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Monday, 23 March 1987
Page: 1301


Mr BEALE —On behalf of the Standing Committee on Expenditure, I present the report of the Committee entitled `An efficient organisation, or, an efficient audit? Review of the Auditor-General's efficiency audit report into construction project management practised by the Department of Housing and Construction', together with the minutes of proceedings and evidence received by the Committee.

Ordered that the report be printed.


Mr BEALE —by leave-The report of the Expenditure Committee which has just been tabled is a review of an efficiency audit report of the Auditor-General. The cover page of our report has an interesting drawing and an engaging title. The drawing depicts two buildings-one ultra modern and in excellent shape; the other, a building in ruins. The title is `An efficient organisation, or, an efficient audit?'. Taken together, both the drawing and the title represent the difficulties the Committee faced with its review because the building in excellent shape represents the view of the Department of Housing and Construction of the quality of its administrative procedures for managing major construction projects; whereas the building in ruins represents the shambles that the Australian Audit Office saw in the Department's construction project management. Thus, major differences between auditor and auditee required the Sub-Committee of which I was Chairman to spend a considerable amount of the time not normally needed on this type of review.

The efficiency audit report is primarily an examination of the administrative efficiency of the Department's handling of two major construction projects-the National Acoustics Laboratory and Ultrasonics Institute at Chatswood, New South Wales, and the Australian Defence Force Academy at Campbell, Australian Capital Territory. The major areas covered by the audit were variations to contracts, choice and application of project delivery methods, project review, tendering procedures, and, octopus-like, spreading its tentacles across the entire report, the need for standards, guidelines and manuals which were a recurring theme, a constant refrain, of the efficiency audit report.

This brief description of the audit report and disagreements between the Department and Audit serves to underline that the Committee's task was complex. It was made unnecessarily complex as a result of the contempt with which the Department treated the Audit report. As a prime example of the Department's attitude I take honourable members to table 1.1 of the Committee's report. The table shows that the Department rejected over 50 per cent of the 42 Audit recommendations, and this includes 11 recommendations interpreted by the Committee as being rejected. The inadequate quality of some of the Department's responses required the Committee to interpret them and in some cases to classify a response as a rejection although the Department said it `accepted' the recommendation. For example, on more than one occasion, Audit asked the Department to give `consideration' to doing something. The Department accepted some of the recommendations of this type, but what it accepted was the `consideration' and not the change the recommendation sought. This type of response is clearly misleading and can be construed as an attempt to pull the wool over the Committee's eyes.

The Committee believes this evasiveness was the product of bureaucratic politics in that the Department did not want to sour too much its relationship with the Australian Audit Office and therefore adopted the pretence of `accepting' recommendations. Such responses have made our inquiry unnecessarily difficult and have thus resulted in unnecessary time consuming work. This is no credit to a department that prides itself on its professionalism.

Turning to the Audit report, the Committee has found it to be less than satisfactory. Our findings, which relate mostly to Audit recommendations the Department disagrees with-the major recommendations-use words not chosen lightly, such as `unconvincing', `confusing' and `superficial', to describe the Audit recommendations. This can lead the interested observer to question whether the benefits of the audit were commensurate with the cost of over $100,000.

One of the major areas of Audit concern was variations to contracts. Variations to contracts can result from a number of factors, such as design errors and omissions, and can sometimes lead to significant increases in the costs of a project. The major recommendations of the Audit report on contract variations cover essentiality testing, guidelines, and formalised controls and standards. Each of these is dealt with separately in the Committee's report but, for the sake of brevity, I will deal with them collectively in this statement.

There is considerable confusion in the Audit analysis and resulting recommendations. Thus there are two recommendations on guidelines for checking specifications and documents-an overlap acknowledged in the audit report-a recommendation on controls, which appears to be similar to another recommendation on monitoring variations against standards, and yet another recommendation on essentiality testing which appears to make redundant some, if not all, of the other recommendations on contract variations.

