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter discusses the protection of classified material concerned with national security during the procurement process. Guidance on the use and protection of commercial-inconfidence information is contained in chapter 3.11. A reference in this chapter to classified material includes classified information and classified assets.

Mandatory Policy
Procurement officers must seek the Defence originators approval prior to the release of official material owned or originated by Defence to a business which is a member of the Defence Industry Security Program (DISP). Procurement officers must ensure that Defence Security Authority (DSA) confirmation has been received by the contractor (and any subcontractors) and they have the appropriate level of security clearance and accreditation prior to releasing classified material. Hard copy RESTRICTED information must not be released to contractors who are not DISP members unless the DSA confirms the recipient holds a RESTRICTED security clearance, and the terms of the Security Instructions to Accompany RESTRICTED Material (excluding caveat, communications security material, cryptographic and accountable material) released to Australian defence industry can be met. Procurement officers must ensure that a contractor, who is not a member of the DISP, receiving the RESTRICTED information signs the appropriate portion of the Security Instructions and Undertaking for the Protection of RESTRICTED Material Released to Australian defence industry and returns it to the sender. Classified information in electronic form must not be released unless the contractor has an appropriately accredited Information and Communications Technologies (ICT) system. Standard security clauses must be included in Requests for Tender, Requests for Proposal, standing offers and contracts. For procurements relating to Defence projects involving assets categorised as major or important and above, the security classification and categorisation guide must be included in the request documentation to assist potential contractors in assessing any physical or ICT infrastructure security costs.

Operational Guidance
Role of Procurement Officers 3. Procurement of goods and services often involves tenderers and contractors accessing classified material. Procurement officers play an important role in the tendering and contract management process and are responsible for ensuring that classified material is appropriately protected. Procurement officers need to be aware of, and should consider the potential national security implications of the proposed tendering and contractual arrangements. This is to ensure that Page 3.91

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Defence Procurement Policy Manual 3.9 Defence Security Requirements security classified material entrusted to tenderers and contractors is adequately protected. In doing so, Procurement officers are responsible for:

ensuring that, if required, contractors obtain and maintain membership of the DISP and appropriate accreditation; ensuring that security related clauses are included in all contracts; gaining approval from the DSA for security related contract clauses (including the suitability of standard ASDEFCON clauses) when an external service provider will provide security related goods or services; obtaining confirmation from the DSA of a contractors suitability to have access to Defence weapons or explosive ordnance; and ensuring that contracts clearly specify that contractors who fail to comply with Defence Security Manual (DSM) requirements are in breach of contract.

5.

Individuals who disclose official information without a clear need to know and appropriate authorisation may be liable to prosecution under the various Commonwealth laws governing the disclosure of official information.

Defence Security Manual 6. The DSM is the authoritative source of policy on minimum Commonwealth and Defence security requirements where purchasing and contracting activities have a security component. The DSM is available on the Defence intranet. People wishing to obtain access from outside the Defence intranet should contact the DSA on (02) 6266 1732.

Defence Industry Security Program 7. If a requirement is identified for an Australian tenderer or contractor to:

store or transport Defence weapons or explosive ordnance; store or handle specified levels of Defence classified material or categorised assets; provide security services; or have access to national security classified or sensitive Defence information, ICT systems or materiel, including weapons and explosive ordnance,

the tenderer or contractor may need to be sponsored for entry into the DISP. The DSA in the applicable State or Territory can confirm membership status or advise of entry requirements. For further information refer to DSM Part 2:42 - Defence Industry Security Program. Security Clearances 8. If a contract will require personnel to have access to classified material, the request documentation should include advice that tenderers will be required to undergo a personnel security clearance process if the tender is successful. In the vast majority of cases, request documentation should not stipulate a requirement for tenderers employees to hold a current personnel security clearance. Instead, a statement should be included advising that contractors are required to undergo a personnel security clearance process if the bid is successful. If any external service provider is unsuccessful in getting the required personnel security clearances, and such clearances are required by the contract, the contract may be terminated. Where an urgent requirement exists there is a need to bring a contract into effect urgently, for example, procurements satisfying direct source justification on the basis of urgency outside the areas control, it may be appropriate to specify that tenderers employees hold current personnel security clearances. The minimum security clearance required for access to classified material is BASELINE RESTRICTED. To acquire this level of clearance contracted personnel will need to be sponsored by a Defence employee. The Defence employee will be required to provide

9.

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Defence Procurement Policy Manual 3.9 Defence Security Requirements justification for the issue of a security clearance. Contracted personnel undergoing the security clearance process for RESTRICTED clearance are required to provide:

personal details about themselves, their partner and their parents; a copy of their birth certificate; and a copy of their naturalisation certificate, if applicable.

10. 11.

The contracted personnel will be subject to a police and background check and may be required to attend an interview with the DSA, if deemed necessary. For further information of security clearances, refer to the DSM Part 2:40 - Personnel Security Clearance Process.

Release of Classified Material 12. Official material owned or originated by Defence can be released to a contractor who is a member of the DISP, but the originators approval must be provided before the release can occur. Contractors who are not DISP members can, if the need exists, access hard copy RESTRICTED information. However, RESTRICTED information must only be released if the DSA confirms the recipient holds a RESTRICTED security clearance, and the terms of the Security Instructions to Accompany RESTRICTED Material (excluding caveat, communications security material, cryptographic and accountable material) released to Australian Defence Industry can be met. Procurement officers must ensure that a contractor, who is not a member of the DISP, receiving the RESTRICTED information signs the appropriate portion of the Security Instructions and Undertaking for the Protection of RESTRICTED Material Released to Australian Defence Industry and returns it to the sender. Classified information in electronic form (i.e. computer disks, thumb drives and emails) must not be released unless the contractor has an appropriately accredited ICT system; for further information see the DSM Part 2:4 - Facilities and ICT Systems Security Accreditation.

13.

14.

15.

Foreign Tenderers or Contractors 16. In the case of a foreign tenderer or contractor, Procurement officers should note that, under most circumstances, only companies from those countries with which Australia has a bilateral security instrument for the reciprocal exchange of classified information are eligible for access to Australian security classified information. Defence Instruction (General) OPS 13-4 - Release of Classified Defence Information to Other Countries provides further guidance. Details of a foreign companys security clearance status can only be obtained from and confirmed by the DSA. For further information on the release of classified information, refer to the DSM, Part 2:30 Classification and Protection of Official Information.

17.

Security Classification and Categorisation Guides 18. For procurements relating to Defence projects involving assets categorised as major or important and above, the Security Classification and Categorisation Guide (SCCG) must be included in the request documentation to assist potential tenderers in assessing any physical or ICT infrastructure security costs. For further information refer to DSM Part 2:41 - Security for Projects and Capability Planning.

Access to Defence Facilities 19. Contracted personnel may require access to Defence facilities to perform work under a contract. Entry to the majority of Defence facilities requires personnel to either hold an access pass or be Page 3.93

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Defence Procurement Policy Manual 3.9 Defence Security Requirements escorted by the holder of an appropriate pass. Contractors will normally hold a yellow pass. To facilitate the issue of an access pass to contracted personnel, Procurement officers should contact the Defence Support Group Pass Office, who will provide the required forms and other relevant information. 20. Defence access passes cannot generally be issued to a person who does not currently hold Australian citizenship. Waivers to the nationality rule will only be granted in specific circumstances following a request from an officer at the Group Head level to DSA. Access rights may be revoked if the contracted personnel use the access for any purpose other than that for which it was granted, i.e. to undertake work in accordance with a specific contract. Where it is believed that contracted personnel are misusing their access, Procurement officers should report this misuse to their security officer in the first instance. Further information on access is contained in the DSM, Part 2:61 Access Control and Identity Management.

21.

22.

Facility Security Accreditation and ICT System Security Accreditation 23. Prior to information being allowed to be stored in or accessed from a contractors facility, the facility must be accredited to a level that will satisfy Defences protective security requirements. The DSA is the only agency that has the authority to provide advice as to a facilitys accreditation status. Detailed information on facility security accreditation and ICT system security accreditation is contained in the DSM, Part 2:4 - Facilities and ICT Security Systems Accreditation. Procurement officers should be aware that it could take more than three months for a company facility or ICT system to be accredited. It is therefore important to factor this into the tendering or contracting schedule. It is equally important to recognise the costs both to Defence and Industry associated with accreditation.

24. 25.

Security Clauses in Tendering Documentation 26. Standard security clauses must be included in Requests for Tender, Requests for Proposal, standing offers and contracts. The ASDEFCON suite of tendering and contracting templates include mandatory security clauses that have been cleared for use. The ASDEFCON suite can be accessed online on the Commercial Policy and Practice Branch DMO website at: http://www.defence.gov.au/dmo. Standard clauses will often require some modification to accommodate:

27. 28.

select tenders; access to Defence weapons and explosive ordnance; tenders involving TOP SECRET, caveat or Communication Security (COMSEC) information; or outsourcing of security functions.

29. 30.

In the above circumstances, Procurement officers should contact the DSA to ensure that proposed standard clauses are suitable for their tender/contract specific requirements. Failure to fulfil the above requirements may cause unnecessary delays or expense to the procurement process.

Security Performance during Contract Execution 31. Contract managers are responsible for monitoring the security procedures of the contractor to ensure compliance with security policy and notifying the DSA of any security deficiencies or incidents. Page 3.94

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Defence Procurement Policy Manual 3.9 Defence Security Requirements Further Information 32. Further information on Defence security matters as they relate to contracting matters can be obtained from the Project Operation and International Visits section of the DSA or from the Regional DSA office in the applicable State or Territory. Security authority contact details are located in the DSM - Part 1, Annex A.

Key References
Defence Security Manual Defence Instruction (General) OPS 13-4 Releasability of Classified Defence Information to other countries ASDEFCON suite of tendering and contracting templates Defence Security Authority website.

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Defence Procurement Policy Manual 3.10 Interacting Policies

3.10
Introduction
1. 2.

Interacting Policies

This chapter applies to all procurement conducted in Defence and the Defence Materiel Organisation (DMO). This chapter refers to core Government policies that may interact with procurement. This chapter draws attention to key Commonwealth policies that must be adhered to in order to satisfy Regulation 9 of the Financial Management and Accountability Regulations 1997 (Cth) (FMARs) and the Commonwealth Procurement Guidelines (CPGs). This chapter does not reproduce the relevant policy but is intended to direct Procurement officers to source documents and other chapters of this Manual that might be relevant to their specific procurement. The responsibility of ensuring that an individual procurement is compliant with Commonwealth procurement policy remains with the relevant procurement delegates in accordance with chapter 1.4. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

3.

Mandatory Policy
Procurement delegates must ensure that their procurement is compliant with Commonwealth policies, in particular the policies listed in the Interacting Policy Table on the Department of Finance and Deregulation (DOFD) website prior to exercising their delegation. Proposal approver delegates must not approve a proposal to spend public money that is inconsistent with the terms of any Australian Government approval or decision relevant to the procurement. Value for Money must be assessed within the framework of Commonwealth policies and any procurement must not be inconsistent with policies of the Commonwealth. Clauses giving effect to the Fair Work Principles must be included in all approaches to the market for covered procurements. Procurements involving the construction of facilities or other infrastructure projects must be conducted in consultation with Infrastructure Division in the Defence Support Group. Defence Procurement officers must ensure that procurements conducted do not breach any trade sanctions currently in place. All external legal services must be engaged through the Defence/DMO Legal Panels. Procurement officers must comply with Defence security policy. Commonwealth agencies must not purchase goods and services from contractors that do not comply with the requirements of the Equal Opportunity for Women in the Workplace Act 1999 (Cth) (Equal Opportunity Act).

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Defence Procurement Policy Manual 3.10 Interacting Policies

Operational Guidance
FMA Regulation 9 4. FMAR 9 provides that an approver must not approve a spending proposal unless the approver is satisfied, after reasonable inquiries, that giving effect to the spending proposal would be a proper use of Commonwealth resources. Proper use is defined in s44(3) of the Financial Management and Accountability Act 1997 (Cth) (FMA Act) as the efficient, effective and ethical use of Commonwealth resources that is not inconsistent with the policies of the Commonwealth. In Defence and DMO, consideration by the Proposal, Procurement and Contract Approvers satisfies the requirements of FMAR 9. For further information refer to chapter 1.4. DoFD issues a list of policies that interact with Procurement Policy to assist in assessing compliance with Commonwealth policy. This list can be found on the DOFD website. All of these policies are dealt with in detail in the Defence and DMO Chief Executives Instructions (CEIs), elsewhere in this Manual or in the ASDEFCON suite of tendering and contracting templates (ASDEFCON) as appropriate. This list of policies published by DOFD is not an exhaustive list of Commonwealth policies for the purposes of section 44 of the FMA Act and FMAR 9. In this context, the policies of the Commonwealth is a broad undefined concept and term and should be interpreted broadly applying its ordinary dictionary meaning. Among other things, it is likely that any Cabinet decision relevant to a spending proposal will constitute a Commonwealth policy, though the terms of that decision will be relevant. If that decision establishes a course or line of action it will generally be a policy for the purposes of section 44 and FMAR 9. Accordingly, Proposal approver delegates must not approve a proposal to spend public money that is inconsistent with the terms of any Australian Government approval or descision relevant to the procurement.

5.

6.

Australian Industry Participation 7. The Australian Government has agreed to strategically apply the Australian Industry Participation (AIP) National Framework to large Commonwealth tenders (generally above $20 million), by requiring tenderers to prepare and implement AIP Plans for certain procurements. Defence implements both the Australian Industry Capability (AIC) and Global Supply Chain (GSC) programs, and other industry support measures. As a result, the Department of Innovation, Industry, Science and Research has determined that the AIP program does not apply to Defence procurements. 1 For further information refer to chapter 3.12.

8.

Coordinated Procurement 9. The Government may decide that for certain goods or services a whole-of-government arrangement will deliver better value for money than individual agency contracts. These wholeof-government arrangements are referred to as coordinated procurement contracting arrangements. Refer to chapter 4.3 for further information.

Employment and Workplace Relations Fair Work Principles 10. Potential suppliers of goods and services to the Australian Government are required to comply with all relevant workplace laws, which include the Fair Work Act 2009 (Cth) or any applicable workplace relations laws (including obligations under awards, industrial instruments and employee superannuation entitlements, etc), occupational health and safety laws and workers compensation laws.

Refer to section 1.3 of the Australian Industry Participation Plans in Commonwealth Government Procurement: User Guide for Agencies January 2010

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Defence Procurement Policy Manual 3.10 Interacting Policies 11. The Fair Work Principles are designed to ensure that Government procurement decisions promote fair, cooperative and productive workplaces in which employees are treated fairly and with respect for freedom of association and their right to be represented at work. Accordingly, for all covered procurements, Defence and DMO must not enter into a contract with a tenderer who:

has not fully complied with judgements for breaching relevant workplace relations laws, occupational health and safety laws, and workers compensation laws (note: a reference to judgements includes any penalty or order but does not extend to infringement notices issued by workplace inspectors or a provisional improvement notice issued by an occupational health and safety inspector); is a textiles, clothing or footwear manufacturer that is not accredited with the Homeworkers Code of Practice, or not seeking such accreditation; and/or supplies cleaning or building management services and does not provide their employees with appropriate training, supervision, equipment and materials, a written duty schedule for each site, and adequate staffing.

Clauses giving effect to these principles must be included in all approaches to the market. The ASDEFCON suite of tendering and contracting templates includes the clauses necessary to comply with this requirement. Construction 12. Procurements involving the construction of facilities or other infrastructure projects are subject to a range of legislative and policy instruments including the National Code of Practice for the Construction Industry and scrutiny by the Public Works Committee. In Defence, these procurements must be conducted in consultation with DSG, Infrastructure Division. Specialist construction advice and templates incorporating Commonwealth Construction policy is available on the Infrastructure Management website or by contacting the Director Construction Contracts on 02 6266 8082.

Environmental 13. Australian Government environmental policy includes - Measures for Improving Energy Efficiency in Government Operations and the National Packaging Covenant. More information on these policies can be found in FMG 10. In addition, there are a range of other environmental legislative and policy requirements that may impact on procurements undertaken in Defence outlined in chapter 3.16.

Hazardous Substances (Excluding Explosives and Radioactive Materials) Policy 14. Procurement officers must comply with the Australian Customs legislative requirements when purchasing and importing supplies which are, or may contain, hazardous substances. The legislation for dealing with hazardous substances for Defence procurements and for Industry is the Occupational Health and Safety Act 1991 (Cth) and the Occupational Health and Safety (Safety Standards) Regulations 1994 (Cth). The Occupational Health and Safety (Safety Standards) Regulations (Cth) list a number of hazardous substances which are prohibited from use and must not be used in any circumstances unless exempted by the Commonwealth Safety, Rehabilitation and Compensation Commission. Where a procurement potentially involves hazardous materials, Procurement officers must refer to the Defence Safety Manual SAFETYMAN. The management of asbestos is a specific issue that should be considered in procurement of capital equipment. For further information on the management of asbestos see SAFETYMAN, Volume 1, Part 5. Advice on hazardous substance management is available from a number of Defence and Government sources including:

15.

16.

Australian Safety and Compensation Council;

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Comcare; Defence Environment and Heritage; Defence Occupational Health, Safety and Compensation Branch, with specific information through the Defence Centre for Occupational Health; and Individual Group and Service OHS areas and subject matter experts.

17.

DMO has a specific standardised system for the management of hazardous materials. Defence Materiel Manual (Risk) 09-0-018 V1.0 Safety Management System Hazardous Material Management Policy includes mandatory requirements regarding procurement, standard operating procedures, training and disposal. It also includes tools and checklists to facilitate implementation.

Financial 18. 19. 20. 21. Information on financial policies, including Foreign Exchange Risk can be found at chapter 3.3. Information on Private Financing can be found at chapter 4.4. Information on Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort can be found in Defence CEI 8.6, DMO CEI 8.6 and chapter 3.15. Information on the 30 Day Payment Policy for Small Business can be found at chapters 3.3, 5.4 and 6.4.

Information Communications and Technology (ICT) 22. Procurement officers should be aware of and comply with, the Limitation of Liability policy for ICT and Communications Technology contracts outlined in Finance Circular 2006/03 Limited Liability in Information and Communications Technology Contracts. Procurement officers should also be aware of and comply with the ICT SME Participation Procurement Policy found at Small and Medium Enterprise (SME) participation procurement policy The Department of Finance and Deregulation has created and supports a suite of templates for the procurement of ICT products and services. Further information on ICT Procurement can be found in chapter 4.3.

23.

International Obligations Trade Sanctions 24. Procurement officers must ensure that procurements conducted do not breach any trade sanctions currently in place. Information on current trade sanctions can be found on the Department of Foreign Affairs and Trade website.

International Agreements 25. Complying with Australian Law, including the CPGs, will ensure that Defence Procurement officers meet all obligations under Australias current free trade agreements.

Export Control 26. Where Defence acquires equipment from overseas, or equipment that is manufactured in Australia under licence from an overseas manufacturer, the export to Australia of the equipment is subject to certain controls. Further information can be found at chapter 4.2 and from the Defence Export Control Office.

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Defence Procurement Policy Manual 3.10 Interacting Policies Legal Legal Services 27. Legal Services must be procured in accordance with the Legal Services Directions 2005 (Cth) produced by the Attorney Generals Department. Further information on obtaining Legal Services can be found in the Defence and DMO Procurement Support Areas section at the front of this manual.

Intellectual Property 28. Information on Intellectual Property can be found in chapter 3.6. DMO Legal is the Defence Business Process Owner for IP. To obtain DMO Legal services refer to the current DPPI regarding the requesting of professional services from the Office of Special Counsel DMO.

Security 29. Procurement officers must comply with Defence security policy within the Defence Security Manual. Further information can be found at chapter 3.9.

Social Inclusion Disability Strategy 30. The Commonwealth Disability Strategy provides a strategic framework for inclusion and participation by people with disability in Commonwealth Government policies, programs and services. The procurement of property or services from a business that primarily exists to provide the services of persons with a disability is now exempt from the Mandatory Procurement Procedures, which means that those businesses are not required to devote resources to preparing tenders and can now be engaged directly by agencies to deliver the services of persons with a disability.

31.

Aboriginal and Torres Strait Islander People 32. A new Indigenous Opportunities Policy was announced on 25 February 2010 and reads as follows. For the purpose of promoting employment and training opportunities for Indigenous Australians, officials must:

consult with the Department of Education, Employment and Workplace relations, the Commonwealth Indigenous Coordination Centres or equivalent Commonwealth Office, and community council or group, as appropriate, in the planning stages of those projects; and in each procurement process under those projects, require each tenderer to submit as part of their tender a plan for providing training and employment opportunities to local Indigenous communities and the use of local indigenous potential suppliers that are small and medium enterprises.

33.

Tenderers submitting tenders where the expenditure is over $5 million ($6 million in construction) in a region with a significant Indigenous population will be required to develop an Indigenous Training, Employment and Supplier plan as part of its tender. Procurement officers should ensure that specifications are not biased, restrictive or written in such a way as to discriminate against potential Aboriginal and Torres Strait Islander suppliers. Further information can be found at: http://www.deewr.gov.au/Indigenous/Employment/Pages/StrengtheningProcurementPolicies.as px

34.

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Defence Procurement Policy Manual 3.10 Interacting Policies Equal Opportunity for Women in the Workplace Policy 35. Commonwealth agencies must not purchase goods and services from contractors that do not comply with the requirements of the Equal Opportunity for Women in the Workplace Act 1999 (Cth) (Equal Opportunity Act). Companies that have not complied with this Equal Opportunity Act are named annually in Parliament. A list of non-complying companies is available on the Equal Opportunity for Women in the Workplace Agency website. Procurement officers may continue to seek or consider offers from companies listed as noncompliant with the Equal Opportunity Act, provided that the company is compliant at the time of contract signature. When offers are received, the Procurement officer must check if any tenderers are on the list of non-complying companies. If a tenderer is non-compliant its offer must either be excluded from further consideration or the tenderer be advised that it must comply with the Equal Opportunity Act and produce a letter indicating compliance from the Equal Opportunity for Women in the Workplace Agency in order to be considered for the contract.

36.

Other Policy Obligations 37. In addition to policies that interact with procurement through FMAR 9, the CPGs also refer to other important obligations that must be considered when undertaking procurement. The majority of these obligations are detailed in the relevant Defence or DMO CEI, this Manual and ASDEFCON. A complete list can be found on the DOFD Website.

Key References
In this chapter the key references and links are incorporated into the applicable paragraph or chapter.

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Defence Procurement Policy Manual 3.11 Confidential Information

3.11
Introduction
1. 2.

Confidential Information

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter provides guidance on:

The identification and classification of confidential information contained in contracts and generated through the contract performance (referred to in Defence as commercial-inconfidence information); and the circumstances in which the law will recognise that certain information has the necessary character of confidential information and impose a duty on the person to keep the information confidential.

3.

This chapter does not address the identification and disclosure of commercial-in-confidence information where disclosure is required:

or authorised by law including under legislation such as the Privacy Act 1988 and the Freedom of Information Act 1982 (see chapter 3.14); because the information is classified and protected under Defence security provisions (see chapter 3.9); or to an Australian court or tribunal as part of a discovery process (see chapter 5.10).

4.

This chapter does not deal with the consequences of a breach of an obligation of confidence. Specific legal advice should be sought from Defence Legal or DMO Legal in such circumstances.

Mandatory Policy
In accordance with the Commonwealth Procurement Guidelines (CPGs), Procurement officers must ensure that tender documents and contracts include provisions that notify potential suppliers and contractors to the public accountability requirements of the Commonwealth, including disclosure to the Parliament of the Commonwealth of Australia and its Committees. Tender documents must notify tenderers of Defence policy on commercial-in-confidence information. Commercial-in-confidence information must be protected from unauthorised disclosure. Within Defence it should only be disclosed to Defence staff with a specific need to access the information. Procurement officers must comply with the mandatory requirements in Financial Management Guidance No 3 (FMG 3)- Guidance on Confidentiality of Contractors

Commercial Information July 2007.


Approval must be sought from an appropriate officer who has the legal authority to bind Defence through indemnification prior to signing a Non Disclosure Agreement (NDA). Further information regarding the Defence or DMO policy on indemnities is contained in Defence Chief Executives Instruction (CEI) 8.6, DMO CEI 8.6, and chapter 3.15. Defence personnel must not sign NDAs offered by another party, such as a potential supplier, tenderer or contractor without seeking legal advice and clearance from Defence Page 3.111

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Defence Procurement Policy Manual 3.11 Confidential Information Legal or DMO Legal. NDAs must not be worded in a way which seeks to abolish the legislative and administrative requirements of accountability and transparency that Defence is subject to, most notably under the Financial Management and Accountability Act 1997 (Cth) and its regulations.

Operational Guidance
Background 5. In Defence procurement, there are two main circumstances where information would attract an obligation for parties to a contract to maintain confidentiality: through the law of confidentiality (confidential information) or through the terms and conditions of the contract (commonly referred to as commercial-in-confidence information). The focus of this chapter is the identification and treatment of commercial -in-confidence information. The identification of commercial-in-confidence information is important as it determines how the information should be handled. Subject to very few exceptions, such as illegality, the law of contract enables the parties to agree to keep any information confidential. Accordingly, the parties have a wide discretion to agree to keep information confidential, even if it would not be recognised as confidential under the law of confidentiality. A breach of these obligations entitles the innocent party to bring a claim for damages for breach of contract. The CPGs require agencies to consider, on a case by case basis, what might constitute commercial-in-confidence when designing any contract. The CPGs also require agencies to include provisions in tender documents and contracts that alert potential suppliers to the public accountability requirements of the Commonwealth, including disclosure to Parliament and its Committees.

6.

7.

Commercial-in-Confidence Information
8. In recent years Parliamentarians, Auditors-General and Ombudsmen, among others, have raised concerns in relation to the classification of government contracts as commercial-inconfidence and the subsequent limitations placed on access to contracts. 1 As a result government agencies, including Defence, are being encouraged to refine their processes with respect to the classification and treatment of commercial-in-confidence information. This chapter aims to assist Procurement offices in ensuring that the classification and protection of commercial-in-confidence information is consistent with Government policy on this issue.

Treatments of Information in Tenders, Standing Offers and Contracts Classification of Information in Tenders 9. In accordance with Financial Management Guidance No 3 - Guidance on Confidentiality of Contractors Commercial Information July 2007 (FMG3), Procurement officers should treat all information provided by tenderers or potential suppliers as confidential prior to the award of a contract and, for unsuccessful tenderers, after the contract award. All request documentation issued by Defence for Complex and Strategic procurements should advise potential suppliers that:

10.

information received and documents produced during the tender process will be treated as commercial-in-confidence; specific tender information in any resulting contracts may be treated as commercial-inconfidence depending on the nature of the information. In general, this should be limited to the information that meets the confidentiality test and description listed in paragraph 18.

Refer to the Australian National Audit Office Report No. 38 of 2000-2001 -The Use of Confidentiality Provisions in Commonwealth Contracts

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they are required to identify the information it requires to be kept confidential in its tender responses; as a Commonwealth agency, Defence is subject to particular accountability requirements and any resultant contract and related material may be disclosed to Parliament and its committees; and the Freedom of Information Act 1982 is applicable to Defence procurement activities (see chapter 5.7).

11.

All Defence request documentation and contracts/standing offers for Complex and Strategic procurements should also contain provisions that set out:

the information that will be considered by the parties to be commercial-in-confidence information; the restrictions on disclosure of commercial-in-confidence information to third parties; the Commonwealths right to disclose commercial-in-confidence information where disclosure is required by law or statutory or portfolio duties; and the Commonwealths right to disclose commercial-in-confidence information to the extent that is necessary to exercise its intellectual property (IP) rights.

12.

Commercial-in-confidence provisions for use in Defence contracts are contained in the ASDEFCON suite of tendering and contracting templates.

Classification of Information in Contracts (including Standing Offers) 13. In contrast to information provided in tenders, the classification of provisions and information included in a contract or standing offer should be considered on a case by case basis prior to the award of the contract or standing offer. Procurement officers should ensure that tenderers are required to identify in their tenders any provisions of the proposed contract/standing offer that they believe should be classified as commercial-in-confidence. Procurement officers should also identify any contract/standing offer provisions that they believe should be classified as commercial-in-confidence to protect Defences commercial interests. Procurement officers should comply with paragraphs 16 24 when determining whether to agree to information being classified as commercial in confidence. Where an amendment to the contract or standing offer is signed which includes information that is commercial-in-confidence, the relevant provisions of the contract/standing offer should be marked as commercial-in-confidence and a file record should be kept of the reasons for the confidentiality.

14.

15.

Determining whether a Contractors Information should be classified as Commercial-in Confidence 16. Procurement officers and tenderers/contractors often agree to keep particular information contained in tenders, contracts and related material confidential. The information may be confidential to either party. This is usually done by including a clause in the contract restricting the use and disclosure of certain information which is specified (often in an Attachment to the contract) as commercial-in-confidence information. Commonwealth guidance on the identification of commercial-in-confidence information is contained in FMG 3 which emphasises the importance of ensuring that a contractors information is only kept confidential where there is a sound reason. It is important that Procurement officers consider each claim for confidentiality on its merits and in isolation from considerations about what kind of information was regarded as confidential for another procurement.

17.

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Defence Procurement Policy Manual 3.11 Confidential Information The Confidentiality Test 18. In accordance with FMG 3, Agencies may decide that a contractors information is confidential if it meets each of the following four initial criteria set out below (the Confidentiality Test):

Criterion 1: that the information to be protected must be identified in specific rather than global terms (for example, a request for inclusion of a clause stating that all information is confidential would not satisfy this criterion); Criterion 2: that the information must be commercially sensitive and not already in the public domain; Criterion 3: that the consequences of disclosure have a real risk of damaging the owners commercial interests which would cause unreasonable detriment to the contractor or other third party (e.g. disclosure of pricing information containing a contractors profit margin); and Criterion 4: that the information was provided under an understanding that it would remain confidential. (The terms included in the request documentation, the terms of the draft contract and any request by a tenderer for the inclusion of confidentiality provisions in response to the request documentation will be relevant considerations.).

19.

Particular circumstances in which it may be appropriate for Defence to keep information confidential include when:

the disclosure of information would be contrary to the public interest; the Commonwealth or the supplier owns IP; or tenderers/contractors seek protection of particular commercial information.

Guidance on the kinds of information that may meet the confidentiality test 20. FMG 3 identifies five categories of information that may, depending on the individual circumstances of the procurement, meet the requirements of the confidentiality test. However, it is important for Procurement officers to assess each claim for confidentiality on a case by case basis. Information identified in FMG 3 that may constitute confidential information includes:

internal costing information or information about profit margins; pricing structures (where this information would reveal whether a potential supplier was making a profit or loss on the supply of a particular good or service); IP, including trade secrets and other IP matters where they relate to a potential suppliers competitive position; proprietary information, for example information about how a particular technical or business solution is to be provided; and artistic, literary or cultural secrets. These may include photo shoots, historic manuscripts, or secret indigenous culture.

21.

FMG 3 also lists types of commercial information that would not generally be considered commercial-in-confidence, including:

performance and financial guarantees; indemnities; the price of an individual item, or group of items of goods or services; liquidated damages, service credits and rebates clauses; performance measures that are to apply to the contract; clauses which describe how IP rights are to be dealt with; and payment arrangements.

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Defence Procurement Policy Manual 3.11 Confidential Information 22. It is important to note that most pricing information, insurance and liability regimes, IP regimes, specifications, warranty provisions, financial guarantees, security or liquidated damages provisions will not be commercial-in-confidence. Such provisions must meet the FMG 3 criteria detailed above before they are classified as commercial in confidence. Information which is agreed to be commercial-in-confidence information may also be IP which may be licensed and protected under the IP provisions of the contract (see chapter 3.6 and the Defence Intellectual Property Manual). Generally under Defence contracts, classification of information as commercial-in-confidence will not have the effect of restricting the Commonwealths use of such information under the IP rights contained in the contract. For further guidance on the classification of information as commercial-in-confidence, procurement officers should refer to:

23.

24.

FMG3; the Interim Defence Contracts Register on-line guidance; and the relevant contracting specialist found at the front of this manual.

Public Interest Issues 25. Public interest issues should be considered when deciding whether to protect particular information as commercial-in-confidence. This analysis will be different for supplier information than it will be for government information. Information provided by tenderers/contractors about their private, personal or business affairs may be confidential and the courts will uphold that confidentiality unless it considers that disclosure is in the public interest. Conversely, the law will not grant protection for government information unless the disclosure of that information would injure the public interest. Accordingly, disclosure may not be required if the disclosure would be prejudicial to the ordinary business of government. Decisions regarding confidentiality in this regard should be made on a case by case basis.

26.

27.

Period of Confidentiality 28. Procurement officers should be aware that the obligation to keep commercial-in-confidence information confidential may come to an end in various ways. One option is for the parties to agree that a period of confidentiality should apply to the information. The receiving partys obligation of confidence may also come to an end if:

the other party expressly or impliedly releases the receiving party from the obligation of confidence; or the information becomes public knowledge (otherwise than as a result of the breach of contract).

