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6.12 The government's Contracting Activity Reports - which measure contracts at the time of signing rather than when paid - do not reflect very small or "informal" contracts. For 1994-95, the most recent data available, the Treasury Board reported that the government entered into formal contracts with a face value of about $8.6 billion.
6.13 The government makes about 6 million separate purchases each year. Each purchase represents a "contract" between the government and a supplier. Most of these are small in individual value. Data from Public Works and Government Services Canada, for example, show that less than 0.2 percent of contracts account for about 90 percent of the total value it processes. Across the government, however, individually insignificant transactions can add up, and offer significant opportunities for smart buying. One department, for example, obtained 40 percent reductions on list prices for stationery and office supplies by offering all its requirements for competition.
6.14 To obtain what? The government buys many different kinds of goods and services. Goods range from ships to ballpoint pens; services range from janitorial services to health care. Public Works and Government Services Canada identifies the top 10 categories among the contracts it arranges as set out in Exhibit 6.2 .
6.16 Public sector contracting must balance additional risks and aims. It is expected to contribute to a range of public policy objectives that are "secondary" to direct operational needs, but important to stakeholders. It must, as a matter of law, conform to complex legal obligations. And it must deal appropriately with pressures to influence contracting for electoral or partisan advantage or for special-interest considerations, including those of suppliers. Contracting activity takes place under the conventions of ministerial responsibility: a minister may be called upon to explain and defend any transaction entered into under his or her authority. As the Treasury Board cautions, each transaction must be able to withstand the test of public scrutiny. Government contracting must cope with these additional expectations without being able to use some of the more aggressive - or co-operative - contracting tactics ascribed to some private sector organizations, and without incurring excessive administration costs.
6.17 The introduction of alternative service delivery highlights the importance to the government of better contracting, in two ways. First, studies of some privatized operations suggest that better contracting was one of the main routes through which they achieved lower costs. A government that wants to work better and cost less thus needs to care about its contracting performance. Second, delivery of services through contracts introduces different kinds of risks for the government to manage.
6.19 Mixed expectations. Canada's treaty partners, businesses, appointed and elected officials and its citizens all expect different results from government contracting. They all define "performance" differently. To the basic expectations (meet operational requirements and get best value) can be added those of a range of public policy advocates, interest groups and stakeholders.
6.20 Legal obligations. Federal contracting for goods and services, like all contracting in Canada, is subject to the provisions of the common law (or civil code in Quebec), to some 15 specific Acts of Parliament and to various treaty obligations. These establish the legal framework within which appointed and elected officials can properly exercise discretion. Among the more important treaty obligations are:
6.22 Information technology. Increasingly, the advent of technology has changed how and what the government buys. The government spends about $2 billion per year for goods and services in the areas of information and communications; using traditional approval and contracting processes to contract for technology hardware and services can cause problems down the road that cannot be specifically anticipated in advance.
6.23 Technology has also changed the way the government contracts, and will likely continue to do so. More information moves faster, and can be correlated differently, opening up possibilities for using information in different ways, and changing the nature of the information decision makers want. It has made possible such innovations as "just-in-time" procurement, and has revolutionized materiel management. Such arrangements change the way the government and its suppliers relate to one another.
6.24 Administrative reform. Like all aspects of government operations, contracting is affected by the ongoing changes in the management of the public service. This has been characterized by the Treasury Board as the pursuit of a "fact-based, results-oriented, open and accountable" public service. In the process, the public service culture is being changed. Assumptions of continuity, employment security, homogeneity and anonymity that formed part of the traditional public service employment "contract" are being replaced with a growing realization of the permanence of change. This is evident in the greater mobility of professional managers both among departments and between government and business, in a more diverse public service, and in higher visibility of appointed officials. Without commenting on their merits, we note that these changes have affected the control environment in which contracting takes place. They have changed the basic assumptions on which the government traditionally based its approach to managing the risks inherent in contracting.
