Procurement Transformation Division
Procurement guidance
Value for money
Procurement guidance: Value for money
Page 2 of 10
Table of contents
Table of contents .......................................................................................................................... 2
Purpose of this guide ................................................................................................................... 3
Who should read this guide?
3
How is this guide to be used?
3
How does the Queensland Procurement Policy link to this guide?
3
What is value for money? ............................................................................................................. 3
What cost factors affect value for money? ................................................................................. 4
Whole-of-life costs
4
When to assess whole-of-life costs
5
Calculating whole-of-life costs
5
Transaction costs
6
What non-cost factors affect value for money?.......................................................................... 6
Fitness for purpose
7
Support
7
Assessment of non-cost factors
7
What is the real cost of the goods and/or services? .................................................................. 7
Valuing each factor
8
Schedule 1 ..................................................................................................................................... 9
This Guide is intended only as a starting point to provide an overview of the main issues that need to be considered in
determining value for money in procurement. It is not intended that this Guide replace expertise and other valuable
resources that are required to produce successful outcomes for departments and agencies.
First published July 2000, updates made January 2014
Procurement Transformation Division
Procurement guidance: Value for money
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Purpose of this guide
This guide has been developed to provide information about the meaning of value for money in
procurement and provide some practical advice on how to achieve value for money.
Who should read this guide?
All Queensland Government officers who are involved in procurement activities should read this
guide.
How is this guide to be used?
This guide should be read in conjunction with the Queensland Procurement Policy and the
department’s “Agency Purchasing Procedures”.
How does the Queensland Procurement Policy link to this guide?
Principle 1 of the Queensland Procurement Policy is that ‘We drive value for money in our
procurement’. This means that:

We select the option that best provides value for money outcomes.

We deploy the most appropriate strategies to facilitate the delivery of best procurement
outcomes.
This policy principle is also the primary and overriding policy principle. In the event of a conflict
between this and the policy’s other principles, value for money is to be the determining factor.
This Guide assists departments/agencies in understanding how to make value for money
decisions.
What is value for money?
Driving value for money is the primary principle of the Queensland Procurement Policy.
Procurement must achieve the best return and performance for the money being spent. Price is not
the sole indicator of value.
The Queensland Procurement Policy includes three factors to be considered when assessing
value for money:

Overall objective of the procurement, and outcome being sought.

Cost-related factors including up-front price, whole-of-life costs and transaction costs
associated with acquisition, use, holding, maintenance and disposal.

Non-cost factors such as fitness for purpose, quality, delivery, service, support and
sustainability impacts.
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Procurement guidance: Value for money
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This guide for the most part focuses on the cost and non-cost related factors.
What cost factors affect value for money?
Deciding which offer provides best value for money includes judgements about a range of cost
factors. These factors include:

Up-front price.

Whole-of-life costs and transaction costs associated with acquisition, use, holding,
maintenance and disposal.
Some of these factors are discussed in more detail below.
Whole-of-life costs
These costs include the initial purchase cost as well as costs arising from using, holding,
maintaining and disposing of the goods or services.
Elements in whole-of-life costing assessments that need to be considered include:

Acquisition costs. Can include price, freight, legal fees, warehousing costs, initial training
costs.

Operating costs. Can include fuel or energy costs, safety costs, performance monitoring
costs, cleaning costs.

Maintenance costs. Can include consumables, spare parts, repair labour, loss of
productivity or revenue during maintenance.

Alteration/refurbishment costs. Can include upgrade costs, modification costs, retraining
costs.

Support costs. Can include insurance, rates and taxes, management fees.