Determining whether Government Information should be kept Confidential 29. 30. Procurement officers may also apply the above criteria to determine whether Government information should be kept confidential. Instances in which Procurement officers may wish to regard particular Government information as commercial-in-confidence include government proprietary information (e.g. research or specifications produced by DSTO and included in a contract) or other contract information the Commonwealth considers sensitive (e.g. negotiated contractual provisions such as liability and indemnity regimes that differ substantially from standard Defence practice). Contractual or standing offer provisions that reflect standard Defence contracting templates should never be classified as commercial in confidence. Procurement officers should also identify any confidential Australian Government information and consider including: Page 3.115

31.

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a requirement for tenderers to sign confidentiality undertakings prior to being given access to confidential information; an evaluation criterion that allows Defence to assess a tenderers ability to comply with the confidentiality requirements included in the request documentation; confidentiality clauses in the draft contract; and contract/standing offer provisions that they believe should be classified as commercial in confidence to protect Defences commercial interests.

32.

If during the planning stages, Procurement officers have assessed their procurement as likely to involve confidentiality issues, they should:

invite tenderers to specify in writing what information they seek to have categorised as commercial-in-confidence; include an evaluation criterion allowing claims for commercial-in-confidence to be taken into account as part of overall value for money assessment; and include a commercial-in-confidence clause in the draft contract (for example, clause 10.4 in ASDEFCON (Strategic Materiel), ASDEFCON (Complex Materiel) and ASDEFCON (Support).

Defence Tender and Contract Requirements 33. Procurement officers should apply the FMG 3 criteria detailed above and negotiate with the preferred tenderer, where appropriate, to ensure that contractual or standing offer provisions or particular information are appropriately classified as commercial-in-confidence. The reasons for agreement to confidentiality arrangements should be documented. The information considered by the parties to be commercial-in-confidence should be listed in an attachment to the contract/standing offer along with the reasons for the confidentiality. Most information will lose its commercial-in-confidence classification over time. During the term of a contract, contract managers should consider reviewing the classification of confidential information where this is practical.

34.

Disclosure of Commercial-in-Confidence Information 35. Commercial-in-confidence information should be protected from unauthorised disclosure. Within Defence it should only be disclosed only to Defence staff with a specific need to access the information eg, for tender evaluation or contract management purposes. Unless permitted under the relevant contract or required by law, statutory or portfolio duties (including Parliamentary reporting), commercial-in-confidence information should not be disclosed to third parties without:

36.

obtaining the permission of the entity seeking to protect the commercial-in-confidence information; and putting in place appropriate protection mechanisms, for example a deed of confidentiality and fidelity or non-disclosure agreement, if required by that entity.

37.

These requirements are reflected in the commercial-in-confidence provisions of standard Defence contracting templates for Strategic and Complex procurement. These templates require the disclosing party to first obtain the written consent of the party for whom the information is confidential before disclosing the information to a third party unless:

the disclosure of the information is required by law or statutory or portfolio duties; or the disclosure is necessary to enable Defence to exercise its IP rights under the contract.

38.

The party from whom the consent is sought may place restrictions on the disclosure of commercial-in-confidence information, including a requirement that a deed of confidentiality be signed by the third party prior to release of the commercial-in-confidence information. Page 3.116

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Defence Procurement Policy Manual 3.11 Confidential Information Deeds of Confidentiality and Fidelity/Non-Disclosure Agreements 39. A deed of confidentiality and fidelity or a non-disclosure agreement (NDA) are documents that are used to ensure that the parties signing them keep specified information confidential, and may be:

a tripartite deed, i.e. a deed between Defence, the supplier and the third party. Tripartite deeds are used to set out the respective rights and obligations of all three parties in relation to the particular disclosure and use of the information; or a two way deed between either the third party and the party for whom the information is confidential, or the third party and the disclosing party.

40. 41.

The ASDEFCON (Strategic Materiel), (Complex Materiel) and (Support) templates contain a standard two-way deed of confidentiality. Entering into a deed of confidentiality and fidelity or a non-disclosure agreement places clear restrictions on the use, disclosure and return of commercial-in-confidence information. The agreements also normally require the third party that receives the information to give indemnities for any loss or damage suffered by the disclosing party or the party for whom the information is confidential as a result of any unauthorised disclosure of the information.

Signing of Non-Disclosure Agreements by Defence Personnel 42. There are circumstances in which Defence personnel will be requested to sign an NDA. Examples of such circumstances include, but are not limited to:

Systems Program Offices requesting that members of a tender evaluation team sign a NDA prior to the start of a tender evaluation process in an attempt to ensure that sensitive information provided in tenders is not disclosed; Companies requesting that Defence personnel sign NDAs prior to obtaining access to commercial in confidence information; and Companies requesting that Defence personnel sign blanket NDAs for any information, whether it is commercial in confidence or not, and seeking expressly or by implication, to override duties held by Commonwealth officers.

No Obligation to sign NonDisclosure Agreements 43. Defence personnel (Australian Public Service (APS) and Australian Defence Force (ADF)) should be aware that they are under no obligation to sign NDAs in a personal capacity. Duties and obligations of confidentiality, and appropriate sanctions for breach of those duties, are placed on both the APS and the ADF by the Public Service Act 1999 (Cth)(PS Act) (in the case of the APS), the Defence Force Discipline Act 1982 (Cth)(DFD Act) (in the case of the ADF), the Privacy Act 1988, the Crimes Act 1914(Cth) and the respective Defence and DMO CEIs. Section 70 of the Crimes Act 1914 makes it clear that current or former Commonwealth officers are not to disclose any information that they are or were, at the time of ceasing to be a Commonwealth officer, bound not to disclose. The definition of Commonwealth officer includes public servants, members of the ADF and persons performing services for or on behalf of the Commonwealth. For Section 70 to apply, a duty of non-disclosure must be established at law. Public servants have common law and equitable duties of non-disclosure and a legislative duty under section 13 of the PS Act. Members of the Australian Defence Force have a common law and a legislative duty under Section 58 of the DFD Act. Section 13 of the PS Act sets out the APS code of conduct. That code provides that APS employees must not make improper use of inside information in order to gain a benefit or advantage for themselves or any other person. Section 13 also requires APS employees to comply with all applicable Australian laws when acting in the course of their employment. Various sanctions are provided by section 15 of the PS Act in the event of a breach of the code of conduct. These include termination of employment, reduction in classification and reduction in salary. Page 3.117

44.

45.

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Defence Procurement Policy Manual 3.11 Confidential Information 46. Defence personnel should be aware that if they choose to sign a NDA personally, they are potentially exposed to a risk of being personally liable for any loss or damage suffered should the confidentiality be breached. For this reason, Commonwealth officers should avoid signing NDAs in a personal capacity. NDAs should not be used internally within Defence to ensure confidentiality. Areas wishing to ensure that confidentiality is maintained should brief employees as to their obligations and provisions of their employment. For example, it is appropriate for staff in tender evaluations to be reminded of their obligations under either the PS Act or the DFD Act and requested to acknowledge these responsibilities before proceeding. In accordance with the Defence Security Manual, Commanders and Managers are responsible for the security of information under their control and determining which of their staff need to know and will require access to official information. Defence personnel who have previously signed NDAs should ensure that they comply with the terms of that agreement to avoid any potential liability.

47.

48.

Signing on Behalf of the Commonwealth 49. There are occasions where a third party may insist on having a NDA in place prior to the release of information. This may be the case even when the confidentiality duties and obligations of Defence personnel have been explained. In order for Defence to pursue its objectives in these cases, a NDA may need to be signed. If this is the case, the NDA should be signed on behalf of the Commonwealth and not in the employees personal capacity. Amongst other undertakings, the NDA is likely to contain indemnity provisions. Approval must be sought from an appropriate officer who has the legal authority to bind Defence through indemnification prior to signing a NDA. Further information regarding the Defence or DMO policy on indemnities is contained in Defence CEI 8.6, DMO CEI 8.6 and chapter 3.15. Defence personnel must not sign NDAs offered by another party, such as a potential supplier, tenderer or contractor without seeking legal advice and clearance from Defence Legal or DMO Legal.

50.

51.

NonDisclosure Agreements Subject to Certain Conditions 52. As a Commonwealth agency, the Department of Defence is subject to legislative and administrative requirements of accountability and transparency, most notably under the Financial Management and Accountability Act 1997 (Cth) and its regulations. These include requirements of disclosure to Ministers, other Commonwealth representatives, Federal Parliament and its committees, publication of information (eg on AusTender), and legislative obligations under other Acts, such as under the Freedom of Information Act 1982 (Cth). NDAs must not be worded in a way which seeks to abolish these obligations. NDAs must contain clauses acknowledging that there are circumstances where Commonwealth officers may be required to disclose information held in confidence, but only to the extent of and where required by the law or statutory or portfolio duties.

53.

External Service Providers 54. Section 70 of the Crimes Act 1914 applies to persons performing services for, or on behalf of, the Commonwealth. External service providers such as professional service providers, consultants or contractors are not employed under the PS Act and so the requirements of that Act do not apply. Procurement officers should ensure there are appropriate NDA requirements in all external service provider contracts. Information about the legal requirements for NDAs, including example templates, may be obtained from Deputy Counsel Knowledge Management, DMO Legal on (02) 6265 2994.

55.

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Defence Procurement Policy Manual 3.11 Confidential Information Disclosure to Parliament 56. Defence is committed to ensuring access by Parliament and its committees to Defence contracting information. Generally all contracting information is to be made available on request except in a very limited range of circumstances, such as where national security issues arise. Defence officers should be aware that Parliamentary committees have significantly greater authority than the public to obtain access to information held by Defence. Accordingly, the marking of a document, including a tender or contract, or specific parts of a document, as commercial-in-confidence will not generally prevent access by Parliament or its committees to the information. However, there may be circumstances in which a person may not consider it appropriate to disclose information or documents to a committee where it is not in the public interest and may seek to withhold information on the grounds of public interest immunity. In certain circumstances, public servants, with the authority of the Minister, may claim public interest immunity and seek to decline to provide information on the grounds that its disclosure to a committee would not be in the public interest. Where Parliament or a committee seeks information, Defence should be prepared to provide all the information it reasonably can. There may be some instances where commercial-inconfidence information can be provided to a Parliamentary committee without requiring public disclosure. Further advice on this issue can be obtained from the relevant Help Desk found at the front of this manual.

57.

58.

Senate Order 59. The CPGs require all agencies to comply with Senate Order (No 192). The Senate Order requires agencies to publish on their website, every six months, a list of all agency contracts valued at or over $100,000 entered into, or remaining active at the date of publication. In addition, Chief Executives are required to advise portfolio ministers of any sensitivity in relation to disclosure before publishing information on contracts entered into by their agency. Refer to chapter 5.8 for further information. Specific guidance on the listing of contracts on the internet is provided by Department of Finance and Deregulation in the publication Guidance on the Listing of Contract Details on the Internet (Meeting the Senate Order on Departmental and Agency Contracts) January 2004. The contract list for Defence and DMO is available in the Publications area of the Industry Resources section of the Defence Materiel Organisation website.

60.

61.

Confidential Information
62. As discussed above, in the event that information is not specified as commercial-in-confidence information in the contract, Procurement officers need to be aware of the circumstances in which the law will still recognise an obligation of confidentiality. Where such a duty exists and is breached, the confider (person who imparts the information) may bring an action for breach of confidence. In order for the information to be protected as confidential information, it must:

63.

be able to be specifically identified and not just in global terms; have the necessary quality of confidence (Element one); and the information was imparted in circumstances involving an obligation of confidence (Element two).

What is Confidential Information? Element one: Does the information have the necessary quality of confidence? 64. This requirement is essentially a negative requirement which is satisfied if the information is not in the public domain.

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Defence Procurement Policy Manual 3.11 Confidential Information 65. However, it is often difficult to determine whether the information is secret as the information will not cease being confidential simply because it is known by someone other than the confidant and owner of the information. Recognised factors relevant to whether commercial information is confidential to a business include:

the extent to which the information is known outside of that business; the extent to which it is known by employees and others involved in that business; the extent of measures taken to guard the secrecy of the information; the value of the information to that business and to its competitors; the amount of effort or money expended by the business in developing the information; and the ease or difficulty with which the information could be properly acquired or duplicated by others.

66.

The key consideration in determining if the information is confidential is whether the information is sufficiently secret so that another party wanting to use that information would have difficulty obtaining it except by improper means. There are also some threshold criteria which need to be satisfied before the information will be protected as confidential. These include that the information is not trivial i.e. it must have (or be capable of having) some commercial value and the information must be sufficiently developed that it is capable of being realised.

Element two: Was the information imparted in confidence? 67. The test of whether the information was imparted in circumstances in which an obligation of confidence can be implied is whether, in the circumstances, a reasonable person in the position of the recipient of the information would have realised that upon reasonable grounds the information was being given in confidence. Generally, the information is confidential at the time it is imparted. Information may have been imparted in confidence even though it was not solicited by the recipient. It is not necessary for there to be a contractual relationship between the parties in order for an obligation of confidentiality to arise. The courts will readily infer an obligation of confidentiality if the information is disclosed in circumstances in which both parties are pursuing common objects, such as contractual negotiations. A common situation in which an obligation of confidence arises is where confidential information has been disclosed in the course of pre contract negotiations for a contract that is never signed.

68. 69.

Key Elements of Breach of Confidence 70. A breach of confidence will occur when there is an unauthorised use of confidential information (in order to be confidential information elements one and two above need to be satisfied). It is not necessary for the information to be disclosed, all that is required is that there is an unauthorised use of part of the confidential information. Proceedings may also be commenced before the breach has occurred if there is a threatened risk of misuse. The unauthorised use of information must have caused harm to the person whom the information is confidential. It is generally not a problem for individuals or companies to show harm has occurred since exposure to public discussion and criticism may be sufficient to demonstrate harm. However, a more stringent standard applies to the protection of Government information. A Government agency will not be able to make a successful claim of confidentiality where the use of the information will:

71.

expose the government to public discussion and criticism; or constitute disclosure of information that is already in the public domain.

72.

In order for a claim for confidentiality of Government information to be upheld it will be necessary that disclosure is likely to injure the public interest. Examples include where the disclosure will prejudice national security, international relations or the business of government.

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Defence Procurement Policy Manual 3.11 Confidential Information Defence to an Action for Breach of Confidence 73. It is important for Procurement officers to note that there are some important defences to an action for breach of confidence. These include:

where disclosure is required under the Privacy Act 1988 (Cth) or Freedom of Information Act 1982 (Cth); disclosure to the Commissioner of Taxation of confidential bank documents relating to income earned by customers under the Income Tax Assessment Act 1936 (Cth); certain disclosure under State and Territory laws including health legislation and whistleblower legislation; where there is a court order for discovery of the confidential information; where there is just cause or excuse for disclosing the information; or where the public interest in disclosure outweighs the interests in preserving confidentiality.

Remedies for breach of Confidence 74. Remedies that may be awarded by a court for breach of confidence include:

an injunction preventing further use or disclosure of the confidential information; damages (either as an alternative to or in addition to an injunction); an account of profits (which awards any profits made by the defendant arising from the use of the plaintiffs information); and the delivery or destruction of the confidential information.

If a Procurement officer considers that there may have been a breach of confidence in relation to a procurement or a contract, the Procurement officer should seek legal advice from Defence Legal or DMO Legal, as the case requires.

Key References
Commonwealth Procurement Guidelines Department of Finance and Deregulation Financial Management Guidance (FMG) 3 - Guidance on Confidentiality of Contractors Commercial Information Guidance on the Listing of Contract Details on the Internet (Meeting the Senate Order on Departmental and Agency Contracts Government Guidelines of Official Witnesses before Parliamentary Committees Defence Intellectual Property Manual ASDEFCON (Complex Materiel) ASDEFCON (Strategic Materiel) ASDEFCON (Support)

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Defence Procurement Policy Manual 3.12 Australian Industry Capability

3.12
Introduction
1. 2.

Australian Industry Capability

This chapter applies to procurements undertaken in Defence and the Defence Material Organisation (DMO). This chapter provides guidance on Industry Development and Australian Industry Capability policy for procurements, including an overview of the Defence Industry Policy and the Australian Industry Capability (AIC) program.

Mandatory Policy
An AIC Plan must be developed for all procurements when:

an applicable Industry Requirement has been identified; or the value of any one contract related to the capability exceeds $50 million.

For all other procurements which do not meet the above thresholds, an AIC Schedule must be developed. Acceptance of an AIC Plan addressing Industry Requirements must be based on value for money principles. Request for Tender (RFT) documentation must specify that tenderers offer the use of Australian defence industry where an Industry Requirement is specified and where it is cost effective to do so.

Operational Guidance
Australian Industry Participation 3. The Australian Government requires that the Australian Industry Participation (AIP) National Framework be applied to large Commonwealth tenders (generally above $20 million), by requiring tenderers to prepare and implement AIP Plans for certain procurements. Since Defence implements the Australian Industry Capability (AIC) and Global Supply Chain (GSC) programs, and other industry support measures, the AIP program does not apply to Defence procurements. 1

Defence Industry Policy 4. The Defence and Industry Policy Statement 2007 sets out the Governments Defence Industry Policy. The Government recognises the important role that defence industry plays in support of ADF capability, from the provision and maintenance of military equipment to the delivery of a wide range of support services. Growing the capacity and competitiveness of local defence industry will require ongoing investment in skills development, workforce growth and improved productivity. The Government will remain closely engaged with Australian defence industry to ensure that it provides the maximum support possible to the ADF while maintaining control of cost, schedule and quality. Total self-sufficiency in defence industry capabilities would be impractical for a nation of Australia's size, and is not necessary in any event. Rather, the Government is committed to ensuring that certain strategic industry capabilities remain resident in Australia.

5.

Department of Innovation, Industry, Science and Research - AIP Plan User Guide for Procuring Agencies, paragraph 1.3

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Defence Procurement Policy Manual 3.12 Australian Industry Capability 6. Defence Industry Policy places emphasis on managing the industrial capabilities required to meet Australias strategic military self-reliance needs. It reflects the current operational, procurement and economic environment in which Defence operates, including the ADFs increased operational tempo, the continued focus on best value for money procurement and the nationwide workforce skill shortfalls. The Defence Industry Policy seeks to address three key policy underpinnings:

7.

ADF support - delivering industry capability to support the ADF. The ADF needs to be supported and sustained by a robust defence industrial base; Strategic to retain those industry capabilities and skills required to meet Australias sovereign, military and self-reliance requirements namely those essential industry capabilities required in support of ADF operational capability; and Commercial to create the commercial environment to provide essential local industry with opportunities to openly compete for domestic and international defence work, based on best value for money principles.

8. 9.

The strategic and commercial industry objectives, as required under the Defence Industry policy, are managed through the AIC program. The AIC program requires companies to provide local industry with opportunities to openly compete for appropriate work, and apply value for money principles when securing goods and services. To this end, tenderers/contractors will be required to establish clearly defined processes and associated programs to identify and manage opportunities for local industry to openly compete for work. Defence will not stipulate the type or level of work to be competed or won by Australian industry. This requirement will extend to second and third level subcontractors for major systems and platforms.

Australian Industry Capability (AIC) Program 10. The AIC program has two objectives:

the generation and sustainment of indigenous industrial capabilities essential to meeting Australias sovereign military self-reliance needs, as required in support of ADF operational capability; and the creation of competitive opportunities for local industry to provide goods and services, domestically and internationally, as part of global supply chains based on best value for money.

11.

The AIC program is intended to ensure Australian industry receives the opportunity to compete for defence industry business on its merits. It is to be applied uniformly across all types of procurement activities undertaken by all Groups within Defence. Where requested in procurement documentation, tenderers will be expected to respond to AIC requirements through the preparation of an AIC Plan, which will then be formalised as part of the final contract.

12.

Open and transparent AIC costs 13. Defence does not want to pay a premium for the AIC program. Therefore, any acceptance of an AIC Plan addressing the industry requirement must be based on value for money principles. Accordingly, Defence requires open and transparent reporting of the costs and risks associated with the delivery of nominated AIC outcomes, as specified in the tender. These costs will be formally considered as part of the procurement approval process. AIC delivery costs that are not clearly identified within tender documentation including documentation provided by second and third level subcontractors, may result in the tender being assessed as non compliant.

14.

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Defence Procurement Policy Manual 3.12 Australian Industry Capability Foreign Military Sales 15. Acquisitions obtained via Foreign Military Sales (FMS) are not exempt from the AIC Program. Under FMS, Defence may also seek to establish Global Supply Chain (GSC) arrangements directly with the Original Equipment Manufacturer (OEM) through the establishment of a GSC Deed between the Commonwealth and the OEM or Defence may articulate the agreed AIC outcomes within a Deed with the preferred tenderer. The purpose of the GSC Deed is to facilitate the participation of Australian industry in the OEMs global supply chain. An annex to the GSC Deed, developed in negotiation with the preferred tenderer should detail the activities to be undertaken and the associated costing.

Government to Government Agreements 16. Acquisitions obtained under Government to Government agreements are not exempt from the AIC program. Prior to finalising the acquisition agreement, the project should seek advice from DMO Industry Division if a GSC Deed or any other deed with the preferred tenderer is required. If this is the case, then a GSC Deed will be developed in agreement with the OEM. A contract will then be established, either directly or through the foreign Government, to implement the agreement.

Industry Division Involvement 17. Procurement officers should consult with the DMO Industry Division (Industry Division) in the planning stages for the procurement, to discuss industry aspects, including whether or not Defence will seek to establish a GSC Deed. Industry Division will provide advice and assistance with the application of the AIC program at each stage of the procurement process. The Industry Division point of contact is the Director AIC Implementation: Phone (02) 62652922.

AIC Program Requirements 18. For all procurements, Australian industry participation should be maximised on a value for money basis.

AIC Plan 19. An AIC Plan must be developed for all procurements when:

an applicable Industry Requirement has been identified; or the value of any one contract related to the capability exceeds $50 million.

20.

For all other procurements which do not meet the above thresholds, an AIC Schedule must be developed. The AIC Schedule is found in Appendix 1 of the AIC Plan.

Industry Requirements 21. Industry Requirements are mandated by Defence and reflect those industry capabilities deemed to be essential to the delivery of the specific platform, system or services. Request for Tender (RFT) documentation must specify that tenderers offer the use of Australian defence industry where an Industry Requirement is specified and where it is cost effective to do so. An applicable Industry Requirement will be identified in consultation with Industry Division and included in the appropriate RFT documentation in the form of an AIC Plan or AIC Schedule. There are three types of Defence mandated Industry Requirements:

22.

strategic industry capability these are capabilities which confer a national security and strategic advantage to Australia by being resident in Australia; which if denied, may affect the way the ADF operates. Priority Industry Capability (PICs) These are a narrower subset of strategic industry capabilities that confer an essential national security and strategic advantage by being resident in-country. Page 3.123

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Defence Procurement Policy Manual 3.12 Australian Industry Capability

Project Specific Industry Capability (PSICs) Industry capabilities that the project prefers to be resident in-country such as maintenance and sustainment activities.

23.

If a company fails to address the Industry Requirements within its response to a RFT, then the tender should be classed as non-compliant and it may be set aside from further consideration in the selection process. Procurement officers should seek advice from Industry Division regarding whether an Industry Requirement is applicable to the procurement that they are undertaking. More information on Industry Requirements is available in the AIC Toolkit and PIC Factsheets.

24.

Commercial Opportunities 25. For all contracts valued above $50 million contractors should provide local industry with commercial opportunities to compete for appropriate work and to apply clearly defined value for money principles when securing goods and services. Defence will not stipulate the type or level of work to be competed or won by Australian industry. If local industry is found to offer a competitive, value for money solution, Defence would expect those firms to be engaged to provide the nominated goods or services. Companies are required to establish clearly defined processes and associated programs to identify and manage opportunities for local industry to openly compete for work. This requirement will extend to second and third level subcontractors for major systems and platforms. For certain procurements identified by Industry Division, Defence will require the overseas company to allow Australian industry to compete on a value for money basis in delivery of goods and services into their global supply and support chains. Industry Division, will advise projects when this requirement is to be met.

26.

27.

Further Information 28. 29. Further guidance regarding all elements of the AIC Program can be obtained from the AIC website. The Industry Division point of contact is the Director AIC Implementation Phone: (02) 62652922.

Waiver from an AIC Plan 30. There will be circumstances where a project, by its very nature, delivers the outcomes of the AIC program without implementing an AIC Plan. If a project assesses that this is the case they should contact Industry Division in the first instance to see if they have a case for a waiver from the requirement for an AIC Plan. If it is established that there is a case for a waiver, the Project Officer is to request a waiver by writing to Head Industry Division through the Executive Director Industry Operations stating the reasons why an AIC Plan is not considered to be necessary. Reasons for a waiver include:

31.

that the majority of the work to be performed under the contract must by its nature be conducted in Australia to fulfil the requirements of the Statement of Work; work performed off shore is not of strategic significance to Australia or is incapable of being performed in Australia; or management of an AIC Plan would increase overall management costs with little or no additional value.

It is important to note that an AIC Plan waiver will not remove the AIC obligation within the procurement.

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Defence Procurement Policy Manual 3.12 Australian Industry Capability Industry Assistance 32. Defence recognises that it can be difficult for industry to find the right entry to Defence procurement activities. Similarly, it can be difficult for AIC practitioners to source the necessary information and tools to implement the AIC program. For this reason the Defence+Industry ePortal has been developed which provides access links to information, contacts and opportunities within Defence. Managing and complementing the ePortal are the DMO Business Access Offices (BAO) around Australia. BAOs are able to provide advice on industry procurement policies and practices. They can help to identify the most appropriate points of contact for doing business with Defence as they relate primarily to Small to Medium Enterprises operating in the Defence market. They are also able to provide assistance to identify appropriate Defence project staff. A further guide for industry on how the DMO engages with industry to support defence capability can be found in the DMO publication, Doing Business with Defence. Information regarding Defence and the DMO's planned procurement for the forthcoming year is available in the Annual Procurement Plan which is available on the AusTender website. The Department of Finance and Deregulation publication Selling to the Australian Government A Guide to Business February 2009 .

33.

34. 35. 36.

External Agency Support 37. There are a number of other organisations and groups that can assist companies seeking to engage with Australian and New Zealand (ANZ) industry including the following:

The Australian Industry & Defence Network (AIDN) acts as the focal point of contact between SME and Defence nationally. The Industry Capability Network (ICN) provides a service to industry that includes responding to queries on, and identifying, potential ANZ suppliers capable of providing goods and services. The New Zealand Defence Industry Association; Australian Business Limited (ABL) can facilitate Defence and industry liaison. The Australian Industry Group (AIG) can also facilitate industry liaison. The Defence Teaming Centre (DTC) in Adelaide assists companies collaborate to win business; and The various State and Territory governments also have units which can assist in providing information on local industry capabilities. Details are available on the Defence+Industry ePortal.

Involvement of New Zealand Industry in AIC 38. Australia and New Zealand (NZ) have a special relationship embracing cultural, political, economic and strategic interests. This relationship has been embodied in a number of government-to-government arrangements. The following government-to-government arrangements influence Defence purchasing activities:

Australia New Zealand Closer Economic Relations Trade Agreement requires Defence to ensure that its purchasing processes and practices provide the opportunity for NZ industry to participate in Australian Defence procurements on an equal footing with Australian industry. There are provisions in the Agreement that allow for the protection of Australian essential security interests and Intellectual Property; Australia New Zealand Closer Defence Relations Arrangement requires the two defence forces to investigate ways of combining capabilities and ensuring inter-operability to provide a more efficient and cost-effective defence capability;

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Government Procurement Agreement between the Australian, State and Territory and NZ governments encourages competition in government procurement. The agreement enables potential ANZ suppliers to compete on an equal footing for government contracts. Defence does not discriminate against a potential NZ supplier on the basis of origin; and Cooperation in Defence Logistics Support Agreement establishes that logistics support may be provided by one defence force to the other and that one force may access the others industrial base.

39.

In accordance with the above agreements, industry in Australia and NZ is regarded as a single defence industrial base. NZ industry should therefore be treated on the same basis as Australian industry with respect to some of the commercial requirements of an AIC program. However NZ industry will be excluded when considering any export facilitation program, such as involvement in the GSC Program. With respect to Industry Requirements, strategic or national security implications may also result in these capabilities being restricted to Australian industry. This will be determined on a case by case basis and clearly specified in solicitation documentation.

40.

Key References
Commonwealth Procurement Guidelines Defence Capability Development Handbook ASDEFCON Suite of Templates Defence 2000 Our Future Defence Force Defence and Industry Policy Statement 2007 AIC Toolkit AIC Priority Industry Capability Factsheet Doing Business with Defence 2007

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Defence Procurement Policy Manual 3.13 Ethics in Procurement

3.13
Introduction
1. 2.

Ethics in Procurement

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter provides guidance and advice on ethics related requirements for Procurement officers when undertaking procurement, including:

the legislative and policy framework; probity; and conflict of interest.

Mandatory Policy
Procurement officers must comply with the Financial Management and Accountability Act 1997 (Cth), the Financial Management and Accountability Regulations 1997 (Cth), the APS Values and APS Code of Conduct set out in sections 10 and 13 respectively of the Public Service Act 1999 (Cth) and the Commonwealth Procurement Guidelines (CPGs) when undertaking procurement activities. Procurement officers must comply with Defence Chief Executives Instruction (CEI) 6.2 (Defence officers) or DMO CEI 6.2 (DMO officers) and Defence Instruction (General) PERS 25-6 Conflicts of Interest and Acceptance of Offers of Gifts and Hospitality when dealing with gifts and hospitality from potential suppliers and contractors. Procurement officers must comply with Defence Instruction (General) - PERS 25-4 Notification of Post Separation Employment and Defence Instruction (General) - PERS 25-6 - Conflicts of Interest and Acceptance of Offers of Gifts and Hospitality when dealing with issues relating to post separation employment. DMO personnel must also comply with the Defence Material Instruction (Personnel Management) - 001 Dealing with Conflict of Interest in the Workplace when managing conflict of interest issues that arise in the course of employment. Defence employees must always behave ethically and fairly throughout the procurement process. Defence employees exercising delegations must conduct due diligence to ensure that the requirements of ethics and fairness have been applied during the procurement process. Procurement officers must consider developing a legal process or probity plan for any Complex or Strategic procurement activity.

Operational Guidance
Legislative and Policy Framework Legislation 3. Paragraph 6.17 of the CPGs states that ethics are moral boundaries or values within which officials work. Ethical behaviour encompasses the concepts of honesty, integrity, probity, diligence, fairness, trust, respect and consistency. Ethical behaviour identifies and avoids conflicts of interest, and does not make improper use of an individuals position. Defence employees must always behave ethically and fairly throughout the procurement process and Page 3.131

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Defence Procurement Policy Manual 3.13 Ethics in Procurement comply with all Commonwealth legislation and policy. A procurement conducted in an ethical manner enables purchasers and potential suppliers to deal with each other with mutual trust and respect. 4. The legislative requirements for Procurement officers to act ethically when undertaking procurement activities stem from two main sources: the Public Service Act 1999 (Cth) (Public Service Act) and the Financial Management and Accountability Act 1997 (Cth) (FMA Act). When conducting procurement activities, Procurement officers must comply with the APS Values (section 10) and Code of Conduct (section 13) of the Public Service Act including subsections: Section 10 APS Values. (d) (e) the APS has the highest ethical standards; and the APS is openly accountable for its actions, within the framework of Ministerial responsibility to the Government, the Parliament and the Australian public.

5.

Section 13 APS Code of Conduct (1) (7) (8) (10) An APS employee must behave honestly and with integrity in the course of APS employment; An APS employee must disclose, and take reasonable steps to avoid, any conflict of interest (real or apparent) in connection with APS employment; An APS employee must use Commonwealth resources in a proper manner; An APS employee must not make improper use of: (a) (b) inside information; or the employees duties, status, power or authority,

in order to gain, or seek to gain, a benefit or advantage for the employee or for any other person; and (11) 6. An APS employee must at all times behave in a way that upholds the APS Values and the integrity and good reputation of the APS.

The concept of ethical behaviour is reinforced in Section 44 of the FMA Act and Regulation 9 of the Financial Management and Accountability Regulations 1997 (FMAR). In particular, section 44 of the FMA Act requires the Chief Executive to manage Defence in a way that promotes proper use of Commonwealth resources, where Proper use is defined as an efficient, effective and ethical use that is not inconsistent with the policies of the Commonwealth.

Government Policy 7. In addition to the above legislative requirements to behave ethically, the two primary documents outlining Government policy on conducting procurement in an ethical manner are the CPGs and the Department of Finance and Deregulations Financial Management Guidance No. 14 Guidance on Ethics and Probity in Government Procurement - January 2005 (FMG 14). To ensure compliance with these policies, Defence employees should:

8.

recognise and deal with any conflicts of interest, including perceived, potential and/or actual; deal with potential suppliers, tenderers and contractors equitably; consider seeking advice where probity issues arise; comply with all duties and obligations, including Defences rules and policies in relation to gifts or hospitality, post-employment separation and sponsorship, the information privacy principles of the Privacy Act 1988 (Cth), the security provisions of the Crimes Act 1914 (Cth) and the Public Service Act Section 13;

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not seek or accept personal benefit when dealing with potential suppliers, tenderers and contractors; always consider accountability and transparency throughout the procurement process; and be scrupulous in their use of public property.

