NSW Auditor slams agency contract extensions

Health, Police fail to get value for money.

The NSW Audit Office has criticised the state’s management of IT services contracts, claiming that agencies failed to get value for money for two deals worth a total of $15 million in the past seven years.

The report (pdf), released today, highlighted a NSW Police contract that had been extended six times since March 2005 and a four-year-old NSW Health deal that was worth $7 million.

Auditor-General Peter Achterstraat said both agencies renewed contracts “without properly reviewing the services that had been provided and what was required in the future”.

He called for the NSW Department of Finance and State Contracts Control Board to:

• develop further requirements for deals worth more than $250,000;
• benchmark suppliers’ prices; and
• develop guidance to agencies on managing contracts.

Finance Director-General Michael Coutts-Trotter replied that the department was reviewing NSW procurement practices but “principal responsibility for contract management must remain with the agencies”.

The Department of Finance began seeking comments from the public last week on a plan to “cut red tape” by replacing the Contracts Control Board with a NSW Government Procurement Board chaired by Coutts-Trotter.

NSW Police’s infrastructure maintenance deal

Police initially agreed to pay its maintenance service provider, NCR, a fixed price per networking device following a competitive tender process.

When it commenced in March 2005, the deal was worth $450,000 a year. It grew to be worth $1.3 million a year after 18 months.

Achterstraat noted that the unit price did not change for several years despite any changes to equipment age, economies of scale and business requirements.

In addition, Police was “unable to locate all records for the contract”, the Audit Office reported.

Two approvals for contract extensions were reported missing, as well as correspondence documenting changes to contract conditions. One contract renewal submission did not include signatures showing that it had been approved.

Police said it was satisfied with its supplier but the Audit Office argued that it could not demonstrate value for money because contract extensions were not formally reviewed.

The Audit Office recommended that Police:

• revise its delegation structure and contract approval process by March;
• implement a risk-based contract management plan for all services contracts by June;
• require all new contracts to undergo a business needs analysis and value for money assessment by June; and
• have structures in place to effectively manage all services contracts, including purchases through state contracts, by December.

A Police spokesman said it had recently restructured its Business Technology Services branch and created new CTO and CIO roles to “better manage technology services to the [Police] Force”.

NSW Police welcomed the report and was addressing Achterstraat’s four recommendations to ensure that IT contracts were efficiently managed, the spokesman said.

Health’s application support deal

NSW Health disputed the Audit Office’s critical assessment of its clinical systems maintenance contract, arguing that it pertained to a custom-built legacy application.

Achterstraat reported that the agency’s shared services provider, Health Support Services (HSS), “did not follow Health protocols for direct supplier negotiations” when it renewed a three-year-old contract last January.

Neither the Audit Office nor HSS would reveal the name of the contractor and the application it was responsible for.

According to the audit report, HSS did not market test the price of its contract, renewing the deal at the same fixed price despite a 36 percent decline in service demand.

Additionally, Achterstraat wrote that some “key decisions” in the contract history were not documented, including the removal of a clause containing rebates for when the supplier failed to meet service levels.

“There was no record of why this amendment was made [when the contract was renewed],” he reported.

NSW Health Director-General Dr Mary Foley said the report “did not adequately consider” the agency’s legacy IT systems, which were purpose-built for “very specific needs” by individual vendors.

“Health’s decision to directly re-negotiate a clinical systems maintenance contract with the vendor that originally built it and has supported it for more than ten years was not only justified, but the most financially responsible approach,” Foley wrote.

“HSS carefully assessed the contract against historical vendor performance and determined it to be both our lowest risk option and value for money.”

Noting that HSS expected to spend $30 million on IT services and an additional $30 million on IT goods in 2011-12, the Audit Office recommended that it:

• prepare a risk-based contract management plan for all new services contract by June;
• establish structures to effectively manage all services contracts, including those purchased through state contracts, by June;
• complete risk assessments of existing services contracts and prepare contract management plans for those identified as high-risk by December.

HSS chief executive Mike Rillstone welcomed the review and noted that the recommendations were being implemented and progressed.

The state spends a total of $13 billion on goods and services, including $2 billion on ICT contracts with nearly $1 billion on ICT goods and services every year, according to the report.