Appendix B of Evolve: The Operating Model AI Demands (Hodgson, 2026) sets out the case for capacity-based vendor engagement — why product teams need continuous access to team capability rather than a series of scoped deliverable outputs. This guide is the implementation companion. It covers the contract structure for a capacity-based engagement, the evaluation criteria for selecting vendors suited to this model, the transition pathway for organisations moving from existing Statement of Work (SoW) arrangements, and the interpretation of Australia’s Commonwealth Procurement Rules (CPR) that makes this approach workable for Australian Public Service (APS) organisations, with a note for corporate readers on the equivalent commercial position.
In Brief
- The Commonwealth Procurement Rules accommodate capacity-based vendor engagement — the obstacle is how practitioners interpret them, not what the rules require.
- An effective capacity-based contract specifies team composition, transparency obligations, quality standards, and a governance cadence tied to the Sprint.
- Vendor evaluation criteria for this model must test capacity-model operating experience, not project delivery track record.
- The transition from a Statement of Work to capacity-based contracting requires mapping current delivery patterns before renegotiating any terms.
- Value for money is demonstrated through the Sprint Review record and fortnightly reporting — not through a list of completed deliverables.
The rules already allow this
The standard objection in APS procurement is that capacity-based contracts lack the specificity the CPR requires. That objection reflects how procurement officers are trained, not what the CPR says.
Australia’s Commonwealth Procurement Rules (Department of Finance, 2024) place value for money at the centre of every procurement decision. The rules require entities to describe what they need — a statement of requirements — and to demonstrate that the arrangement they entered delivers value against that description. The CPR does not specify what form those requirements must take. A statement that describes required team capability, Sprint cadence, cross-functional composition, and quality standards meets the CPR’s requirements as fully as a deliverable list does. What a capacity-based statement of requirements does not do is make performance visible to a reviewer trained to check outputs against a pre-agreed list.
That interpretive gap sits between the rules and the practice. A procurement officer applying the standard accountability model asks: what was agreed, and was it delivered? That is a reasonable question. In a capacity-based model, the answer requires a different evidentiary trail — Sprint Review records, fortnightly throughput reporting, and quality mechanism documentation — rather than a milestone completion register. Both forms of evidence demonstrate value for money. One is familiar; the other requires deliberate contract design to produce.
Panel arrangements make the structural solution straightforward. Panel establishments — which require competitive processes to select pre-approved suppliers — can be scoped to accommodate capacity-based engagement terms from the outset. Individual call-offs against those panels then purchase team capacity from a pre-established pool without re-tendering for each engagement. Australia’s digital and ICT procurement panels already accommodate time-and-materials engagements on this basis. The interpretive work is not about finding a new procurement mechanism — it is about writing the call-off terms to specify capacity rather than deliverables.
The path to compliance is to write the contract as the CPR intends: describe what the entity needs, establish how value will be assessed, and create accountability for both parties. A well-constructed capacity-based contract does all three. It specifies what the team will be capable of producing, what quality standards apply to every work item, and how performance will be tracked through the engagement. It is not a departure from the CPR’s principles — it is a direct application of them, in a form the CPR has always permitted (Department of Finance, 2024).
A capacity-based contract has four accountability elements
A capacity-based engagement contract has four functional elements. Each creates accountability for a different aspect of the engagement — what the team commits to, what the vendor reports, how quality is defined, and how governance operates in the absence of fixed milestones.
Element #1: Key clauses
The contract’s core terms establish what capacity means for this specific engagement. This covers: the Sprint cadence and the vendor’s obligation to field a complete, cross-functional team for each Sprint; the composition of that team, expressed as named roles and required capabilities, with notification obligations if any team member is substituted; the pricing model, which ties cost to Sprint delivery capacity rather than to individual outputs; and the performance standard, which defines what constitutes a failure of capacity in a model where deliverables are not pre-specified.
An effective capacity clause names what the team is capable of handling — the work types it will address, the throughput range the entity can expect under normal operating conditions, and the circumstances under which throughput expectations can be renegotiated. The vendor’s obligation is not to produce a specific list of outputs but to maintain the team conditions under which productive work is possible. The entity’s obligation is to provide a prioritised product backlog and clear access to the Product Owner accountability. Both sides’ obligations need to be in the contract.
Element #2: Transparency obligations
Transparency obligations create the evidentiary trail that demonstrates value for money on the procurement record. They give the entity’s governance chain the visibility it needs, and they give the vendor the accountability structure that protects both parties in a performance dispute.
Minimum transparency obligations include: a fortnightly summary of completed work items, classified by work type; the team composition for each Sprint, including any substitutions and their rationale; and a quarterly utilisation review that compares actual team capacity against contracted capacity, with an explanation of any material variance. Where the entity holds Sprint Review participation rights — which should be a standard contract provision — the Sprint Review itself is the primary transparency event. It is observable, documented, and repeatable. Entities that treat Sprint Review as optional reduce their ability to demonstrate value for money after the fact, because they remove the primary mechanism through which the evidentiary record is built.