Probity 9. The fundamental way in which Defence implements and monitors ethics in procurement is through probity, meaning good process. A good tender process is one in which clear procedures, consistent with Commonwealth legislation, policies and principles and the legitimate interests of tenderers, are established, understood and observed from start to finish. All tenderers are to be treated equitably in accordance with these procedures. There are four essential principles to promoting probity which should be considered throughout the whole tendering process:

10.

value for money; impartiality and fairness; dealing with conflicts of interest; and transparency and accountability.

11.

Accurate record keeping is an important part of ensuring transparency and accountability. Procurement officers should ensure the tendering process is well documented. Decisions should be made in a clear, open and transparent manner which enables them to be understood and defended. For more information on Defence record keeping policy, refer to chapters 5.1 and 5.4 and POLMAN 3.

Legal Process and Probity Plans and Probity Briefings 12. 13. Procurement officers must consider developing a legal process or probity plan for any Complex or Strategic procurement. Prior to undertaking any Complex or Strategic procurement tender evaluation, all officers involved in the tender evaluation should be briefed on their probity obligations in accordance with the probity plan.

Use of Legal Process / Probity Advisers and Auditors 14. The terms legal process adviser and probity adviser are often used interchangeably. However, a key difference is that a legal process adviser is engaged to provide legal advice on the development and implementation of the procurement process in addition to the more usual probity advice provided by a probity adviser about the conduct of the procurement process. An advantage of a legal process adviser can be that legal professional privilege is maintained in the advice provided by the legal adviser. In the rest of this chapter, the term probity adviser is used to denote both a legal process adviser and a probity adviser. Probity advisers and probity auditors perform different functions. Depending on the particular procurement activity, it may be appropriate to engage either or both. Probity advisers provide independent advice and assistance during a procurement process. They are normally engaged at the beginning of the procurement process. A probity auditor is independent of the procurement process and is engaged to review a procurement activity at a particular point in the process (eg at the completion of the tender evaluation) to verify whether the processes undertaken were consistent with the legal process and probity framework put in place to govern the procurement. It is important for Procurement officers to ensure that the roles of a probity adviser and probity auditor are clear and that there is no duplication between the services provided.

15. 16.

17.

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Defence Procurement Policy Manual 3.13 Ethics in Procurement 18. Obtaining probity advice or conducting a probity audit should not be confused with obtaining legal advice. Both legal and probity advice may be required in relation to a procurement activity.

Probity Advisers 19. Probity advisers can provide the following services:

legal process and probity advice on tender planning, request, evaluation, negotiation and recommendation processes and assistance to comply with the CPGs and Defence procurement policy; provision of advice/briefs to the procurement teams on probity principles; advice and/or assistance in the preparation of a legal process or probity plan (although responsibility for compliance with and the outcomes from the plan still rests with the project team manager); advice and assistance on the development of conflict of interest and confidentiality declarations; advice and/or assistance with procedures to ensure probity, for example processes dealing with communications with tenderers and third parties, information security, confidentiality, conflicts of interest, records and information management, setting up data facilities etc. Whenever possible, probity procedures already established by other projects should be reused in order to avoid developing new documentation and to encourage continuous improvement; advice on tender documentation, tender evaluation documentation and any probity issues that may arise during the tender process; and advice on the robustness of the final recommendation process and report.

20.

Procurement officers may seek legal process or probity advice and engage a probity adviser prior to conducting the following procurement activities:

where an offer definition or other risk reduction process is being used to assist in making a source selection decision in a procurement; for projects using the project alliancing/alliance contracting methodology; and where parallel negotiations will be conducted with two or more tenderers.

21.

Legal process or probity advice may also be useful in other circumstances, including where:

the integrity of the procurement process may be questioned; there has been a history of controversy and litigation; the project is politically sensitive and vulnerable to controversy; the nature of the market place makes tenderer grievances more likely; it is an innovative project where tenderers are likely to be concerned about protecting their intellectual property; the project is highly complex; a single supplier direct source acquisition strategy is being used; and an in-house option tender is being considered.

22.

The probity adviser cannot perform probity auditing services for the same procurement activity. This would be a conflict of interest because normally part of the work undertaken by the probity auditor would be to audit the activities of the probity adviser.

Probity Auditors 23. Probity auditors provide independent opinions on probity issues that arise during the tendering process and confirm, in writing, whether the concluded process has met all probity Page 3.134

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Defence Procurement Policy Manual 3.13 Ethics in Procurement requirements. The audit findings are provided by the auditor in a written report, including any non compliance with probity requirements. 24. A probity auditor can be engaged to audit different stages of a procurement activity. For example, it may be appropriate to have a probity audit conducted prior to requests for tender being issued, before contracts are signed and at the end of the procurement activity. A probity audit may be required where:

25.

concerns are raised about a procurement process by an aggrieved tenderer; the integrity of the process has been questioned; or there is political controversy surrounding the procurement activity.

Where to obtain probity adviser or probity auditor services 26. 27. For preliminary probity advice, Defence Procurement officers should contact the Office of the Inspector General and DMO Procurement officers should contact the Office of Special Counsel. Procurement officers seeking to engage a probity adviser for the life of the procurement process can also seek external probity advisers through various panels. In DMO, Procurement officers should contact DMO Legal. Procurement officers in Defence Groups should contact Defence Legal or seek to access the Defence Support Group Consultancy Services Panel (Panel 2). For probity auditing services, DMO Procurement officers should contact DMO Legal in the first instance, and Defence Procurement officers should contact the Office of the Inspector General and lodge a management task with the Assistant Secretary Management Audit (ASMA). For more information on probity, refer to the Australian National Audit Offices Better Practice Guide - Fairness and Transparency in Purchasing Decisions: Probity in Australian Government Procurement August 2007.

28.

29.

Conflicts of Interest 30. Conflicts of interest refers to any situation where there is, or may appear to be, a conflict between an employees personal interests and their public duties and responsibilities that can prejudice their impartiality. Defence employees are expected to avoid, or take steps to avoid, any actual, potential or perceived conflicts of interest. There are many kinds of conflicts of interest, but they can generally be categorised into the following:

31.

gifts and hospitality (including travel and accommodation); holding interests or investments in companies, or their competitors, doing business with Defence; post separation employment; and sponsorship by private sector companies.

32. 33.

For further information on conflicts of interest, Procurement officers should refer to FMG 14. DMO personnel must comply with the Defence Material Instruction (Personnel Management) 001 Dealing with Conflict of Interest in the Workplace when managing conflict of interest issues that arise in the course of employment.

Gifts and Hospitality 34. Defence employees must not accept or solicit gifts, any benefits or hospitality for themselves or any other person or group. Offers of gifts, benefits or hospitality that could give rise to actual or perceived conflicts of interest should not be accepted. Any gifts, or offers of gifts should be reported on a relevant organisational gift register. Page 3.135

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Defence Procurement Policy Manual 3.13 Ethics in Procurement 35. Procurement officers must comply with Defence Chief Executives Instruction (CEI) 6.2 (Defence officers) or DMO CEI 6.2 (DMO officers) and Defence Instructions (General) PERS 25-6 - Conflicts of Interest and Acceptance of Offers of Gifts and Hospitality when dealing with gifts and hospitality from potential suppliers, tenderers and contractors.

Post Separation Employment 36. Defence employees wishing to take up employment with private sector organisations must consider whether there might be potential for a real or apparent conflict of interest. Where a conflict exists or is perceived to exist, Defence employees must fully inform Defence of the situation before accepting employment. Procurement officers must comply with Defence Instruction (General) PERS 25-4 - Notification of Post Separation Employment and Defence Instruction (General) PERS 25-6 - Conflicts of Interest and Acceptance of Offers of Gifts and Hospitality when dealing with issues relating to post separation employment.

37.

Private Sector Sponsorship 38. Defence employees must not accept or seek sponsorship or commercial endorsement relating to events, functions, products or businesses when this could give rise to a perception of real or potential conflict of interest for Defence or another party. Refer to Defence Instructions (General) PERS 25-6 - Conflict of Interest and Acceptance of Offers of Gifts and Hospitality, Defence CEI 2.12 Receiving and Providing Sponsorship and to the Ethics Matters in the Defence Resource Management Handbook for more information.

39.

Key References
Public Service Act 1999 (Cth) Financial Management and Accountability Act 1997 (Cth) Financial Management and Accountability Regulations 1997 (Cth) Commonwealth Procurement Guidelines DOFD Financial Management Guidance No. 14 Guidance on Ethics and Probity in Government Procurement January 2005 Defence Chief Executives Instruction (CEI) 6.2 Receiving and Gifting Gifts Defence Chief Executives Instruction (CEI) 2.12 Receiving and Providing Sponsorship DMO Chief Executives Instruction(CEI) 6.2 Gifting Public Property and Receiving Gifts and Benefits Australian National Audit Office (ANAO) Better Practice Guide - Fairness and Transparency in Purchasing Decisions: Probity in Australian Government Procurement August 2007 Defence Resource Management Handbook, Ethics Matters Defence Workplace Relations Manual Chapter 7, Part 5 Defence Instruction (General) PERS 25-2- Employment and Voluntary Activities of ADF Members in Off-Duty Hours Defence Instruction (General) PERS 25-3 - Disclosure of Interests of Members of the Australian Defence Force Defence Instruction (General) PERS 25-4 - Notification of Post Separation Employment Defence Instruction (General) PERS 25-6 - Conflicts of Interest and Acceptance of Offers of Gifts and Hospitality

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Defence Procurement Policy Manual 3.13 Ethics in Procurement Departmental Personnel Instruction 1/2006 Financial and Other Private Interest Statements by Defence Senior Executive Service Officers Defence Materiel Instruction (Personnel) 1/2007 Post Separation Employment Policy Defence Materiel Instruction (Personnel Management) 001 - Dealing with Conflict of Interest in the Workplace APS Ethics Advisory Service

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement

3.14
Introduction
1. 2.

Legislation Affecting Procurement

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter details key Commonwealth, State and Territory legislation that may affect Commonwealth procurements, including:

consumer protection legislation; superannuation legislation; workers compensation legislation; taxation legislation; privacy legislation; anti-discrimination legislation; occupational health and safety legislation; and environmental legislation.

3.

This chapter does not address the Financial Management and Accountability Act 1997 (Cth), or the Financial Management and Accountability Regulations 1997 (Cth). For further information on this legislation refer to chapters 1.2 and 1.4. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

Mandatory Policy
Any Defence contract for services must require the contractor, its officers, employees, agents and subcontractors to comply with Defence Instruction (General) Personnel 35-3 Management and Reporting of Unacceptable Behaviour. Procurement officers must ensure that contracts comply with applicable legislative requirements, including those outlined in this chapter.

Operational Guidance
Implications for Defence Contracts 4. Specific clauses often need to be included in tender and contract documentation to cover issues such as privacy, occupational health and safety and superannuation as a consequence of legislative requirements in these areas. Standard Defence templates will normally include such clauses, but advice should be sought from a procurement or legal specialist if you consider that further clauses may be necessary. Where the applicability of specific legislation is uncertain, Procurement officers should seek legal advice.

5.

Applicability of State and Territory Legislation 6. The application of State and Territory laws to the Commonwealth is a complex area of the law involving questions of Commonwealth immunity and statutory interpretation. Consideration needs to be given to whether the State or Territory legislation is intended to have the effect of binding the Commonwealth and whether the Commonwealth is in fact bound. Page 3.141

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement 7. For contractual dealings, it is generally accepted that the Commonwealth can be bound by State and Territory legislation as long as there is no inconsistency with a Commonwealth law and the State and Territory law intends to bind the Commonwealth. This means that when setting up a contract, consideration may need to be given to the possible applicability of relevant State laws, e.g. State environmental and planning laws and laws relating to contracts and rental arrangements. Procurement officers should seek legal advice where the applicability of State and Territory laws is uncertain.

Consumer Protection Legislation 8. 9. Key legislation relating to Commonwealth procurement includes the Competition and Consumer Act 2010 (Cth) (CCA) and the Sale of Goods Acts in each State and Territory. The CCA is the successor to the Trade Practices Act 1974 (Cth) (TPA), with a series of legislative amendments coming into force as at 1 January 2011 with the aim of creating a uniform consumer law regime in Australia. As at 1 January 2011 each of the States and Territories have repealed their respective Fair Trading Acts and implemented the CCA as law in their jurisdictions.

10.

Competition and Consumer Act 2010 11. The objectives of the CCA are to promote competition and fair trading and to provide consumer protection. The CCA operates to imply terms into certain contracts for the supply of goods relating to title, merchantable quality, fitness for purpose and misleading description of goods. Specific definitions of goods, consumer and corporation in the CCA need to be met before the CCA will apply to a contract. As such, the above CCA implied terms may not apply to many Simple procurements and will not generally apply to most Complex and Strategic procurements. Schedule 2 of the CCA, known as the Australian Consumer Law, contains national consumer protection and fair trading laws (such as those dealing with misleading and deceptive conduct) which have been implemented by each State and Territory. Given the limited potential application of the TPA to Defence, the changes associated with the introduction of the CCA should have little impact upon existing processes and procedures. The introduction of CCA has served primarily to restructure the TPA with the aim of providing greater clarity. The CCA regulates a range of activities designed for consumer protection and prohibits discrimination likely to substantially lessen competition such as:

12.

13.

Misuse of market power; Exclusive dealings; Resale price maintenance; Acquisitions that would substantially lessen competition; Unconscionable conduct; Misleading or deceptive conduct; and False or misleading representations.

14.

Where Commonwealth agencies carry on the activities of a business either directly or indirectly, they are bound by the CCA (section 2A). The current legal position is that the CCA does not apply to the Commonwealth in relation to the procurement, sustainment and disposal of goods or services acquired for the defence of the Commonwealth. These are functions of the Commonwealth and do not amount to the carrying on of a business. In short the current legal position is that Defence, in respect of its procurement activities, is not carrying on a business for the purposes of the CCA. Notwithstanding this, it is good practice to recognise that all interactions with tenderers during the tender process, including briefing

15.

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement sessions and negotiations, are potentially challengeable by them whether or not this challenge occurs under the CCA 16. Further, this does not mean that Procurement officers are excused from the need to ensure that all information given to tenderers is accurate and consistent, that all conditions in the tender documentation are adhered to, and that all communications are consistent with those conditions.

Sale of Goods Acts 17. The Sale of Goods Acts in each State and Territory imply certain warranties as to title, quality and fitness for purpose in contracts of sale. Implied warranties include:

the right of the seller to sell the goods; the goods correspond with the description; and the goods are of merchantable quality and are fit for the purpose for which they were sold.

18.

These warranties may be applicable to all contracts unless excluded or modified by the terms of the contract. Defence does not normally agree to exclude the warranties implied in the Sale of Goods Acts are not excluded. Where a tenderer wishes to modify clauses in the contract documentation issued by Defence, Procurement officers should be cautious about accepting clauses which attempt to modify or exclude the provisions of the CCA or the Sale of Goods Acts and legal advice may need to be sought. For example, a clause that states all conditions, warranties and liabilities implied by statute, common law or otherwise are excluded should not be included in a contract.

19.

Contracts pre-1 January 2011 20. Contracts executed prior to 1 January 2011 will continue to be subject to both the TPA and the relevant State or Territory Fair Trading Act. Legal advice should be sought in cases where Procurement officers are unsure as to whether the contract they are dealing with falls under the CCA, under the TPA, or neither.

Superannuation Legislation 21. Under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SG Act), an employer is required to provide a minimum level of superannuation support for all employees. The SG Act also provides for an extended definition of the terms employer and employee for the purposes of the Act. Some contractors and consultants are employees for superannuation guarantee purposes only due to the fact that they work under a contract which is wholly or principally for their labour. These contractors and consultants are not common law employees and are therefore not entitled to join the Public Sector Superannuation Accumulation Plan. The Australian Government Employees Superannuation Trust (AGEST) is the appropriate fund in these cases. To determine whether there is an obligation to make provision for superannuation contributions for individuals (that is, whether an individual is an employee or an independent contractor), Procurement officers need to understand the nature of the arrangements they are entering into with contractors. In this regard, Australian Taxation Office Superannuation Guarantee Rulings (SGR) SGR 2005/1 (who is an employee), SGR 2005/2 (work arranged by intermediaries) and SGR 2009/2 (meaning of the terms ordinary time earnings and salary or wages) are all relevant for determining who is an employee and upon what basis employer superannuation contributions are to be calculated for the purposes of the SG Act. If there is a superannuation liability, it is then the responsibility of the Procurement officer to calculate the extent of the superannuation contribution and raise a purchase order for the calculated amount. For further advice on superannuation liability for contracted personnel, Procurement officers should contact the Directorate of Superannuation on (02) 61272540. Page 3.143

22.

23.

24.

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement Taxation 25. Defence may have an obligation to withhold a percentage of the invoiced amount when making payments against invoices submitted by contractors, depending on the status of the contractor and any agreements they may have with the Australian Taxation Office. Refer to chapter 3.7 for further information on GST. In accordance with Schedule 1 of the Taxation Administration Act 1953 (Cth), Defence may be required to withhold 46.5% of all payments where a contractor fails to provide their Australian Business Number. This provision applies to all contracts. There are circumstances however where a person need not have an Australian Business Number and Defence is not required to withhold 46.5%, that is:

26.

the supply is made to Defence in their capacity as an individual, in the course of an activity that is a private recreational pursuit or hobby; the supply is wholly of a private or domestic nature; the contractor (or the supplier that they represent) is non-resident and not carrying on an enterprise in Australia; or the whole of the payment that they (or the supplier that they represent) will receive for the supply is exempt from income tax.

27.

The Defence Tax Management Office recommends obtaining and holding on file a signed Statement by Supplier form (ATO form number NAT 3346-04.2008) to confirm the reason the contractor has not provided an Australian Business Number. Defence may incur additional taxation obligations to withhold Pay As You Go taxation instalments, against invoices submitted by the contractor when entering into a contract with certain legal entities, particularly natural persons, sole traders and partnerships. This may occur in the following circumstances:

28.

the contractor, whether holding an Australian Business Number or not, enters into a voluntary agreement with the Australian Taxation Office to make its payments subject to Pay As You Go withholding; or the contractor is deemed to be an employee of Defence for taxation purposes.

29.

Where the contractor has elected to have its invoices subject to Pay As You Go instalments, Defence is required to withhold either 20% or another amount agreed between the Commissioner of Taxation and the contractor under a withholding agreement. The contractor is obliged, under its withholding agreement, to advise Defence of the amount of Pay As You Go taxation to be withheld in respect of invoices lodged by them. Before agreeing to action any request to withhold an amount of less than 20%, a copy of the withholding agreement is to be obtained by the Procurement officer. A copy of the withholding agreement must be maintained, on file, for a minimum period of five years after the final payment has been made against the contract. Where a contractor is deemed to be an employee of Defence, Pay As You Go taxation amounts will be required to be withheld by Defence from payments made under the contract. The employee/employer relationship test, set out in chapter 4.10, is to be used to determine if a contractor is deemed to be an employee of Defence for taxation purposes. Further advice and information about Pay As You Go taxation, withholding agreements and payment summary requirements can be obtained from the Defence Taxation Management Office phone 1800 806 053 or via email at taxation.management@defence.gov.au.

30.

31.

Workers Compensation 32. Employers are obliged by legislation to provide workers compensation coverage, for their employees, against injuries incurred during the course of employment.

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement 33. Defence standard templates contain clauses to ensure that the contractors employees are covered for workers compensation purposes by the contractor. The standard clauses may not cover situations where Defence is contracting with natural persons (individuals) who are unable to obtain workers compensation insurance. In these circumstances, it would be appropriate to ensure that the individual has appropriate personal injury insurance. When contracting with a natural person, Procurement officers should apply the employee/employer relationship test set out in chapter 4.10 to assist in determining if the contractor will be deemed to be an employee of the Commonwealth for workers compensation purposes. Where it is considered that a contractor, who is a natural person, is an employee of the Commonwealth for workers compensation purposes, that contractor will be covered under the Safety Rehabilitation and Compensation Act 1988(Cth) as are other Commonwealth employees. Comcare, the workers compensation insurer for the Commonwealth, provides safety, rehabilitation and compensation services to Commonwealth agencies. Further advice on whether contracted personnel will be covered by the Commonwealth workers compensation scheme can be obtained from Comcare by telephone on 1300 366 979, via email at claims.help@comcare.gov.au or on the Comcare website.

34.

35.

36.

Privacy Act Requirements 37. The Commonwealth Procurement Guidelines (CPGs) require agencies to ensure that service providers are aware of their obligations under the Privacy Act 1988 (Cth) (Privacy Act) at an early stage, by including appropriate advisory provisions in requests for tender, expressions of interest and other tendering documentation. The ASDEFCON suite of tendering and contracting templates include clauses to fulfil this requirement. The National Privacy Principles set out minimum requirements for business and private sector organisations, including contracted service providers and subcontractors, in relation to the collection, use, disclosure, quality, security, openness, access and correction of personal information. These principles, like the Information Privacy Principles in section 14 of the Privacy Act that apply to Commonwealth agencies, reflect the Organisation for Economic Co-operation and Development data protection principles. The National Privacy Principles are to be applied in conjunction with the Information Privacy Principles. It is a requirement of the Privacy Act that contracted service providers, and subcontractors engaged by them, do not breach the Information Privacy Principles, National Privacy Principles 7-10 and section 16F (Information under Commonwealth contract not to be used for direct marketing) of the Privacy Act when engaged under contract to the Commonwealth. A contracted service provider, for the purposes of a government (Commonwealth or State) contract, is defined in section 6 of the Privacy Act as:

38.

39.

40.

an organisation that is or was a party to the government contract and that is or was responsible for the provision of services to an agency or a State or Territory authority under the government contract; or a subcontractor for the government contract.

What is required of Defence? 41. Section 95B (Requirements for Commonwealth contracts) of the Privacy Act applies to contracts entered into by Defence from 21 December 2001 onwards. The section requires Defence to include provisions in its contracts to ensure that contracted service providers do not perform an act, or engage in a practice, that would breach an Information Privacy Principle if that act was performed, or the practice engaged in, by Defence.

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement 42. Defence is also required to include provisions in its contracts to ensure that such acts or practices are not authorised by a subcontract, which is defined in subsection 95B(4) of the Privacy Act as: a contract under which a contracted service provider for the Commonwealth contract is engaged to provide services to: (a) (b) another contracted service provider for the Commonwealth contract; or any agency,

for the purposes (whether direct or indirect) of the Commonwealth contract. 43. Section 95B of the Privacy Act also applies where contracted service providers and subcontractors are located overseas. The Privacy Commissioner has jurisdiction to investigate a complaint made in relation to services or activities of overseas contracted service providers. Section 95B of the Privacy Act does not apply where the services being provided under the contract are not connected with the function of Defence. Contracted service provider obligations under a contract will continue to apply in relation to relevant information after the contract has come to an end. It is important that contracted service providers and their subcontractors are made aware of the long term nature of the requirements and are encouraged to make appropriate arrangements (e.g. in relation to the ongoing storage of relevant information).

44.

Contracts pre-21 December 2001 45. 46. Contracts entered into prior to 21 December 2001 that do not contain privacy clauses are subject to the National Privacy Principles from 21 December 2001 onwards. Where privacy clauses in a contract are consistent with the National Privacy Principles, and the contractor breaches a privacy clause in the contract, they may be deemed to have breached a National Privacy Principle. The Privacy Commissioner has jurisdiction to investigate and take appropriate action. Where there is an inconsistency between the National Privacy Principles and a Commonwealth contract, privacy clauses in the contract will prevail. Therefore, privacy clauses in Commonwealth contracts entered into prior to 21 December 2001 are enforceable even where they are inconsistent with the National Privacy Principles. Unless extended, Defence is not required to amend contracts they have entered into prior to 21 December 2001. However, it is preferred that contracts be reviewed and amended where they are not consistent with the new legislative provisions unless there are specific reasons for not doing so. Similarly, where there is an inconsistency between section 16F of the Privacy Act and the provisions of a Commonwealth contract, unless the contractor is required to undertake direct marketing to meet the requirements or obligations of the contract, then the contractor should be made aware of obligations not to engage in any such act.

47.

48.

49.

Clauses to Meet Privacy Act Obligations 50. 51. Contracts entered into, or extended, after 21 December 2001 must comply with the requirements of section 95B of the Privacy Act. Defence must include privacy clauses in their contracts to ensure that contractors are aware of their obligations to comply with the Information Privacy Principles, the National Privacy Principles 7-10 and section 16F of the Privacy Act. The ASDEFCON suite is compliant with this requirement. It is not sufficient to only include a blanket clause in a contract stating that the contractor must not breach their privacy obligations in relation to the Privacy Act. Detailed or practical provisions for each requirement are required in order to make a contractor fully aware of their responsibilities under the contract.

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement 52. The contractors obligations under the National Privacy Principles may be varied by a contract to allow the contractor to undertake an act or practice that would allow it to meet the requirements or obligations of the contract, so long as the agency abides by the section 95B requirements of the Privacy Act. Obligations of the contractor to protect any personal information continue after the completion or termination of the contract.

53.

Health Privacy 54. The Privacy Act has been extended to cover the private health sector throughout Australia. The National Privacy Principles promote greater openness between health service providers and consumers in the handling of health information, and include a general right of access for consumers to their own health records. Health service providers are also required to have documentation available clearly setting out their policies for the management of personal information.

Complaints Handling 55. The Privacy Commissioner handles and investigates complaints under the Privacy Act, and has wide ranging powers including the ability to obtain information and take evidence under oath. Even where a contractor is subject to an approved privacy code, the Privacy Commissioner retains jurisdiction to investigate the contractor in relation to its obligations under the Privacy Act. Where the complaint concerns an act or practice of a contractor, it is the contractor, not the contracting agency, who is the respondent in the investigation. Under certain circumstances, the contracting agency may be substituted for the contractor as respondent in the event of a dispute. This happens where the contractor is no longer available such as in the event of death, bankruptcy or where the contractor ceases to exist. The Privacy Commissioner is required to give the contracting agency the opportunity of appearing before the Privacy Commissioner and to make an oral and/or written submission concerning the proposed substitution of the contracting agency as respondent.

56.

Anti-Discrimination Legislation 57. There are a number of Commonwealth Acts dealing with discrimination in the workplace. These Acts apply to all Australian employers and employees including contract workers, employment agencies and unions. Procurement officers need to be aware that the legislation is not only applicable to Defence as an employer of military and civilian personnel, it also applies when selecting potential suppliers of goods and services. Defence cannot discriminate against a potential supplier contrary to the legislation and should ensure that the potential supplier is compliant with the legislation. Anti-discrimination legislation which must be complied with includes:

58.

59.

Racial Discrimination Act 1975 (Cth); Sex Discrimination Act 1984 (Cth); Human Rights and Equal Opportunity Commission Act 1986 (Cth); Disability Discrimination Act 1992 (Cth); and Age Discrimination Act 2004 (Cth).

An overview of the anti-discrimination laws is contained in Defence Instruction (General) Personnel 34-2 - Complaints of Discrimination and Harassment through the Australian Human Rights Commission. 60. Defence policy contained in Defence Instruction (General) Personnel 35-3 - Management and Reporting of Unacceptable Behaviour also defines discrimination as a category of unacceptable behaviour. For further information see paragraph 65 below. Page 3.147

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement Occupational Health and Safety and Contractors 61. Contractors who provide goods, equipment or services when working on Defence premises must comply with the requirements of the Occupational Health and Safety Act 1991 (Cth) (OH&S Act). An exception to this is if the contractor is undertaking construction or maintenance work which is deemed to be in control of the contractor. In such instances, the relevant State or Territory Occupational Health and Safety legislation is to be complied with. Whether or not a contractor is in control of a workplace is a question of fact in each case. Where there is doubt, the obtaining of legal advice should be considered. The OH&S Act also imposes specific obligations on manufacturers, suppliers, erectors, and installers. The Occupational Health and Safety (Safety Standards) Regulations 1994 (Cth) detail how the obligations of the OH&S Act are to be fulfilled. Specifically Part 4 Plant and Part 6 Hazardous Substances cover most goods and equipment provided to Defence. In the case of Hazardous Substances and some other parts of the regulations, e.g. Confined Spaces, there is supplementation within the Occupational Health and Safety Code of Practice 2008 and related guidance material. In certain cases there are no prescribed Commonwealth legislative safety requirements (outside the general Duty of Care). In accordance with the OH&S Act, section 4 unless the regulations state otherwise, the Commonwealth is not bound by State and Territory Occupational Health and Safety legislation. An example of this is in the transport, storage and handling of Dangerous Goods. The Australian Radiation Protection and Nuclear Safety Act 1998 (Cth) applies to Commonwealth employment which includes members and employees of Defence. For information on these legislative requirements or Defence Radiation Policy contact the Radiation Safety section, Joint Logistics Command. Defence policy on radiation hazard management is contained in Defence Safety Manual (SAFETYMAN) Vol 1, part 4. The Defence authorised policy on contractor safety management is SAFETYMAN, Volume 1, Part 1. Chapter 8 Contractor Safety Management. A booklet entitled Contractor Safety Management has been prepared by the OHS Branch to assist in complying with this policy. A copy is available on the Defence OH&S website (Publications). Within Defence and DMO, the responsible Group/Organisational Executive is to ensure that the contractor follows Occupational Health and Safety standards that are consistent with those of the Defence organisation through the implementation of a contractor safety management system. Contract safety management is achieved through:

62. 63.

64.

65.

66.

67.

the selection of contractors that meet Occupational Health and Safety criteria (specified in request documentation); the contract containing appropriate safety clauses and information on explicit safety arrangements; the contractors safety management plan that includes: safe work practices; risk assessments; consultation mechanisms; incident reporting; sub contractor management; induction safety training; and site safety training; and monitoring of the contractors Occupational Health and Safety performance.

68.

The obligations of Defence and the contractor under the OH&S Act and common law should be specified in all contract documents so that there are no misunderstandings about who is Page 3.148

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement responsible for the various aspects of Occupational Health and Safety in the workplace. Policy advice on safety issues can be obtained from SAFETYMAN. Unacceptable Behaviour 69. The OH&S Act, section 16 imposes a duty on Defence to take all reasonably practicable steps to protect the health and safety of its employees. The OH&S Act, section 17 also imposes a duty on Defence to take all reasonably practical steps to protect the health and safety of third parties. This requirement would extend to contractors in the workplace. The requirement to take reasonably practical steps to protect the health and safety of employees and third parties would include the provision of a workplace that is free from harassment, bullying and other forms of unacceptable behaviour. Defence Instruction (General) Personnel 35-3 (DI(G)Pers 35-3) Management and Reporting of Unacceptable Behaviour applies to contractors who, under the conditions of contract with Defence must comply with the Instruction. DI(G) Pers 35-3 requires Defence service contracts to include in the conditions of contract a requirement that the contractor, its officers, employees, agents and subcontractors comply with the Instruction. In accordance with DI(G) Pers 35-3 all Defence personnel must undertake annual equity awareness training. The requirement applies to contractors who provide their service in the Defence workplace. Contractors who do not provide their service in a Defence workplace, or infrequently visit the Defence workplace, are not required to complete the training. Contract managers must exercise professional judgment in assessing the training requirement for contractors with a high level of interaction with Defence personnel, but who either do not perform their service in, or infrequently visit, the Defence workplace. Contract managers are responsible for providing access to the training and for ensuring the contractor has met this requirement. It is important that contractors and their subcontractors are made aware of the training requirement. In situations where the contract manager has determined that training will be necessary, this obligation should be included in the contract. A complaint of unacceptable behaviour against a contractor that is not resolved informally must be managed in accordance with the Resolution of Disputes clause in the contract. Any subsequent action against the individual arising from the dispute resolution is the responsibility of the contractor. For further information on Defences policy on unacceptable behaviour visit the Fairness and Resolution website at http://www.defence.gov.au/fr/.

70.

71.

72.

73.

Environmental Legislation 74. The Environment Protection and Biodiversity Conservation Act 1999 (Cth) and other environment legislation have implications for Procurement officers. These issues are addressed in chapter 3.16.