6.25 Further, continued delegation of contracting authority to departments places individual ministers and their deputies in a position where they are responsible for making finer judgments than before about contracting activity and performance. Not all departments are alike. This introduces the need for flexibility in approaches. It also introduces a need for tools that help managers maintain a balance between allowing contracting performance to divert attention from their primary responsibilities on the one hand and, on the other, taking it for granted to the extent that it fails the test of public scrutiny.
6.26 Performance pressures. The growing recognition of the deficit has put pressure on the government to reduce its size and cost, and to demonstrate better results for money spent. This emphasis on "results" in government creates a number of challenges.
6.27 One challenge has been to balance the desire for good results with concern for due process and legal obligations. Faced with a choice between observing the contracting rules or meeting a significant operational deadline, most line managers we talked to would at least bend the rules. Sometimes they cross the line, and get caught (see Exhibit 6.3) .
6.28 Another challenge is to discern whether results are getting better or worse, and to decide whether reported instances of poor results represent a pattern that calls for high-level action across the board, or individual deviations that are best dealt with at the local level.
6.29 Overall management context . Decisions and choices about individual contracts always take place within the context of broader management decisions, and particularly budget allocations. A manager with contract dollars in his or her budget, but without authority to hire staff, does not have a realistic choice between contracting and hiring. Past decisions and resource allocation patterns influence current contracting decisions and choices. These are set before "contracting activity" begins, and adjusted through mechanisms such as budgets, business plans and operational plans. Financial management considerations have been shown to significantly concentrate contracting activity in the last quarter of the year, for example, restricting ability to obtain best value.
6.30 Market considerations. The nature, size and structure of the pool of suppliers from whom the government buys its goods and services affects government contracting. It is difficult, for example, to get effective competition in markets characterized by a small number of dominant suppliers and with little excess capacity. At the same time, there are 99 losers and just one winner when a tender attracts 100 bids. The government has choices about how and into which marketplaces it feeds its demands; these choices have impacts.
6.32 Parliament, particularly through its Standing Committee on Government Operations, has held many hearings to consider and recommend changes to government contracting practices. In doing so, it has explored the practical implications of establishing oversight and accountability for government contracting, and has signalled the importance parliamentarians attach to contracting.
6.34 We based our judgments on Treasury Board policy, augmented where necessary by reasonable expectations. Against these expectations, we considered a range of information derived from government databases, management reports, testimony before standing committees, past audits, interviews and examination of individual contracts.
6.35 Illustrative cases that support our findings are presented in the special insert .
6.36 Further details of the way we carried out the audit can be found at the end of the chapter, in About the Audit . A report based upon a technical review of the contracting process against our audit criteria has been provided to the Treasury Board Secretariat.
6.38 The evidence we have seen shows that some aspects of performance have deteriorated over time, and comparison with past studies and royal commissions suggests that others have remained stubbornly below expectations for decades. The Treasury Board Secretariat has not established baselines or clear expectations, and there is insufficient relevant and credible information about the results achieved against some important criteria to support a firm conclusion about whether those results are getting better or worse, or, indeed, if many of the desired objectives are being met. The potential for improvement is not uniform among departments (and even within them) or across different categories of goods and services.
6.39 With respect to policy and framework responsibilities, Treasury Board Secretariat (TBS) and Public Works and Government Services Canada (PWGSC) have acted to:
6.40 Significant investments in processing and information systems have been made, and now need to produce the intended operating efficiencies. The information generated by systems, and by the government's review capacity, is just beginning to be channelled to help the Treasury Board Secretariat guide contracting performance; to identify the present level of contracting performance (or capacity); to agree on clear targets for improvement; and to see that targets are met.
6.41 Government/industry consultations, and our interviews, reveal widespread concerns that the government has lost or is close to losing the critical skills needed to contract well. But we found no one responsible to see that the government has, or is developing, the skills needed to maintain or improve contracting performance. Contracting performance will be critical to the government's strategy for alternative service delivery.