Another weakness of the audit analysis is that, apart from a few examples, it is guided by generalisations based on big numbers-the number of variations and the additions to total costs. The Committee appreciates and shares Audit's concern about the cost implications of variations but what is lacking generally in the Audit analysis is an assessment of whether the errors identified were the result of inadequate procedures, lack of compliance with existing procedures or the result of human error associated with the lack of supervision. There is an inconsistency in a logic which uses an implicit criterion of the need for guidelines to test the quality of administrative procedures when guidelines and other institutional procedures are known to exist. Further, one of the problems about variations is not necessarily their number but the need for variations and whether this need could have been anticipated at the design stage of the project. This type of essentiality testing goes beyond the examination of administrative procedures and can be done only by persons who have the necessary technical expertise.

A recurring theme of the Audit report is the need for guidelines, standards and so forth. The unshakable belief of the auditors is that each mistake should be covered by a subsequent separate guideline. The Committee report pursues this matter in some detail so I will quote only its conclusion that `the mind boggles at the prospect of a guidelines document reaching encyclopaedic proportions as each human error is covered by a separate guideline'. A red tape solution to perceived problems of public administration is no solution at all.

Choice and application of project delivery methods is another major area of the Audit report. Briefly, project delivery refers to the particular way in which the construction of a project is to be managed. The traditional method requires completion of design and documentation before tenders are called, a single lump-sum contract between the successful tenderer-the head contractor-and the Department and project management by departmental officers. Under construction management the Department contracts with an individual or an organisation to manage and co-ordinate the construction of the project, so that the construction manager takes the place of the head contractor under the traditional system and there is reduced emphasis on departmental project management.

Construction management was used on the Australian Defence Force Academy project where the cost escalation was enormous-a forecast increase of $25m or 51 per cent for the second construction management package. The Department listed a number of factors where construction management was said to offer better prospects than other options, but this did not satisfy the auditors. What they expected to find was the choice of construction management based on the consideration of the comparative costs of other options `because information as to relative cost should always be taken into account when such issues are being determined'. The Department has not obeyed this Audit edict and so, for the auditors, construction management became the villain of the Australian Defence Force Academy piece. The Audit report called for an assessment of the extent to which construction management had contributed to the cost increases because this would assist the Department to make better informed decisions on the use of construction management in the future.

There have also been significant increases in the apparent `real' costs of the National Acoustics Laboratory and Ultrasonics Institute and the Australian Defence Force Academy. Ascertaining the reasons for these increases and the responsibility of the Department, rather than what was in the Audit report, became the overriding issue of the Committee's review. I will return to this aspect later.

Unfortunately, the Audit analysis of the second construction management package gave us no assistance because, to put it bluntly, the analysis was naive. Surely, the relevant question is not how much construction management has contributed to the cost increases of the Australian Defence Force Academy, but rather whether in the circumstances construction management was the best choice. The Department says it was. Audit says it does not have the professional expertise to make a judgment! The Department gave the Committee documents and explanations as to why it chose construction management, but one does not know how much the Department told Audit or how well Audit listened. The Audit insistence on comparative cost analysis ignores unquantifiable benefits or the horses for courses method of choice, but there is now some belated recognition by the auditors of the need to take these factors into consideration. Impressions and suspicions are probably a necessary starting point for investigation but a dangerous finishing point on which to base conclusions and recommendations.

Tendering procedures is yet another major area of the Audit report. The Department favours open competitive tendering which entails selection of the successful tenderer after public invitation. Audit says that two State public works departments use selective tendering as the National Capital Development Commission has done recently for housing contracts. Selective tendering offers to the entire building and construction industry the opportunity to submit credentials for consideration so that only those selected are given the opportunity to tender-many are called but few are chosen.

The Audit report describes the proponents' case for selective tendering, states the Department's objections to it-selective tendering is costly to set up and administer-and then, Audit pulls the evaluation rabbit out of its hat. Based on the conclusion that there are two schools of thought on the merits of selective tendering, Audit asks the Department to evaluate this tendering system.