Disposal. Can include residual value, disposal method costs.
Schedule 1 at the end of this guide provides a more detailed checklist of costs for each of the
above elements.
Whole-of-life costing assessments can be complex, involving making assumptions about likely
future events and their impact on costs. For example, the initial purchase price of capital
equipment will often be significantly less than the subsequent maintenance and operating costs
over the item’s life. Risks associated with the inefficient use of funds exist in both under estimating
and over estimating these costs.
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Procurement guidance: Value for money
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When to assess whole-of-life costs
It is important to identify the cost of ownership at an early stage in the procurement process.
Otherwise it can result in a flawed assessment of value for money and the department/agency
incurring unnecessary expense.
A whole-of-life costing assessment is essential to understand the true costs of long life, complex
procurements. However, there is generally little benefit in undertaking a detailed formal
assessment for short life, low cost items, especially when comparing them with other well-known
and equally simple options.
Whole-of-life costing assessments are particularly important when comparing lease or buy
alternatives. Whole-of-life costing is also important when considering low initial price
goods/services and high ongoing cost versus high initial price and low ongoing cost
goods/services.
Calculating whole-of-life costs
A commonsense approach is needed when determining the extent and method of the whole-of-life
costing assessment. There is no one formula that covers all circumstances. In many cases
calculating whole-of-life costs will be a simple and straightforward process as the total costs and
benefits of ownership will be apparent.
However, a formal evaluation should be used when comparing options with noticeably different
initial price and different:

technical and performance features

life expectancy

ongoing costs

residual value

disposal costs.
Calculating whole-of-life costs involves a number of steps. They include:

estimating the life of the goods or services

listing all financial costs and benefits in the year in which they occur

choosing a method of analysis (for example, net present value)

determining the uncertainty of the data being used

sensitivity analysis

calculating the whole-of-life costs.
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Procurement guidance: Value for money
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Transaction costs
As well as considering whole-of-life costs when assessing cost-related factors,
departments/agencies need to also consider the transaction costs arising from the particular
purchasing activity.
Transaction costs include all costs internal to the department/agency arising from:

establishing the need for the procurement

planning for the procurement

identifying sources of supply

approaching the market to seek supply

selecting suppliers

ordering and processing payments

managing relationships with suppliers including supplier performance monitoring and
management.
Transaction costs arise from managing the total procurement process. Transaction costs may
therefore also include the cost of any organisational changes that need to be made within the
department/agency to make best use of the goods or services.
The transaction costs in some procurement exercises can be significant and impact heavily on the
assessment of value.
Hint
The amount of time spent on determining the total costs associated with goods or services on offer will
depend on the size, risk and complexity of the particular purchasing exercise.
For example, a detailed financial analysis of both whole-of-life costs and transaction costs would be needed
to assess value for money in large construction or information technology projects. By contrast, there is little
value in performing a detailed analysis of these costs for a short-lived, low relative expenditure good or
services.
What non-cost factors affect value for money?
Deciding which offer provides best value for money includes judgements about a range of non-cost
factors related to the supplier and the functionality of the goods or services offered. Non-cost
factors include:

Fitness for purpose.

Quality.
Procurement Transformation Division
Procurement guidance: Value for money

Delivery.

Service.

Support.

