VfM has been established internationally by governments (including Australia and the UK) as a critical foundation of decision making in government contracting. The VfM concept is applied, inter alia, to make decisions on the allocation and expenditure of public funds for capital projects.
Definitions of VfM applied by Australian governments are generally consistent and it is unnecessary to present a wide-ranging debate on the best VfM definition. However, it is important to recognise that each statement is drafted for a particular jurisdiction and context.
This Guidance Note uses the following definition of VfM from the Victorian Department of Treasury and Finance7:
| A VfM definition: Value-for-Money denotes, broadly, a net measure where the required benefits (including quality levels, performance standards, and other policy objectives such as social and environmental impacts) are balanced and judged against the cost (price and risk exposure) of achieving those benefits. Generally, Value-for-Money is assessed on a 'whole-of-life' or 'total-cost-of- ownership' basis. This includes the various phases of contract period, including transitioning-in and transitioning-out. The concept of 'long-term sustainability of Value-for-Money' often applies, and this emphasises the government's focus on investment choices that ensure Value-for-Money outcomes are promoted and protected outside the contract period and over successive anticipated contracts. |
It is useful to appreciate that the general concept and definition of VfM, and any specific criteria, is applied at different levels of decision making (this is discussed further in the next section):
1. at the government level: a VfM criteria will be applied to prioritising different Business Case submissions from agencies, across all sectors of government activity, for funding support. Final government decisions are made on these competing business cases (i.e. investment and project proposals) using also an 'opportunity cost of capital'8 criteria;
2. at the Agency/Owner level: a VfM proposition will be articulated for each investment proposal subjected to a Business Case analysis prepared by the Agency. The Agency normally prepares a number of business cases pertaining to its specific sector of responsibility and will apply an internal VfM criteria to prioritise and finalise its submission to government for funding support (including project approvals);
3. at the project management level: consistent with the Owner's VfM Statement, a VfM criteria is developed and applied by the Owner when setting up the alliance structure including the selection of the Proponents, the legal and Commercial Framework, the TOC, and by the alliance when planning, designing and constructing its project (many choices need to be made here on the total utility which can be obtained from a particular project action or material input9).
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7 Adapted from the Department of Treasury and Finance, Victoria (DTF) 2006, Good Practice Guidelines: Developing a State Purchase Contract Business Case.
8 The opportunity cost of capital refers to the cost of funding one proposal (and thereby achieving the resultant consequential benefits) set against the loss of opportunity to fund and achieve the benefits of the next best proposal.
9 Public sector bodies, like the offices of Auditors-General, generally construe VfM in terms of efficiency, effectiveness and economy. Decisions based on a VfM criteria would consider the utilisation of resources in terms of efficiency (i.e. maximising output per unit of input); effectiveness (i.e. the outputs and outcomes contributing to achievement of stated objectives); and economy (i.e. acquiring resources of required quality/performance at minimum cost).