6.42 The operational results we observed vary among departments and with different types of goods and services. We believe that the government still derives substantial benefits from the legacy of public service values and the basic integrity of the established processes, particularly in contracting for traditional goods. Too rarely, however, is contracting performance guided by clear, concrete and challenging performance goals and expectations.
6.43 Particularly in contracting for information technology and related professional services, results have been disappointing. Screening requests for systems development contracts presents special challenges, and we agree with the Treasury Board Secretariat that the need for improvement has become critical.
6.44 It takes time for efforts to show up in results. This report would be unbalanced if it did not recognize the scope and scale of current efforts to provide stronger leadership and a more flexible but more clearly defined framework. We observed initiatives at the centre and in departments as well as at the individual level. They include, for example:
6.46 However, we believe there is a reasonable case for more purposeful improvement of contracting results. A number of useful analyses have been carried out, but not since the Nielsen Task Force Report of 1985 have we been able to find any clear attempt to assess the possible payoff from buying smarter, and what it would take to obtain it.
6.47 The leadership of TBS and PWGSC has not always been clear or co-ordinated. They are not yet in a position to demonstrate that they have successfully created the conditions to promote both good results and respect for rules. Who is responsible for what is too often unclear, and performance expectations are vague and conflicting.
6.48 Confusion about the respective roles and responsibilities of PWGSC, Treasury Board Secretariat and line departments has persisted for decades. On the one hand, PWGSC's legislation states, for example, that it has a responsibility to improve the efficiency of the whole contracting process. Its officials note that the common service role may well be seen to deny program managers authority to manage. At the same time, PWGSC is clearly expected -- in, for example, decisions of the Canadian International Trade Tribunal -- to play a control role, screening requisitions to ensure that specifications are open and fair and making sure that the process followed complies with laws. On the other hand, Treasury Board Secretariat officials acknowledge that PWGSC has statutory authority to purchase goods and enter into service contracts if asked to do so by client departments. PWGSC's contracting activities are expected to function within the policies and guidelines issued by Treasury Board, just like any other department.
6.49 Our own observations, internal audits and documents all suggest that this confusion over service or control finds its way to the individual procurement officer, and to the line manager who receives mixed messages about whether and how far to push suggestions for better contracting practices. Internal audit reports observe time and time again that line managers and procurement officials do not understand well their responsibilities or how to work effectively together to achieve good results. Within departments, our observations confirm this assessment, while suggesting that some departments have set clearer direction than others.
6.50 A Treasury Board synthesis of internal audit reports dealing with contracting over the last five years comments on the extent of understanding:
Time and time again, managers reported that they and their staff either did not know something contravened contracting policy, did not understand the significance of a requirement, or did not see how it applied in their particular situation.
... the most common thread running through the reviews was the lack of clear communication about the meaning, content and importance of central agency and/or departmental policy requirements to those who most needed to understand them.6.51 Within Public Works and Government Services Canada - and between it, the Treasury Board Secretariat and departments - there are significant unresolved debates about the scope of organizational responsibilities and how best to discharge them. In the absence of a clearer sense of direction, and better linkages to responsibilities and reporting, the ongoing discussions and debate about the authority of Public Works and Government Services and individual departments lack focus, and we are unable to assess whether the authority delegated is commensurate with the responsibility assigned and the performance expected.
6.53 Overall, however, current reporting practices do not yet provide the kind of credible and relevant information needed to manage. Quantitative data about government contracting are fragmented, replete with jargon, and laced with inconsistencies. Some of the problems include inconsistent definitions of indicators, unreconciled data, and insufficient attention by senior management.
6.54 Inconsistent indicators . The two main indicators of contracting activity that the Treasury Board Secretariat monitors are the ratio of competitive to non-competitive contracts and amendments. There are problems with both of them.
6.56 As mentioned previously, many of the mechanisms to support more purposeful procurement exist but as yet the market and purchasing information that would support those mechanisms has not been harnessed.