Element #3: Quality mechanisms
Quality in a capacity-based model is defined at the level of each work item, not at the level of a deliverable set. The contract should specify a Definition of Done — a set of conditions that apply to every piece of work the team completes and that determine when an item is considered finished. This typically includes automated test coverage requirements; peer review obligations for production code; accessibility standards for user-facing components; and the process for addressing defects identified after Sprint completion.
The contract should also establish the entity’s right to participate in Sprint Retrospectives as an observer and to initiate an independent technical review after twelve months of continuous engagement. The independent review clause is a standard governance provision. Positioned as a routine quality assurance mechanism rather than a response to under-performance, it maintains the vendor relationship while providing the entity’s audit function with an independent assessment pathway when one is needed.
Element #4: Cadence requirements
Cadence requirements tie the contract’s governance obligations to the team’s operating rhythm rather than to fixed calendar milestones. The minimum governance cadence for a capacity-based engagement includes: Sprint Review participation at the close of each Sprint; a monthly capacity utilisation review between the entity’s engagement lead and the vendor’s account manager; and a quarterly strategic review that assesses whether the team’s capability profile continues to match the entity’s product roadmap.
The Sprint Review is the engagement’s most important governance touchpoint. It is where the entity observes what the team produced, what was not completed and why, and what the team’s assessment of the next period looks like. The quarterly strategic review is where capability gaps are identified early enough to address them — whether through vendor coaching, team composition changes, or a reassessment of the product roadmap’s technical assumptions.
Standard vendor criteria select the wrong vendor
Standard vendor evaluation criteria — prior experience, price, methodology, and references — are insufficient for capacity-based procurement. A vendor that performs reliably in a fixed-price SoW model may not have the practices required to operate transparently when outputs are not pre-specified. The evaluation criteria need to test for a different set of capabilities.
Cross-functional team experience
The vendor should demonstrate sustained delivery from cross-functional teams operating across changing priorities — not teams assembled for a specific project scope and disbanded on completion. The relevant evidence is not project references but capacity-based engagement references, including Sprint-level throughput data from prior engagements. A vendor that cannot provide this has not operated in the model being purchased.
Transparent throughput reporting
The vendor should have a demonstrated practice of Sprint-boundary reporting that includes completed and non-completed work, the reasons work was not completed, and team composition data. Ask to see sample Sprint reports from a prior engagement. A vendor that cannot produce these has not been operating with the transparency this model requires, and cannot be expected to produce it under a new contract.
Technical practice maturity
Capacity-based engagements are only as productive as the team’s underlying technical practices. The evaluation should test for continuous integration, automated testing discipline, trunk-based development, and deployment pipeline maturity. These are the practices that make a capacity-based team consistently productive; without them, the model’s flexibility creates conditions for low-accountability time billing rather than genuine product team throughput.
Product model operating experience
The vendor’s team should be able to operate within a product ownership structure — working with a prioritised product backlog rather than waiting for task-level specifications, and understanding the Product Owner and Scrum Master accountabilities. This capability is not present in most vendors whose primary experience is project delivery. It cannot be built during an engagement; it must be demonstrated before the contract is signed.
Domain and governance knowledge
For APS engagements, the vendor should demonstrate familiarity with the governance and accountability structures that constrain government product development: ministerial accountability chains, security classification requirements, whole-of-government policy obligations, and the implications of digital service design for Freedom of Information. These are not peripheral concerns — they determine whether the team’s work is usable in a government context.
The evaluation should include a scenario exercise: the vendor is asked to describe how their team would respond to a significant change in product direction at the mid-point of a Sprint. The question is not whether they would complete the original Sprint plan — it is how they would renegotiate Sprint scope, communicate the change to the entity, and maintain the transparency obligations while adapting. The vendor’s response to this scenario is a more reliable predictor of capacity-model performance than any reference check.
From fixed deliverables to capacity
Moving an existing SoW arrangement to a capacity-based contract requires a structured transition. The most common obstacles are a vendor relationship built around deliverable accountability, a procurement record organised around milestone completion, and an entity whose internal governance processes require output verification. The following steps address each in sequence.
Step 1: Map what the current arrangement is actually producing
Before renegotiating terms, analyse the past three to six months of delivery under the existing SoW. Identify what work types the team handled, how closely the contracted deliverables corresponded to actual product outcomes, and what the cost per unit of useful output was. This analysis creates the baseline against which the capacity-based arrangement will be assessed, and surfaces capability gaps that need to be resolved before the transition.
