Supporting SMEs and the environment: Updates to the Commonwealth Procurement Rules

What you need to know

• New Commonwealth Procurement Rules (CPRs) will commence on 14 December 2020.
• Non-corporate Commonwealth entities (NCEs) will no longer be required to conduct an open approach to market for procurements valued between $80,000 and $200,000 where the supplier is a small or medium enterprise.
• The provisions related to assessing value for money have been updated to require officials to consider each procurement against the Department of Agriculture, Water and the Environment’s Sustainable Procurement Guide.
• The CPRs now expressly exclude arrangements between NCEs where no other suppliers have been approached.
• Officials are now required to specifically consider the cyber security risks associated with each procurement.
• The Commonwealth Contracting Suite (CCS) is now mandatory for procurements valued at under $200,000 through the CPRs rather than just through Commonwealth policy.
• The CPRs have been updated to include reference to the Modern Slavery reporting requirements.

What you need to do

• Familiarise yourself with the changes to the CPRs. 
• Review your internal procurement policies, processes and decision-making procedures against the rules and update them as appropriate.
• Keep an eye out for updated guidance from Finance on the new Small and Medium Enterprise (SME) exemption.

2020 updates to the Commonwealth Procurement Rules

The Minister for Finance, Simon Birmingham, has announced updates to the CPRs, which will come into effect on 14 December 2020. 

The changes are intended to have positive outcomes for small and medium enterprises and encourage the procurement of environmentally sustainable goods and services. The key changes are discussed below.

New exemption from Division 2 of the CPRs

The CPRs contain the key obligations regarding how Commonwealth officials conduct procurements. Commonwealth procurements must be performed in accordance with:

• Division 1 of the CPRs; and
• Division 2 of the CPRs, where the procurement is above the relevant threshold ($80,000 for the procurement of non-construction services by an NCE) and no relevant exemption applies.

The changes announced by the Minister for Finance today have added an additional exemption from the requirements in Division 2 of the CPRs. The new exemption is expressed as follows:

17. procurement of goods and services from an SME for procurements valued up to $200,000 (note: the requirements under the Indigenous Procurement Policy must first be satisfied before this exemption is applied).

The exemption has the effect that NCEs are not required to comply with Division 2 of the CPRs in circumstances where:

• the entity is conducting a procurement for a good or service that is not related to construction;
• the procurement is valued at between $80,000 and $200,000; 
• there is no suitable indigenous supplier that can meet the procurement requirement; and
• the procurement is to source an SME (an Australian or New Zealand firm with fewer than 200 full-time equivalent employees).

In practical terms, the most notable effect of the new exemption is that NCEs may now source an SME for a procurement without approaching the open market. In many circumstances, this will allow the NCE to conduct a sole source procurement.  This is because Division 2 is the part of the CPRs that contains the requirement for procurements to be conducted through an open approach to market.

The changes will provide a much needed boost to SMEs, as it will allow NCEs to obtain their services without undertaking an often burdensome open approach to market process. 

Officials will, of course, still be required to comply with the Division 1 requirement to establish that the relevant procurement arrangement achieves 'value for money' for the Commonwealth, and the mandatory set aside requirements of the indigenous procurement policy. 

Definition of 'value for money' - Environmental Sustainability Guide

For some time, Commonwealth officials have been required to assess the environmental sustainability of goods and services as part of the assessment of whether a tenderer's offer will achieve value for money for the Commonwealth.

The changes to the CPRs have further enhanced this requirement to require officials to consider the offered goods and services against the requirements in the Department of Agriculture, Water and the Environment’s Sustainable Procurement Guide:

4.5 Price is not the sole factor when assessing value for money. When conducting a procurement, an official must consider the relevant financial and non-financial costs and benefits of each submission including, but not limited to the:
[…]
e. environmental sustainability of the proposed goods and services (such as energy efficiency, environmental impact and the use of recycled products)

i. recognising the Australian Government’s commitment to sustainable procurement practices, entities are required to consider the Australian Government’s Sustainable Procurement Guide where there is opportunity for sustainability or use of recycled content;
ii. the Sustainable Procurement Guide is available from the Department of Agriculture, Water and the Environment’s website;

The implementation of this requirement will require officials to consider the environmental, social and economic impacts of their procurements, particularly where there is an opportunity for the Commonwealth to improve the sustainability of its activities or where there are recycled goods that can be used. The Sustainable Procurement Guide provides specific guidance on the types of matters that officials should have regard to when determining 'value for money'. It states that procurement officials should consider the costs associated with the following matters when conducting a value for money assessment:

• Purchase price;
• Delivery;
• Installation and commissioning;
• Energy and fuel;
• Water;
• Consumables;
• Waste from operation;
• Labour;
• Health and safety;
• Maintenance and repair;
• Decommissioning; and
• Disposal.

