Staged approach to budgets

A stage-based approach to budgets

Before starting a procurement, the following information about budgets usually needs to be documented:

• estimated or maximum Total Contract Value (TCV)
• approval from the appropriate delegate to spend funds
• proof of funding availability (e.g. cost centre).

This page guides buyers and agencies through a stage-based approach to each type of budget-related information. The last section on this page has guidance on budgeting for early stages to cover supplier participation in, or delivery of, testing stages.

Total contract value (TCV)

Since TCV is not disclosed as part of the market approach, its main purpose is to confirm that implementation is budgeted for. It also helps identify the right delegation level for spending approvals.

TCV should cover the cost of each testing stage in the procurement pathway, the cost of implementing the end solution and potential scale opportunities. A range of market information sources can help to estimate a TCV including references, case studies or market engagement. For less mature markets, information will be more limited and confidence in benchmarking figures may be low.

Managing cost uncertainty

TCV is always an estimate and subject to change. When buying innovation, there is a higher likelihood of variation between the initial estimate and actual cost because the solution is unknown.

Buying teams should factor this into change management and governance arrangements as part of the procurement strategy. This can be done by signalling which approvals or consultations are triggered once it is known that the estimate might be exceeded.

Once the procurement is underway, buying teams can ask suppliers for indicative or actual pricing to refine the TCV estimate. They should then follow the change management plan laid out in the procurement strategy.

Approval from appropriate delegate

The TCV estimate will identify the level of delegation required to approve the commitment of funds, market approach and eventual spend. Delegations will vary between agencies, but all work on thresholds. To identify the right delegate, the estimated TCV only needs to be as accurate as the thresholds in an agency's delegations manual.

For example: an Executive Director might be authorised in a delegations manual to spend up to $2 million, Deputy Secretary approval required for spend between $2 million and $5 million. If the TCV estimate is between $2 million and $5 million, that is enough information to know that Deputy Secretary approval will be most appropriate, despite the wide range of estimates.

If the TCV estimate is under $2 million but the buying team has low confidence in the estimate, they might seek Deputy Secretary approval regardless. This makes the procurement more resilient to changes and is a chance to get buy-in from the most senior decision-makers.

Once the procurement is underway and there is some indication the estimate could be exceeded or a higher level of approval needed, buying teams can request the higher level of approval using information documented in their business case.

Agency delegations and processes might also require additional approvers for certain kinds of procurements. This is covered in the business case section.

Proof of funding availability

When available funding covers cover the entire estimated TCV, buying teams should document the funding source in the procurement strategy as they would for a standard procurement. This may include confirmation from a finance representative that the funds are available.

In other cases, available funding might only cover one or more testing stage with the remainder of the funding subject to a business case. In these cases, requiring buying teams to have all funding to be in place or a complete business case approved would be a blocker for innovation.

Testing stages usually create insights that feed into a business case and unlock funding, so agencies should consider proceeding with procurements where testing stages are funded and there is a commitment to pursue a business case. Introducing the concept of ‘seed funding’, will result in better support for innovation compared to focusing on total funding.

This means building in flexibility around funding for later stages. Flexibility does not mean an absence of accountability. Buying projects should always anticipate a future point (or ‘gate’) where information will be available to support funding decisions. A procurement strategy should clearly state the expected timing of funding decisions related to procurement stages.

The funding status of each procurement stage should be clearly signalled to suppliers. This will help inform their decision about participating in a tender and is an important aspect of maintaining probity. The more stages are funded, the more attractive an opportunity will be for suppliers. Buying teams can also increase supplier appetite by showing how evidence from testing will inform a business case.

Transparent communication is critical for managing the sorts of probity risks that can be amplified when buying innovation.

Budgeting guide for early testing stages

Show us stage

A Proof of Value is a popular way to engage suppliers in for the 'Show us' stage, and may also be known as a 'scope-specific' demonstration. The buying team generally invites shortlisted suppliers to participate in this stage after evaluating proposals in the 'Tell us' stage.

Compensating suppliers to participate in this stage is recommended when buying teams aim to encourage participation from diverse participants, including small businesses. Buying teams may choose to set a fixed compensation amount for the stage, or ask suppliers for quotes for the stage and take these into account when evaluating proposals. Either way, buying teams should consider the resources and costs suppliers would face to deliver against the Proof of Value requirements when setting stage budgets.

• Suppliers may need to configure their demonstration environment to show relevant functionality and prove the value of their solution, which typically takes 6–8 weeks.
• A rule of thumb for costings is to allow time and material costs of approximately $5,000 per week to configure demonstration environments, depending on the complexity of the challenge.
• Paying for the Proof of Value is likely to improve the quality and relevance of the solution demonstration, as well as level the playing field by enabling suppliers to participate without losing money.

'Prove it works' stage

A Proof of Concept can be used to test technical feasibility in the 'Prove it works' stage, and may also be known as a limited implementation or trial. The buying team generally invites one or more shortlisted suppliers to test the most promising solutions and capabilities from the 'Show us' stage.

A Proof of Concept costs more than a Proof of Value because the solution needs to be built. It may even involve integration into a NSW Government technology environment. When setting budgets for this stage, buying teams should take the following into consideration:

• As a rule of thumb, a Proof of Concept may take a supplier between eight and twelve weeks to build, and may require more supplier resources than a Proof of Value.
• Types of supplier expenses to take into account include time and materials and technology licence costs.
• A good starting point is approximately $100,000 for an eight week build, however this will vary with project complexity and type of technology.
• There may be a need for co-development with users or technology experts, which may need to be budgeted for.

Buying teams should ask suppliers for indicative Proof of Concept costing as part of previous stages to ensure appropriate budget allocation. Without this, licensing costs can be hard to estimate, especially if the solution is an emerging technology with limited information in the market.

Alternatively, buying teams can ask for and evaluate Proof of Concept pricing when they invite suppliers to apply for the stage and may also use the labour and license costs to inform later stage budgeting and/or final business case.

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