Key References
Age Discrimination Act 2004 (Cth) Australian Radiation Protection and Nuclear Safety Act 1998 (Cth) Competition and Consumer Act 2010 (Cth) Disability Discrimination Act 1992 (Cth) Environment Protection and Biodiversity Conservation Act 1999 (Cth) Human Rights and Equal Opportunity Commission Act 1986 (Cth) Occupational Health and Safety Act 1991 (Cth) Occupational Health and Safety (Safety Standards) Regulations 1994 Page 3.149

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Defence Procurement Policy Manual 3.14 Legislation Affecting Procurement Privacy Act 1988 (Cth) Racial Discrimination Act 1975 (Cth) Sale of Goods Acts and Fair Trading Acts in each State and Territory. Sex Discrimination Act 1984 (Cth) Trade Practices Act 1974 (Cth) Defence Safety Manual SAFETYMAN ASDEFCON (Services) ASDEFCON (Shortform Services) Australian Taxation Office Superannuation Guarantee Ruling 2005/1, 2005/2, 2009/2 Department of Finance and Deregulation - Superannuation Circulars 2006/3 and 2006/4 Defence Instruction (General) Personnel 34-2 - Complaints of Discrimination and Harassment through the Australian Human Rights Commission. Defence Instruction (General) Personnel 35-3 - Management and Reporting of Unacceptable Behaviour

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance

3.15
Introduction
1. 2.

Indemnities, Limitation of Liability and Insurance

This chapter applies to procurement undertaken within Defence and the Defence Materiel Organisation (DMO). This chapter provides guidance and advice on indemnities, contractual limitation of liability and insurance obligations in procurement contracts. It assumes that a risk analysis of the contract has already been undertaken and a risk management strategy devised (see chapter 3.2). The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

Mandatory Policy
Prior to agreeing to provide an indemnity to a contractor, Procurement officers must refer to, and comply with the relevant Defence or DMO Chief Executives Instructions (CEI). Procurement officers within Defence must comply with CEI 8.6 Contingent Liabilities (including Indemnities, Guarantees, Warranties and Letters of Comfort) and Schedule F8-6 of FINMAN 2. Procurement officers within DMO must comply with DMO CEI 8.6 - Contingent Liabilities (including Indemnities, Guarantees, Warranties and Letters of Comfort) and Annex A to DMO CEI 8.6. Procurement officers must never include a Defence indemnity in request documentation or provide a Defence indemnity as an alternative to the contractor obtaining readily available insurance. Defence indemnification of a contractor must only be considered after consultation with the Defence Legal Service or DMO Legal (unless the indemnity is contained in a procurement type that is exempt under Defence CEI 8.6 or DMO CEI 8.6). Procurement officers must consider the full potential cost to the Commonwealth of any indemnity, guarantee, warranty or letter of comfort provided by the Commonwealth, and if required, have that amount authorised under Financial Management and Accountability Regulations 1997 (Cth) (FMAR) 10. For procurements undertaken in Defence, if FMAR 10 is triggered, written agreement from the Finance Minister, or their delegate, must be obtained before the Proposal Approver can approve a spending proposal under FMAR 9. For procurements undertaken in the DMO, if FMAR 10 is triggered, written agreement from the Finance Minister, or their delegate, must be obtained prior to obtaining Contract Approval. If it becomes apparent after tender release (i.e. after Proposal Approval has been exercised) that the resultant contract may contain a Commonwealth provided indemnity, warranty or guarantee or the preferred tenderer requires a letter of comfort, then the necessary FMAR 10 approval must be sought as soon as possible prior to Contract Approval. A new Proposal Approval for the purposes of FMAR 9 must also be exercised following the FMAR 10 approval and prior to Contract Approval. Procurement officers must undertake a risk assessment prior to agreeing to any limitation of liability in a contract. If there is a compelling reason to agree to limit a contractors liability, the liability cap must, wherever possible, be of a limited scope and with specified maximum liabilities, both in relation to each event that can cause liability to occur and the number of those events. Procurement officers seeking extensions in cover (Comcover) or requiring additional Page 3.151

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance insurance to cover losses over the liability limit must contact the Defence Insurance Office. Where a tenderer proposes to self insure against a particular risk, Procurement officers must undertake a risk assessment to ascertain whether or not the tenderer has the financial resources to adequately cover all liabilities likely to occur during the life of the contract. In the DMO, where the tenderer proposes to limit its liability to the Commonwealth, Procurement officers must comply with the Liability Risk Management Process. For DMO contracts valued at $2m or more when there is to be an increase in the value of the contract exceeding $20m or 20% of the contract value the requirements detailed in chapter 1.4.

Operational Guidance
Indemnities Commonwealth Policy 3. An indemnity is where one party agrees to hold another party harmless against some possible future loss or liability and usually relates to general risks such as personal injury, property damage, claims by third parties and intellectual property risks, such as claims for infringement of copyright by a third party. The Commonwealth policy regarding indemnities is that the Commonwealth should seek appropriate indemnities from a contractor in relation to the procurement. Commonwealth policy on the granting of indemnities to a contractor is contained in Department of Finance and Deregulation Financial Management Circular 2003/02 - Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort and Financial Management Guidance No. 6 (FMG 6) - Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort. This document summarises when the Commonwealth will give an indemnity, reporting and disclosure requirements and risk management considerations and obligations.

4.

Indemnity Provisions 5. Indemnities are one of the most common legal tools used by Defence to transfer risk. Indemnities are contained in all standard Defence contracting templates including the ASDEFCON suite of tendering and contracting templates, the SP020 - Purchase Order and Contract for the Supply of Goods and Repair Services and the Defence Support Group Property Disposal Contract. In Defence contracts, the contractor provides indemnities to Defence which vary based on the risk profile and complexity of the contract. It is important to note that a cap or limitation of a contractor's liability under a contract can work, in effect, as an indemnity by Defence in favour of the contractor. Further guidance on limitation of a contractors liability is contained in paragraphs 15-34 below. Indemnity provisions are usually structured as follows:

6. 7.

8.

the parties protected (typically, the Commonwealth, its officers, employees and agents); the risk that is the subject of the indemnity (typically, Commonwealth property damage or personal injury of those indemnified or claims against the Commonwealth by third parties); and exceptions where the indemnity does not apply (typically if the loss or claim that eventuates is caused by a fault on the part of the Commonwealth or its personnel, rather than the contractor). Page 3.152

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance 9. The structure of indemnities can vary considerably and is determined by factors including the appropriateness of transferring risk, the types of risks to be covered and whether it is sensible or fair to impose an indemnity. Commonwealth policy states that as a general principle, risks should be borne by the party best placed to manage them. 1 An indemnity clause is usually of no practical value unless the indemnifier is in a position to make good the indemnity if it is called upon i.e. is financially able to pay any claims associated with the indemnity. Paragraphs 35 - 79 below examine in detail a tool which may provide comfort that a contractor can meet its liabilities and any indemnities granted under the contract, namely, insurance.

10.

Defence Indemnities to Contractors 11. Prior to agreeing to provide an indemnity to a contractor, Procurement officers must refer to, and comply with, the relevant Defence or DMO CEIs. Procurement officers within Defence must comply with Defence CEI 8.6 - Contingent Liabilities (including Indemnities, Guarantees, Warranties and Letters of Comfort) and Schedule F8-6 of FINMAN 2. Procurement officers within DMO must comply with DMO CEI 8.6 - Contingent Liabilities (including Indemnities, Guarantees, Warranties and Letters of Comfort) and DMO CEI 8.6, Annex A. It may be necessary in circumstances where a contractor is exposed to risks over which it has no control, or which would otherwise make the contract uneconomical for the contractor, for Defence to grant an indemnity. As an indemnity is a contingent liability and necessarily involves a potential payment in the future, the granting of an indemnity to a contractor is likely to trigger the requirements of FMAR 10 (see chapter 1.4 for further guidance on FMAR 10). In the DMO, where a limitation of liability creates a contingent liability, the limitation of liability must be approved in accordance with Annex B to DMO CEI 8.6. Defence should only provide an indemnity to a contractor in rare and exceptional circumstances, at the request of a contractor, and only after a rigorous risk assessment. Procurement officers must never include a Defence indemnity in request documentation or as an alternative to the contractor obtaining readily available insurance. Defence indemnification of a contractor must only be considered after consultation with the Defence Legal Service or DMO Legal (unless the indemnity is contained in a procurement type that is exempt under Defence CEI 8.6 and DMO CEI 8.6). Where an indemnity is given by Defence, Defence should have a right to be subrogated to the contractor's rights of recovery from third parties in the event the indemnity is called upon. This means that Defence has the right to "step into the shoes" of the contractor for the purpose of pursuing recovery from third parties. This occurs when third parties are responsible for the loss or damage indemnified and conduct any indemnified claims made against the contractor by third parties. To enable Defence to do this, the contractor should be under an obligation to:

12.

13.

14.

mitigate all indemnified losses; not make any admissions of liability or compromise (settle) the claim without Defence's consent; and provide Defence with all reasonably required assistance to determine the amount of any indemnified loss and to defend third party indemnified claims.

Limitation of Liability Commonwealth Policy 15. A limitation of liability is an arrangement where future liabilities that a party may incur are capped to an agreed amount. The Commonwealth Procurement Guidelines (CPGs) recognise that in some circumstances it may be necessary to limit a contractors liability in order to achieve a sound value for money outcome in the procurement process. If there is a compelling reason to agree to limit a contractors liability, the liability cap must, wherever possible, be of a limited

Paragraph 6.9 of the Commonwealth Procurement Guidelines

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance scope and with specified maximum liabilities, both in relation to each event that can cause liability to occur and the number of those events. 16. Agreeing to limit a contractors liability through an indemnity, liability cap or similar arrangement may result in direct and/or indirect costs to Defence. These potential costs should be taken into account when assessing value for money. Request documentation should include a draft contract with clear liability provisions, with tenderers required to indicate compliance against each clause of the draft contract, including the liability provisions. The cost of any alternative clauses proposed should be clearly identified by the tenderer. Agreements to limit a contractors liability to the Commonwealth or a third party that take the form of an indemnity, guarantee, warranty or letter of comfort provided by the Commonwealth, come within the scope of a contract agreement or other arrangement under which public money is payable or may become payable. Procurement officers must consider the full potential cost to the Commonwealth of any indemnity, guarantee, warranty or letter of comfort provided by the Commonwealth, and if required, have that amount authorised under FMAR 10. For procurements undertaken in Defence, if FMAR 10 is triggered, written agreement of the Finance Minister, or their delegate, must be obtained before the Proposal Approver can approve a spending proposal under FMAR 9. For procurements undertaken in the DMO, if FMAR 10 is triggered, written agreement of the Finance Minister, or their delegate, must be obtained prior to obtaining Contract Approval. If it becomes apparent after tender release (i.e. after Proposal Approval has been exercised) that the resultant contract may contain a Commonwealth provided indemnity, warranty or guarantee or the preferred tenderer requires a letter of comfort, then the necessary FMAR 10 approval must be sought, prior to Contract Approval. In Defence, a new Proposal Approval for the purposes of FMAR 9 must also be exercised following the FMAR 10 approval and prior to Contract Approval. Further guidance on the treatment of indemnities and liability caps under the FMA regulations can be found in the Finance Circulars 2011/01 Commitments to spend public money (FMA Regulations 7-13), 2003/02 - Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort and FMG 6. Further guidance on limitation of liability in Information and Communications Technology (ICT) contracts can be found in Finance Circular 2006/03 - Limited Liability in Information and Communications Technology Contracts.

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20. 21.

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Defence Policy 24. Defence has a preference for liability under its contracts to be determined according to principles of Australian common law. In appropriate circumstances, request documentation for higher risk Complex and Strategic procurements may contain draft limitation of liability provisions. A common misunderstanding (especially with overseas contractors) is that liability determined according to common law principles is unlimited. This is not the case. For a loss to be recoverable under Australian common law the following conditions will usually need to be met:

25.

a causal connection must exist between the breach or negligent act of the contractor and the loss suffered by Defence; the loss must not be too remote; and Defence must have taken reasonable steps to mitigate its loss.

26.

Where a tenderer proposes to limit its liability on an alternative basis to Australian common law principles, the proposal should be considered on its merits and in the context of value for money considerations. Page 3.154

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance 27. Procurement officers should not usually accept any limitation of a contractors liability in relation to:

personal injury or death; third party property damage; breach of IP rights, confidentiality, privacy or security obligations; fraud or dishonesty; unlawful or illegal acts; or indemnities provided by the contractor under the contract.

28.

Any other limitation of a contractor's liability for third party claims should also be avoided. Such a limitation can, in effect, work as an indemnity by Defence in favour of the contractor. For example, if a third party successfully sues Defence for damage caused by the acts of a contractor, Defence will be liable to the third party. Defence's ability to recover the amount of damages payable to the third party from the contractor will be limited by any liability cap in the contract.

Selecting an Appropriate Limitation of Liability Cap 29. Tenderers often seek to limit their liability to a particular specified sum or to a multiple of the contract price. Prior to agreeing to any limitation of liability a risk assessment must be undertaken to ensure that the liability cap proposed takes into consideration the likelihood and consequences of all relevant risks. A tenderer may also seek to limit its liability to the amount that is recoverable under its insurance policies. There are significant risks associated with including a provision of this nature and specialist advice must be sought before including such a clause in a Defence contract.

30.

Liability Risk Assessment 31. For Defence and DMO a liability risk assessment (LRA) may need to be undertaken at various stages of the Defence procurement process, including:

prior to procurement; where a tender process is necessary for a procurement, as part of the evaluation of a tenderer's proposal; during negotiation of the contract; and at the time of any contract change proposal.

32. 33.

In the DMO, where the contractors liability to the Commonwealth is to be limited, Procurement officers must comply with the Liability Risk Management Process outlined below. For DMO Procurement officers, advice from DMO Legal is not required to be obtained where the limitation of liability regime reflects the standard ASDEFCON clauses without material change and the Liability Risk Management Process has been followed.

Liability Risk Management Process 34. The DMO and Australian Industry Group have collaborated to adopt, to the greatest extent possible, an agreed approach to the methodology to be employed when conducting such liability risk assessments. The following papers set out the process for use by Defence and Industry when conducting the part of the risk assessment for Defence procurement that is used in determining the allocation of liability between contractual parties:

Liability Risk Management Process - this sets out the liability risk assessment methodology;

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Liability Risk Assessment Template accompanies the Liability Risk Management Process to facilitate the conduct of a liability risk assessment; and Limitation of Liability Discussion paper contains general information on the background to the development of both the liability risk assessment methodology and the liability risk assessment template.

35. 36.

These papers can be accessed through the Commercial Policy and Practice Branch website. The adoption or acceptance of any regime purporting to limit the liability of a contractor to the Commonwealth must comply with existing Commonwealth and Defence legislative and policy requirements governing risk and liability in Commonwealth procurement, including the CPGs and Defence and DMO CEIs.

Insurance 37. The Commonwealth policy regarding insurance is that the Commonwealth carries its own risks and insures for them. This is done under the Comcover arrangement. Where necessary, it is possible to insert a condition in a contract requiring the contractor to take out suitable insurance. The ASDEFCON Suite of Tendering and Contracting templates contain core insurance clauses that should be included in any RFT documentation.

Defence Insurance Cover 38. Defence insures against many risks through the Commonwealth's self managed insurance schemes known as Comcover (general insurance) and Comcare (workers' compensation insurance). These schemes insure Defence's own losses and liabilities. Contractors are not usually covered under Comcare (see chapter 3.14). The Comcover insurance arrangements do not provide insurance coverage to contractors nor will Comcover consent to adding contractors as additional insureds. Accordingly, if a tenderer requires insurance for its own potential losses and liabilities it must obtain its own insurance. It should be remembered that Defence's own insurances are subject to limits, exclusions and high deductibles. In the event that Defence's insurances cover a loss or liability suffered by Defence, insurers expect to have the right to pursue any third party responsible for the loss or liability. This is called the insurer's rights of subrogation. Comcover expects Defence to act prudently when entering into contracts with contractors, and whenever possible, include indemnity clauses indemnifying the Commonwealth together with insurance clauses to support the indemnity given. Procurement officers should ensure that, where appropriate, indemnity clauses are also flowed down into any subcontracts. For further information regarding insurance provided under Defences polices placed with Comcover contact the Defence Insurance Office on 1800 990 900 or email definsurance@defence.gov.au.

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Insurance Coverage for Contract Indemnities and Limitation of Liability 43. Comcover policy does not cover any liability under any indemnity beyond that for which Defence would have otherwise been liable. This exclusion does not apply to indemnities contained in a contract where the contract was entered into prior to 1 July 2004 (see subrogation clause 2.9.12 Comcover insurance policy Part 2 Policy Terms and Conditions). In addition, Defences Comcover policy relates only to the insurable risks for which Defence is responsible. If a proposed liability cap relates to insurable risks for which another Commonwealth agency is responsible, Comcover may need to consult that agency. Clauses that limit the liability of a contractor also limit Comcovers rights to seek recovery if an insured property loss occurs and this will prejudice Defences entitlement to receive a full Page 3.156

44.

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance settlement under the policy. Defence would then be required to bear any losses above the liability limit. 46. Procurement officers should not assume that damage to Commonwealth property caused by a contractor above the liability cap will be covered by either the contractors or Defences insurance policies. An important component of the relevant Subrogation clause 2.10.10 is: If Comcover accepts a claim under the policy, Comcover will have your rights of recovery to the extent of the claim payment made by Comcover to you. If an amount is recovered then Comcover will be entitled to deduct from that amount any administrative or legal costs incurred or paid by Comcover in funding the recovery action. In certain circumstances Comcover may consider extending coverage to cover additional liability provided the activity covered by the indemnity is regarded properly as part of Defences core business and provided the risk (both the chance and the potential cost exposure) can be regarded as an acceptable insurable risk. However, before doing so Comcover will need to be satisfied that the circumstances warrant the extension, particularly where the indemnity requires Defence to insure liabilities pertaining to other parties liabilities that those parties would normally be expected to insure themselves against. There should be compelling reasons for Comcover to agree to issue cover to the other parties. Further guidance can be obtained from Comcover Member Guidance Coverage of Contract Indemnities located under useful links at http://intranet.defence.gov.au/dsg/sites/Insurance/ Procurement officers seeking extensions or additional insurance cover must contact the Defence Insurance Office on 1800 990 900 or via email definsurance@defence.gov.au for advice on Comcover requirements. Procurement officers must ensure that any legislative requirements of the FMA Act section 44, FMARs 9, 10, 11 and 14 and relevant Defence and DMO delegations (see chapter 1.4, Defence CEI 8.6 and DMO CEI 8.6) are satisfied before contacting the Defence Insurance Office. The following documentation will be required by the Defence Insurance Office before any formal submission is made to Comcover:

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a description of the activity covered by the indemnity; the relevant contract clauses(s); a risk management report recording the reasons why an indemnity should be issued and identifying the physical and financial exposures to Defence as a result of issuing the indemnity; legal advice on what the potential exposure could be; and supporting documentation confirming Defence has complied with requirements of the FMA Act, FMARs and any relevant FMA delegations.

Why do we Require Contractors to have Insurance? 52. Defence will usually require a contractor to have insurance for two main purposes:

to ensure that the contractor will be able to perform its obligations under the contract; and to ensure that if the contractor breaches the contract or otherwise incurs a liability that the contractor will have the financial resources available to meet that liability.

Contractor Self Insurance 53. In the context of the second point in para 50, it is relevant to consider the financial capacity of the tenderer. For example, if Defence is dealing with a large, financially secure entity insurance may not be required for this purpose. In such cases, it may be acceptable for the contractor to rely on "self insurance", either by retaining and managing the risk or, by transferring it to a related company set up to act as insurer to the contractor (a "captive insurer"). For example, it Page 3.157

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance is not uncommon for large corporates to self insure professional indemnity risks. Similarly, most governments have self insurance schemes of one type or another. For example, most Australian States or Territories have a Treasury Managed Fund which self insures the risks of that State or Territory. However, even if the tenderer is financially strong, insurance may still be desirable in order to facilitate payment in the event of a claim by Defence against the contractor. 54. Where the tenderer is financially weak or its ongoing financial capacity is questionable, insurance becomes very important as it provides security that the contractor will be able to meet its liabilities to Defence, particularly under any indemnities provided by the contractor to Defence. Where a tenderer proposes to self insure against a particular risk, the Procurement officer must undertake a risk assessment to ascertain if the tenderer has the financial resources to adequately cover all liabilities likely to occur during the life of the contract. When assessing the financial capacity of a tenderer to meet its self insured liability, consideration should be given to all potential liabilities to which the contractor may be exposed, not simply those associated with the contract being considered at the time. Where it is agreed that a tenderer will self insure, any resultant contract should reflect this agreement by:

55.

56.

deletion of the insurance requirements from the contract or reference to a captive insurer of the contractor; and inclusion of an acknowledgment from Defence that self insurance or the use of a captive insurer to meet the insurance requirements of the contract is acceptable.

What Insurances Should be Required from the Contractor? 57. Consideration should be given to the whole contract. Procurement officers should be very careful when transferring risks from one party to another by contract as most commercial insurance policies will not cover parties for contractually assumed risks. Defence may require a contractor to take on legal risks the contractor would not otherwise assume. These are contractually assumed risks. These risks may not always be acceptable to contractors as it may expose them to added liability. The following table outlines circumstances that arise in this situation and the correct procedures to deal with them.
If the contractually assumed risk is acceptable to the contractor the risk is not acceptable to the contractor the risk is that Defence may be liable Defence would be liable if the event occurred Defence is insured under *Comcover for this event Defence is not insured under *Comcover Then the contractor bears the risk burden, though correspondingly the cost may rise. A value for money judgment needs to be made by Defence. Procurement officers should consider whether Defence would be liable for the risk if there were no contract. Defence must exercise great caution in assuming such risks. is the event insured under Comcover? shifting risk to the contractor might not be the best approach and may incur extra cost to Defence. if there is no Comcover insurance, a risk assessment should be made and consideration given to whether the contractor should contractually assume the risk.

58.

* For information on coverage provided under the Comcover policy contact the Defence Insurance Office on 1800 990 900 or email definsurance@defence.gov.au.

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Contracts sometimes include terms that require a contractor to insure against all risks, for example, in respect of an indemnity which has been given earlier in the contract. This may not be possible. All insurances are likely to be subject to exclusions and limitations. Accordingly, such clauses can fail totally and be unenforceable. When including insurance requirements in Defence contracts, Procurement officers must be specific and realistic with respect to the risks Page 3.158

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance to be insured by the contractor. Legal advice should be sought in relation to any contract involving significant insurance provisions. Types of Insurance Policies 60. Examples of insurance policies that Defence commonly requires contractors to obtain include:

workers compensation insurance the contractor should be required to effect workers compensation insurance to cover its liability at general law and under statute to its employees and their dependants for injuries or illnesses sustained in the course of the employee's employment; professional indemnity insurance this type of insurance covers liabilities of the contractor arising from a breach of duty owed in a professional capacity under the contract or at common law. For example, professional indemnity insurance is required where the contractor provides design or architectural services, engineering services, medical services, accounting services or legal services. For specialised activities, specialised professional indemnity policies may be required. For example, medical service providers require medical malpractice insurance and ship designers require naval architecture insurance. Professional indemnity policies are usually 'claims made' policies, this means that the policy must be current when the claim is reported/made i.e. if an incident is reported a week after the policy expires no claim exists even if the incident occurred whilst the policy was current. Generally in the commercial market a 'run off' professional indemnity policy would be in place for 7 years after the business operations cease. If the contractor is continuing their business after the Defence contract ends the professional indemnity policy should be continued and an additional 'run off' policy is not required. public liability insurance this type of insurance covers loss of or damage to third party property and personal injury, illness or death caused to a third party (other than the contractor's employees); and product liability insurance this type of insurance covers the liability of the contractor for loss of or damage to third party property or injury, illness or disease caused to any person (other than the contractor's employees) arising out of products supplied, distributed, installed, repaired, manufactured or altered by the contractor. Public and products liability policies are generally 'occurrence' policies, this means that provided the policy was in place when the incident occurred the policy would respond. It is important to note the trigger events in each policy that will give rise to a claim under the policy.

61.

Subject to a risk assessment, other policies which may be considered for individual contracts include, but are not limited to:

motor vehicle insurance if the contractor will use motor vehicles in performing the contract, motor vehicle insurances should be required covering third party injury or death and third party property damage; aviation and marine liability insurances if the contract involves the use of aircraft or marine vessels, consideration should be given as to whether aviation and/or marine liability insurances are required. These insurances can include cover for liability for loss of, or damage to, third party property and injury or death of third parties and passengers; business interruption insurance this type of insurance covers the insured for increased costs of working and loss of profits in the event of insured loss of, or damage to, property; property insurance this type of insurance covers the risk of loss of or damage to property owned by the insured or in which the insured has an insurable interest (for example, as a financier). This type of insurance is to be distinguished from liability insurances which insure the liability of the insured to third parties. This policy is often effected in conjunction with business interruption cover and called an industrial special risks policy; marine cargo or transit insurance this type of insurance covers goods in transit. It can cover goods being transported by air, ship, road or train;

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contractor's "all risks" insurance or contract works insurance this type of insurance covers the risk of loss of, or damage to, contract works. It can also include cover for liabilities arising in the course of the contract works, in which case it is usually called contractor's all risks insurance; advanced consequential loss insurance this type of insurance can be purchased in conjunction with contract works insurance to cover losses such as loss of rent and increased costs of completion caused by a delay in the completion of the works; aviation and marine hull insurances this type of insurance covers loss of, or damage to, aircraft or marine vessels used by a contractor in performing the contract; directors and officers insurance this insurance covers directors and officers for their legal liability to third parties for breach of their directors duties or duties as officers; and charter services this type of policy can cover hull, war risks and allied perils, hijacking, confiscation and kindred perils and passenger liabilities for charter services.

In some circumstances, tender responses will offer corporate/group insurance policies to meet the insurance requirements specified in the request documentation. Where a tenderer proposes a corporate/group insurance policy, specialist legal advice should be sought. Naming the Commonwealth as an Insured 62. Defence does not generally require that the Commonwealth be named as an additional insured on a contractor's liability policies. The Commonwealth has its own insurances to cover its liabilities to third parties arising from its own acts or omissions and does not need to rely on a contractor's insurances. Accordingly, to require the contractor to insure the Commonwealth would lead to a situation of unnecessary double insurance. Further, it is generally extremely difficult, often impossible, for a contractor to have its insurances extended to include cover for the Commonwealth as an insured. However, in some limited circumstances it may be appropriate to have the Commonwealth named on an insurance policy taken out by a contractor to assist in obtaining payment under the insurance in the event of a liability arising. Such insurance policies may include:

63.

certain liability policies for the Commonwealths vicarious liability for the acts or omissions of the contractors; property insurances, if the Commonwealth has, or will have, an interest in the property insured. If the Commonwealth owns or has an interest in the property concerned or is making progress payments for contract works, the Commonwealth should be named as a loss payee on the relevant insurance policy. This means it will receive any monies paid out by the insurer under the policy. Where it is not named on the insurance policy, the Commonwealth will not be able to enforce the insurance policy directly against the insurer and may have to advise the insurer of its claim as an interested party 2 and aviation policies where Defence pilots are operating aircraft that are hired, leased or subleased from a person or organisation.

64.

If the Commonwealth is to be named, Procurement officers should ensure that the Commonwealth is the named party. The Department of Defence is not itself a legal entity.

Noted or Insured? 65. There has been recent case law in Australia which suggests that mere notation in the absence of other terms in the insurance policy giving rights to the noted parties, may provide no benefit. So where it is important for the Commonwealth or another party to be insured, it is not sufficient for that party to be merely "noted" on the schedule to the insurance. The schedule should state that the party is insured for its liability, or insured for its respective rights and interests in the property insured. The policy should also contain a provision in which the insurer agrees to treat the policy as if a separate policy had been issued in respect of each named insured.

22

Refer to ANAO Audit Report No. 23 2008-09 Management of Collins-class Operations Sustainment para 4.53 for further information.

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance Cross Liability, Non-Imputation and Severability Clauses 66. It is usually preferable that each party has their own separate insurance cover. Though in any case a risk analysis is required. Where a policy of insurance insures more than one party (i.e. Insurer X is insuring both A & B), it is proper to require that the policy include certain provisions to protect the rights of each insured including:

A cross liability clause. This is where Insurer X agrees to insure the liability of A and B in relation to potential liability issues between A & B. Insurer X will also be insuring the liability of A and/or B against third parties. A non-imputation clause. Where Insurer X agrees to not attribute the acts or omissions of A to B for the purposes of determining whether the insurance cover is available. A clause in relation to non disclosure. Under insurance law, A & B must disclose/reveal all relevant information for the purposes of the insurance contract. If A fails to do so, Insurer X may agree to not impute/attribute that failure to B (or vice versa) who disclosed/revealed all information. A waiver of subrogation clause.

67.

Cross-liability, non-imputation and severability clauses should be negotiated into the contract when there are products liability and property policies.

Waiver of Rights of Subrogation. 68. When an insurer pays a claim it is usually subrogated to the insured's rights of recovery against third parties who are legally responsible for the loss or liability of the insured. This means that Defence can pursue the insured's legal rights against those parties. The insurer should be asked to waive its rights of subrogation against other named insureds. This protects insureds from paying multiple excesses for the one loss or occurrence. It is appropriate to seek a waiver of subrogation in favour of the Commonwealth in respect of property policies where the Commonwealth is a named insured. The insurer should not be asked to waive its rights of subrogation against the Commonwealth except to the extent that the Commonwealth is an insured under the policy.

69.

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Reputable Insurers 71. Contractor insurances should deal with reputable insurers with a security rating of "A" or better as awarded by a recognised rating agency such as Standard & Poors, Moody's or AM Best. The contractor should be asked to provide evidence of the security rating of its insurers with the exception of insurers of statutory insurances such as workers compensation. If the contractor's insurers do not meet the required security rating, Procurement officers should consider whether insurers with the required security rating are available. Before insurers with a lower insurance rating are accepted, Procurement officers should consider the increased risk that insurers will be unable to meet any claim. Obviously, the greater the risk insured, the greater this consideration. Appropriate advice should be sought if in any doubt as to the availability or suitability of insurance.

72.

Territorial and Jurisdictional Limits 73. Some policies, particularly liability policies, will have a territorial limit identifying the territory in which the event or occurrence giving rise to the claim must occur. This is a geographical limit. Defence should consider whether the geographical limit of a particular policy is wide enough to cover all locations where events giving rise to claims may occur. For example, a public liability policy with a territorial limit of Australia will not cover occurrences in the Solomon Islands. Some policies also have jurisdictional limits which identify which courts' decisions will be covered by the policy. For example, if the policy has a jurisdictional limit of Australia, then a judgment given by a court of the United States will not be covered by the policy. If there is a Page 3.1511

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance chance that litigation may be brought in a country outside of the jurisdictional limit of the policy, then Defence should seek to have the jurisdictional limit extended. Approval of Policy Terms 75. Defence should have the right to approve the terms of insurances held by a contractor in other than Simple or low risk Complex procurement contracts. The terms of a policy can dramatically affect the coverage provided by that particular policy. For example, Procurement officers should ensure that there are no unacceptable exclusions and that levels of deductibles and excesses are acceptable. Contractors often resist providing copies of their policies for review, especially where corporate/group policies are proposed. In Complex or Strategic Procurement contracts, Defence should insist upon inspecting the insurance policies and approving the terms. The most resistance is likely to be experienced with respect to professional indemnity policies. Defence does not need to see the full professional indemnity policy. Terms setting out the overall limits of cover can be excluded. However, Defence needs to see the general terms of the policy (particularly exclusions) and the definition of professional services covered. If this definition is not wide enough, the policy may not respond to cover breaches of duty by the contractor in respect of the services to be provided to Defence. In Complex or Strategic Procurement projects, if a contractor has a justifiable reason why it cannot provide its insurances consideration can be given to:

76. 77.

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offering to inspect the policies in lieu of copies being provided this can be done by an adviser to the Commonwealth and the inspector may be required to give undertakings of confidentiality.

79.

In Simple or low risk procurement contracts where contractors are unwilling to provide copies of their policies, Procurement officers could accept:

accepting a detailed summary of the cover from the contractors insurance broker confirming that the policies meet contractual requirements and do not contain any unusual terms as well as a certificate of currency ; or accepting a certificate of currency. However, certificates of currency may not accurately represent the terms of cover.

Certificates of Currency 80. Contract managers should also request contractors to provide a certificate of currency for each insurance. This confirms that the policy is still current. However, certificates of currency should be viewed with some caution as it is a summary only and is overridden by the actual policy in the event of any inconsistency.

Other Contract Provisions 81. The contractor should be required to give notice to Defence whenever an insurer of any of the insurances taken out in compliance with the contract, gives the contractor a notice of cancellation or any other notice in respect of a required policy of insurance. Clauses may also be inserted in Defence contracts to:

place a requirement on the contractor to give notice to Defence whenever it serves a notice on its insurers of an intention to cancel a policy or fails to renew a policy; provide Defence with the right to claim insurances should the contractor fail to effect the required insurances or supply proof that they have been effected and maintained in accordance with the provisions of the contract. Usually, this type of provision also provides that Defence can recover the cost of claiming on the insurances as a debt due and payable from the contractor;

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place a requirement on the contractor to inform Defence whenever it becomes aware of any actual, threatened or likely claims under any of the insurances required to be maintained under the contract. This requirement should only apply to claims which could materially reduce the coverage under a policy, or which may involve the Commonwealth. Defence does not need to be made aware of all minor claims; place a requirement on the contractor to ensure that subcontractors carrying out work under the contract are insured as required by the contract. However, the contract should not relieve the contractor of liability for the acts or omissions of its subcontractors, regardless of whether the subcontractors hold insurance; and cover off the situation where particular risks under the contract become uninsurable. For example, the parties may have a right to terminate, or may be obliged to meet to determine other risk management initiatives in order to manage the risk.

Ensuring Compliance with Insurance Provisions 82. It is important that Defence, in particular contract managers, implements procedures to check that insurances are maintained as required by any procurement contract which has a duration of greater than 12 months. Contractors should be required to provide certificates of currency and/or copies of policies on each renewal date. If these terms are not enforced, there is the potential that they will not be complied with and the protections which the insurance requirements of the contract are intended to afford Defence, may be wholly or partially illusory. Defence should be particularly mindful of "claims made" policies which must be maintained after the end of the contract, for example, professional indemnity insurance.