The Audit analysis is superficial because it is selective and inaccurate. The reference in the report to the relative poor performance of open tendering is to research published in 1971, some 14 years before the presentation of the Audit report. The reference to the National Capital Development Commission using selective tendering recently for housing contracts is factually incorrect and no attempt was made to find out why the National Capital Development Commission decided not to use open competitive tendering for housing contracts or why the majority of States did not use selective tendering. Evaluation and/or studies have their costs. Those who ask for them have a responsibility to ensure that their recommendations are soundly based.

Assessment of the quality of an efficiency audit report gets tied up ultimately with the contribution it has made to improving the efficiency of the area under examination. This assessment is detailed in the last chapter of the Committee report. Briefly, what we say is that although there are some useful Audit recommendations, these are not the major recommendations which the Committee has found to be `unconvincing', `confusing' and `superficial'. The general impression the Committee is left with is that the Audit analysis is superficial.

There are some aspects relating to the quality of the evidence which are worth noting. The first was the reluctance of the Department to own up to the Audit criticism that the Department took a `management risk' that did not come off. The cryptic comment the Committee makes in its report is that to `get to the bottom of a simple factual matter has been time consuming because of the need to find the way through the labyrinth of arguments'.

In the foreword to the Committee report, I said that some of the Audit evidence lacked any credibility. In the matter of the site allowance dispute, Audit was clearly critical of the Department but backed away from this position under questioning and introduced new reasons to support its analysis of the dispute. This is unsatisfactory. At the minimum, it points to a lack of supervision within the Audit Office and an apparent readiness to accept, without internal testing, statements that are critical of the audited organisation.

What disturbed the Committee most, however, was the use by the Australian Audit Office in evidence given to the Committee of cost information not contained in the Audit report and a method of calculation different from that used in the Audit report to support a conclusion of that report. I will not labour this point but earnestly hope that this massaging of figures will be the last of its type from the Australian Audit Office.

This review by the Committee has been made complex by the amount of detail. It was thus left to the Committee to look for the wood despite the trees. The overriding issue in our inquiry is, however, not what is contained in the audit report but rather the matter of significant increases in the apparent `real' costs of the National Acoustics Laboratory and Ultrasonics Institute project and the Australian Defence Force Academy project and the extent to which departmental management was responsible for such increases.

From cost information published in the Department's annual reports the Committee calculated increases of apparent `real' costs for major construction projects, from 1980-81 to 1985-86, managed by the Department and used this as a yardstick with which to measure the performance of the two projects. The costs of the Acoustics project increased from $12m to over $25m and that of the Defence Academy, in the second construction management package, from $49m to over $95m. When we compare the increases of the two projects with the six-year average mentioned above we find that the increases for the National Acoustics Laboratory and Ultrasonics Institute and the Australian Defence Force Academy are five times and eight times greater respectively than the 1980-81 to 1985-86 average. These are significant increases indeed. Some of them can hardly be said to be beyond the control or influence of the Department of Housing and Construction. The Committee has recommended that the Department undertake `post occupancy evaluations' of both projects which will, among other things, specify the causes for the real cost increases and indicate whether the cost increases were within the control or influence of the Department. Such evaluations would be open to scrutiny and would thus enable one to get to the bottom of the basic and overriding issue concerning the Department's management of these two projects.

My thanks go to my fellow Sub-committee members, the honourable member for Fraser (Mr Langmore), the honourable member for Lindsay (Mr Free), the honourable member for Macarthur (Mr Martin), the honourable member for Bass (Mr Smith), and particularly the Expenditure Committee Chairman, the honourable member for Banks (Mr Mountford), many of whom are in the House today. I also pay tribute to the contribution of the honourable member for Grayndler (Mr Leo McLeay). The Sub-committee thanks those who made submissions to the inquiry and also thanks the Secretary of the Expenditure Committee, Phil Bergin, and inquiry staff Malcolm Aldons and Ron Newton, and the support staff in preparing the manuscript of the Committee report, Heather Chapman and Peter Ratas. The Sub-committee pays particular tribute to Malcolm Aldons, who dedicated much of his time as Acting Secretary of the Expenditure Committee to resolving the conflicting positions that arose as a result of this inquiry. I commend the report to the House.