Sustainability impacts.
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Some of these factors are discussed in more detail below.
Fitness for purpose
This relates to the extent to which the goods or services meet the customer’s requirements. If the
goods or services are fit for purpose then they can achieve the specified outcomes.
Support
In a decentralised state such as Queensland, availability of maintenance and support is often an
important consideration and may be taken into account in assessing value for money. Suppliers
may have various ways of making maintenance and support available. For example, suppliers may
physically provide support in the local area or offer it remotely through telephone “help desks” or
similar mechanisms. It is the responsibility of procurers to determine the most effective means of
ensuring that maintenance and support is available and assess this aspect of value for money
accordingly.
Assessment of non-cost factors
A detailed analysis of these non-cost factors is usually necessary for procurements of high relative
expenditure and/or for which there is “difficulty in securing supply”, for example, a major
construction project.
For low relative expenditure purchases where there are competitive markets available, a detailed
analysis of these non-cost factors will often not be required. The main considerations, generally,
are fitness for purpose and the meeting specifications and therefore a less detailed assessment
process is sufficient. For example, buying small quantities of office consumables.
What is the real cost of the goods and/or services?
To make decisions about value for money it is necessary to determine all significant costs
associated with the goods and/or services being purchased. Depending on the nature of the goods
or services to be acquired, both whole-of-life costs and transaction costs will need to be
determined.
For significant purchases (that is, goods and services of high relative expenditure and/or “difficult to
secure supply”) a preliminary assessment of these costs should be carried out during the
procurement planning stage and subsequently refined as the procurement exercise progresses.
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Procurement guidance: Value for money
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Valuing each factor
In making value for money decisions the aim is for the department/agency to obtain the optimum
balance between the costs, the non-cost factors and the overall objective of the procurement and
outcome being sought. There is no standard formula for determining this balance.
Depending on the nature of the goods or services being procured, the supply market and the
requirements of the department/agency in relation to the particular procurement, varying degrees
of importance will be given. Decisions about relative importance will initially be done in the planning
phase and may be further refined at the transaction level. In particular, for procurements of a high
relative expenditure and/or for which supply is difficult to secure, the significant procurement plan
for may deal with these matters.
In a particular procurement, the relative importance may be reflected, for example, in the
specification of the required goods or services, the criteria for evaluating supply options, the
weightings applied to these criteria and/or the acquisition strategy.
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Procurement guidance: Value for money
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Schedule 1
Checklist for identifying whole-of-life costs
Acquisition costs
Those associated with the initial purchase including:
 costs of capital
 freight/transport internal and external costs
 permits and fees
 survey costs
 land costs including demolition and relocation
 design costs
 consulting and contractor costs
 legal fees
 labour, materials, components costs
 hedging costs
 direct communication costs
 warehousing costs
 initial inventory management costs
 initial quality inspection and testing costs
 initial handling and insurance costs
 proportion of organisation overhead cost (e.g. administration
 proportion of capital asset cost (plant, buildings)
 any modification costs to meet immediate requirements
 installation and commissioning costs
 initial training costs
 manuals and support literature
 appraisal costs (including travel and time to examine options)
 initial consumable costs
 initial spare parts costs
 safety compliance costs
 quality assessment costs.
Operating costs
These are usually associated with:
 fuel or energy sources and charges
 operational labour
 security costs
 safety costs
 training costs
 ordering and processing costs incurred by the department/agency
 performance monitoring and managing arrangements

Maintenance costs
supplier relationship management.
These relate to the costs of retaining the asset in a fit, efficient and operable
condition. This might vary over the life of the asset according to corporate
strategies on maintenance liability and appraisal.
These costs may include:
 consumables
 maintenance spare parts
Procurement Transformation Division
Procurement guidance: Value for money




Cleaning costs





environmental compliance costs
recalibration costs
overhaul and repair labour and overheads costs
logistics costs of spares including inventory management,
warehousing, quality inspection, purchasing, handling, and receipts
loss of productivity/revenue/use during maintenance
systems monitoring costs
quality assurance audit costs
warranty conditions
training costs for operations and maintenance staff

contract maintenance costs.
These can be separately identified or included as maintenance costs:
 cleaning labour rates
 comparative costs associated with types of surface coverings
 capital expenditure on dedicated cleaning equipment, including discrete
operating/maintenance/replacement costs
 cleaning consumables
 protective clothing
 accommodation/storage facilities for cleaning equipment/materials
 associated administrative overheads in personnel management,
inspection, purchasing, and administration

Alteration/refurbishment
costs
where replacement costs cannot economically be justified over an
expected life span; and includes retraining costs.
These may include:
 insurance
 rates and taxes


Disposal -
amortised portion of capital costs of other associated cleaning
equipment if not absorbed elsewhere.
These may include:
 upgrade costs including retrofits
 alteration resulting from future change
 modification to a standard or to a purpose built

Support costs
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management fees and charges
safety compliance costs
These may include:
 residual/salvage value
 asset residual valuation costs
 disposal method costs (e.g. auctioneers/agents fees)
 associated transport and freight costs
 decommissioning costs
 management and administration costs
 associated labour costs
 statutory compliance costs
 any demolition/destruction costs

Procurement Transformation Division
environmental re-establishment costs.