Uninsured Risks and Good Risk Management 83. It is important to remember that insurance is only one tool in any overall risk management strategy. Whatever insurance is required of the contractor or held by Defence there will nevertheless be uninsured risks under any contract which must be managed by other risk management techniques. Even those risks that are insured should be the subject of risk management as:

insured events are often undesirable (for example, personal injury); insured events are often partially uninsured (for example, there will usually be an excess or deductible); the cost and continued availability of the insurance will often be affected by the frequency with which the risk eventuates; and insurance companies sometimes require risk management practices to be adopted under the policy with failure to do this jeopardising the ability to claim under the policy.

Key References
Commonwealth Procurement Guidelines Defence Chief Executives Instruction 8.6 Contingent Liabilities (including Indemnities, Guarantees, Warranties and Letters of Comfort) DMO Chief Executives Instruction 8.6 Contingent Liabilities. Defence Chief Executives Instruction 8.7 Insurance DMO Chief Executives Instruction 8.10 Insurance Financial Management Guidance No. 6 Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort September 2003 Finance Circular 2003/02 - Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort Finance Circular 2006/03 - Limited Liability in Information and Communications Technology Page 3.1513

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Defence Procurement Policy Manual 3.15 Indemnities, Limitation of Liability and Insurance Contracts Finance Circular No. 2011/01 Commitments to Spend Public Money (FMA Regulations 7 to 12) Comcover Insurance Policy Comcover Member Guidance Coverage of Contract Indemnities Department of Communications, Information Technology and the Arts A guide to limiting contractor liability in ICT contracts with Australian Government agencies

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Defence Procurement Policy Manual 3.16 Environment in Procurement

3.16
Introduction
1.

Environment in Procurement

This chapter is applicable to all procurement activities undertaken by Defence and the Defence Material Organisation (DMO) and provides guidance on the activities required to be undertaken by their contractors. Purchasing decisions have the potential to impact on the environment, including through the emission of Greenhouse gases and the consumption of natural resources. Accordingly, this chapter addresses:

2.

relevant legislative requirements interacting with procurement; core Commonwealth environmental policies which interact with procurement; and Defence environmental policy requirements.

Mandatory Policy
Procurement officers must comply with Defence Instruction (General) DI (G) ADMIN 403 - Assessment and approval of Defence actions under the Environment Protection and Biodiversity Conservation Act 1999 (DI (G) ADMIN 403), including the requirement to obtain approval, through Defence Support Group (DSG) from the Minister for Environment Protection, Heritage and the Arts prior to undertaking an action that has, will have or is likely to have a significant impact on the environment. Under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) Defence must not take an action that has, will have or is likely to have an adverse impact on the National Heritage values of a National Heritage place or the Commonwealth Heritage values of a Commonwealth Heritage place without obtaining prior approval. In accordance with the Commonwealths Energy Efficiency in Government Operations Policy (EEGO,) Procurement officers must consider energy efficiency in procurement. Procurement officers must undertake consultation with the Director of Environmental Impact Management in DSG to ensure that their procurement has been assessed as unlikely to have significant environmental impacts and will align with Commonwealth legislative requirements and the Defence Environmental Policy. Procurement officers must procure office equipment that complies with the US EPA Energy Star standard, where available, be fit for the purpose and cost effective and enable power management features as part of the supply of new appliances and equipment. Procurement officers must ensure that the procurement of commercial vehicles is undertaken using the Green Vehicle Guide, Items entering the Defence inventory, or services procured by Defence, must be free from ozone depleting substances and specified synthetic greenhouse gases. Where avoidance is impracticable, approvals must be obtained from regulators and those supplies containing such substances must be fully identified to users and handlers to ensure they are adequately trained, and the nature and extent of the associated hazard is clearly displayed. Procurement officers must ensure that contractors hold required licences and comply Page 3.161

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Defence Procurement Policy Manual 3.16 Environment in Procurement with the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 (Cth) (OP&SGG Act). Any contractor handling a scheduled substance on behalf of Defence must be required to produce all relevant licences to the Contract Manager before being permitted to work.

Operational Guidance
Legislative Framework 3. The Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) imposes requirements on all Australian Government agencies, including Defence and the DMO, regarding management of their activities. It is important that Procurement officers have an understanding of the activities which require approval and actions which may incur sanctions under the EPBC Act as in some instances Defence and DMO officers may be personally liable for offences under the EPBC Act. Defence has developed internal guidance on determining whether or not an activity is likely to be assessed as having a significant impact on the environment. Procurement officers must comply with DI (G) ADMIN 403, including the requirement to obtain approval (through Defence Support Group) from the Minister for Environment Protection, Heritage and the Arts prior to undertaking an action that has, will have or is likely to have a significant impact on the environment. Approval may be required for a wide range of actions referred to in the EPBC Act and approvals may be required under other environmental legislation. The activities requiring approval include those activities with a significant impact on:

4.

a World Heritage property; a National Heritage place; a Ramsar wetland; the Great Barrier Reef; Commonwealth Marine Areas; listed threatened species, endangered communities or migratory species; and the environment;

Approval is also required for actions involving certain nuclear technologies. 5. If the Minister determines that the proposed action is a controlled action and, requires their approval, the approval granted will often be subject to conditions. It is a serious civil offence to contravene a condition and may constitute a criminal offence where there is a significant environmental impact and the person is reckless about whether the action or omission will contravene a condition. Procurement officers should be aware that even if a proposed action does not require Ministerial approval under the EPBC Act, it may still require internal Defence consideration and approval via an Environmental Clearance Certificate (see DI(G) ADMIN 40-3)

6.

Application of Environmental Legislation and Defence Environmental Policies to Contractors 7. The EPBC Act also creates offences for any person taking action on Commonwealth land that is likely to have a significant impact on the environment unless otherwise approved by the Minister or exempted from needing approval. State environmental laws also apply to the activities of contractors in most circumstances. Accordingly, there is the potential for Defence contractors to commit offences under environmental legislation. Defence contractors should be required to meet applicable environmental standards while carrying out work on Defences behalf on Defence facilities or land. In accordance with DI(G) ADMIN 40-3 and DI(G) ADMIN 40-2 Environment and Heritage Management in Defence, all Defence contracts should include an obligation to comply with Defence environmental policies and relevant Defence Instructions (General) (DI(G) Page 3.162

8.

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Defence Procurement Policy Manual 3.16 Environment in Procurement ADMIN40-2). The ASDECON suite of tendering and contracting templates (ASDEFCON) includes these requirements where relevant.

Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 (Cth) (OP&SGG Act)
9. The OP&SGG Act gives effect to Australias international obligations under the Montreal Protocol and establishes measures to protect the ozone layer and to minimise emissions of synthetic greenhouse gases. The OP&SGG Act puts in place:

10.

a system of controls on the manufacture, import, export and distribution of substances that deplete ozone in the atmosphere; specific controls on the use of products that contain such substances or use such substances in their operation; and a regulatory framework for the end use of such scheduled substances within both the Refrigeration and Fire Protection Industries; and directives to organisations to replace ozone depleting substances to the extent that such replacements are reasonably possible within the limits imposed by the availability of suitable alternate substances, and appropriate technology and devices.

11. 12.

The controlled substances are listed in Schedule 1 of the OP&SGG Act. Although there is the potential for State and Territory ozone protection legislation to apply, several States and Territories are in the process of repealing State and Territory regulation in this area. However, Procurement officers should check the status of State and Territory legislation in the jurisdiction in which the work will be performed. Commonwealth legislation requires that all Procurement officers who are responsible for the management (purchase, handling or use) of scheduled substances comply with the requirements of the Ozone Protection and Synthetic Greenhouse Gas Management Regulations 1995 (Cth) and the OP&SGG Act. This includes requirements on importing and exporting, record keeping, storage, disposal and obtaining permits, licences and trading authorisations. Procurement officers must ensure that contractors hold required licences and comply with the OP&SGG Act. Any contractor handling a scheduled substance on behalf of Defence must be required to produce all relevant licences to the Contract Manager before being permitted to work. The ASDECON suite of tendering and contracting templates (ASDEFCON) includes these requirements where relevant.

13.

14.

Key Commonwealth Environmental Policies Energy Efficiency 15. Defence is required under the Energy Efficiency in Government Operations Policy (EEGO) to consider energy efficiency in purchasing decisions. The EEGO Policy is available at http://www.environment.gov.au/sustainability/government/eego/publications/pubs/eegopolicy.pdf. Key requirements are as follows:

16.

revised energy intensity portfolio targets by 2011-2012 financial year of 7,500 megajoules/person/annum for office tenant light and power and 400 megajoules/m2/annum for office central services;

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Defence Procurement Policy Manual 3.16 Environment in Procurement

a revised framework for agencies to identify, monitor and manage their energy consumption by specifying minimum energy performance standards (typically 4.5 stars Australian Greenhouse Building Rating) in contracts, leases, etc for new buildings, major refurbishments and new leases over a certain threshold. All new leases of buildings >2000m2 and > 2years duration are required to have a Green Lease Schedule in place between tenant and landlord to set targets for achieving the 4.5 AGBR rating or an alternative cost effective rating. There are some exceptions where it is impractical or not cost effective to achieve this rating which will require application for exemption from the Government; stakeholder engagement through industry workshops and energy forums; provides help desk support to provide advice and clarify agency reporting requirements; and communications and existing building strategy requiring Defence to report on its aggregate energy consumption to the Defence Minister and the Department of Environment, Water, Heritage and the Arts and to determine how Defence can implement the minimum energy performance measures to meet the revised targets.

National Packaging Covenant 17. Defence encourages the purchase of recycled goods and improvement of environmental outcomes through the use and recovery of recycled packaging. Guidance on the management of packaging waste is contained in the National Packaging Covenant (NPC). Procurement officers should apply the principles of the NPC in internal operations in relation to:

18.

Purchase of raw materials; Purchase of packaged goods and paper; Disposal of used packaging and paper; and Materials recovery and the purchase of recovered materials.

19.

In addition, Defence is required to report on its progress against Key Performance Indicators which measure Defences performance on meeting minimum targets relating to increasing the amount of recycled post consumer packaging recycled, increasing the recycling of difficult or non-recycled materials (including plastics, coded (4) to (7) and non recyclable paper & cardboard packaging and ensuring that no new packaging goes to landfill. The Environmental Code of Practice for Packaging is an integral part of the current NPC, promoting excellence in packaging that is designed to have a minimum net impact on the environment (in terms of waste, water, energy and emissions) while preserving the integrity of the product. Adoption of the Environmental Code of Practice for Packaging within Defence facilitated through the Defence Packaging Committee.

20.

Defence Environmental Policies 21. Procurement officers should:


purchase environmentally sustainable goods and services; consider whole-of-life issues; re-use and re-allocate assets in preference to purchasing new assets; minimise wastage; consider energy and water efficiency when appropriate in procurement activities; and use the Environmental Purchasing Guide checklists for environmental evaluation guidance (refer to para 35); The Defence Environmental Policy and objectives can be accessed at: http://www.defence.gov.au/Environment/. Page 3.164

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Defence Procurement Policy Manual 3.16 Environment in Procurement Defence Environmental Management System 22. Defence has an Environmental Management System aimed at improving Defences management of environmental risk and guided by the International Standards Organisation (ISO) 14001:2004 standard. This management system is integrated with other Defence business processes, and supports the Australian Defence Forces capability while managing its environmental risks. The Defence Environmental Management System is implemented at three levels: corporate; groups and services; and sites. As an element of the Environmental Management System, Defence should identify the environmental impacts of its activities, products and services. Purchasing has been identified in the corporate Environmental Management System as having an environmental impact.

23.

Ecologically Sustainable Development Strategy 24. The Ecologically Sustainable Development (ESD) Strategy provides guidance for the application and integration of ESD principles in all phases of the life cycle of Defence land, Defence capability, business practices, buildings and other assets. The policy sets out a number of strategic initiatives to achieve ESD in Defence and can be accessed at: http://intranet.defence.gov.au/environment/esd/main.htm

Key Considerations In Conducting Environmental Purchasing 25. Consistent with Commonwealth procurement policy, when purchasing goods and/or services, Procurement officers should give consideration to whether the goods and/or services:

are required in the first place, or if there is an alternative, reuse or reallocation option - all purchases should be defensible; meet environmental best practice in energy efficiency and/or consumption; are environmentally sustainable in terms of manufacture, use and disposal; are reusable or recyclable; are designed for ease of recycling, re-manufacture or to otherwise minimise waste; and are designed and made for reliability, long life and/or easily upgraded or updated.

26.

Evaluation of the environmental effects of all procurements is to be considered and included in the request documentation as specifications or contract conditions where appropriate. Tenderers may be requested to provide information against specific environmental criteria. Care should be taken when specifying a criterion as essential or mandatory as noncompliance may result in those tenders being excluded from further consideration (refer to chapters 5.4 and 5.6 for further information regarding essential requirements). Sustainable Environmental Management is an integral element of capability development and equipment acquisition. The project office needs to consider the environmental impacts, including heritage impacts, of its activities and purchases. Environmental risks must be identified and evaluated and management strategies developed to minimise environmental impacts. An environmental management plan may be an appropriate way to minimise these impacts. Procurement officers must undertake consultation with the Director of Environmental Impact Management in DSG during development of the plan to ensure the project has been adequately assessed as unlikely to have significant environmental impacts and will align with Commonwealth legislative requirements and the Defence Environmental Policy. More information on key considerations such as whole of life costing, resource efficiency in production and use, waste and disposal issues are available on the Defence Environmental Intranet site at http://intranet.defence.gov.au/environment/greenprocurement/main.htm.

27.

28.

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Defence Procurement Policy Manual 3.16 Environment in Procurement Whole of Life 29. The Commonwealth Procurement Guidelines (CPGs) require that the value for money of a good or service be considered on the basis of whole-of-life costing including assessing the relative costs and benefits of each proposal throughout its life (see section 4.1 of the CPGs). For example, purchasing that does not consider the operating costs (such as energy consumption for an appliance) or consideration of the cost of disposal at end-of-life as part of the value for money decision making process, is unlikely to meet the objectives of Government procurement or environment policies. Whole of life considerations are fundamental to environmental purchasing as factors such as the manufacture, maintenance, and disposal of the goods or services purchased need to be considered in order to determine the full environmental impact and associated life cycle costs of the procurement. Specifically, Procurement officers should consider factors such as availability of warranties and cost of servicing, into account, as well as the initial cost, likely running costs (energy star rating) and disposal options in developing a definition of the whole of life cost. For example, while an appliance with a higher star rating may be more expensive in terms of its initial purchase price, it may be less expensive in the long run when compared with a cheaper appliance with a lower energy efficiency rating. To inform the value for money decision making process, it may be appropriate to request information from tenderers on the environmental benefits of goods and services and how those benefits or risks have been enhanced or mitigated (for example how the product or service has been designed to minimise risk).

30.

31.

32.

33.

Environmental Purchasing Guide 34. The Environmental Purchasing Guide includes environmental purchasing checklists to help Procurement officers take account of relevant energy and environmental issues when procuring goods and services. Procurement officers are strongly encouraged to incorporate the Environmental Purchasing Guide and environmental purchasing checklists into their existing purchasing systems or use it for stand-alone environmental evaluation. The toolkit is made up of environmental checklists and environmental specifications and is available at: http://www.environment.gov.au/settlements/#checklists.

Environmental Impacts 35. In addition to the EPBC Act, there may be other legal obligations that must be considered prior to procurement. Procurement officers may find it helpful to consult the Legal Obligations Registers (LOR) prior to the commencement of procurement activities to determine other environmental requirements which may apply. There is a separate LOR for each State and Territory and these also include relevant Commonwealth requirements. These can be accessed at: http://intranet.defence.gov.au/environment/legal_registers/main.htm. When planning to procure goods and services, Procurement officers should consider those National Environmental Protection Measures outlined in The National Environment Protection Measures (Implementation) Act 1998 that are likely to apply to Defence, e.g. goods and/or services that involve or require:

36.

the movement of controlled waste between States and Territories; used packaging materials; the assessment of site contamination; the use of a polluting substance; or the use of diesel vehicles.

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Defence Procurement Policy Manual 3.16 Environment in Procurement 37. 38. Defence guidance on the application of National Environment Protection Measures can be obtained from the Director of Environment Impact Management on (02) 6266 8067. Procurement officers must ensure that the procurement of commercial vehicles is undertaken using the Green Vehicle Guide.

Water Efficiency 39. Where relevant, Procurement officers must include water efficiency in planning, specifying and conducting procurement in accordance with the Defence Water Management Strategy. Water efficiency should be considered in the procurement of the following key products/services:

domestic water using appliances; plumbing equipment and services; landscaping products and services, e.g. water efficient irrigation systems; and plant material used in landscaping e.g. native species requiring less water.

40.

Where relevant, the latest products rated by the Governments Water Efficiency Labelling and Standards (WELS) Scheme, which sets minimum water efficiency standards for plumbing products, sanitary ware and whitegoods, should be used.

Waste Management and Reduction 41. Under the new National Waste Policy 2009 (NWP), all agencies are required to embody and promote sustainable procurement principles and practices within their own operations and delivery of programs and services to facilitate certainty in the market requiring, as far as practical, considerations such as waste management, use of reprocessed materials, resource recovery and responsibility for goods and materials at end of life to form part of Commonwealth purchasing decisions. Where practicable, Procurement officers should consider waste management, use of reprocessed materials, resource recovery and responsibility for goods and materials at end of life when making procurement decisions.

42.

Heritage 43. Procurement officers should ensure they take into account matters affecting the environment, including heritage values, when formulating requirements. Under the EPBC Act Defence must not take an action that has, will have or is likely to have an adverse impact on the National Heritage values of a National Heritage place or the Commonwealth Heritage values of a Commonwealth Heritage place without obtaining prior approval (through DSG). A list of Defence places that have National and/or Commonwealth Heritage values and further guidance of Defences heritage obligations is available from the Defence Heritage Management website at: http://www.defence.gov.au/environment/heritage.htm.

44.

Pollution Prevention 45. The Defence Pollution Prevention Strategy (DPPS) has assessed that the risk of significant impact on the environment and health of Defence personnel from the procurement of assets (refers to plant, equipment, machinery, weapons, vehicles, vessels and aircraft) and infrastructure is high if not managed correctly. Procurement officers should ensure that purchasing activities take account of Defences liability associated with the use of hazardous substances and the management of waste streams. The DPPS details the potentially hazardous substances that can affect people and the environment (land, air, water). Procurement decisions should consider pollution impacts, with Capital Equipment and Asset procurement to include design, development, management and disposal specifications which avoid or minimise these risks.

46.

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Defence Procurement Policy Manual 3.16 Environment in Procurement Ozone Depleting Substances and Synthetic Greenhouse Gases 47. Defence is required by law to phase-out ozone depleting substances and manage synthetic greenhouse gases. Defence is committed to ensuring that the handling and use of ozone depleting substances and synthetic greenhouse gases is controlled in a manner which prevents or minimises any damaging emissions to the atmosphere. Defence policy requires that goods and services procured by Defence are to be free from ozone depleting substances or, where avoidance is impracticable, the use of those substances is clearly identified and the nature and extent of the hazard is clearly displayed. Standard Defence contracting templates for the procurement of goods and services (including ASDEFCON) contain a clause requiring contractors to comply with this policy. Further information on ozone depleting substances and synthetic greenhouse gas policy can be found in the following Defence documents:

48.

49.

Defence Instruction (General) LOG 4-3-022 The Ozone Depleting Substance and Synthetic Greenhouse Gas Manual; and Defence Logistics Manual (DEFLOGMAN) Volume 3, -Ozone Depleting Substances and Synthetic Greenhouse Gas Manual.

50.

Defence policy in this area focuses on the phasing out of ozone depleting substances from the inventory whenever a suitable and safe alternative is available. If the use of a particular ozone depleting substance is unavoidable for a specific application, a management plan is required. Defence policy recognises that there are some substances which will be regarded as essential for Defence use, i.e. those ozone depleting substances for which there is no acceptable replacement substance, and which are required to maintain systems. In those cases where the potential for hazard has been defined and it is not feasible to replace the ozone depleting substance with a non-ozone depleting alternative, the contractor shall ensure that the location and nature of the hazard involved is clearly indicated and documented in order that appropriate precautions can be taken in the handling, operation and maintenance of the equipment once it is introduced into service. Such information should be visible not only on the item itself, but also on any higher assembly in which the item is incorporated and in all related technical documentation. In such cases a management plan is required.

51.

Biosecurity 52. Where relevant, Procurement officers should consider design features of vehicles / equipment and clothing that help reduce the risk of spreading of pests and disease (not human-human). Defence policy relating to managing biosecurity risks is provided in Management of Biosecurity and Overabundant Native Species Risks on the Defence Estate 2009.

Key References
Environment Protection and Biodiversity Conservation Act 1999 Environment Protection and Biodiversity Conservation Regulations 2000 Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 Ozone Protection and Synthetic Greenhouse Gas Management Regulations 1995 Energy Efficiency in Government Operations Policy Environmental Purchasing Guide: An Australian Government Initiative Environmental policy on the Environment Australia website National Waste Policy: less waste, more resources Defence Instruction (General) DI (G) ADMIN 403 - Assessment and approval of Defence actions under the Environment Protection and Biodiversity Conservation Act 1999 Page 3.168

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Defence Procurement Policy Manual 3.16 Environment in Procurement Defence Instruction (General) ADMIN 40-2, Environment and Heritage Management in Defence Defence Instruction (General) LOG-4-3-022 The Ozone Depleting Substance and Synthetic Greenhouse Gases Manual Defence Logistics Manual (DEFLOGMAN) Volume 3, The Ozone Depleting Substances and Synthetic Greenhouse Gases Manual Defence Sustainable Water Management Strategy Defence Environment website Management of Biosecurity and Overabundant Native Species Risks on the Defence Estate 2009 Green Vehicle Guide

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Defence Procurement Policy Manual 4.1 Partnering and Teaming Arrangements

4.1
Introduction
1.

Partnering and Teaming Arrangements

Partnering and teaming arrangements are strategies that may be adopted to facilitate cooperation between Defence, its contractor and their subcontractors. These arrangements do not form part of the contract between Defence and the contractor and it is important to ensure that they do not affect the contractual obligations of either Defence or its contractors. Partnering and teaming arrangements should not be confused with project alliancing.

Partnering Arrangements 2. Partnering is a management strategy under which the parties agree to focus on developing cooperative working relationships in order to avoid adversarial approaches to resolving problems. A partnering relationship is based on teamwork and commitment from each of the entities contributing to it.

Partnering objectives 3. Partnering is designed to support the achievement of several objectives:

the enhanced delivery of products and services to Defence through more effective and efficient communication channels; the adoption of best practice business processes and systems as may be agreed by the contributing parties; and the engagement of industry in ways that enables support to Defence more cooperatively than may occur in adversarial contracting relationships.

Benefits of partnering 4. Benefits that may be gained through partnering include:

both parties are focused on achieving common goals, and are better placed to be able to work cooperatively towards them; problems that arise are able to be communicated to other parties and dealt with more expeditiously than may ordinarily be the case; a reduction in adversarial relationships resulting in reduced administrative costs; the creation of a better environment for innovative ideas to be suggested and implemented as a consequence of open communication channels; and the capacity for risks to be identified and allocated appropriately early in the procurement process.

Partnering agreements 5. Defence supports the use of partnering agreements for Complex and Strategic procurements. Defence is currently extending the use of partnering agreements beyond capability acquisition projects, as partnering principles have general application to longer-term contractual relationships where there are advantages in minimising adversarial conflicts. A partnering agreement is usually specific to a particular contract, although similar general conditions may be applied to other contracts. There may be circumstances, especially in the case of a proposed single supplier direct source arrangement, where it is appropriate to enter into a partnering agreement before contract signature. Any such agreement must include a clause stating that the agreement is subject to contract. This will provide Defence with legal protection against tenderer claims in the event that the contract is not entered into. To avoid the Page 4.11

6.

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Defence Procurement Policy Manual 4.1 Partnering and Teaming Arrangements contractual relationship being inconsistent with the partnering arrangements between the parties, the contract should be drafted, and where necessary amended, to reflect the partnering relationship between the parties. Representations made in a partnering workshop, or forming part of the partnering arrangement, and which are relied upon by the parties should be incorporated into the contract. Similarly, it is important to ensure that dispute resolution procedures in the contract are consistent with the issue resolution process set out in the partnering agreement. 7. A partnering agreement is not a contract but is designed to promote more effective contract management, relationships and outcomes. It does not replace a contract, lessen or reduce requirements or decrease the responsibilities of Defence or the contractor. Annex 4A contains an example of a partnering agreement that may be used as a model that can be adapted to meet particular circumstances. Procurement officers should seek advice from the contracting specialists listed at the front of this Manual when preparing a partnering agreement.

Who are the partners to a partnering arrangement? 8. The participants or partners in a partnering relationship comprise those stakeholders directly involved in the project. They are Defence as customer, the contractor and relevant subcontractors and consultants. It is important to ensure that all the significant stakeholders participate in the partnering process, not only the contracting parties. HANDY HINT It is important to note that a partnering relationship, whether long term or not, does not create a legal relationship such as a legal partnership, a joint venture or any other form of legal entity. Thus the partnering agreement is a mission statement that declares the overall goals in a single statement. Partnering principles 9. Partnering principles which have been successfully applied involve all stakeholders in:

facilitating better personal relationships and a sense of common purpose; formalising a joint resolution process, where decision makers always hear both sides of the story; resolving issues and problems at the lowest practicable level; and developing mutual respect between all stakeholders.

10.

Implementation of these principles leads to:


a team approach to the contract outcomes; resolution of issues before they become disputes; pro-active planning and early identification of risks; increased prospects for a successful project; a more cooperative, productive and enjoyable working environment; and a win-win outcome.

11.

The working relationship under an effective partnering arrangement will provide for less formality and more flexibility and will enhance the management provisions outlined in the formal contract document. However, it remains important for significant issues arising under partnering relationships to be formally documented and any agreements impacting on the terms and conditions to be implemented by contract amendment.

Partnering process 12. For partnering to be successful there must be a commitment to the process at all levels within each stakeholders organisation. Several steps are involved in the partnering process: Page 4.12

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Defence Procurement Policy Manual 4.1 Partnering and Teaming Arrangements

an invitation. One or more of the parties must invite the other parties to enter into a partnering arrangement; agreement to enter into a partnership arrangement. Defence, the contractor, subcontractors and other stakeholders agree to enter into a partnering relationship; a partnering workshop. This is an opportunity for the parties to determine an appropriate partnering agreement, an issue resolution process, and a joint evaluation process to monitor and evaluate performance; implementation of a joint venture evaluation process. On a regular basis, the partners should use an agreed joint evaluation process to evaluate their performance against the objectives; and final evaluation. At project completion the partners should meet to evaluate their performance over the life of the project and record any lessons learnt.

13.

Procurement officers establishing a partnering agreement should:


include details of the planned project partnering process in any briefing to tenderers; foreshadow in the particular request documentation, Defences preference for partnering relationships; obtain senior management commitment to partnering for the project in the form of a mission statement; and immediately prior to, or immediately following contract signature, hold a team-building workshop to develop a partnering agreement to be signed by all stakeholders. This will usually involve a facilitator. The partnering agreement should include an issue resolution process, pro-active problem identification mechanisms and mechanisms for monitoring the achievement of the mission objectives.

Teaming Arrangements 14. The terms partnering and teaming arrangement are not interchangeable. A teaming arrangement is an affiliation (not necessarily a formal arrangement) of companies brought together to be better able to meet a requirement. This arrangement is often established precontract. In most cases, a company will not be obliged to be a member of an exclusive team but may be a member of several teams. For Complex and Strategic procurements, Defence has often advocated the formation of teams between potential suppliers to tender for Defence business. Defence policy is not to involve itself in the actual composition of the teams, as it is a matter for the commercial judgement of those involved. An exception is where Defence advises in its tender documentation that a particular subcontractor must be engaged in the work under any resultant contract because of the nature of the requirement. Where Defence nominates a particular subcontractor in request documentation, tender documents should be released to that subcontractor at the same time.

15.

Mandating subcontractors 16. Mandating subcontractors should be avoided unless it is absolutely necessary for the performance of the proposed contract. By mandating a particular subcontractor, Defence will limit the commercial freedom of tenderers and may not achieve value for money. In addition, Defence may be exposed to greater risk where the mandated subcontractor fails to perform under a subcontract as Defence may be prevented from claiming loss or damages due to the fact that the subcontractor was mandated by Defence. To counter this, at least in part, Defence should make it clear in the request documentation and at negotiations that bidding for the role of prime contractor, despite the mandating of a subcontractor(s), implies full responsibility for the management and performance of that subcontractor(s). Those bidding for the role of prime contractor should prepare their bids and pricing on this basis.

17.

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Defence Procurement Policy Manual 4.1 Partnering and Teaming Arrangements 18. Circumstances in which a subcontractor may need to be mandated include:

where a company is the only provider for a particular item required for incorporation in the supplies and Defence wishes to prevent the formation of exclusive teaming arrangements that limit competition at the tendering stage; or where Defence has entered into a previous contract with the provider of a particular item and is contractually bound to secure the item from the supplier.

19.

The firmness of the teaming arrangements will depend on the phase of the acquisition process. In general, Procurement officers should not promote any arrangement in which local companies lock themselves into exclusive arrangements with an overseas supplier in the early phases of the tendering process. Exclusive teaming arrangements could deny local firms the flexibility and opportunity of being involved subsequently with the successful tenderer.

Advice on Partnering and Teaming Arrangements 20. Procurement officers seeking further advice on partnering and teaming arrangements should contact the appropriate Defence and DMO Support Areas found at the front of this manual.

Chapter Summary
Partnering is a management strategy in which the parties agree from the outset to focus on cooperation, problem solving and conflict avoidance procedures. Defence supports the extension of partnering agreements beyond capability acquisition projects to reflect a whole-of-life approach to capability management. Partners to the process can enter into a partnering agreement, which is simply a formal commitment between Defence, its contractor and other relevant stakeholders to work together to avoid adversarial confrontation. It does not replace the relevant contract and is not a legally binding document. Partners in the process are Defence, the contractor, its subcontractors and consultants. If Partnering is to succeed, commitment at all levels within each stakeholders organisation is required. From the partnering process, stakeholders develop mutually agreed procedures for timely resolution of issues or conflicts at the lowest possible management level. Several stages are involved in the partnering process: an invitation to enter into a partnering arrangement, an agreement to enter into a partnering arrangement, a workshop, implementation of a joint evaluation process, and a final evaluation. A teaming arrangement is an affiliation of companies brought together to be better able to meet a requirement. In general, tenderers should not be encouraged to lock themselves into exclusive arrangements in the earlier phases of the tendering process.

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Defence Procurement Policy Manual 4.2 Overseas Procurement

4.2
Introduction
1. 2.

Overseas Procurement

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter provides guidance on the procurement of supplies from overseas, and in particular addresses the following:

the role of Defence Materiel (DEFMAT) Branch in Washington, United States of America (US), and the Counsellor Defence Materiel (CONDMAT) in London, United Kingdom (UK); the procedures for purchasing goods and services from overseas suppliers through the DEFMAT and CONDMAT offices; the Foreign Military Sales (FMS) process and associated risks; and export compliance.

Mandatory Policy
Defence and DMO Procurement officers must comply with Defence Materiel Handbook (Procurement) DMH (PROC) 13-0-002 Engaging CONDMAT and DEFMAT in the conduct of Procurement when engaging DEFMAT and CONDMAT. Procurement officers must use DEFMAT as the single point of contact for establishing or amending FMS cases. DMO Procurement officers must undertake a risk assessment for the purposes of entering into an indemnity arrangement as part of the establishment of an FMS case in accordance with DMO Chief Executives Instruction 8.6: unless:

the procurement is for spares or repairable items; and a risk assessment was previously undertaken for procurement of the higher assembly.

Procurement officers must also obtain Financial Management and Accountability Regulation (FMAR) 10 delegates approval for the indemnity arrangement in accordance with FINMAN 2 Schedule F2-1 (for Defence) and DMD Chief Executives Instruction (CEI) 2.1. Under the standard terms and conditions of an FMS case, Procurement officers must obtain approval prior to transferring FMS procured goods or services to a third party. Where foreign currency bank accounts are maintained as part of commercial arrangements or acquisition of military equipment, the accounts must not be used to store money in a foreign currency purchased before a payment is due. DMO Procurement officers must comply with the Defence Materiel Manual (Finance)(DMM(FIN)) 01-0-004 Foreign Military Sales Financial Management Manual when managing financial aspects of FMS.

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Operational Guidance
Background 3. The acquisition of any new capability is likely to involve the procurement of elements from overseas, in particular from the US. For this reason, it is important that Procurement officers have a clear understanding of:

the different methods of overseas procurement; the common legal restrictions on the importation of overseas military equipment; and the risks that these procurement methods pose to Defence.

4.

There are a number of ways in which Defence procures equipment and military technology from overseas. In particular, certain supplies will often be purchased from overseas as part of a wider procurement in which the remaining goods or services are provided by a domestic supplier. There are various types of procurement used for the foreign element of the procurement, including:

a commercial arrangement between Defence and an overseas supplier; and a direct government-to-government arrangement between Defence and the US Government under the FMS program. Under these arrangements, the US Department of Defense acts on Australias behalf in negotiating a FMS contract with US corporations and there are standard terms and conditions (including liability arrangements) that form part of any FMS contract.