This requires Commonwealth officials to have regard to the 'whole of life' cost of the procurement, including any indirect costs. 

The expected effect of the change is that the Commonwealth will less frequently select goods and services that have a lower up-front cost, with a comparatively high ongoing cost or a cost to the environment. 

For example, a low-priced printer that uses low quality printer cartridges that have a significant impact on the environment and cannot be disposed of easily would be assessed as having a higher cost to the Commonwealth under CPR sub-paragraphs 4.6(f) and 4.6(g) which expressly refer to environmental sustainability of consumables and disposal costs. This may, in turn, result in the selection of another printer or printing solution.

Similarly, in circumstances where there is an option for the use of recycled goods, then the official will be required to have regard to those benefits under sub-paragraph 4.5e, resulting in an assessment which yields a lower whole of life cost of the procurement.

The implementation of these changes to the CPRs will see the Commonwealth (one of the biggest purchasers of goods and services in Australia) give effect to its environment policies via its procurement activities.  

Arrangements between NCEs

Paragraph 2.9 of the CPRs has been updated to include an additional circumstance that is not considered a 'procurement' for the purpose of the CPRs:

The change will have the effect that NCEs can now approach another NCE for services without having to consider the application of the CPRs. It is most applicable to the services provided by the Commonwealth's Shared Services hubs in:

• the Australian Taxation Office;
• the Department of Foreign Affairs and Trade;
• the Department of Home Affairs;
• the Department of Industry, Innovation and Science;
• Services Australia; and
• the Department of Finance.

It will allow NCEs to receive services from those agencies without having to comply with limited tender rules or value for money considerations – as long as they have not approached another supplier in relation to the required services. NCEs will still have to comply with the balance of the Commonwealth's resources management framework, including the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act).

Cyber security risk

In the current climate of heightened awareness of cyber risk to agencies and their suppliers, paragraph 8.3 of the CPRs has been updated to include a requirement for officials to assess the cyber security risks associated with all procurements:

The relevant provision of the CPRs had already required the consideration of security risks, but has been updated to expressly require the assessment of cyber security risks by NCEs.

The update will be beneficial to those suppliers which have made a much larger investment in the security of their IT systems. It will also have the effect of enhancing security across Commonwealth suppliers, as those suppliers will be encouraged to further invest in the security of their systems.

The intent appears to be that agencies consider this risk as part of their standard risk assessment process when undertaking a procurement. However, we anticipate that agencies may have to more frequently involve their IT security teams when preparing approach to market documentation, to ensure compliance.

Commonwealth Contracting Suite

The use of the CCS for procurements under $200,000 is now referred to in paragraph 6.10 of the CPRs:

6.10 Non-corporate Commonwealth entities must use the Commonwealth Contracting Suite for contracts under $200,000. Corporate Commonwealth entities are encouraged to apply the suite of templates*.
*Footnote: Further information is provided in Resource Management Guide No. 420 – Mandatory use of the Commonwealth Contracting Suite for procurement under $200,000

Interestingly, the use of the CCS was already mandated by policy for procurements valued under $200,000 conducted by NCEs, unless an exception set out in Resource Management Guide No. 420 applies. Compliance with Australian Government policy (including this one) is mandatory through section 21 of the PGPA Act.

Accordingly, Finance's inclusion of the CCS in the CPRs appears to be a consolidation of policy rather than the implementation of a new requirement on Commonwealth officials conducting a procurement.

Modern Slavery Act Reporting

The Modern Slavery Act 2018 (Cth) came into effect on 1 January 2019. The Act requires the Commonwealth to publish a modern slavery statement on an annual basis which covers Commonwealth procurement. 

The most recent CPRs have been updated to reference this reporting requirement, in the same section that deals with other Commonwealth procurement reporting requirements. 

As with the CCS, the addition of this sub-paragraph is not the implementation of an additional requirement on Commonwealth officials undertaking procurement. Rather, this inclusion in the CPRs appears only to be a consolidation of the Commonwealth's reporting requirements as they apply to procurement.

What do you need to do now?

Entities should review and update their internal departmental procurement and contract management procedures, policies and templates to ensure they comply with the updated CPRs by 14 December 2020.

Agencies should also update any procurement IT systems to include the relevant Division 2 exemption, so that the use of the exemption can be recorded correctly.

Further Guidance

We expect that the changes to the CPRs will require additional guidance from the Commonwealth on the application of the new rules. In particular, officials should keep an eye out for Department of Finance guidance on the application of the SME exemption.

Authors: Sarah Ross-Smith, Partner and Mitchell Wright, Senior Associate.