6.57 The Treasury Board Secretariat and Public Works and Government Services Canada have yet to:
6.59 Pinpointing the difference that people make. At the level of individuals, we were advised of two instances where contracting authority had been rescinded or withdrawn in seven departments over the last five years. Contracting and finance officials knew that some responsibility centre managers consistently discharged their contracting responsibilities better than others. But, with one exception, we found no organized efforts to establish the patterns and to focus training or remedial action where it could do most good. Some managers with whom we discussed this pattern cautioned that informal peer pressures, while not visible, play an important role in creating the work environment. Others, however, observed that without greater visibility there would be no real accountability, and no incentive to disturb the status quo.
6.60 There are widespread concerns about the loss of skills, corporate memory and knowledge (as there are in other parts of the government), and about the need for greater skills to carry through still further delegation of contracting authority and respond to changing patterns. There is a particular lack of detailed knowledge about products and markets. Based on the operational results, the explanations given for deviations, and staff surveys, the evidence suggests considerable support for these concerns. For example, while there has been a 10 percent increase in the number of Procurement Grade Officers over the last 10 years (see Exhibit 6.5) , we found no one with clear responsibility for assessing ongoing skills and capacity requirements.
6.62 Sharpening the tools. Public Works and Government Services Canada aims to improve its Open Bidding and its Automated Buyer Environment systems to support the government's strategy of increased delegation to departments, and to focus its own efforts on high-risk procurements. In December 1996, it completed an evaluation of its open bidding policy and system. The report concluded that while information technology had been introduced, significant "teething" troubles and implementation concerns needed to be addressed. These include:
6.63 Other initiatives respond to specific marketplace pressures and to performance problems in complex systems development contracts. The government is not yet in a position to report success in developing the tools to contract well for service delivery, or in developing (or buying) the tools to support smart buying of specific types of goods or services. We are unable to conclude whether the costs involved have been reasonable, because we do not know how much the government has spent. As for other aspects of support costs, the information is fragmented and incompletely recorded. The systems development costs alone, however, significantly exceed $300 million. A recent deputy minister task force questioned the affordability of continuing to develop systems in an unco-ordinated manner, and recommended consolidation of the effort.
6.65 Screening practices for individual contract requests do stimulate competition or negotiation of better value from suppliers, and detect and deter some inappropriate requests. Line and functional managers stressed that their day-to-day interactions, contacts and involvement provide them with important information about contracting activities and performance. Many of them provided anecdotal evidence of having changed or stopped proposed contracts before formal requisitions were issued. They also typically noted that about 80 percent of problematic contract requests emanated from 10 to 20 percent of managers. For the most part, they prefer to deal with such managers informally. One line department and one central agency provided anecdotal evidence of having restricted or withdrawn contracting authority or required refresher training as a result of informal monitoring.
6.66 However, our current work suggests that results would have to be improved significantly to meet or even approach the expectations of the Treasury Board. Not enough contracts are competed for to meet Treasury Board or public expectations. Despite sustained pressure to improve the extent of competition, annual Contracting Activity Reports for the four years 1991-92 to 1994-95 (see Exhibit 6.6) show the levels of open or selective tendering, which according to the government have stayed below expectations.
6.67 When competition is not practical, more could be done to negotiate best value. Where only one supplier is invited to bid, or use is made of standing offer arrangements, prices are sometimes negotiated. Our sample indicated that this applies to 40 percent of sole-sourced contracts, and to 29 percent of those called up under standing offers. There is some confusion about whether and under what conditions it is appropriate to negotiate the price under a standing offer arrangement.
6.68 Despite the number of approvals required in policy, screening practices appear to have had limited success in clarifying just what is required, particularly in informatics and service contracts. The evidence suggests that some departments specify what they require more clearly than others.
6.70 The evidence suggests that competition, where it is used effectively, does produce better prices and other benefits. Open bidding, where it has been used, has attracted more bidders for individual contracts. Advance notice mechanisms have made it more transparent and independent appeal processes have made it more fair. The 1996 evaluation of open bidding reports that, on average, Public Works and Government Services Canada sent out more bid sets and received more bids for openly advertised opportunities than for those selectively advertised. In 1994-95 it secured, on average, about 10 bids for each openly advertised opportunity compared with about 6 bids for selectively advertised opportunities.