5.

With some exceptions, the same legislative and policy framework applies to overseas purchases through DEFMAT and CONDMAT offices as applies to other Defence procurements. Both the Financial Management and Accountability Act 1997 and the Commonwealth Procurement Guidelines (CPGs) apply to the procurement of goods and services from overseas. Procurement officers should note that if the goods or services being procured are purchased outside Australian territory, for consumption outside Australian territory, then the Mandatory Procurement Procedures of Division 2 of the CPGs do not apply. The requirements of Division 1 of the CPGs still apply. These include obligations such as demonstrating value for money, nondiscrimination and transparency. For further information refer to chapters 1.2 and 3.10. Procurement officers should also note that DEFMAT and CONDMAT offices have access to favourable freight rates through their contracted freight forwarders. This is an important aspect to consider when assessing offers from Australian companies or agents of US suppliers.

6.

7.

The role of DEFMAT and CONDMAT Offices 8. The DEFMAT and CONDMAT offices are the first point of contact for all matters relating to Defence projects, acquisition and through-life support of Defence equipment, and Industry issues. DEFMAT Washington has responsibility for these matters in the US and Canada, while CONDMAT London has responsibility in the United Kingdom and Europe. Prior to engaging the services of DEFMAT or CONDMAT, Procurement officers should consider whether:

9.

the proposed procurement is likely to involve suppliers from a DEFMAT or CONDMAT jurisdiction; and the complexity of the procurement means that it is appropriate for DEFMAT or CONDMAT to manage the procurement directly or to provide assistance as part of a wider effort by the domestic acquisition team.

10.

In general, the kinds of Simple procurement carried out by DEFMAT or CONDMAT involve an approved arrangement with a particular supplier (i.e. under a standing offer) or a direct purchase from an Original Equipment Manufacturer (OEM). Strategic and certain Complex Page 4.22

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Defence Procurement Policy Manual 4.2 Overseas Procurement procurements are not generally suitable to be progressed independently by a CONDMAT or DEFMAT office although these offices may well provide assistance on various aspects of the procurement. 11. Circumstances in which it may not be appropriate for a procurement to be conducted independently by DEFMAT or CONDMAT include where the procurement involves:

significant negotiation on commercial or technical matters; developmental requirements; or potential or known integration risks.

12.

The key DEFMAT and CONDMAT activities relate to the support of the capability management and materiel aspects of Defence business, with particular emphasis on:

the overall management of Simple and lower end Complex procurements including exercising Procurement, Contract and Contract Signatory approvals on behalf of the domestic project; market research and testing; providing comprehensive local market knowledge and expertise; developing or assisting in the development of request documentation; conducting approaches to the market; conducting or assisting in the conduct of tender evaluation and contract negotiations, including the provision of facilities at overseas missions; facilitating cost investigation under reciprocal memorandums of understanding (MOU); the issue of End User certificates and provision of advice on Export Licences in their areas of jurisdiction; coordinating and providing advice in relation to freight support; and assistance with contract management, the delivery of supplies and processing of invoices.

13.

Defence and DMO Procurement officers must comply with Defence Materiel Handbook (Procurement) (DMH (PROC) 13-0-002) Engaging CONDMAT and DEFMAT in the conduct of Procurement when engaging CONDMAT and DEFMAT.

Purchasing through Counsellor Defence Materiel Offices Obtaining Relevant Approvals 14. Procurement delegation requirements for purchases through DEFMAT and CONDMAT are the same as those for all procurements, as outlined in chapter 1.4. Additional requirements and specific responsibilities for obtaining Proposal approval, Procurement approval, Contract approval and Contract signatory are contained in DMH (PROC) 13-0-002.

Overseas Visits and Contract Approval 15. As part of the tender evaluation process for a particular procurement, Procurement officers in Australia may be required to have discussions directly with the overseas-based tenderer. The following practices should be adopted where DEFMAT or CONDMAT staff will be required to exercise Contract Approval and Contract Signatory. DEFMAT and CONDMAT offices are to be advised as early as possible of forthcoming visits by Australian Procurement officers to overseas-based tenderers to enable their input prior to the visit. Where the relevant DEFMAT or CONDMAT office is to exercise Contract Approval and Contract Signatory, a representative from that office should be included in the discussions held with the overseas-based tenderer.

16.

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Defence Procurement Policy Manual 4.2 Overseas Procurement 17. If a Procurement officer is not available from the DEFMAT or CONDMAT office, and unless other arrangements are made, tenderers should be advised that any discussions of contractual arrangements are not formal contract negotiations or agreements. If appropriate, the Procurement officer in Australia should forward a brief to the DEFMAT or CONDMAT office detailing the issues discussed as part of the visit, as there may be areas of local knowledge that the DEFMAT or CONDMAT offices can assist with, such as terms and conditions specific to countries.

Price and Availability Data 18. When sourcing supplies from overseas, Procurement officers should bear in mind the Defence policy on agency relationships set out in chapter 4.10. Procurement officers may approach Australian agents or brokers of the overseas manufacturers to obtain information relating to supplies but should advise CONDMAT or DEFMAT of all suppliers who have been approached. To ensure value for money is achieved, Procurement officers should also task the CONDMAT or DEFMAT office to obtain price and availability data direct from the overseas manufacturer. Because of the administrative burden otherwise placed on the overseas manufacturer, Procurement officers should not approach agents or brokers of overseas manufacturers on a routine basis for price and availability details. Where Procurement officers make price and availability enquiries directly, they should not commit the Commonwealth to a purchase or otherwise reduce the leverage that CONDMAT or DEFMAT would have in price negotiations.

19.

20.

Limitation of Liability 21. If in the process of conducting procurement a tenderer proposes a limit to its liability, Procurement officers must conduct a risk assessment to inform any decision about whether limiting the tenderers liability is appropriate, unless the procurement fits into one of the exemptions for FMS cases discussed in paragraphs 36 and 37 below.

Purchasing in Foreign Currency 22. Procurement officers should ensure that overseas purchases quoted and paid for in foreign currency, as an alternative to Australian currency, are considered in accordance with Defence policy (refer to chapters 2.2, 3.3 and Annex 3F).

Contract Management Requirements 23. In instances where a Procurement officer in Australia contracts directly with an overseas supplier, the Australian Procurement officer must forward details to the DEFMAT or CONDMAT office of any post contract actions required of that office and a copy of the resultant contract. Types of post contract actions falling under this requirement might include arranging for inspection or shipment of the supplies and payment to the supplier. In all such instances Procurement officers in Australia should consult with DEFMAT or CONDMAT before including any contract conditions in a contract that DEFMAT or CONDMAT is to administer, particularly in regard to payment terms, dispatch arrangements and export licences. For such contracts, the contractual authority will remain the Australian purchasing authority and it will be responsible for resolving any queries regarding technical requirements and the interpretation of contractual conditions. DMO Procurement officers must comply with the Defence Materiel Manual (Finance)(DMM(FIN)) 01-0-004 Foreign Military Sales Financial Management Manual when managing financial aspects of FMS.

24.

25.

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Defence Procurement Policy Manual 4.2 Overseas Procurement Foreign Military Sales FMS Case Procurement Process 26. Procurement officers must use DEFMAT Washington as the single point of contact for establishing or amending FMS cases. However, once the FMS case is established, case sponsors then become responsible for the direct management of their case, with DEFMAT officers providing ongoing facilitation. FMS cases are established using the following processes:

27.

the Procurement officer in Australia forward a complete statement of requirement (SOR) to DEFMAT using a request for a Letter of Request. A template SOR is contained in the Electronic Supply Chain Manual (ESCM); the Letter of Request (LOR) is sent to the US Government by the Director Foreign Military Sales within DEFMAT; and the US Government responds with a Letter of Offer and Acceptance (LOA) which following the signature of both parties and the payment of a deposit by the Commonwealth forms the FMS contract. There is a template minute addressed to DEFMAT(W) advising of acceptance of the LOA by Defence contained in the ESCM.

28.

Further guidance on the FMS process is contained in Defence Instruction (General) Logistics (DI(G) LOG 43002) - Procurement of Materiel and Services from the United States of America under the Foreign Military Sales Program. The procurement of goods and services via an FMS case is an exception to the requirement to obtain an export licence under International Traffic in Arms Regulations (ITAR) as the FMS case initiates a DSP-94 - Authority to Export Defense Articles and Defense Services sold under the Foreign Military Sales Program. Accordingly, once Defence has obtained a LOA from the US Government, Procurement officers do not need to obtain an export licence from the Department of State (refer to the Export Compliance section of this chapter). Procurement officers should note that not all purchases of goods or services from the US can be conducted on a commercial basis by dealing with American suppliers. In some circumstances, items may only be available from the US Government itself. Examples include sensitive American technology such as missiles and cryptographic and electronic warfare equipment. These items may be purchased from the US Government through the US FMS program.

29.

30.

Benefits and Risks of the FMS Program 31. For non-sensitive items, the choice between procuring through FMS or directly through American commercial sources will depend upon the circumstances in each case. The decision to source an item through FMS or from American commercial sources is not always clear cut as there are advantages and disadvantages associated with either approach. Foreign Military Sales can be an attractive option because:

32.

the US Department of Defense acts on Australias behalf in negotiating a contract once the Foreign Military Sales is established and often has better bargaining power with large American corporations than the Commonwealth would have under a direct commercial arrangement; economy of scale price reductions can often be achieved through piggybacking on US Department of Defense (and other countries) requirements and orders; some sensitive items can only be procured via FMS; it assures the Australian Defence Force of interoperability with, and long term support from, the US Department of Defense; and

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in support of operations, the US may divert assets previously assigned to US Department of Defense units to assist in meeting these operational imperatives.

33.

However, there are significant additional risks associated with the use of FMS arrangements which Procurement officers should be aware of. FMS arrangements involve substantial changes to the standard contractual risk allocation in favour of the US Government. Under an FMS arrangement the following specific risks should be considered:

the US Government procures the items on terms and conditions that conform to US Department of Defense regulations and procedures. There may be a disparity between the acceptance procedures applied by the US Government and those used by Defence to satisfy itself as to the condition of goods. Accordingly, it is important that any specific requirements regarding the condition of the equipment is identified in the LOR; FMS contracts are a type of cost reimbursement contract (see chapter 2.2) as the US Arms Export Control Act 1976 (US) requires that the FMS Program is conducted at no cost to US Department of Defense. As a result, the total price of items procured is billed to Defence even if that cost exceeds the amount estimated in the LOA. This places additional responsibility on Procurement officers to ensure that value for money is achieved; Defence assumes the risk of delay with the United States Government only being required to use its best efforts to advise Defence where the delays may substantially affect delivery dates; The indemnification and limitation of liability arrangement in an FMS arrangement differ greatly from the standard Commonwealth position; Defence bears the risk of the costs of cancellation or deletion of items from the FMS case; and the US Government has no liability for infringement or violation of intellectual property or technical data rights and there are almost no warranties which benefit Defence.

34.

In considering whether better value for money will be achieved via FMS or commercial procurement, Procurement officers should note that quotes cannot be pursued from both US commercial suppliers and through FMS channels (to the same supplier). However, alternative US suppliers using commercial procurement can be competed against an FMS case. For further information on the FMS process and policy, refer to the Defense Institute of Security Management website.

35.

Limitation of Liability 36. While in Defence (as opposed to DMO) there is no mandatory requirement for Defence officers to conduct a risk assessment in respect of FMS procurement, a risk assessment is considered best practice (refer to FINMAN 5 Chapter 8.6 Contingent Liabilities (including indemnities, guarantees, warranties and letters of comfort). DMO Procurement officers must undertake a risk assessment for the purposes of entering into an indemnity arrangement as part of the establishment of an FMS case in accordance with DMO Chief Executives Instruction 8.6: unless:

37.

the procurement is for spares or repairable items; and a risk assessment was previously undertaken for procurement of the higher assembly.

38.

Procurement officers should use the template Liability Risk Assessment (LRA) for FMS cases at Annex H to DMO Legal FMS Legal Practice Guide - Liability Risk Assessments and Delegate Approvals for Foreign Military Sales Acquisitions. DMO Procurement officers must also undertake a remoteness and materiality assessment for the purposes of FMAR10 approval. See DMO CEI 8.6 Annex A. DMO officers do not need to seek legal advice prior to approving a contingent liability in the case of FMS procurement. Legal advice on the standard FMS indemnity is contained in the Page 4.26

39. 40.

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Defence Procurement Policy Manual 4.2 Overseas Procurement DMO Legal FMS Practice Guide Liability Risk Assessments and Delegate Approvals for Foreign Military Sales Acquisitions available at: http://intranet.defence.gov.au/dmoweb/sites/DMOLegal/docs/DMOLegal_FMSLegalPracticeGui de.doc. 41. Procurement officers must also obtain FMAR10 authorisation in accordance with Defence CEI and DMO CEI 2.1 and obtain delegate approval for providing the indemnity.

Need to obtain Approval for Sale, Transfer or Disposal 42. Under the standard terms and conditions of an FMS case, Procurement officers must obtain approval prior to transferring FMS procured goods or services to a third party. Procurement officers should be very careful to adequately provide for the intellectual property rights needed for the provision of through life support by a contractor or upgrade work in the FMS case. Control of the supplies and technology cannot be transferred to third parties (Australian or other foreign industry) unless authorisations have first been obtained from the Department of State. Advice on retransfers is provided by the Directorate Export Control Systems in Commercial Industry Programs Division in DMO and detailed advice on US export control policy is contained in the Defence Materiel Handbook (Supplier Management) 05-2-001 United States Defence Export Controls Guidance. Additional assistance with FMS cases and contact with the sponsoring US Service can be obtained from Support Office Foreign Military Sales (SOFMS) or the Director of Foreign Military Sales at the Australian Embassy in Washington.

43.

44.

Export Compliance
Export Licences 45. Under the ASDEFCON suite of tendering and contracting templates, the contractor is responsible for obtaining all export licences or other approvals required to perform the contract. In addition, under the ASDEFCON (Strategic Materiel) and ASDEFCON (Support) templates the contractor is required to notify the Commonwealth Representative of certain events, including making an application for an export licence or other approval and upon becoming aware of the grant, refusal, revocation or qualification of an export licence or other approval. In some Defence contracts Defence, is required to provide the contractor with assistance (if requested) to facilitate the contractor obtaining an export licence (including providing a certificate as to the end use of the supplies). So, for example, where Defence acquires equipment from overseas, or equipment that is manufactured in Australia under licence from an overseas manufacturer, the export to Australia of the equipment is cannot occur with a written assurances. The written assurances is required from the Australian government, to the exporting foreign government, that the equipment will not:

46.

47.

be transferred to a third party without permission from the foreign government; be used for purposes associated with either chemical, biological or nuclear weapons, or missiles capable of delivering such weapons; or be transferred if the Commonwealth knows or suspects that they are intended or likely to be used for such a purpose.

Exports from the United Kingdom 48. In the United Kingdom, in order to export military goods and technology, a contractor:

needs to obtain an export licence from the Secretary of State under the Export Control Order 2008 (UK) noting that the export of military goods and technology is prohibited unless an exemption applies or a licence has been obtained;

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may need to make a separate application to obtain F680 clearance from the UK Ministry of Defence Export Policy and Assurance area. This is generally required if the export involves classified goods (and in some other limited circumstances); and will generally need to obtain end user undertakings or consignee undertakings or other documentation, such as a purchase order or relevant pages from the contract from Defence. Procurement officers should be aware that if such undertakings are requested by a contractor, these undertakings normally need to accompany the associated export licence application.

Export from the United States of America 49. As discussed above, the export of equipment or military technology from the US may be done via a contract between Defence and an overseas commercial supplier or via a government to government FMS arrangement. Different rules apply to commercial arrangements between Defence and an overseas supplier depending on the intended use of the exported goods or services, so that the export of:

50.

defense articles or defense services are regulated by the US State Department, through the International Traffic in Arms Regulations (US) (ITAR). The items which are covered by ITAR are specified on the US Munitions List; and items with a predominantly civilian use are regulated by the Export Administration Act (US) (EA) and associated regulations. the export of these items is far less regulated than under ITAR and, for example, does not involve end user certificates or agreements.

International Traffic in Arms Regulations 51. The ITAR is a regulatory regime controlling the export and import of defense articles and defense services and gives effect to the US Presidents power to control this area under the Arms Export Control Act, section 38. Under ITAR, any persons (including corporations) who manufacture or export defense articles or furnish defense services are required to register with the US Directorate of Defense Trade Controls in the Department of Defense. In addition, Procurement officers need to be aware of the licensing regime under ITAR. This requires exporters of defense articles, (such as contractors to Defence), to obtain the approval of the US Directorate of Defense Trade Controls prior to the export unless one of the limited exemptions applies. Procurement officers should ensure that if an export licence is required to be obtained under ITAR that the time to obtain the licence has been factored into the contract schedule. It is the contractors responsibility to ensure it is registered with the Directorate of Defense Trade Controls and that it has obtained all necessary export licences prior to exporting from the US defense items or defense services. However, Procurement officers need to be aware that contractors are required to provide the following documentation as part of an export licence application and will require assistance in complying with these requirements:

52.

53. 54.

a copy of the purchase order, letter of intent or other appropriate documentation; an executed non-transfer and use certificate (Form DSP-83) if the application relates to the export of significant military equipment, including classified hardware or classified technical data or is otherwise required (the US Office of Defense Trade Controls has the discretion to require a non-transfer and use certificate for the export of any defense articles or defense services).

55.

Where an overseas procurement is being undertaken, it is best practice for Procurement officers to consider including a question regarding company compliance with ITAR and its security regime for dealing with sensitive technical data as part of the Conditions of Tender.

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Defence Procurement Policy Manual 4.2 Overseas Procurement Requirements for Non-Transfer and Use Certificates 56. 57. Form DSP-83 needs to be executed by Defence and the contractor (as well as any foreign consignee). The certificate states that, except as specifically authorized by prior written approval of the Department of State, the foreign consignee and foreign end-user will not re-export, resell or otherwise dispose of the significant military equipment enumerated in the application outside the country named as the location of the foreign end-use or to any other person. The instructions for completing the DSP-83 require precise quantities of the articles or data to be shown on the certificate and for each item to be clearly identified with type, model number, make and, where known, US military designation or national stock number. Components and spare parts should be fully identified as well as the resulting item in which they will be used. Major components should be separately valued.

58.

Complying with the Terms of the Export Licence 59. ITAR provides that the written approval of the US Directorate of Defense Trade Controls must be obtained prior to reselling, transferring, transhipping or disposing of a defense article to an end user, end use or destination that is not stated on the export licence. This means that it is important for Procurement officers to check the terms of the export licence prior to moving an item or transferring an item for the purposes of modifications or upgrades.

Deemed Export 60. 61. Procurement officers should be aware of the risk in being deemed to have exported military goods, services or technical data to a country to which the United States will not permit exports. Section 126.1 of ITAR prohibits the export and sale of defense articles and services to certain countries. These countries are listed on the US Department of State, Directorate of Defense Trade Controls website and Procurement officers should access the following list as this is updated on a regular basis: http://www.pmddtc.state.gov/regulations_laws/itar_official.html. Procurement officers need to be aware that the item or technical data may be deemed to have been exported to a country if Defence proposes to conduct upgrades of equipment in one of these countries, use subcontractors from one of those countries or even if Defence employs someone born in one of these countries. An illustration of this problem is where Defence may be deemed to have exported technical data to an individual born in one of these countries by allowing them to use a computer where technical data is stored even if the individual has not been given the key to the encryption.

62.

Additional Requirements for the Export of Technical Data 63. Procurement officers should be aware that there are additional requirements which apply to the provision of defense services (including the provision of technical data) to foreign persons. This means that even if a contractor has obtained an export licence in relation to equipment, a contractor needs to satisfy additional requirements in order to provide defense services in support of this equipment. Procurement officers should note that there are certain exceptions relating to the provision of maintenance services and export of associated technical data to Australia. Contractors need to obtain the approval of the US Department of State which is usually obtained by submitting a proposed Technical Assistance Agreement (TAA) or, less commonly, a Manufacturing License Agreement (MLA). In exceptional circumstances, the US Directorate of Defense Controls will, on request, consider granting a licence for the export of the technical data. Refer to the Defence Export Control Office for further information. A non-transfer and use certificate is required to be provided if the MLA or TAA relates to significant military equipment or classified defense articles. However, the US Department of State may also require that a non-transfer and use certificate is provided where the agreement Page 4.29

64.

65.

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Defence Procurement Policy Manual 4.2 Overseas Procurement does not relate to significant military equipment or classified defense articles. If a licence is to be issued, a completed Form DSP 83 will be required. 66. It is important that Procurement officers assist in the development of the TAA prior to its approval and that they ensure that the TAA or MLA does not contain any IP rights or clauses. Contractors will sometimes attempt to include restrictive IP or technical data clauses in TAAs or MLAs which will often be more restrictive that the rights being sought by the Commonwealth through the relevant acquisition or sustainment contract. Procurement officers should ensure that TAAs and MLAs deal only with the necessary export control requirements, with other matters such as IP rights and access to technical data being dealt with in the contract or a separate IP deed.

End User Assurances 67. As discussed above, contractors will request that Defence provide an end user certificate containing assurances to the exporting foreign government regarding restrictions on the transfer (which includes sales and any change in ownership or possession of the equipment) and future use of the equipment by third parties. Obtaining approval of the end user certificate can be a lengthy process that can delay an export application and delivery schedules should be planned with this in mind. The end user certificate is signed on behalf of the Minister of Defence. The Minister has delegated authority to sign end user certificates to specific officers within Defence (see DI(G) LOG - 4-4-004 Export and import of Defence and dual-use goods and the use of Government end user assurances). Procurement officers should consult with the Defence Export Control Office (DECO) for advice on end user certificates and non transfer certificates. The DECO can be contacted by telephone on 1800 661 066 or by email: deco@defence.gov.au.

68.

69.

Practical Tips on Completing End-User Assurances 70. Detailed advice on completing end-user assurances is contained in Defence Materiel Handbook (Supplier Management) 05-2-001. Procurement officers should be aware of the following matters when completing end-user assurances:

the description and quantities of goods should be specific - this should be concise, identify the original military use of the goods as well as a description of the intended use by Defence and include model or type numbers where relevant; the stated purpose of the goods and technology should reflect Defences future use requirements; the end-user should be specified as the Commonwealth of Australia represented by Department of Defence to permit the transfer between various parts of Defence and other government agencies as required; any end-user assurances given should be recorded and, if required, included in a compliance plan for auditing purposes; the need for end-user certificates to only be signed by those with authority to do so; if the end-user assurances require official endorsement these should be provided to DECO; whether IP schedules need to be updated once items are exported; and the need to direct contractors to the standard clauses and provisions.

Banking and Foreign Exchange Arrangements 71. Where foreign currency bank accounts are maintained as part of commercial arrangements or acquisition of military equipment, the accounts must not be used to store money in a foreign currency purchased before a payment is due. This practice is referred to as hedging. Refer to chapter 3.3 for further information on Commonwealth Foreign Exchange Policy. Page 4.210

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Key References
Export Control Order 2008 (UK) Arms Export Control Act (US) Chief Executive Instruction 2.1 - Procurement DMO Chief Executive Instruction 2.1 - Procurement DMO Chief Executive Instruction 2.8 - Foreign Military Sales Defence Instruction (General) Logistics - 4-4-004 Export and import of Defence and dual-use goods and the use of Government end user assurances Defence Instruction (General) Logistics - 43002 - Procurement of Materiel and Services from the United States of America under the Foreign Military Sales Program Defence Materiel Instruction (Finance) DMI (FIN) 01-0-024 Obtaining FMAR 10 Authorisation Defence Materiel Manual (Finance) DMM(FIN) 01-0-004 Foreign Military Sales Financial Management Manual Defence Materiel Handbook (Procurement) DMH (PROC) 13-0-002 Engaging CONDMAT and DEFMAT in the conduct of procurement activity Defence Materiel Handbook (Supplier Management) 05-2-001 United States Defence Export Controls Guidance. DMO Legal Practice Guide Liability Risk Assessments and Delegate Approvals for Foreign Military Sales Acquisitions Information DEFGRAM No 196/2010 Organisational Change Counsellor Defence Materiel Washington

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Defence Procurement Policy Manual 4.3 Whole of Government Procurement Contracts, Arrangements and Initiatives

4.3

Whole of Government Procurement Contracts, Arrangements and Initiatives

Introduction
1. 2. This chapter applies to all procurements undertaken in Defence and the Defence Materiel Organisation (DMO). This chapter provides an overview of the types of whole of government arrangements that should be considered by Procurement officers when selecting a contracting methodology, including:

Coordinated Procurement; Cooperative Procurement; Information communication and technology (ICT) procurement; and Multi Use Lists.

Refer to chapter 5.3 for further information on contracting methodologies.

Mandatory Policy
Procurement officers must use the whole-of government mandated arrangements specified by the Department of Finance and Deregulation (DOFD). Where the Government establishes a coordinated procurement arrangement for certain goods or services, Defence must use the contract established under the arrangement unless an exemption is provided. Defence must use the Microsoft Volume Sourcing Agreement (VSA) for sourcing all Microsoft products. Defence must only engage a provider of telecommunications carriage services (as defined in the Telecommunications Act 1997) that has signed an Australian Government Telecommunications Agreement (AGTA) Head Agreement. Procurement officers must refer to and comply with the DOFD Good Procurement Practice booklet (GPP) 05 Establishing and Using Multi-Use Lists when establishing or using a multi-use list To establish a multi-use list, a request inviting potential suppliers to apply to be included on the multi-use list must be published on AusTender in accordance with the Commonwealth Procurement Guidelines (CPGs) paragraph 8.17. A multi-use list must be established through an open approach to the market that meets the requirements of the mandatory procurement procedures set out in the CPGs, which enables potential suppliers to apply for inclusion on the list where they can demonstrate they meet the conditions for participation. Defence must use the Communications Multi-Use List (CMUL) when procuring specialist communications suppliers to assist in the development and implementation of advertising and information campaigns where total costs exceed $250 000 (including GST). Defence must also comply with the process and approval requirements set out in the DOFD guidance document Business Planning Processes for Campaign Information and Advertising Activities when procuring such campaign advertising.

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Operational Guidance
Background 3. Whole of Government arrangements have been established to achieve the following outcomes:

benefit Financial Management and Accountability Act 1997 (the FMA Act) agencies when procuring property and services; give effect to Government policy decisions; improve consistency and control; and deliver savings and efficiencies.

4.

Whole-of-government arrangements may take the form of a contract, standing offer, and/or template documentation. The DOFD website (Whole-of-Government Procurement - DOFD) provides a consolidated list of contracts and arrangements and provides Procurement officers with information on the arrangements that are in place. Procurement officers must use the mandated arrangements specified in that list when procuring the goods or services covered by these arrangements. The list also contains optional standard documentation and cooperative arrangements that other agencies are able to use for procurement purposes. Multi-use lists, when available to more than one agency, could also be considered a whole-ofgovernment arrangement. Multi-use list available for use by Defence can be searched on AusTender.

5.

Coordinated Procurement 6. 7. Procurement officers should be aware that certain categories of goods and services are required to be purchased through co-ordinated purchasing arrangements. Where the Government has established a coordinated procurement arrangement for certain goods or services, Defence must use the contract established under the arrangement unless an exemption is provided. An exemption will only be granted if both the Minister for Defence and the Minister for Finance are satisfied that Defence has a special need for the alternative supply. Where a contract exists that is the subject of an ongoing scoping study by the Department of Finance and Deregulation and the contract does not have a valid extension option, such contracts may be extended for a period of up to 12 months where the extension represents value for money. Further guidance is provided in DPPI 29/2009 Coordinated (Whole-ofGovernment) Procurement Arrangements and Defence Tendering and Contracting Documentation. Where a coordinated procurement arrangement that affects Defence is created, this will be promulgated through a Departmental Procurement Policy Instruction (DPPI) or DEFGRAM. Procurement officers should ensure that they check for the most up to date document. Existing DPPIs on this subject are DPPI 5/2008 Coordinated (Whole-of-Government) Procurement Arrangements for Telecommunication and DPPI 29/2009 Coordinated (Whole-of-Government) Procurement Arrangements and Defence Tendering and Contracting Documentation and DPPI 17/2010 Coordinated Procurement (Whole-of-Government) Arrangements and Defence/Defence Materiel Organisation Tendering and Contracting Documentation.

8.

9.

Cooperative Procurement 10. Cooperative Procurement involves the establishment of a contract or standing offer arrangement for use by more than one agency. This can be achieved by either a joint approach to the market, or one agency establishing an arrangement that allows access by other agencies. For guidance on cooperative procurement arrangements see the DOFD website.

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Defence Procurement Policy Manual 4.3 Whole of Government Procurement Contracts, Arrangements and Initiatives Information Communication and Technology (ICT) Procurement 11. There are a number of whole of government arrangements and contracting templates for the procurement for ICT goods and services including:

Microsoft Volume Sourcing Arrangement; Australian Government Telecommunications Arrangements; ICT Management Consultant Multi Use List; ICT Multi Use List; Source ICT Model Contracts; and Government Information Technology and Communications Framework

12.

In Defence, the procurement of ICT is conducted primarily by the Chief Information Officer (CIO) Group. Refer to the CIOG Website for further information on all of these arrangements. The Defence and DMO Procurement Support Areas section of the DPPM also contains contact information for CIOG. Further guidance is also contained in the Guide to ICT Sourcing for Australian Government Agencies published by DOFD.

Microsoft Volume Sourcing Agreement (VSA) 13. The Microsoft VSA provides pricing and licensing conditions for the supply of Microsoft products to FMA Act agencies and Commonwealth Authorities and Companies Act 1997 bodies (excluding Government Business Enterprises). Defence and the DMO must use the Microsoft VSA for sourcing all Microsoft products.

Australian Government Telecommunications Arrangement (AGTA) 14. The Australian Government Telecommunications Arrangement (AGTA) (previously referred to as Whole of Government Telecommunications Arrangements WoGTA) is a standing offer between the Commonwealth and service providers. Under this arrangement, agencies must only engage a provider of telecommunications carriage services (as defined in the Telecommunications Act 1997) that has signed an AGTA Head Agreement before the provider can provide such services to Australian Government agencies. A full list of the current signatories is available at: http://www.finance.gov.au/procurement/ict-procurement/australiangovernment-telecommunications-arrangement/service-providers.html. Some services such as specialised military and classified telecommunications, which are used only by military and/or intelligence agencies, may be exempted from coordinated procurement arrangements. Defence Legal or DMO Legal should be consulted for specific advice.

15.

Source ICT Model Contracts 16. The Source ICT model contracts provide templates for Australian Government agencies to develop sound commercial agreements efficiently and effectively for a range of simple ICT procurements. It is expected that this will encourage good business practices and minimise the risk of conflict and disagreements between agencies and tenderers.

Government Information Technology and Communications (GITC) Framework 17. 18. The GITC Framework is a legal framework that has been developed as a cooperative effort between Australian industry representatives and the Australian Government. The GITC Framework is based on standard Terms and Conditions for the purchase of products and services in the information technology (including major office machines) and telecommunications fields. The framework is designed to assist government buyers and potential suppliers to develop contracts in the most efficient and effective manner. GITC4 differs from Source ICT in that GITC4 allows one to build a customised contract from a list of clauses.

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Defence Procurement Policy Manual 4.3 Whole of Government Procurement Contracts, Arrangements and Initiatives 19. Further information about the use and operation of the GITC Framework template can be obtained at http://www.gitc.finance.gov.au.

Multi-use Lists 20. A multi-use list is a list, intended for use in more than one procurement process. The list consists of pre-qualified suppliers who have satisfied the conditions for participation for inclusion on the list. A multi-use list may be used by requiring inclusion on the list as an essential criterion or condition for participation in an open tender process or as a basis for choosing suppliers for a select tender process. Procurement officers must refer to and comply with the DOFD Good Procurement Practice booklet (GPP) 05 Establishing and Using Multi-Use Lists when establishing or using a multiuse list.

21.

22.

Reporting Requirements for Multi Use Lists 23. 24. To establish a multi-use list, a request inviting potential suppliers to apply to be included on the list must be published on AusTender, either continuously or annually. A multi-use list must be established through an open approach to the market that meets the requirements of the mandatory procurement procedures set out in the CPGs, which enables potential suppliers to apply for inclusion on the list where they can demonstrate they meet the conditions of participation. The request for inclusion on a multi-use list must be published either:

25.

continuously on AusTender; or annually on AusTender.

Specific Multi Use Lists 26. Defence must use the Communications Multi-use List (CMUL) when procuring specialist communications suppliers to assist in the development and implementation of advertising and information campaigns where total costs exceed $250 000 (including GST). A list of CMUL members is available at www.tenders.gov.au/cmul. DOFD has issued the guidance document Guidelines on Information and Advertising Campaigns by Australian Government Departments and Agencies (March 2010) which sets out the steps for campaign development and approval. Defence must comply with these processes and approvals. It should be noted that these processes also include mandatory consultation with the Minister of the agency, the Auditor-General, DOFD, the Interdepartmental Committee on Communications and the Secretary for Defence/Chief Executive Officer DMO. Defence has also established a Whole of Government Multi-use list for various Security Compliance and Performance Review Services for use when procuring Security Compliance and Performance Review suppliers to assist in the development and implementation of security compliance and/or security performance reviews.

