New cap on IT contracts
What you need to know
- As of 23 August 2017, Commonwealth Government IT contracts will be capped at a maximum value of $100 million or three years’ duration.
- Exceptions will require approval from the Assistant Minister for Cities and Digital Transformation and the Minister for Finance.
- Further guidance is required in relation to how this policy applies, including which contracts it applies to and which agencies it applies to.
- Agencies will also need to keep a keen eye on how the Government intends to implement the other recommendations of the ICT Procurement Taskforce. This will largely be coordinated by the Digital Transformation Agency (DTA). In particular, agencies should expect more centralisation in the ICT space and a reduction in agency panels.
A brief history of the Taskforce
The ICT Procurement Taskforce (Taskforce) was established in October 2016 to identify procurement barriers and opportunities to streamline ICT procurement as well as to identify opportunities to make it easier for start-ups and small and medium sized businesses to compete for government ICT contracts. It issued a consultation paper in November 2016 and received submissions from ICT businesses, industry associations and government agencies.
The Taskforce issued its report on 23 August 2017, outlining 10 recommendations. All of these recommendations were accepted by the government, with the exception of recommendation 3 (which was accepted in principle) and recommendation 4 (which was partially accepted).
New cap on IT contracts
The new cap on IT contracts just announced is a result of Recommendation 2:
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The Taskforce recommends setting annual targets for ICT procurement. An initial set of annual targets could comprise:
All agencies will be required to provide an annual report to government on their contributions to achievement of targets. |
Some of the key drivers for Recommendation 2 are to:
- increase transparency
- provide greater opportunity for SMEs to provide components of significant ICT projects
- drive the use of agile rather than waterfall procurement approaches with smaller and more regular approaches to market
- encourage innovation by reducing the impact of failure
- reduce overall expenditure on ICT by 10% by more closely controlling higher value contracts.
Relevantly for the purposes of the new cap, the Taskforce report notes (on pages 16, and 36 to 37) that:
A very small number of the government’s 17,000 ICT procurements drive most of the government’s ICT commitments. In 2015–16, less than 200 ICT procurements (1 per cent) were worth $5 million or more, but these procurements were responsible for $4.7 billion (52 per cent) of the government’s $9 billion of ICT commitments, with an average value of $25 million each.
In addition to introducing overall targets on ICT spending, the government would also set targets on the maximum size and length of individual contracts for ICT procurement. Although most of the government’s ICT procurement contracts are for small amounts of money over a short period of time, the very few amount of long contracts make up a significant amount of the total value of ICT procurement … This indicates that more closely controlling these large and long contracts can produce disproportionately large benefits for the government.
In accepting Recommendation 2, the Government commented that:
Initially, the Government will establish an initial annual cap for agencies on ICT contracts and exceptions will require approval from the Assistant Minister for Cities and Digital Transformation and the Minister for Finance.
On 23 August the Assistant Minister for Cities and Digital Transformation announced that:
From today, Government IT contracts will be capped at a maximum value of $100 million or three years’ duration. This is to allow small and medium sized businesses the opportunity to bid for smaller components of larger projects.
What next?
Further guidance is required in relation to key aspects of this policy.
| How will this policy be implemented? |
We expect this will be implemented as a procurement connected policy. Other procurement connected policies include:
|
| Which agencies does this apply to? |
We expect this restriction is directed at:
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| How does the three year requirement work in practice? |
Given that only a handful of agencies have IT contracts of over $100 million, the bigger question for most agencies will be how the three year requirement works in practice. In particular:
We expect that the policy is not intended to discourage warranties, perpetual licences or cloud arrangements. Rather the focus will be on ensuring that software maintenance and support arrangements are flexible and contestable. However, this requirement will need to apply equally to Australian software vendors. |
| How does this apply to standing offers? | We expect that agencies will be required to value standing offer arrangements to avoid a situation where agencies enter into 3 year standing offer arrangements that allows it to award multiple contracts that together exceed $100 million. The government has also committed to reducing the number of panel arrangements. |
| What constitutes an IT contract? |
While the Taskforce refers to ICT contracts, the Minister's announcement refers to IT contracts. Accordingly further guidance will be required about the policy's application to telecommunications contracts – particularly as these are often higher value/ longer term arrangements. Clarifications is also required about how the policy applies to:
Given that a key reasons for the new cap is visibility, we expect that the definition will be broad. |
| Who will manage exemptions? |
Exceptions will require "approval from the Assistant Minister for Cities and Digital Transformation and the Minister for Finance". It is unclear at this stage whether exceptions will be processed through DTA or Finance. |
Other recommendations
We will issue a more detailed alert about the 10 recommendations, but we have summarised the recommendations into three categories (1) Framework; (2) Actions and (3) Reporting:
| framework | actions | reporting |
|---|---|---|
| (1) New framework for ICT procurement, including targets and reporting requirements |
(6) Build the APS's ICT procurement capability and culture |
(3) A new dataset of government ICT spend |
| (5) New ICT strategy which complements the Commonwealth Procurement Rules but incorporates ICT specific policies such as cloud and the Digital Standard |
(7) Co-ordinate significant ICT procurements and vendor relationships |
(4) A new dashboard showing the status and outcomes of significant ICT projects |
| (10) Regular review and renewal of the new framework and policies |
(8) and (9) Simplify ICT procurement practices, including by reforming panels and developing new procurement pathways. |
Authors: Amanda Ludlow, Partner; Georgina Adams, Consultant;Tess Hemming, Senior Associate.
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