6.71 At the same time, few benefits are achieved when the forms of competition fail to attract more than one supplier. Internal audit at PWGSC reported that open bidding had only limited success in opening up government business to new suppliers. Rather, the same suppliers were competing harder for the business advertised through the open bidding system.
6.72 Most contracts are not advertised on the open bidding system. They are awarded through selective tendering or are sole-sourced. Representations from small business, and internal audits, both suggest that these contracts are not open because their complexity and the cost of doing business with government tend to hinder market entry. In addition, the lack of analysis and forecasts of what the government will want in specific market segments hinders the involvement of new suppliers.
6.73 Overall, in our opinion, Treasury Board is not yet in a position to say that it is getting what it wants from competition, where it is used. Its expectations regarding competition are vague, and possibly unrealistic. Further, we found no one who regularly monitors the effects of competition in a meaningful way; an exception is the evaluation of the Open Bidding Policy, undertaken by PWGSC in 1996. The evidence suggests a relatively low level of unfair, ineffective or artificial competition.
6.75 About half the internal audit reports we reviewed provided information about one or more of the results associated with delivery. About half of those reported problems that, in our view, are serious or very serious at the level of the unit being audited. In at least some of these reports, the internal auditors were called in to confirm or dispel senior management concerns. Accordingly, the overall extent of the problems may not be as great as the raw numbers suggest.
6.76 Most but not all of these problems were associated with contracts for services rather than goods. For example:
6.78 As reported in previous work of this Office, delivery on systems development contracts has been particularly problematic. The current state of monitoring and reporting on contracting performance provides few incentives for those contractors and departments who meet their contractual promises more consistently than the norm.
6.80 The limited evidence available suggests that Public Works and Government Services Canada cycle time has deteriorated over the last five years. PWGSC management considers that these changes reasonably reflect a number of factors including, among others, the effects of trade agreements and of increased delegation. A limited number of departmental re-engineering studies suggest that eliminating non-productive steps could cut cycle time by 40 to 70 percent.
6.81 In our sample (see Exhibit 6.7) , contracts that were competed for took longer to arrange than sole-sourced contracts and call-ups against standing offers, as did contracts arranged through Public Works and Government Services. We recognize that there is a need for further analysis of the causes of extended cycle times.
6.83 The limited cost and productivity data that are available suggest that these administration costs have risen appreciably over the last 10 years, despite the investments in technology and disproportionately to changes in contracting expenditures or activity (see Exhibit 6.5) . A limited number of re-engineering studies suggest that some of the costs involved could be cut by as much as 50 percent. The evidence further suggests that the potential for savings is not evenly spread through the system.
6.85 Traditionally, procurement expectations relative to other objectives have been added without making clear the results expected and without measuring the results achieved. Expectations and information on results are generally too vague to support firm conclusions. Such evidence as is available suggests that efforts to promote -- or at least act consistently with -- stated objectives fall short of stakeholder expectations. However, departmental managers treat the absence of specific feedback from policy departments as confirmation of good results.
6.87 These issues were perhaps less important when Treasury Board could assume that maintenance of the status quo was an appropriate strategy. Today, they constrain the ability of individuals and organizations to respond appropriately to a fast-changing environment and to deliver the kind of high performance results (at low cost) that governments need to be able to deliver and demonstrate. Contracting needs better direction and support, and more focus, if it is to change past patterns without compromising the traditional values of integrity and probity.
6.88 Improving contracting performance is not simply a technical issue for bureaucrats or procurement specialists. Constraints to better contracting (and to more honest reporting about contracting performance) are complex, long-standing and deeply embedded. Not all of them fall within the scope of this audit, although they must be considered in any realistic attempt to improve performance.