27.

28.

Key References
Department of Finance and Deregulation Good Procurement Practice booklet (GPP) 05 Establishing and Using Multi-Use Lists Department of Finance and Deregulation Guidelines on Information and Advertising Campaigns by Australian Government Departments and Agencies (March 2010) Department of Finance and Deregulation Guide to ICT Sourcing for Australian Government Agencies Page 4.34

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Defence Procurement Policy Manual 4.3 Whole of Government Procurement Contracts, Arrangements and Initiatives Department of Finance and Deregulation website: http://www.finance.gov.au/procurement/ictprocurement/australian-government-telecommunications-arrangement/agta-framework.html Government Information Technology and Communications Framework website: DPPI 5/2008 - Coordinated (Whole-of-Government) Procurement Arrangements for Telecommunication DPPI 29/2009 - Coordinated (Whole-of-Government) Procurement Arrangements and Defence Tendering and Contracting Documentation

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Defence Procurement Policy Manual 4.4 Public Private Partnerships

4.4
Introduction
1.

Public Private Partnerships

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO) having an estimated capital cost in excess of $50 million and where there is an opportunity for entering long-term contracts (i.e. 15-30 years), involving asset based procurement. This chapter outlines the policy applicable to Public Private Partnership (PPP) Projects where the public sector purchases services from the private sector under an arrangement where the private sector is responsible for the up front investment in capital assets and their subsequent operation, support, maintenance and refurbishment. This chapter replaces the previous Private Financing Chapter. This chapter provides a broad overview of the PPP process. Due to the complex nature of PPP activities, projects considering using PPP should consult the Public Private Partnerships Branch in the Defence Support Group (DSG).

2.

3.

Mandatory Policy
The PPP delivery method must be considered for all project proposals having an estimated capital cost in excess of $50 million and where there is an opportunity for entering long-term contracts (i.e. 15-30 years) involving asset based procurement. All projects meeting the above criteria must consult with PPP Branch in the Defence Support Group for the provision of advice on the suitability of a project proposal for delivery under PPP Arrangements. All projects reaching the Project Assessment PPP Suitability checklist stage must consult with the Corporate Finance Review Unit, in Defence Chief Finance Officer Group, for an independent review of financial and budgetary impacts. Procurement staff must comply with the following legislation and policy documents:

Financial Management and Accountability Act 1997 (Cth); Public Works Committee Act 1969 (Cth); Commonwealth Procurement Guidelines (Cth); National PPP Policy and Guidelines (December 2008) (Cth); and Project Assessment PPP Suitability checklist.

Operational Guidance
Background 4. Under a PPP arrangement the private sector is responsible for the provision of a capability and the design, construction, operation, maintenance and financing of the associated assets needed to deliver that capability. This whole of life integration under the responsibility of one party should deliver operational and/or financial advantages over a traditional procurement. PPP arrangements should be performance based, with payment being conditional on the private sector delivering a specified output based service to a required standard. Payment under a PPP arrangement generally begins when delivery of the output required actually commences. Therefore, there is a strong financial incentive for the company to continue to Page 4.41

5.

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Defence Procurement Policy Manual 4.4 Public Private Partnerships provide the service to the required level. The services are generally self monitored by the contractor and if the service is not provided the company will not be paid and in turn may not be able to repay its debts or provide a return to shareholders. National Public Private Partnership Framework 6. On 29 November 2008, the Council of Australian Governments (COAG) endorsed the National PPP Policy and Guidelines and noted that the new framework would effectively replace the existing PPP policy and guidance applied by Australian State and Territory Government agencies. The new policy and guidelines replace Australian Government PPP and Department of Finance and Deregulation (DOFD) policy and guidance (FMG 16, 18, 19 and 21) with the exception of Financial Management Guidance No. 17 (FMG 17) - Public Private Partnerships: Business Case Development. The PPP delivery method must be considered for all major capital equipment and infrastructure projects having a capital cost exceeding $50 million and where there is an opportunity for entering long-term contracts (i.e. 15-30 years) involving asset based procurement. Such projects must be examined to verify if a PPP arrangement may offer better value for money over traditional procurement options. This should be determined as early in the life of the project as possible. PPP arrangements are most likely to be appropriate where there is:

7.

8.

a medium to high level of certainty of the capability required; and a whole of life requirement involving a mix of assets and services.

9.

Where the Australian Government considers that a project involves National Security issues, the National PPP Policy and Guidelines may not apply. Agency Chief Executives may put in place measures which allow such an exemption. Where an exemption is granted Agencies should:

identify the particular issues relating to the project which raise concerns; determine alternative measures necessary to address those concerns; and document the reasons for exemption from the National PPP Policy and Guidelines and obtain approval from their Chief Executive to use the alternative measures.

Public Private Partnership Suitability 10. Value for Money is the core principle to consider in deciding whether to use PPP arrangements. Value for Money should be assessed on a whole of life and whole of Government basis. Value for Money may be achieved through PPP arrangements when there is:

increased efficiency through appropriate risk transfer to the private sector; cost savings achieved through innovation; synergies achievable through a whole of life approach to design, construction and maintenance; or additional revenue from third party use.

11.

The Defence Committee requires consideration of PPP suitability at First Pass approval stage for all Major Capital Equipment and facilities projects Defence Capability Development Handbook. Before deciding to use PPP arrangements, the projects operational issues must be examined in a consistent and objective manner. It is required that:

12.

the ability to deploy and sustain ADF elements and execute an operation is not to be prejudiced; and the application of combative force is to remain solely with the ADF.

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Defence Procurement Policy Manual 4.4 Public Private Partnerships 13. PPP arrangements may be less appropriate where the asset acquired under the arrangement is designed or substantially modified for deployment in military operations. This is likely to reduce the amount of risk that can be transferred to the private sector. The appropriateness of using a PPP arrangement should be initially assessed by considering the operational impact, practicality and financial viability of progressing a PPP option. As a minimum, a Project Assessment PPP Suitability checklist will need to be completed for all applicable procurements. The checklist can be found at on the Finance Website Where a project has characteristics identified in the Medium to High Potential range for a majority of the checklist questions (i.e. greater than 50%), it is possible that the project will be able to achieve a value for money outcome under a PPP arrangement. In this case, a PPP option and associated detailed risk assessment should be considered as part of the project Interim Business Case. For projects with an infrastructure component, a Corporate Services and Infrastructure Requirement (CSIR) Part 1 and CSIR Part 2 must be completed. The CSIR Part 2 has the Project Assessment PPP Suitability checklist attached. Refer to Defence Support Group (DSG) Infrastructure Management for further guidance.

14.

15.

Interim Business Case 16. The key stages involved in any capital investment decision consist of:

government approving the preferred procurement method, generally at the point of seeking First Pass approval through the National PPP Policy and Guidelines Interim Business Case (including scoping study and Procurement Options Analysis); government approving the investment (and funding as required); and delivering the project: Release of Expressions of Interest, Request for Tender, selection of shortlisted tenderers, contract negotiations and contract execution (Commercial Close and Financial Close).

17.

The National PPP Policy and Guidelines Interim Business Case approval must be obtained from the Minister for Defence and the Minister for Finance and Deregulation before proceeding with any PPP proposal involving projects valued at $20 million or more but below $50 million. Either the Minister for Defence or the Minister for Finance and Deregulation can refer the proposal to Cabinet for approval. PPP proposals involving assets over $50 million require Cabinet approval. For projects involving infrastructure, all Defence works estimated to cost $15 million or more are to be referred to the Public Works Committee (PWC) before contracts can be awarded and works commence. The terms Works and Public Works have the meaning given to them in Sections 5 and 5AA, respectively of the Publics Work Committee Act 1969 (Cth). Generally work means architectural or engineering work including construction, alteration, refurbishment, repair, fitting out, demolition and the preparation of land for works. Guidance on the process and requirements in development of the Interim Business Case can be obtained from the National PPP Policy and Guidelines and FMG 17. The key steps of the Interim Business Case are:

18.

19. 20.

refinement of project scope and documentation of Project Plan; communication with project stakeholders; further development of risk analysis; development of the Public Sector Comparator and PPP Suitability Assessment Checklist; Procurement Options Analysis; assessment of market interest (market sounding activity); and recommendation and submission to government.

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Defence Procurement Policy Manual 4.4 Public Private Partnerships 21. Development of the Interim Business Case is a complex task that needs to be carried out by suitably experienced staff or with assistance from external specialists (members from the PPP Panel within Infrastructure Division). The Interim Business Case includes financial modelling and development of a Public Sector Comparator. A Public Sector Comparator provides an indicative cost of delivering the capability through Defence purchasing the asset (as in a traditional procurement) and providing the service delivery by the most cost effective means. This may include contracting out maintenance support of the asset. A Public Sector Comparator provides a financial measure against which the PPP cost of meeting a specification can be compared. Further information regarding the Public Sector Comparator can be found in FMG 17 Appendix A. Defence's established practices and strategies for engaging the market in a procurement process in accordance with the Commonwealth Procurement Guidelines are applicable where a PPP arrangement is pursued. A dual tender process using PPP and an alternate contracting model should not be used. Establishing a preferred procurement method prior to engaging the market creates certainty and reduces transaction costs for the public and private sectors.

22.

23.

Tendering Process 24. 25. 26. Most PPP procurements will adopt a two-stage tendering process involving an Expression of Interest and Request for Tender. The National PPP framework uses the term Request for Proposal. The term used within Defence and the DMO is Request for Tender. Due to the complexity of PPP procurements, project teams should engage suitably experienced probity/legal process advisers to assist and provide advice on process and procedures including conflict of interest matters.

Expression of Interest and Shortlisting 27. The documentation released in the Expression of Interest should contain enough information to attract all relevant consortia, request sufficient information to ensure that a preliminary shortlisting of potential consortia can be carried out and provide details of the shortlisting process. The initial assessment of consortia should be evaluated against standards required for technical capability and financial capability and management standing. Information should also be obtained detailing the skills and previous experience of consortia. The information requested is required to rank the potential consortia and to select a shortlist of consortia who qualify for consideration in the next stage of the procurement. It is suggested that the number of shortlisted consortia be between three and four. While competition plays an important role in achieving best Value for Money, consortia should not be exposed to unnecessary expense.

28.

29.

Request for Tender 30. Shortlisted consortia are then asked to submit detailed tenders through a Request for Tender process. The information requested should be comprehensive enough to enable Value for Money comparisons to be made between the tenders and will usually include:

details of how the specified output (design, construction and facilities maintenance services) will be delivered; details of the tenderers acceptance of the terms and conditions of the proposed Project Deed (contract); industry involvement and development proposals; details of how finance will be organised;

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Defence Procurement Policy Manual 4.4 Public Private Partnerships

an account of the tenderers willingness to accept the risks allocated to the private sector by the Commonwealth; a declaration from the tenderers financiers that they accept the tenderers proposal in relation to risk allocation; performance indicators and reporting arrangements; and an acceptance by the tenderers of the payment mechanisms in the proposed contract.

31. 32.

A Tender Evaluation Plan should also be developed at this stage. Details of the non risk-adjusted Public Sector Comparator are to be provided in the Request for Tender documentation. This provides industry with confidence that they have a clear understanding of the requirement. However, the Request for Tender documentation should not provide the detailed costing information for the project.

Evaluation of Tenders 33. 34. The evaluation should be carried out in accordance with the principles and criteria set out in the Tender Evaluation Plan and Request for Tender documents. Tenders should be sufficiently comparable with the risk-adjusted Public Sector Comparator that the project may proceed to contract negotiations with a high level of confidence that a suitable contract will be signed.

Negotiation with Tenderers 35. Negotiation of the commercial terms and technical aspects required for the project should be conducted with the shortlisted tenderers prior to any preferred tenderer being announced. This approach allows Defence to take advantage of competition between remaining tenderers. The negotiation process will allow tenderers to ensure that their proposal has been accurately understood and reconcile any outstanding concerns they have before selection of the preferred tenderer.

Selection of the Preferred Tenderer and Final Negotiations 36. The tender that represents best Value for Money in comparison to the Public Sector Comparator should be selected as the preferred tender. This will facilitate finalisation of negotiations between the parties to the proposed contract. There may be technical and commercial issues to be negotiated after the preferred tenderer is announced. However, the number of parties involved in a PPP arrangement can add complexity to the process.

Financier Due Diligence and Approval 37. When agreement is reached between Defence and the tenderer on the draft terms and conditions of the contract the tenderer will generally have to secure final arrangements with its financier. The financier will seek satisfaction that money lent to facilitate the project is secure. This will involve the financier seeking to fully understand all of the risks involved in the project and satisfaction with how the risks have been addressed in the contract. The financier will also require confidence that the payment mechanism detailed in the contract will provide the consortia with sufficient funds to repay the loan.

Contract Signature 38. Contract signature will not occur until after Commercial and Financial closure. Commercial closure occurs after negotiations between Defence and the consortia reach an agreed set of terms and conditions. Financial closure occurs after the financier completes due diligence assessments and agrees on their terms with the consortia.

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Defence Procurement Policy Manual 4.4 Public Private Partnerships Contract Management and Performance Reporting 39. Due to the long-term nature of PPPs, a high standard of contract administration and management will be required to ensure that the benefits of taking a PPP approach are sustained and the respective roles and responsibilities of each party are fulfilled. Whilst the contract may require the contractor to self-monitor its performance, ongoing performance monitoring is still required to ensure the output specified in the contract is received and that appropriate corrective action is taken if the contract requirements are not fulfilled. The relationship between Defence and the consortium is to be maintained over a long contract term and the contract should specify the foundations of the relationship. It should include:

40.

sufficient and appropriate contract performance indicators; a performance monitoring and reporting system which records the level of service delivered but is not overly complex or costly to run; an appropriately structured performance management regime, which does not provide a disincentive to continuous improvement; and independent reviews of the operation of the contract to ensure Value for Money is being achieved.

Refinancing Post Construction Phase 41. Consortia may seek to refinance their projects to improve the expected returns to their shareholders. Refinancing may include:

extending the period over which the bank loan would be repaid; reducing the lending margin of the loan; arranging a fixed rate of interest to cover the full period of the loan; or early repayment of the subordinated debt invested by the shareholders.

42.

Refinancing of a project may occur as a result of:


successful completion of the construction phase; or the establishment of a successful track record in providing the service.

43.

PPP arrangements are usually financially complex and Defence will need to consider the implications of refinancing on a project-by-project basis. The possibility of refinancing occurring should be considered when planning the procurement. Aspects of refinancing that need to be examined include:

the effect on the project achieving Value for Money, including changes which may affect the level of risk allocation/exposure of the parties; the effect on the stability of the contractual relationship between all the parties involved; contract provisions that require consent from Defence before refinancing can occur; contract provisions that allow Defence to share in some of the financial gains; and the requirement for experienced legal and financial advisers to assist projects in understanding the full implications of refinancing.

Advice on Public Private Partnership Arrangements 44. The PPP Branch, Defence Support Group, is the leading authority for the provision of procurement advice on the suitability of project proposals for delivery under PPP arrangements. All proposals being considered for delivery under a PPP are to be considered by PPP Branch at the earliest possible opportunity.

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Defence Procurement Policy Manual 4.4 Public Private Partnerships 45. The Defence CFO Group is the leading authority for the provision of budgetary advice relating to PPPs. Defence CFO must provide budgetary clearance for projects being considered or agreed as candidates for procurement under PPP arrangements at each of the following points in the project lifecycle:

Initial Assessment of the Project for suitability as a PPP (prior to exercising of FMA Act Regulation 10 and Proposal Approver delegations); Business Case Development; and Tender Evaluation.

46. 47.

Defence CFO Group must be involved in the evaluation of tenders for PPP projects to evaluate the budgetary risks of the tender responses. Information concerning the National PPP Policy and Guidelines can be obtained from Infrastructure Australia. Information regarding Public Works Committee and business case development can be obtained from DOFD.

Key References
Public Works Committee Act 1969 (Cth) The National Public Private Partnership Policy and Guidelines, available at www.infrastructureaustralia.gov.au Department of Finance and Deregulation Financial Management Guidance No. 17 - Public Private Partnerships: Business Case Development Department of Finance and Deregulation Finance Circular No. 2009/02 - The National Public Private Partnerships (PPP) Policy Framework and National PPP Guidelines Defence Capability Development Handbook

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition

4.5
Introduction
1.

Evolutionary Acquisition

This chapter provides policy and guidance on the application of evolutionary acquisition within Defence and includes:

a definition of evolutionary acquisition; guidance on when to use evolutionary acquisition; guidance on when not to use evolutionary acquisition; guidance on conducting evolutionary acquisition; and guidance on the contracting and procurement considerations that must be addressed in an evolutionary acquisition context. 1

Evolutionary Acquisition Defined 2. Evolutionary acquisition involves the initial acquisition and fielding of a well-defined core system that provides a subset of the required functionality, with this core then being enhanced by a series of increments that incorporate additional functionality. Each of the increments may be significant procurements in their own right, each requiring an acquisition strategy of their own. As such, evolutionary acquisition is an acquisition model which provides the foundation for one or more acquisition strategies. 2 Evolutionary acquisition can be viewed as an overarching risk-mitigation strategy, which is selected when the risks associated with the traditional once-through model are unacceptable and an approach is required that treats multiple risks simultaneously (as illustrated in the following figure). As with many risk treatments, the use of evolutionary acquisition will introduce new risks that will also need to be managed. The selection of evolutionary acquisition, therefore, involves an analysis of the associated benefits, costs and risks to determine if this acquisition model offers greater utility in comparison with other models. Evolutionary acquisition should not be confused with the developmental strategy that may be adopted by the contractor. Evolutionary development can be undertaken under a once-through acquisition model, while waterfall development can be undertaken for each increment under an evolutionary acquisition model. Within the definition of evolutionary acquisition, there are two main approaches which are differentiated by whether or not the end-state requirements for the ultimate system can be specified at the outset of the project. These two approaches are discussed below.

3.

4.

5.

This chapter has been completely revised and updated in response to Recommendation 2 of the Management and Audit Branch (MAB) Audit of Project SEA 1297 Phase 2B/3 Mine Warfare Command Support Systems. 2Evolutionary acquisition may be used for the both acquisition projects or for major sustainment activities. This chapter is framed primarily in terms of acquisition but the principles explained are the same. In all cases, specialist advice will be essential

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition

Region of useful and useable capability

A once-through approach may get you there in the cheapest way, but it may not be the place you wanted to get to

e fw l (i a ide

e ld cou

ver

t in wi kno

anc adv

e)

A spiral EA program doesnt guarantee success but increases the likelihood of nearing the ultimate goal

The Spiral Approach to Evolutionary Acquisition 6. The spiral approach to evolutionary acquisition (EASpiral) is used where the end-state requirements are not known in detail at the outset of the project. Under this approach, an acquisition strategy is implemented to acquire the required system in such a way that the requirements are able to be progressively refined and applied to future increments. The spiral approach to evolutionary acquisition or is the more complicated of the two main approaches. The use of the spiral approach to evolutionary acquisition is intended to overcome problems encountered in the conventional acquisition of modern equipment and systems using a oncethrough acquisition model (i.e. each step is only done once) where significant development is involved. Typically, systems of this nature are growing in complexity and facing higher rates of technology change. The life of many technologies is now comparable to the time it takes to acquire modern systems. Because of this, systems are not only likely to become prematurely obsolete, but they are also unlikely to satisfy contemporary user expectations. Increasing complexity and rapid technology change can make it difficult to define the operational requirements in detail at the start of a project. Instead, the operational requirements will tend to evolve progressively with increasing user understanding of the system, its operation, and the technologies involved.

7.

The Incremental Approach to Evolutionary Acquisition 8. The incremental approach to evolutionary acquisition (EAIncr.) is used where the end-state requirements are able to be fully defined at the outset of the project. Components of the required system are procured in increments for non-requirement-related reasons (e.g. due to schedule or budget constraints). The use of the incremental approach to evolutionary acquisition is intended to overcome problems with providing systems and equipment to the end-user, where schedule or budget constraints (or both) mean that only a subset of the desired functionality can be delivered at any one time. Staged upgrades to a platform over its life of type (e.g. to address changes to threats or obsolescence problems) provide a typical example of the incremental approach to evolutionary acquisition. Evolutionary acquisition projects generally will be heavily reliant on feedback from users in earlier phases to determine the direction of subsequent phases. In spiral evolutionary Page 4.52

9.

10.

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition acquisition projects particularly, the exact functionality and price of early increments may be agreed upfront, but later increments will typically not be agreed until prior to the start of each increment. When to use Evolutionary Acquisition 11. Defence policy is that for projects that exhibit particular characteristics (discussed below), evolutionary acquisition should be considered as an overall contracting approach for that project or projects. The purpose of this policy is to ensure that evolutionary acquisition is applied to projects where it is suitable and justified and that evolutionary acquisition is not applied to projects where it is not suitable or appropriate.

Timing of the Decision to use Evolutionary Acquisition 12. The decision to employ an evolutionary acquisition model must be made early in the life of the project or group of projects to which it applies. Normally, this requires the issue to be addressed at the committee and/or capability definition stage. Those responsible for the procurement should ensure that the question is addressed as early as possible. If the question has not been addressed by the time the project is approaching First Pass Approval, it may be too late to properly apply an evolutionary acquisition approach. Significant risk surrounds the incorrect application of an evolutionary acquisition approach. For example, if a project is using a traditional once through approach where the technological rate of change is rapid, it is likely that the procured goods will be obsolete by the time the procurement has been completed. However, it is important that the procurement is of sufficient size, complexity and importance to justify the additional cost and effort involved in supporting an evolutionary acquisition approach, particularly in light of the rigours of the 2 pass system of government approval. Given these risks and potential benefits, consideration should be given to using evolutionary acquisition for projects where:

13.

14.

the operational requirement dictates that an early fielding of useable functionality is required, with this functionality then able to be progressively enhanced to achieve the full system requirement (e.g. for schedule reasons or forecast technology changes); the available funding only allows the fielding of functionality in increments (i.e. for cost reasons); the end-state requirements are not known in detail for all or part of the system, but are sufficiently well understood to develop a useful base requirement or core functionality for initial acquisition (e.g. due to the requirements being expected to change frequently over the life of the project or external interfaces being immature); elements of the technology are uncertain (e.g. due to the technology rapidly changing or being immature); the system is too large to acquire all at once (e.g. too complex, too expensive, or the enduser is unable to wait for the total system to be developed); the system naturally breaks into increments, each of which may be a separate phase, and each increment could be fielded as a build; or the user community is large and unlikely to be able to assimilate synchronous change (e.g. which could occur when there is a large number of distributed user sites).

15.

Based on these considerations, it should be expected that particular types of systems should be prime candidates for using evolutionary acquisition. These systems, in either the acquisition or sustainment context, may be:

software intensive, and highly interactive, with diverse users; fully or partially unprecedented;

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition

part of larger systems or systems-of-systems (e.g. Network Centric Warfare (NCW) systems); systems in which aspects of functionality are assessed as high risk; and systems where the solution is likely to be based on rapidly changing commercial off-theshelf technology (e.g. electronics-based systems).

16.

The evolutionary acquisition model should also be considered for parts of systems where the identified attributes are present. For example, the combat data system element of a platformoriented project may be a prime candidate for the use of an evolutionary acquisition model, even if the construction of the platform itself is not.

Risks and Costs Associated with Using Evolutionary Acquisition 17. Evolutionary acquisition is complex and can involve a range of costs, which include (in comparison with an equivalent once-through acquisition model):

increased requirements for management resources across all project disciplines (e.g. due to multiple iterations of approvals, requirements definition, soliciting offers, contract management, and verification and validation), in particular governance requirements and the demands of the two pass Government approvals process; higher levels of expertise, particularly management expertise (e.g. due to the intensive and dynamic nature of evolutionary acquisition projects); extended tenure for project teams (both acquirer and developer) to maintain continuity across multiple increments, particularly with respect to key persons; increased requirements for planning and coordination because of the number of concurrent activities and the greater interaction with stakeholders; increased requirements for configuration management because of overlapping increments and the associated need to simultaneously manage multiple functional and product baselines; and increased support requirements because multiple increments may have to be fielded that have different functional and product baselines.

When not to use Evolutionary Acquisition 18. Evolutionary acquisition also involves a range of risks, particularly in relation to:

requirements definition; requirements partitioning across increments; the need to have a sound system architecture that accommodates the incremental approach; the application of the evolutionary acquisition model itself and the potential for lack of understanding of the model by the acquirer, developer, operator, supporting organisations, and testing agencies; transition to support (e.g. because of issues with interfacing with legacy systems or the lack of a clear point where management responsibility can be transitioned due to the incremental update process); verification and validation, particularly for early increments, where the verification and validation requirements are often either unclear or overdone; and Governance issues associated with the requirement for management of what amounts to several subordinate contracts being conducted in parallel.

19.

Gives these costs and risks, the selection of an evolutionary acquisition model must be based on a rigorous assessment of the benefits, costs and risks, and should be avoided in the following circumstances: Page 4.54

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition

The acquirer is using the approach to try to improve poor requirements Governance requirements have not been properly addressed or resourced

The requirements are completely definable and likely to remain stable (and other constraints do not warrant its consideration)

There is a leading edge technology chase (as opposed to a planned approach to technology insertion)

Evolutionary Acquisition should be avoided if:

The acquirer or the contractor is likely to be underresourced

The stakeholders are not committed to the evolutionary acquisition process The users wont be readily available

A simpler acquisition model can produce the required project outcomes within acceptable levels of risk.

Conducting Evolutionary Acquisition Introduction 20. Under an evolutionary acquisition model, each increment is deliberately planned as a defined step in the evolution of the system, which may be either:

an increment of functionality for the system, which is militarily useful, logistically supportable, technically mature, and able to be fielded for operational use; or an increment of development for the system, which is undertaken to mitigate risk (e.g. through providing opportunities for review, testing, operational evaluation, etc), but which is not necessarily fielded for operational use and may not be able to be fielded for operational use (e.g. prototypes and system models).

21.

The basic evolutionary acquisition model creates a cycle of activities that must be conducted at least twice before realising the final system, as illustrated in the following diagram:

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition

System Definition System Design Increment A System Development System Implementation Verification & Validation Acceptance Define/scope next Increment Review and Decision

Increment X

Increment B

Increment C

22.

Each increment of the project may involve a complete cycle of the activities detailed above or only some of the activities detailed above. Once this process has been conduced to define the requirement that will be procured for that phase, a standard once through procurement method may be able to be used to procure the item.

Design and Development 23. A detailed set of requirements for the initial minimal system must be clearly defined at the outset, with further requirements progressively refined during the project. The allocation of requirements to increments, the set of increments, and the sequence of these increments must be endorsed by an appropriate engineering authority at the point in the lifecycle when these requirements are defined and before they are used in any solicitation activities. The viability of an acquisition strategy based on the evolutionary acquisition model is determined primarily by the architecture of the system because the longevity of the system and its ability to readily incorporate future increments is highly dependent upon the system architecture. The system architecture needs to be flexible, scalable, extensible and maintainable in order to support the functionality delivered with each release, including functionality for which no detailed requirement has yet been defined. It is essential that the user be involved in the development process at the outset. This allows for a continuous review of the requirements and feedback on the performance of each release in an operational environment. The system architecture must be continually assessed as each increment progresses through its design-and-development stage to ensure that the architecture can continue to meet project and capability needs.

24.

25.

The Role of the Prime Systems Integrator 26. Under an evolutionary acquisition model, the prime system integrator role is critical to project success because of the need to continually refine requirements, define and manage the system architecture, integrate new increments into the evolving system, and manage system performance. The prime system integrator is the design authority for the entire Materiel System (i.e. both Mission System and Support System). The prime system integrator role may be undertaken by any of the following entities (with corollary effects on the contracting approach):

the prime contractor for the system; the acquiring organisation (e.g. the DMO); or a separate prime system integrator contractor. Page 4.56

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition 27. Of these three approaches, the preferred approach for Defence projects is the prime contractor as prime systems integrator, consistent with normal Defence practice of holding a single prime contractor responsible for overall delivery of the system. The prime system integrator role being undertaken by the acquirer is not recommended because it is often not resourced or equipped to undertake this role and, generally, does not have the necessary systems, processes, expertise or experience. The separate prime contractor and system integrator model should also be used with caution as it will normally lead to the Commonwealth standing between the Systems Integrator and the prime contractor(s). In all cases, specialist advice should be sought.

Issues to Consider when Conducting Evolutionary Acquisition 28. Key requirements associated with using an evolutionary acquisition model are outlined in the following diagram:

Emphasis on riskbased requirements partitioning and rigorously defined system architectures is essential.

Smaller, faster increments may need to be undertaken at first to guarantee commitment

More work needs to be undertaken at the commencement of a project

Authorities may need to cope with less complete information for decisions

Requirements when using an evolutionary acquisition model

Both acquirers and users are more involved than with other contracting strategies

Higher level project decisions affect more stakeholders more often

Each increment should, wherever practicable, provide functionality that is both useful to the user and supportable.

Transition needs to be carefully planned upfront, particularly where legacy systems and/or multiple fielded builds are involved.

29.

The use of an evolutionary acquisition contracting approach will create many issues not normally encountered when using a traditional contracting methodology, which will have implications across all project disciplines. For this reason, projects considering the use of an evolutionary acquisition contracting strategy should consult with a wide range of specialists for guidance and assistance on whether such an approach would be appropriate for their requirement.

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition Evolutionary Acquisition Contracting Approaches 30. There are a number of different methods by which evolutionary acquisition can be effected contractually. However, it is important to note that standard ASDEFCON suite of tendering and contracting templates are not suitable for use in evolutionary acquisition without significant modification and there is currently no standard template available. As the use of an evolutionary acquisition model has implications across all project disciplines, further guidance on evolutionary acquisition contracting approaches and the development of evolutionary acquisition contracts must be obtained by contacting:

your relevant Group or Divisional contracting specialists listed at the front of this manual; technical specialists, particularly in relation to requirements development, requirements partitioning, system architectures, integrated logistic support, configuration management, and verification and validation; and project management specialists, particularly in relation to planning for evolutionary acquisition and risk management.

Further general information will also be available on the Quality Environmental Management System (QEMS). Common Provisions Across all Contracting Approaches 31. Under all contracting approaches, there are a number of key issues that must always be addressed. Special attention must be given to ensure that the contractor continues to perform satisfactorily and, if acting as the prime system integrator, is able to be held responsible for providing an integrated and coherent solution to the requirement. This is particularly important where the project has several contracts running in parallel, including some that may be performed by a subcontractor or third party. Performance guarantees, liquidated damages, termination provisions and other specialised contractual issues must also be dealt with for the particular needs of the procurement. Special provision should also be made for transfer of work, and Intellectual Property, from the contractor on termination to a new supplier of the Commonwealths choosing. Specialist legal advice will be essential to achieve these results. In giving effect to an evolutionary acquisition model, it is also critical that a contractual mechanism is included allowing for consecutive iterations of the same product to be delivered with enhanced functionality in subsequent iterations. This may be addressed by the use of an options clause within the contract for successive iterations or via an order structure contract arrangement (described below). Note, however, that an options clause can only be used for the simplest cases of evolutionary acquisition. Evolutionary acquisition also places a greater project management, governance and engineering burden on Defence and requires a closer relationship between the contractor, the project office and the user than under a traditional contract. These issues must be dealt with appropriately within the contractual arrangements that are used, which is an onerous requirement in itself.

32.

33.

34.

Order Structure Contract 35. An order structure contract arrangement is very similar to a standard standing offer and is illustrated in the following diagram:

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition

Head Agreement

Order Contract Order Contract Order Contract

Order Contract

Order Contract Time


36. Under an order structure contract arrangement, the head agreement (which could be either a deed or a contract):

provides for the placement and administration of successive orders; sets out the contractors responsibilities with regard to design and integration, including the requirement to ensure that all supplies delivered under standing offer contribute towards the overall objectives of the project; specifies the initial functionality required and the manner in which it can be incorporated into successive releases; and may provide a price which the overall contract is not to exceed.

37.

The work for each release is done under orders placed in accordance with the head agreement. As new functionality or additional requirements are identified, an order is placed for its incorporation into the evolving requirement. This is one of the key distinctions between the order structure contract and a standing offer. Under an order structure contract, subsequent orders must integrate with current and past orders as opposed to simply purchasing additional quantities of goods or services under a standing offer. The contractor, when acting as the prime system integrator, is responsible for coordinating the work done under orders into each successive release. This responsibility includes updating the specifications as they evolve to include new functionality. Not all orders under the head agreement need to have the same intent. For example, the head agreement could include separate orders for:

38.

development of an increment of the system; undertaking a study to reduce risk, such as obsolescence; or supporting elements of the delivered / fielded system.

39.

As each order is in itself a new contract, the terms and conditions applicable to each order may be modified to take into account specific requirements, notwithstanding the need for these orders to be consistent and integrated with the head agreement. Additional work may be added as required and development activities conducted at the same time as more defined work is carried out. Orders may be placed on a time and materials or firm/variable price basis and Page 4.59

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Defence Procurement Policy Manual 4.5 Evolutionary Acquisition provisions such as specific warranties and liquidated damages may be turned on or off under an order, depending upon the nature of the work involved. Nevertheless, no order structure contract arrangement is to be established using a time and materials approach, except where otherwise agreed by the Division Head after having followed the normal procurement advisory processes. 40. Under an order structure contract arrangement, Defence is only liable for the work done under the head agreement and any subsequent orders placed. Defence should ensure it has rights to terminate the head agreement and/or any order or to not place any additional orders where it is clear no adequate solution can be reached. This allows a mechanism for Defence to add additional work where the contractor has performed well and a solution is possible, or to dispense with the contractor where performance has been poor.

