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2 March 2007

Simple guide to value for money and sustainability

This paper provides a short outline, in straightforward terms, about what the longstanding government policy to achieve value for money when buying goods and services means. It is aimed at people who are not economics or finance professionals, but might be responsible for managing procurement projects - small and large.

Government policy is that value for money must be assessed over the whole lifetime of a project, including disposal (either sale proceeds or decommissioning costs), estimating the costs and benefits to society as a whole, not simply those directly relevant to the purchaser - eg environmental impact - as set out in the Treasury's Green Book (Appraisal and Evaluation in Central Government).

These principles apply to all government policies, whether they involve procurement or not, and public auditors, including the National Audit Office and Audit Commission, will audit on this basis when carrying out value for money assessments. This approach ensures that all factors - costs and benefits - are properly taken into account so that the public gets the best overall value for money when buying goods and services from the private sector.

Energy efficient products are a good way to explain the general principle. Many such products cost more initially but have significantly lower running costs, making them cheaper over their lifetime than less efficient products. When the respective environmental costs are also taken into account, the value for money case for the more energy efficient product becomes even stronger. In these circumstances, and provided that the product is otherwise fit for purpose - eg it provides heat or light to the standard required - the more energy efficient product should be procured as it has the best whole life net cost-benefit.

Evaluating the costs and benefits of proposals, particularly those relating to society as a whole rather than the buying organisations directly, can be challenging. However, many suppliers already provide information to help buyers assess the impacts of their products, for example through labelling schemes, and DEFRA's Environmental Direct initiative provides simple information and advice about the environmental impacts of a range of goods and services.

The Government has decided, collectively, to meet prescribed environmental standards when buying particular products, judging that these provide value for money based on whole life costing, including the impact on society as a whole. These are the, soon to be updated, Quick Wins.

In June 2006 the Government set sustainable operations targets for the government estate. These targets are expressed as overall outcomes (eg the level of CO2 emissions), giving departments the flexibility to meet them in the most appropriate and cost effective way, including through procurement.

Achieving value for money from procurement in practice, however, requires more than carrying out a value for money calculation or following simple rules. It needs high calibre people with the skills to:

  • define clear and deliverable objectives at the outset;
  • communicate those to potential suppliers at an early stage;
  • assess the relative merits of different proposals from a qualitative, as well as quantitative, perspective
  • follow a competitive, efficient, fair and transparent procurement process;
  • agree contract terms that give suppliers the right incentives to deliver what the organisation wants; and
  • hold suppliers to the contract as they carry it out.

The Treasury set out further details about its vision for government procurement and the plans to boost procurement skills in Transforming government procurement, published in January 2007. The paper also includes some real life examples of value for money procurements that have helped deliver better public services at lower cost for the taxpayer, on whose behalf the Government acts when it buys.

Finally, as well as value for money, a department needs to take account of what is affordable within its overall budget, allocating resources in accordance with its own priorities and needs to deliver its objectives. If more is spent on one project than originally allocated, that will mean less is available for other priorities. Conversely, if savings are achieved, these can be redeployed for other departmental priorities.

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