6.89 Because of the nature of the constraints, the variations among individual departments, and the changing environment of government contracting, we do not believe that better contracting will come from simple solutions, or from "one size" models designed to fit all circumstances at all times. Hard choices and fine distinctions will have to be made: about what to contract; about where it is worth investing focussed management attention to achieve contracting excellence; and about how to balance concern for results with due process.
6.90 Continuing delegation of contracting authority by the Treasury Board and of procurement authority by Public Works and Government Services Canada have made line departments increasingly responsible for making those choices, and for identifying and acting on opportunities and problems. The Treasury Board Secretariat can help them by providing them with the right tools.
6.91 The Treasury Board Secretariat should provide departments with:
6.93 The government should improve its reporting to provide Parliament with a periodic overall assessment of contracting performance and priorities, showing the progress made.
Treasury Board Secretariat's response: In contracting policy, as in other policy areas, the Treasury Board is providing more authority, flexibility and optionality to individual departments and agencies. This approach will enable them to effectively deliver their programs within a solid but high-level and strategic policy framework. The cornerstones of the contracting policy framework are well defined and basically entail the use of contracting to effectively meet operational and program needs and obtain best value in a fair and open manner, and to meet other national objectives of the government. These principles have recently been reinforced by Canada's international and internal trade agreements and their related contract dispute resolution mechanisms. Within this policy framework, departments will have the flexibility to achieve good program results, balanced with due process and integrity in contracting. Departments and agencies will be further encouraged to develop implementation tools and processes suitable to their individual requirements and to set performance goals, taking into account the policy framework, as well as their operational and program delivery objectives. Finally, the Treasury Board supports improved contract reporting with periodic overall assessment of contracting performance and priorities, to the extent feasible and practicable within given resources.
Public Works and Government Services Canada's response: Public Works and Government Services Canada is currently working with the Treasury Board Secretariat to review the procurement policy frameworks and responsibilities. Results of these discussions will, without doubt, contribute to a clearer understanding among all stakeholders of responsibilities, expectations, authorities and accountabilities.
Initiatives such as the recent implementation of an automated contracting reporting tool in all departments should also contribute more accurate and comprehensive contracting statistics on a government-wide basis.
The remaining criteria deal with more operational results. We developed them specifically for this audit, reviewed them with managers and other stakeholders, and agreed on them with Treasury Board Secretariat and Public Works and Government Services Canada. We considered an additional criterion when looking at contracts involving information technology services: the extent to which government contracting protects government information and intellectual property. However, we did not pursue our work to an overall conclusion against this criterion.
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Criterion
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Subcriteria
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Results Indicators
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Management direction.
The extent
to which the contracting objectives of
the government are clear, well
understood and well integrated into
the government's plans, structures,
delegations of authority and decision
making.
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Monitoring and reporting.
The
extent to which contracting
performance is monitored, reported
and acted upon.
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People and working environment.
The extent to which the government
provides appropriate incentives,
sanctions and development
opportunities to sustain a skilled and
competent contracting work force.
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Other resources and tools.
The
extent to which contracting processes
and tools provided are appropriate to
achieve the desired contracting
performance.
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Criterion
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Subcriteria
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Results Indicators
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Screening.
The extent to which
contracting screens out requests for
goods and services that are
unacceptable, unduly expensive, or
unnecessary, so that the federal
government buys -- with integrity
-- only what it needs.
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Competition.
The extent to which
competition (when used) is open, fair
and gets good value.
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Delivery.
The extent to which
government contracting delivers
what was agreed, when it was agreed,
and for the price agreed.
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Cycle time.
The extent to which the
government arranges contracts in a
timely manner.
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Administrative costs.
The extent to
which the federal government
arranges and administers contracts at
a reasonable cost to all participants.
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Criterion
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Subcriteria
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Results Indicators
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Contribution to other objectives.
The extent to which contracting
contributes to -- or does nor
undermine -- other objectives.
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(Depending on the mechanisms
adopted)
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For information, please contact Shahid Minto, the responsible Assistant Auditor General.