Chapter Summary
Evolutionary acquisition involves the acquisition and early fielding of a well-defined initial system with a limited capability, followed by a series of enhancements that incorporate planned additional functionality and that may include improvements based on feedback from users. Defence policy is that evolutionary acquisition should be considered for projects that exhibit certain key characteristics to ensure that the right contracting approach is used. There are two main approaches to evolutionary acquisition; spiral, for when the end-state requirements are not known in detail at the outset of the project; and incremental, where the end state requirements can be fully defined at the outset of the project. Correctly identifying and managing the increments within an evolutionary acquisition project is critical to success. Evolutionary acquisition should not be used if a simpler acquisition approach can produce the required project outcomes with acceptable levels of risk. The evolutionary acquisition model should also be considered for parts of a system where the applicable attributes are present. A rigorous risk assessment must be conducted upfront to ensure that the selection of an evolutionary acquisition model is properly informed of the risks being mitigated and any new risks being introduced. The prime systems integrator ensures that the different components of the program become part of a connected whole. This role is critical to the success of a project using an evolutionary acquisition model. Projects using an evolutionary acquisition model will need to implement effective stakeholder management strategies because of the increased requirements for stakeholder engagement. Different contractual mechanisms can be employed to give effect to the evolutionary acquisition model, including the use of options and an order structure contract arrangement. ASDEFCON templates are not suitable for evolutionary acquisition and no template currently exists. Specialist legal advice will always be needed to give effect to an appropriate contractual arrangement. Specialist advice across all project disciplines needs to be sought when considering the use of, and conducting, evolutionary acquisition.

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Defence Procurement Policy Manual 4.6 Electronic Procurement

4.6
Introduction
1. 2.

Electronic Procurement

This chapter applies to all electronic procurement undertaken by Defence and Defence Material Organisation (DMO). This chapter outlines current Defence policy on the use of electronic procurement (eprocurement) including e-mail, digital signatures, AusTender, integrated e-procurement, and the use of the Defence Purchasing Card on the Internet.

Mandatory Policy
Use of e-mail in Defence procurement must meet the requirements of Defence Instructions (General) ADMIN 10-06 Use of Defence Telephone and Computer Resources, the Protective Security Manual (PSM), Information Security Manual (ISM) and Defence Security Manual (DSM). Where external electronic business transactions are being considered, Procurement officers must consult with the Directorate of e-Business Integration in the Chief Information Officer Group (CIOG). When conducting electronic business, Procurement officers must have appropriate security services implemented using a Gatekeeper 1 accredited digital certificate approved by the Defence Public Key Infrastructure (PKI) Policy Board or where appropriate, a Defence based digital signature and confidentiality service. The use of digital signatures in e-Procurement must occur in accordance with the

Electronic Transactions Act 1999 (Cth).


Procurement officers must comply with all AusTender publishing and reporting obligations as set out in the Commonwealth Procurement Guidelines (CPGs) and explained in the DPPM chapters 5.5 and 5.8. Where the DPC is used to purchase a specialist item via the Internet, Procurement officers must document their risk planning, including details of the risk management strategy adopted and any tax implications.

Operational Guidance
Background 3. Electronic business is the performance of any business process, conducted via electronic means, or the provision of web-based or electronically provided information, without benefit of supporting paper with handwritten signatures, that retains the same status of signed, paper based business as regards its authenticity, integrity and accountability. E-procurement is a subset of electronic business. For the purposes of the Commonwealth Procurement Guidelines (CPGs), electronic, in relation to procurement, means any information provided on AusTender, and includes documentation provided to a supplier or potential supplier by email, facsimile or otherwise transmitted to the recipient by another electronic means.

4.

Gatekeeper is the Australian Governments strategy for the use of Public Key Infrastructure (PKI) which provides a framework to manage digital signature public key technology, asymmetric key pairs and certificates so as to develop a measure of trust and certainty for electronic activity.

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Defence Procurement Policy Manual 4.6 Electronic Procurement 5. All communications between Defence and a potential supplier, tenderer, supplier or contractor that is conducted via e-mail, facsimile or other electronic means is considered to be encompassed under e-procurement. This includes correspondence from the tender stage through to contract management and where appropriate, disposals.

Use of E-mail in Defence Procurement 6. Use of e-mail in Defence procurement must meet the requirements of Defence Instructions (General) ADMIN 10-06 Use of Defence Telephone and Computer Resources. Any e-mail that is used to transact Defence business that includes an action or decision is a Commonwealth record and should be treated accordingly. Use of e-mail must also meet the requirements of the Protective Security Manual (PSM), Information Security Manual (ISM) and Defence Security Manual (DSM) with regard to the classification of the information in the e-mail and the possible public communications networks that e-mail may be exposed to. Where external electronic business transactions are being considered, Procurement officers must consult with the Directorate of e-Business Integration in CIOG. When conducting electronic business, Procurement officers must have appropriate security services implemented using a Gatekeeper 2 accredited digital certificate approved by the Defence Public Key Infrastructure (PKI) Policy Board or where appropriate, a Defence based digital signature and confidentiality service. Further information is contained in Defence Information Management Policy Instruction 8/2000 Defence Information EnvironmentSecurity Services required for Defence Electronic Business. When the originator and addressee agree to send information by e-mail, they should also agree on a common profile for correspondence, its associated status and authority. Issues to be considered include:

7.

8.

9.

the status of an e-mailed copy of a signed letter, where a signed paper copy will also be sent by mail. This includes whether the addressee may act on the e-mail copy, the level of authority to direct or request action, and when the information is deemed to have been received; identification of staff within each organisation authorised to correspond by e-mail and their authority; the type of information each authorised person can send; and security issues associated with the use of e-mail.

10.

Procurement officers should ensure that business principles are developed regarding the use of email in relation to their contract. This will give confidence to both parties that:

messages will be managed when the addressee is away from the workplace or has left their place of work; and other business relationships and means of communications between the two parties are adequate to identify missing electronic communications.

E-mail Post Rules 11. E-mail post rules should be specifically agreed to between the originator and the addressee. It is Defences preference that e-mails are received when the message appears in the inbox of the addressees e-mail system. For further information about when the law deems email communications to have been received refer to the material on the postal acceptance rule in chapter 2.1. In addition, the originator and addressee should recognise in their agreement:

12.
2

Gatekeeper is the Australian Governments strategy for the use of Public Key Infrastructure (PKI) which provides a framework to manage digital signature public key technology, asymmetric key pairs and certificates so as to develop a measure of trust and certainty for electronic activity.

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Defence Procurement Policy Manual 4.6 Electronic Procurement

that the Defence firewall will filter out incoming messages above 1.5MB and certain file types including graphics, sound, video, and executable files; and that the originator of the e-mail, not the addressee, will receive notification that a message has been stopped at the Defence firewall.

13.

The parties should adopt appropriate strategies to deal with these issues e.g. by providing the other party with a phone number which can be called to make arrangements to re-send e-mails or send correspondence by an alternative means.

Digital Signatures 14. The use of digital signatures in e-Procurement must occur in accordance with the Electronic Transactions Act 1999 (the Act). The Act provides that a transaction is not invalid merely because it took place electronically. The Defence PKI is Gatekeeper certified and operated in order to provide Defence with additional integrity, security and non-repudiation in the Defence Information Environment. The Defence PKI provides the means of evaluating the reliability of digital signatures and is the method for tracing the digital signature back to the person who originally provided it. Delegations can be exercised/signed in an electronic format when utilising digital certificates issued from the Defence PKI if, prior to using the digital signature, all parties involved with the transaction have agreed to their use. Procurement areas need to determine if the use of digital signatures is appropriate given their business needs and whether to utilise the technology or not within their processes and documentation.

15.

16.

17.

Use of E-mail as Evidence of a Transaction 18. The Defence e-mail system records the original e-mail, including its destination, time sent, time received or that the information has remained complete and unaltered, but does not automatically record the email to an approved Records Management System, for example the Defence Records Management System (DRMS). All advice, transmission of information, tender documentation and contracts that Defence may need to have accepted by a court as evidence should therefore be sent under signature in hard copy. This is because, under the Evidence Act 1995 (Cth), a printout of an e-mail may not be accepted by a court as evidence if it is not supported by additional evidence, including evidence not currently available from the Defence e-mail system.

19.

E-mails and the Archives Act 20. 21. The Archives Act 1983 (Cth) governs all Commonwealth documents, including electronic documents. Further guidance can be obtained from Defence Archives. Any e-mail that is used to transact Defence business is a Commonwealth record. This will include all information that is sent or received during a tender process or in relation to a Defence contract. Commonwealth records are required to be retained in record keeping systems for as long as the Commonwealth and the community require them. The current Defence network does not store e-mail messages for the purposes of the Archives Act 1983 (Cth). E-mail messages that are Commonwealth records should be stored on an electronic record keeping system or printed out and retained on a registry file. The DRMS has the capability to store electronic documents in an electronic format that meets the requirements of the Archives Act 1983.

22.

23.

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Defence Procurement Policy Manual 4.6 Electronic Procurement Electronic Advertising, Tendering and Reporting 24. Agencies subject to the Financial Management and Accountability Act 1997 must advertise all open tendering approaches to the market (ATM) on AusTender (www.tenders.gov.au) in accordance with the requirements set out in the CPGs, paragraph 7.17 and 8.12.There is no financial threshold for advertising ATM, the decision to undertake an open or select ATM is the determining factor. Where practicable, request documentation for an open or select approach to the market must be distributed through AusTender in accordance with the CPGs, paragraph 8.44. For further information on advertising, tendering and reporting using AusTender, ROMAN and MILIS see chapters 5.5 and 5.8. For further information on ATM, including how to gain AusTender access to upload request documents, how to publish an ATM, who is responsible for publishing ATM and the different levels of AusTender refer to the AusTender Procurement Publishing Obligations webpage on the Directorate of Procurement Policy website.

25. 26. 27.

Integrated E-Procurement Trading Partner Agreements 28. Electronic business with other Commonwealth agencies or external business partners will require the establishment of special contractual arrangements called Trading Partner Agreements. A Trading Partner Agreement expresses the purpose, manner, operational considerations and contingency arrangements applicable to electronic interactions that are being used to perform the contracted business being undertaken e.g. a Trading Partner Agreement would specify the agreed transaction profiles that allow the exchange of orders, shipping notices and electronic invoice documents. A Trading Partner Agreement also identifies the common business rules, electronic trading terms and conditions, electronic catalogue standards and the e-procurement document definitions.

29.

30.

Security Services for Contract Management 31. Defence Information Management Policy Instruction 8/2000 Defence Information Environment Security Services required for Defence Electronic Business (6 September 2000) states that all Defence electronic business transactions which have significant security, privacy, commercial and regulatory consequences are required to use appropriate authentication, integrity, non-repudiation and, where necessary, confidentiality security services. This includes electronic information, web-based information and electronic commerce transactions which are either issued or provided by Defence, or received and relied upon by Defence.

Use of the Defence/DMO Purchasing Card on the Internet 32. Before using the Defence/DMO Purchasing Card (DPC) to purchase a specialist item via the Internet, procurement officers should undertake market research to ensure that there are no alternative products available and that no alternative ordering and payment method is offered by the supplier. Where the DPC is used to purchase a specialist item via the Internet, Procurement officers must document their risk planning, including details of the risk management strategy adopted and any tax implications. For further information on using the DPC on the internet, including purchases of non-specialist items, see the Simple Procurement Chapter.

33.

34.

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Defence Procurement Policy Manual 4.6 Electronic Procurement Further Information 35. Further information on e-procurement can be obtained by contacting the Chief Information Officer Group, Director eBusiness Integration on (02) 6128 7620.

Key References
Electronic Transactions Act 1999 (Cth) Commonwealth Procurement Guidelines Department of Finance and Deregulation Financial Management Guidance 15 - Guidance on Procurement Publishing Obligations Commonwealth Electronic Procurement Strategy 2000: http://www.agimo.gov.au/archive/publications_noie/2000/04/eproc_strategy.html Protective Security Manual Information Security Manual 2006 e-Government Strategy, Responsive Government: A New Service Agenda available at: http://www.finance.gov.au/publications/2006-e-government-strategy/index.html Commonwealth Electronic Procurement Strategy 2000 Strategic Guide to e Procurement available at http://www.finance.gov.au/agimo/index.html Defence Security Manual Commonwealth Electronic Procurement Strategy 2000 Defence Instruction General ADMIN 10-06- Use of Defence telephone and computer resources Defence Information Management Policy Instruction 8/2000 - Defence Information Environment - Security Services required for Defence Electronic Business Defence Information Management Policy Instruction 5/2001 - Defence Information Environment Provision of Defence E-mail and Internet Services Defence Online Action Plan: http://intranet.defence.gov.au/ciogweb/sites/DEBI/docs/Defence_OAP_Version_1.pdf Government Online Strategy and other electronic procurement policy documentation available at http://www.austrac.gov.au/index.html 2009 Defence Information and Communications Technology Strategy 2009 available at: http://intranet.defence.gov.au/ciogweb/sites/aboutus/comweb.asp?page=50386&Title=Defence %20ICT%20Strategy

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Defence Procurement Policy Manual 4.7 Not Used

4.7

Not Used

This chapter was deleted as part of the DPPM 1 July 2010 update.

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Defence Procurement Policy Manual 4.8 Standing Offers

4.8
Introduction
1. 2.

Standing Offers

This chapter applies to all procurement undertaken in Defence and the Defence Materiel Organisation (DMO). Standing offers are established to facilitate repetitive acquisition of goods and services by avoiding the need to continually approach the market. This chapter outlines:

the process for establishing a standing offer; and the process for placing orders under a standing offer.

3.

The Commonwealth Procurement Guidelines (CPGs) refer to a panel rather than standing offer. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

Mandatory Policy
All new standing offers must be manually reported on AusTender in the Standing Offer Notices Section. For covered procurements, the standing offer deed must contain minimum requirements, including an indicative price or set price or rate as appropriate for the goods or services to be procured in the period of the standing offer. Procurement officers must ensure that orders placed under a standing offer valued at $10,000 or more are published on AusTender. Care must be taken to ensure the procurement method reported on AusTender for the order is the method that was used to establish the Standing Offer. Procurement officers must ensure that orders placed under a standing offer valued at $100,000 or more are entered into the Interim Defence Contracts Register (IDCR). A standing offer must not be established in relation to purchases for the purpose of avoiding competition, to protect domestic suppliers, or in a manner that is discriminatory. DMO Procurement officers must use the DMO Support Services (DMOSS) panel where the required specialist skills are available through that panel. DMO Procurement officers must seek approval from General Manager Commercial prior to establishing a standing offer for specialist skills not available through the DMOSS panel. In order to conduct future competitive procurements within an existing standing offer, the request documentation released to the open market to establish this standing offer must have clearly specified that this may occur. Procurement officers must comply with any local business rules governing the use of the standing offer. Procurement officers must refer to, and comply with, the Department of Finance and Deregulation Good Procurement Practice (GPP) 04 Establishing and Using Panels.

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Defence Procurement Policy Manual 4.8 Standing Offers

Operational Guidance
Background 4. A standing offer is a continuing offer by a supplier or suppliers to provide specified goods and services for a predetermined length of time, usually at a predetermined price and in accordance with pre-agreed terms and conditions. Standing offers normally take the form of a deed and no contract is made until an order is placed, at which point a contract is formed only in relation to that particular order. Establishing a standing offer is a complex procurement. Orders placed under a standing offer are generally considered a simple procurement when the only variables are the quantity and delivery point.

Establishing Standing Offers When to Establish a Standing Offer 5. Standing offers can provide a convenient, flexible, streamlined and efficient process for acquiring the goods or services covered by the standing offer. Consideration should be given to establishing a standing offer where:

the requirement arises frequently, over an extended period and generally conforms with commercial standards; an appropriate standing offer does not exist; the range of products, skills and expertise is of a related nature; the extent of the requirement cannot be determined in advance and may be needed at short notice; and lower prices and better value for money may be achieved by combining the requirements of more than one ordering area.

6.

In most cases it will not be appropriate to establish a standing offer where:


special, non standard or non commercial goods or services are involved; or there is a clear requirement for a fixed quantity of goods or services within a set period.

7.

DMO Procurement officers must use the DMOSS panel where the required specialist skills are available through that panel. Where the required specialist skill is not available through the DMOSS panel, DMO Procurement officers must seek approval from General Manager Commercial prior to establishing a standing offer for those specialist skills.

Establishing a Standing Offer 8. A standing offer can be established by an open or select tender process that meets the requirements of the Mandatory Procurement Procedures (MPPs) set out in Division 2 of the CPGs. For further information regarding these procurement methods see chapter 3.1. Where the chosen process is select tender from a multi-use list, the original notice inviting suppliers to participate in the multi-use list should include a clause that reserves a discretion to establish a standing offer from a multi-use list. Chapter 4.3 contains further information on multiuse lists. Although the final number of suppliers participating in the standing offer will not be determined until after evaluation has been completed, consideration should be given to the optimal number of suppliers for the standing offer. In setting up the panel, Procurement officers should consider the availability of resources, administrative effort, and cost involved in establishing and managing the panel. It is recommended that guidance is given to potential tenderers in the tender documentation as to the anticipated panel size, where practicable. The structure of a standing offer Request for Tender usually contains conditions of tender, draft conditions of Deed and a scope of services. It also typically includes a pricing schedule/labour Page 4.82

9.

10.

11.

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Defence Procurement Policy Manual 4.8 Standing Offers rates table, template official order (i.e. the contract) and, where the standing offer is for a period of more than two years, a price variation/adjustment formula. Further guidance on the content and structure of a standing offer Request for Tender can be obtained in GPP 04 Establishing and Using Panels. 12. The ASDEFCON suite of templates, contains several templates suitable for use when establishing standing offers. ASDEFCON (Standing Offer for Goods and Maintenance Services) (SOGMS) should be used when establishing a standing offer where goods are to be acquired and/or maintenance services are to be provided. It can be used for either, or both, of these purposes. This template is closely based on the AC565 and SP020 forms used for Simple procurement. ASDEFCON (SOGMS) should be used at the low end of complexity in relation to both acquisition and support where the risks to technical integrity (ie, safety, fitness for service and environmental compliance) are minimal. Refer to the ASDEFCON (SOGMS) handbook for further information on the use of the template. ASDEFCON (Standing Offer for Goods) should be used as a basis for standing offers with a supplier or a panel of suppliers for low value, low risk procurements of goods up to an aggregate value of $5 million. While the template is designed to be modified with respect to the length of the standing offer period, it has been drafted on the basis that each standing offer would generally be in place for three years, with an option for two additional 12-month extensions. This template is not suitable for use when procuring services or software. The ASDEFCON (Standing Offer for Goods) handbook contains additional requirements for standing offers with an aggregate value greater than $5 million. ASDEFCON (Standing Offer for Goods) should not be used to acquire spare parts for equipment required as part of a project that has established its own arrangements for the acquisition of spare parts. Refer to the Chief Information Officer Group (CIOG) website for information on how to procure IT services. ASDEFCON (Standing Offer for Services) should be used when establishing a panel for the engagement of consultants (suppliers) to provide services to Defence, where there is an ongoing requirement to procure standard commercial services on an as required basis up to an aggregate value of $5 million. While the template is designed to be modified with respect to the length of the standing offer period, it has been drafted on the basis that each standing offer would generally be in place for three years, with an option for two additional 12-month extensions. This template is also not suitable for use when procuring IT services. The value of a standing offer procurement is the estimated total value of the goods or services that may be procured under the standing offer over the life of the standing offer. This is relevant for purposes of determining whether the proposed standing offer will be a covered procurement i.e. exceeds the financial threshold of $80,000 for application of the mandatory procurement procedures set out in the CPGs. In accordance with the MPPs, a standing offer deed for any covered procurement must contain minimum requirements, including an indicative price or set price or rate as appropriate for the goods or services to be procured in the period of the standing offer. In some circumstances it is acceptable for a standing offer procurement process to result in a single supplier. This can occur where there are benefits in a single supplier providing the goods or services or where only one supplier submitted a bid assessed as meeting the tender requirements. Where this occurs, care should be taken to ensure that the terms of the standing offer are appropriate and does not give the supplier an unfair advantage in the marketplace. When establishing a standing offer Procurement officers should refer to chapter 1.4 for delegation requirements. All new standing offers must be manually reported on AusTender in the Standing Offer Notices Section (see chapter 5.8). A standing offer must not be established in relation to purchases for the purpose of avoiding competition, to protect domestic suppliers, or in a manner that is discriminatory.

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19. 20. 21.

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Defence Procurement Policy Manual 4.8 Standing Offers Standing Offer Period 22. There is no standard term or period for standing offers. The period or term of a standing offer arrangement is at the discretion of the procurement area based on a value for money assessment. Many standing offers have a period of three years and may include options for defined extensions up to a total of five years (i.e. initial term of three years plus options for two additional 12-month extensions). Extension options can provide flexibility in the operation of the standing offer, and could be used where prices or technology may change significantly over shorter periods of time. Procurement officers should monitor expiry dates of their standing offers so that sufficient time is allowed for the necessary action to either extend or replace the expiring standing offer. A standing offer should only be extended where options to extend exist within the standing offer deed.

23.

Piggybacking / Clustering 24. Defence may piggyback on the existing contractual arrangements of other agencies where this option is stated in both the tender documentation at the start of the procurement process and the standing offer deed. Care must be taken to ensure that value for money is still achieved and that the goods or services being procured are the same as provided for within the standing offer deed. Where several agencies have the same procurement needs, costs and duplication can be reduced by agencies forming a cluster arrangement. Clusters are formed where several agencies go to the market with a single procurement request. Usually, one of the agencies forming the cluster will become the lead agency that undertakes the administrative tasks, such as approaching the market and finalising the resultant standing offer deed. The agencies intending to form the cluster must be specified in the tender documentation at the start of the procurement process and must be mentioned in the terms and conditions of the resultant standing offer deed. As an alternative, each agency may set up a separate standing offer deed from the same approach to market. Clustering arrangements are different from the coordinated procurement arrangements outlined in chapter 4.3.

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26.

Compliance Requirements for Standing Offers Established Pre 1 January 2005 27. 28. Different rules apply to standing offers that were signed prior to 1 January 2005. The following guidance relates to standing offers entered into prior to that date. The period of operation of existing pre 1 January 2005 standing offers must not be extended for the purpose of avoiding the application of the revised CPGs. The following conditions are placed on the extension of existing standing offer panels:

for standing offers that pertain to covered procurements an extension is only permitted where, as at 1 January 2005, the deed or contract of standing offer contains a valid option to extend. Where the deed or contract is silent on the matter no extension is permitted with the consequence that a new standing offer process must be commenced; and standing offers for non-covered procurements may be extended (with the agreement of the parties) notwithstanding the absence of an express clause in the deed or contract of standing offer to that effect. However, all standing offers must retain clear procedures or conditions for the termination or closure of the standing offer. Additionally, any proposed extension must constitute value for money.

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GST transition rules may apply where existing pre 1 January 2005 contracts have not been reviewed to incorporate GST clauses. In these circumstances expert advice from the Defence Tax Management Office should be sought.

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Defence Procurement Policy Manual 4.8 Standing Offers Placing Orders under Standing Offers 30. The Standing Offer Notice Section of AusTender contains a current list of available standing offers. Where a standing offer exists within Defence or DMO that has been assessed as meeting the procurement requirement, it is best practice to use the standing offer in the first instance unless there are valid reasons for not doing so. Where a similar standing offer exists elsewhere in Government, this also may be used if the terms and conditions are suitable and facilitate Defence use of the arrangement. If an existing standing offer arrangement is not suitable and an alternative procurement method needs to be employed, then Procurement officers should record the reasons for their decision within their procurement submission. DMO Procurement officers must use the DMO Support Services (DMOSS) Panel where the required specialist skills are available through that panel. Once a standing offer is established, the purchase of goods or services from a supplier under that arrangement does not attract the operation of the MPPs. That is, Defence can procure goods or services utilising the standing offer without seeking competitive quotes from the panel, unless otherwise provided for by the terms of the standing offer. Such procurements do not constitute a single supplier direct source procurement for AusTender reporting purposes unless the standing offer was established in such a manner (see chapter 3.1). However, any purchase made using the standing offer is still governed by other elements of the procurement policy framework (e.g. requirements to achieve value for money and to have appropriate authority for the expenditure of public money.) A standing offer cannot be used to order goods or services that were not specified in the request documentation, even if the supplier may be able to provide the goods or services. Standing offers are usually established through a single procurement process and can be used to source goods or services within the scope of that arrangement that are classified as covered procurements where:

31. 32.

33. 34.

a panel is established in accordance with the CPGs and will provide value for money; and there is a deed of standing offer signed with each panel member which clearly specifies: the types of goods or services which may be purchased under the standing offer; a set of indicative prices or rates as appropriate for the goods or services; how purchases under the standing offer will occur; and where relevant, mechanisms for competitive approaches under the standing offer.

35.

The rates set within some standing offers are indicative or maximum rates and do not in themselves necessarily provide value for money for the services being provided. Procurement officers should apply some scrutiny to establish that the rates are consistent with market rates for the level of services being procured. This is particularly important when drafting delegate submissions and value for money considerations.

Delegations to be Exercised 36. 37. When placing an order against an already established standing offer, Procurement officers should refer to the delegation requirements outlined in chapter 1.4. Orders placed under a standing offer must be published on AusTender where they are valued at $10,000 or more. Care must be taken to ensure the procurement method reported on AusTender for the order is the method that was used to establish the Standing Offer.(see chapters 3.1 and 5.8). Orders placed under a standing offer valued at $100,000 or more must be entered into the Defence Interim Contracts Register (IDCR) (see chapter 5.8) .

Competitive approaches within a Standing Offer 38. It is an option to establish a competitive approach within a panel where such an approach would provide value for money. The standing offer deed may specify the circumstances when a competitive approach within the panel must be undertaken. Page 4.85

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Defence Procurement Policy Manual 4.8 Standing Offers 39. In such cases, the request documentation issued for the initial approach to the open market to establish the panel must have clearly specified that the panel being established may also be utilised for competitive procurement before placing an order with a panel member.

Signing a Standing Offer as a Deed 40. A deed is most often used to establish the legal framework of a standing offer panel. The deed is typically an enforceable agreement between Defence and potential suppliers to make a standing offer or a continuous offer to supply goods or services on certain pre-defined terms and conditions. Unless otherwise stated in the standing offer deed, Defence is not bound to place any orders under the standing offer or provide consideration for the benefit of the standing offer. The lack of consideration is the main difference between a contract and a deed. However, once the standing offer is agreed and signed, Defence and the supplier are bound to comply with the terms and conditions set out in the deed.

Local Business Rules 41. Areas responsible for establishing and managing standing offers often have additional rules governing the use of the standing offer. These rules may place more onerous requirements on the use of the standing offer than are outlined in this chapter. Procurement officers must comply with any business rules governing the use of that particular standing offer.

Further Advice on Standing Offers 42. When establishing and using standing offers, Procurement officers must refer to and comply with the Department of Finance and Deregulation Good Procurement Practice (GPP) 04 Establishing and Using Panels. When arranging a standing offer with a panel of suppliers, care should be taken to maintain consistency in the terms of the standing offer panel arrangements. Any variations of the terms and conditions between suppliers will make management of the standing offer and value for money decisions more difficult.

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Key References
Commonwealth Procurement Guidelines Department of Finance and Deregulation (DOFD) Good Procurement Practice 04 Establishing and Using Panels Financial Management Guidance Publication No.13 - Guidance on the Mandatory Procurement Procedures ASDEFCON (Standing Offer for Goods) and ASDEFCON (Standing Offer for Goods) Handbook ASDEFCON (Standing Offer for Services) and ASDEFCON (Standing Offer for Services) Handbook ASDEFCON (Standing Offer for Goods and Maintenance Services) and ASDEFCON (Standing Offer for Goods and Maintenance Services) Handbook

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Defence Procurement Policy Manual 4.9 Staged Procurement

4.9
Introduction
1.

Staged Procurement

This chapter outlines the use of staged procurement in the Defence procurement context. The Division 2 (Mandatory Procurement Procedures) of the CPGs (MPPs) requirements that apply to covered procurements do not apply to Defence/DMO Exempt Procurements.

Overview 2. Staged procurement involves the use of a staged or structured acquisition strategy to break the procurement process into more manageable parts and refine the market testing process. Staged procurement may involve the use of one or more of the following activities:

a Request for Information; an Invitation to Register Interest; a Request for Proposal; a Project Definition Study; or a prototype development stage,

prior to seeking formal offers from potential suppliers, for the fulfilment of a requirement. 3. A staged procurement acquisition strategy is used mostly for high value Complex and Strategic procurements. The individual activities of a staged procurement need not be viewed as progressive steps, each of which is to be undertaken. The activities each have a specific purpose and are to be used in a manner appropriate to the procurement activity being conducted. Staged procurement will increase the time required to complete the procurement activity as each stage will require additional time for:

4.

the development of request documentation; the respondents to acquire information and develop responses; and Defence evaluation of the responses received.

Using a Staged Procurement Strategy 5. Staged procurement activities may be appropriate in the following circumstances:

The requirement is unknown or cannot be adequately defined; The requirement is only broadly known and the solution may need considerable analysis, evaluation; The complexity of the requirement, or its potential for imposing large costs during tendering, makes it desirable to shortlist the most competitive tenderers; The requirement may be capable of multiple solutions; The requirement is of a developmental nature to meet a particular need; It is necessary to qualify goods or services to defined standards; It is necessary to qualify tenderers for security reasons; and It is necessary to ensure adequate standards of service capability.

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Procurement approval is required for each separate staged procurement activity. The Procurement Approver should endorse the evaluation recommendations after each activity. Page 4.91

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Defence Procurement Policy Manual 4.9 Staged Procurement Approval to move to the next phase may be combined in the evaluation recommendation. Separate Procurement approval should be obtained prior to seeking formal offers from potential suppliers by Request for Tender. 7. Each activity in a staged procurement has a clearly defined purpose and needs to be adequately planned. Before proposing each procurement activity officers should:

be aware of timing constraints which need to be factored into planning; be aware of resource constraints which influence the length of stages and outcomes of a procurement; determine the outcome required from each stage; avoid unnecessary stages which add cost for both Defence and industry; and ensure that tenderers are aware of what is required in their responses and the evaluation criteria that will be applied to each stage.

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Staged procurement incurs costs to both Defence and tenderers and should be used where the benefit of such a process outweighs the increased costs. Staged procurements do not set aside and should not be used to avoid obligations to encourage competition and avoid discrimination.

Request for Information 9. Requests for Information are predominantly used in relation to Defence capability and technological development. A Request for Information is used to assess if the market is capable of satisfying a requirement or to determine the size of the market capable of satisfying a requirement. While the requirement may not be fully specified at this stage, a broad description of the requirement or capability needs to be advised to enable potential suppliers to provide the information required for future decisions on the procurement activity. Responses to a Request for Information will not include any detailed pricing, although estimated overall costings may be requested. Where a costing is requested respondents will not be required to provide tender prices in accordance with those costings. The use of a Request for Information needs to be carefully considered because of the cost it imposes on respondents. Requests for Information should not be used when more appropriate staged procurement activities, such as Request for Proposal or Invitation to Register Interest, would be more appropriate. Potential suppliers may be advised of a Request for Information either by public advertisement or directly by letter, where there are a known limited number of potential suppliers. Respondents to a Request for Information should be acknowledged and also advised of the decision as to whether any further procurement activity will occur. The failure of a potential supplier to respond to a Request for Information is not to be used as a justification for restricting their access to future procurement activity in respect of the requirement. A Request for Information is not used to shortlist suppliers.

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Invitation to Register Interest 13. An Invitation to Register Interest is used to seek expressions of interest from potential suppliers to fulfil a known Defence requirement, following public advertisement. The cost to potential suppliers in responding to an Invitation to Register Interest is relatively low compared with that of preparing a detailed tender. The requirement may not be fully defined but a general description needs to be included to allow potential suppliers to assess their ability to fulfil the requirement. The objectives of an Invitation to Register Interest include:

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an assessment of the interest of potential local and overseas suppliers to supply goods and/or services to meet the advertised requirement; Page 4.92

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Defence Procurement Policy Manual 4.9 Staged Procurement

the provision of sufficient time to potential suppliers to enable them to explore the formation of teaming and licensing arrangements in order to meet the requirement; saving potential suppliers not capable of meeting the requirement from the unnecessary expense of providing a detailed tender response; providing sufficient time to potential suppliers to undergo any security requirements before the release of a classified Request for Proposal or Request for Tender (see chapter 3.9); and identifying potential suppliers not capable of fulfilling the requirement because of their technical, managerial, legal and/or financial capacity.

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An Invitation to Register Interest should not:


be used to seek proposals or offers; be used to seek indicative pricing; require unpaid research and development; or require the creation of any intellectual property by a respondent.

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