Defence procurement in Australia: understanding the framework - Government Contracts, Procurement & PPP

With defence funding forecast to exceed $575 billion over the decade to 2029-30,¹ procurement activity in Australia is likely to increase. For those seeking to do business with the Commonwealth, it is vitally important to understand the framework for procurement activity.

The Commonwealth's approach to defence procurements reflects three broader trends in government procurement in Australia, namely:

an emphasis on a standardised, rules based approach – most particularly through the Commonwealth Procurement Rules (CPRs) issued by the Minister for Finance in late 2020 under Section 105B(1) of the Public Governance, Performance and Accountability Act 2013 (Cth);
greater accountability for procuring agencies (in theory); and
an emphasis on social procurement.

Further themes may emerge as a result of the review recently launched by the Minister for Defence of the Australian Standard for Defence Contracting (ASDEFCON) suite of standard form contracts and procurement processes (Review).

In line with the Department of Defence's (Defence) aim to improve Australian defence industry capability, the Review will consider opportunities to streamline the standard contracting templates and improve industry's participation in Defence's supply chain.

Trend 1: Standardisation

The first procurement trend reflected in Defence procurement is the adoption of a ‘whole of government' approach to procurement. Although there have long been Defence-specific template contracts and policies, Defence must also follow rules that apply to all Commonwealth procurements, including the newly released CPRs.²

The new CPRs are mainly aimed at reflecting the Government's commitment to sustainable procurement practices and relaxing certain rules to encourage participation of small and medium enterprises for procurements up to $200,000.

The CPRs and other broad requirements for government procurement processes have been introduced around Australia following the Federal Government's ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) and other Free Trade Agreements with key trading partners.

CPRs

Achieving value for money is the core rule of the CPRs. Procurements should:

encourage competition and be non-discriminatory;
use public resources in an efficient, effective, economical and ethical manner;
facilitate accountable and transparent decision making;
encourage appropriate engagement with risks; and
be commensurate with the scale and scope of the business requirement.

For procurements above $4 million (or $7.5 million for construction services) (Division 2), additional rules are imposed, including that officials must consider the economic benefit of the procurement to the Australian economy. For Defence procurements, this includes ‘enhancing key industry sectors through the Department of Defence's Sovereign Industrial Capability Priorities'.³

Defence exclusions

Certain procurements are exempt from additional rules in Division 2. This includes, for example:

procurement of goods and services by, or on behalf of, the Defence Intelligence Organisation, the Australian Signals Directorate, or the Australian Geospatial Intelligence Organisation (Annex A, CPRs);
procurements relating to weapons, ammunition and explosives; and
services for the operation of Government-owned facilities.

Although these exemptions are broad, there remains a range of Defence procurements that are subject to the CPRs.

Trend 2: Greater accountability

The second trend affecting Defence procurements is that there is (at least theoretically) heightened accountability for procuring agencies.

JR Act

Bidders have increasing ability to challenge the conduct of a tender process due to the introduction of the Government Procurement (Judicial Review) Act 2018 (Cth) (JR Act), which provides suppliers with the right to seek judicial review of contraventions of the CPRs by a Commonwealth entity or its officials, where this relates to a ‘covered procurement'.

Before any judicial review, a complaint must be made to the procuring authority, who must:

investigate and report on the conduct the subject of complaint; and
suspend the relevant procurement process, unless a "public interest certificate" is issued by the responsible office holder in the procuring agency where suspension is not in the public interest.

Since the enactment of the JR Act, only six public interest certificates have been issued by Defence. These relate to projects such as its national fuel supply program and unexploded ordnance program. Although these certificates exempt Defence from the requirement to suspend the procurement process in the face of a complaint, they do not provide an exemption from compliance with the CPRs or the judicial review process as a whole.

Where the CPRs are contravened, the Federal Circuit Court or the Federal Court of Australia may grant an injunction and/or order payment of compensation for reasonable expenditure associated with the tender process and/or in making and attempting to resolve a complaint.

The JR Act confirms that a contravention of the CPRs will not affect the validity of a contract. This does not change the current common law position.

Application of the JR Act to Defence procurements

The JR Act may not apply to all Defence procurements.

Procurements are subject to the JR Act if they are ‘covered procurements', namely procurements:

to which both Divisions 1 and 2 of the CPRs apply (i.e. they are above the relevant procurement thresholds);
to which no exemption has been applied; and
not included in a class of procurements specified in a determination under s5(2) of the JR Act.

As stated above, certain types of Defence related procurement are exempt from Division 2 of the CPRs, and will therefore not be subject to review under the JR Act. However, it seems likely that the CPRs will influence Defence's approach to procurement, whether or not they are compulsory.

Other remedies in relation to procurement processes

The JR Act does not exclude a tenderer's other remedies with respect to a ‘covered procurement' that has been improperly conducted.

Similarly, if a tender process is not a ‘covered procurement' under the JR Act, tenderers will also need to rely on existing (but possibly less predictable) rights with respect to improper tender processes. This may include:

an action for breach of contract, on the basis that the tender documents constitute a ‘process contract'';⁴ or
the making of a complaint to the Commonwealth Ombudsman or the Procurement Coordinator within Finance.

Consistent with approaches at a State level in Australia, a bill has recently been introduced to establish a Commonwealth Integrity Commission to investigate potential criminal conduct perpetrated by Commonwealth public sector, intelligence agency and Australian Defence Force employees.⁵

Trend 3: Social procurement

The third trend in Defence procurement is the emphasis on the social outcomes of the procurement process. Suppliers to governments at all levels of government in Australia are routinely required to make binding commitments as to the achievement of certain outcomes consistent with the government's social agenda.

The social outcomes on which Defence is presently focussed are reflected in the following policies:

Indigenous Procurement Policy
Workplace gender equality
Australian Industry Capability; and
Black Economy Policy.

These policies are reflected as firm obligations under the Defence standard contracts. They are expressed to apply not only to the head contractor but all the way down the supply chain.

This presents a number of challenges for Defence agencies and suppliers. Firstly, monitoring compliance by a large number of contractors and subcontractors can be extremely resource intensive.

Secondly, it requires a pass through of the social obligations, which may be difficult to achieve where a tenderer's value for money proposition relates to the use of subcontractors engaged under pre-existing subcontracts that may have broader application.

It appears these issues will be considered as part of the Review. It will be interesting to see whether there is any relaxation of the pass through obligations under Defence standard contracts as a result.

Conclusion

We are not aware of any claims brought under the JR Act to date, and it may be that bidders are reluctant to pursue avenues for redress under this regime. However, the CPRs and JR Act reflect the ‘rules of engagement' for Defence procurers and suppliers and seek to bring consistency, transparency and fairness to the procurement process.

While the framework presents some challenges for Defence suppliers, particularly in relation to compliance with social procurement policies, the Review appears to recognise that flexibility may be required in the application of some of these rules.

Footnotes:

¹ 2020 Defence Strategic Update and 2020 Force Structure Plan.

² In addition to the CPRs, the Defence Procurement Policy Directives apply to Defence procurements. The Directives expand on the CPRs and how they are to be complied with in a Defence context.

³ Australian Government, Department of Finance, Consideration of broader domestic economic benefits in procurement, available here.

⁴ Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558.

⁵ Commonwealth Integrity Commission Bill 2020 (Cth).</p>

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