How to comply with the recent Procurement Policy Note on contract variations

What you need to know

• For entities subject to the Commonwealth Procurement Rules (CPRs), a variation that would increase the value of the contract by more than 100% of its original total will generally now require approval at the most senior level – either by the entity’s Accountable Authority, or a delegate no lower than an SES Band 3 officer (or equivalent).

• From 1 July 2027, the increase in value threshold will reduce to 50% of the original contract value.

• A variation that will add options into the original contract is now also subject to this approval requirement.

• The policy does not apply if an existing option is being exercised or the contract is being varied to give effect its existing terms – such as if pricing is updated by a variation in accordance with agreed adjustment mechanisms (for example, changes labour and material indices).

What you need to do

• Review existing contract management and procurement governance arrangements to ensure alignment with this policy.

• Review internal delegation instruments to facilitate decision-making by appropriate personnel.

• Establish and update a variation register to track original contract values, options and variations.

• Plan for appropriate contract options or adjustment mechanisms early in the procurement process.

Detailed Insight

Policy coverage

In June 2026, the Department of Finance published a new Procurement Policy Note entitled Senior oversight of contract variations, which sets out the Australian Government’s policy on significant contract variations – a policy that is intended to enforce robust procurement planning, scoping, and contract management practices in relation to contract variations.

The policy must be complied with by all non-corporate Commonwealth entities (being all Departments of State, and all other Commonwealth entities that are not body corporates) as well as those corporate Commonwealth entities that, having been prescribed under section 30 of the Public Governance, Performance and Accountability Rule 2014, are bound by the CPRs.

The effect of the policy is that approval from either the Accountable Authority (being the Secretary in the case of a Department of State) or a delegate no lower than an SES Band 3 officer must be obtained where a relevant Commonwealth entity seeks to agree a variation to an existing contract that:

• will result in the revised total contract value (inclusive of all existing contract options) being above the relevant procurement threshold and:
  • between 1 July 2026 and 30 June 2027, increase the total contract value by more than 100% of the original contract value; or
  • from 1 July 2027 increase the total contract value by more than 50% of the original contract value; or
• add contract options to the contract.

For the purposes of the policy, the total contract value is the combination of the original contract value and any contract variations and contract options that have been exercised. The original contract value is the original reported value, and does not include the value of any existing contract options. The relevant procurement thresholds, which depend on the goods and services being procured and whether the entity is a corporate or non-corporate Commonwealth entity, are set out in paragraph 9.7 of the CPRs.

Approval required

The Department of Finance advises that entities should not seek or allow variations in circumstances where:

• other potential suppliers may have responded differently to the amended contract scope in the tendering process, which may have resulted in a different value for money outcome; or

• the variation may compromise the value for money assessment.

To address this preliminary requirement in connection with a proposed variation, it isappropriate to provide an assessment to the appropriate delegate that addresses:

• whether the variation will still constitute value for money;

• if the variation may compromise the initial procurement process;

• whether the variation will transfer or create additional risk for either the entity or the supplier;

• what effect the variation will have on the procurement outcomes; and

• whether a variation is the most appropriate procurement method.

Reflecting the requirement of the new policy for approval to be provided at the most senior level, it would also be appropriate for the approval process to:

• address whether the proposed work falls within the scope of the original contract;

• identify the extent to which the additional requirement could reasonably have been anticipated when the contract was being stood up;

• explain why a variation, rather than a new procurement, would be more appropriate;

• confirm that the proposed pricing of the variation represents value for money; and

• address the consequences of not approving the variation.

This approval is in addition to the other internal approvals that may need to be obtained for the variation, including financial commitment approval under section 23(3) of the Public Governance, Performance and Accountability Act 2013. Depending on the internal policy of the entity, this may mean that contract managers need to seek approval from multiple delegates for distinct purposes for the same variation.

Contract options

The policy does not apply the exercise of contract options that were included in the original contract. A contract option could include a pre-agreed ability for the parties to extend the duration of the contract for specified a period of time, or to purchase additional quantities of goods or services within an agreed framework.

Variations for price reductions, or price increases that result from an agreed mechanism within an existing contract (such as to account for foreign exchange movements) are also not impacted by the policy.

Increased transparency

To support the policy, new AusTender reports will be available from 1 July 2026, which will identify each entity’s proportionally largest variations for active contracts. This will increase the visibility of significant contract amendments, and reinforce the need for clear and precise decision-making documentation, as it is likely that major variations will be subject to external scrutiny.

Further information

The Procurement Policy Note should be read alongside the CPRs, the Commonwealth entity’s Accountable Authority Instructions and instruments of delegation, and of course the terms of any relevant contract. As always, guidance on contract variations provided by the Department of Finance should also be consulted, and carefully considered.

If you have any questions or would like specific advice on contract variations and how it might affect your procurement activities, please feel free to contact us.

Authors

Michael Burton – Principal

Derek Smith – Special Counsel

Norman Tao - Associate