Value for money

In every procurement, your primary consideration should be achieving value for money.
On this page
What you need to know
  1. Achieving value for money isn’t the same as getting the lowest price.
  2. You should take a big picture view that compares lifetime benefit to the lifetime cost.
  3. Assessing value for money means looking at the upfront and after-purchase costs and benefits, as well as considering fitness for purpose.
  4. You need to apply a monetary value to potential costs, benefits and risks.
  5. You should consider whether technology, innovation and citizen engagement can help deliver value for money.

What does value for money mean?

The term ‘value for money’ means different things to different people. But as a government buyer, you should always take a big-picture view.

This means looking at the total benefit to the community and measuring and costing it in the most transparent way. It’s not just about securing the lowest price or the highest quality.

If you have limited funds, you may find a low-cost option that meets your minimum quality requirements is enough. But you always need to consider the value over the goods or services’ entire lifetime. This includes everything from upfront installation or construction to maintenance and exit costs, as well as indirect costs and benefits.

For instance, you may deliver economic value through cost-saving innovations or downstream job-creation.

Equation for measuring value

Broadly speaking, you can determine value by comparing lifetime benefits (non-financial factors) against lifetime costs (financial factors). As an equation, it looks like this:

Value for money = total lifetime benefits - total lifetime costs

Measuring these means considering factors such as cost, quality, fitness for purpose, capability, capacity, risk and more.

Assess value for money

Procurement benefits, costs and risks generally fall into 3 categories: upfront, after-purchase and fitness-for-purpose. We explore each of these in more detail below.

1. Upfront

  • Savings. How will your offering reduce costs immediately or over time? You must be able to verify any savings.
  • Changes to revenue. Look at new revenues rather than those you already achieve.
  • Costs avoided. What costs – often called ‘opportunity costs’ – would you face if your procurement didn’t go ahead?
  • Transitioning-in costs. What are your setup costs, including the direct and indirect costs of commissioning and maintaining technology and staff?
  • Risks. What are the commercial, business and operational risks? What about the risk of operations being disrupted?

2.  After-purchase

Ongoing benefits and costs are often called the ‘total cost of ownership’, ‘whole-of-life’ or ‘whole-of-contract’ benefits and costs.  These are generally easier to measure in services contracts involving people than in those for physical goods.

You should look beyond recurring costs such as rentals and licence fees to consider the following factors.

  • Contract period. Benefits and costs often change over time. Is technology likely to change during the contract term? What about agency preferences?
  • Transactional costs. How much will it cost to maintain and operate the goods or services over the contract term?
  • Transitioning-out costs. Is there an end-of-contract benefit? Are remediation costs likely?
  • Contingency costs. Are there early termination fees? What will it cost you if a supplier fails to deliver?
  • Contract management risks. Go beyond supply and business continuity risks. Are there any risks to your reputation?

3.  Fitness-for-purpose

Estimating fitness for purpose involves analysing the non-price elements of the contract. You could do this by answering the following questions.

  • Are you in line with government-wide procurement policies? For instance, are you following government policy on promoting competition?
  • Do the goods or services really meet your need? Will you have to make adjustments? If so, what’s the likely cost? Don’t buy more than you require.
  • Are you complying with relevant standards and specifications? What are the costs of compliance or non-compliance? What’s the risk of non-compliance?
  • Can the supplier deliver? What’s their availability, reputation and track record? Don’t double count benefits you’ve identified in contingency costs.
  • How flexible are the goods or services? Assess any potential for improvement and innovation during the contract term. What impact will this have on cost?

How to apply a monetary value

After you’ve identified the potential costs, benefits and risks, you’ll need to assign a monetary value to each of them. This isn’t always easy. But keep in mind the following:

  1. Every procurement activity has an opportunity cost. Your resources are limited. What opportunities are you foregoing to procure the goods or services?
  2. Include everything. Make sure you assign a monetary value to all benefits and costs you’ve identified.
  3. Don’t focus only on the benefits. Ignoring the costs will lead to errors in your calculations.
  4. Consider the entire lifecycle. Assess costs and benefits across the lifecycle of the goods or services. Don't forget about disposal of goods, where applicable.
  5. Can you include broader community benefits? Community benefits are only relevant where they align with government priorities, policies or programs. This is usually more relevant to large procurements.
  6. Costs and benefits aren’t always commodity-based. For instance, buying teleconferencing equipment may reduce the need to spend money on travel. Look out for these knock-on benefits and quantify them.

Citizen engagement strategies

When you’re planning to procure goods or services that citizens will consume, consider consulting potential customers. Robust and valid citizen engagement can help you understand the user and give you informed feedback.

If you take this approach, be sure to:

  • ensure suppliers can’t influence the outcome
  • test several options against pre-set criteria, not just your preferred option
  • consider using a control group to give you a baseline view.

Innovation and collaboration

You may find emerging technology and the collaborative economy can help you cut costs and boost benefits. Consider whether:

  • any digital solutions could help you cut costs or increase benefits over the lifecycle
  • buying through a collaborative platform is a better approach than traditional procurement
  • you could improve the value of underused assets through the collaborative economy.

Resources

You’ll find more information and guidance on how to measure value for money in the following documents.