Step 2: Define the capacity terms you need
Based on the work type analysis, define the team composition, Sprint cadence, capability profile, and throughput range that would meet the entity’s product roadmap over the next twelve months. This becomes the foundation for the new contract’s key clauses and the reference point against which vendor evaluation is conducted.
Step 3: Test the vendor's capacity-model readiness
Before renegotiating the contract, conduct a structured capability assessment of the existing vendor using the evaluation criteria above. A vendor that has been performing competently under a SoW model may not have the transparency practices or product model experience this contract requires. If the assessment reveals that the existing vendor cannot meet the new requirements, that finding is a procurement decision — and the sooner it is established, the less disruptive the replacement process will be.
Step 4: Draft the new contract terms
Using the clause structure described in this guide, draft the capacity-based contract terms with procurement legal advice. The draft should specify capacity, transparency obligations, quality mechanisms, and cadence requirements as described above, with explicit reference to the panel call-off terms under which the arrangement will operate. Legal review should confirm that the draft meets the CPR’s requirements before it is submitted for internal sign-off.
Step 5: Obtain legal and procurement sign-off
Submit the draft contract for internal legal review and procurement sign-off. The review should address three questions: whether the arrangement complies with the relevant panel’s call-off terms; how value for money will be demonstrated in the absence of pre-specified deliverables; and how the entity’s standard contract reporting obligations will be met. These are answerable questions. The evidentiary trail described in the transparency obligations section provides the answers to all three.
Step 6: Pilot one Sprint under the new reporting model
Before executing the new contract, run one Sprint under the existing contract with the new transparency obligations applied as a voluntary pilot. This tests the vendor’s reporting capability and the entity’s governance processes without creating contractual exposure if either side cannot meet its obligations under the new model. Use the pilot Sprint to identify gaps before they become compliance issues.
Step 7: Execute and establish the governance cadence
Execute the new contract, schedule the first monthly utilisation review, and document the initial team composition and capability baseline. Treat the first three months as the stabilisation period in which the governance cadence is established before the first formal performance assessment. The governance cadence — Sprint Reviews, monthly utilisation reviews, quarterly strategic reviews — is what makes the capacity model legible to the entity’s audit and assurance functions. Establishing it deliberately at the outset avoids the need to reconstruct it retrospectively.
Proving value for money without deliverables
The CPR’s value-for-money principle requires that the entity demonstrate it received what it paid for. In a capacity-based model, that demonstration is built from the transparency obligations and quality mechanisms described in this guide, not from a deliverable list. The compliance questions are specific and answerable.
Statement of requirements
The CPR requires entities to describe what they need. A capacity-based statement of requirements describes team composition, capability profile, Sprint cadence, and quality standards. This is a more complete description of what a product team needs than a deliverable list, because it specifies the conditions under which productive work will occur, not just the outputs that would result from it (Department of Finance, 2024). The statement should be precise enough that a procurement reviewer can assess whether the arrangement as structured is reasonably likely to deliver the described capability.
Panel call-off compliance
Where the engagement is conducted under a panel arrangement, the call-off terms govern what can be purchased and how value for money must be demonstrated. Panel arrangements for digital and ICT services typically accommodate time-and-materials and capacity-based engagements within their scope. Where a panel was established primarily for project-based services, the entity may need to make an explicit value-for-money argument for the capacity-based model in the call-off documentation. This is documentation work, not a structural obstacle — the CPR’s value-for-money principle does not specify how requirements must be structured.
Contract reporting
Contracts above the relevant reporting threshold require notification on the AusTender system within prescribed timeframes. The contract description should accurately reflect the engagement as executed. Sprint-level performance information is maintained in the entity’s contract management files as part of the evidentiary record — it is the substance of the value-for-money assessment, not part of the public procurement notice.
A note for corporate readers
The CPR applies to non-corporate Commonwealth entities. Corporate entities and private sector organisations operate under Australian common law, which implies terms of reasonable care and skill in service contracts regardless of what is explicitly specified. The transparency obligations, quality mechanisms, and cadence requirements described in this guide create the same governance foundation in a commercial contract that the CPR evidentiary requirements create in a government one. The value-for-money argument is equivalent: the entity demonstrates that the contract terms created the conditions for productive work and that it maintained the oversight mechanisms to verify it.
The gap between what the CPR allows and what procurement practice typically produces is not legislative — it is interpretive. Procurement officers trained on deliverable-based accountability are applying the right principle with a mental model of contract performance that capacity-based work does not satisfy. The fix is not to seek a CPR exception. It is to write contract terms, transparency obligations, and quality mechanisms in a form that makes the value-for-money case visible on the procurement record without a deliverable list. The entities that establish this contract form have found that the subsequent procurement cycle does not require the same argument — the Sprint Review records, utilisation reports, and quality mechanism documentation provide the evidentiary basis the CPR requires, directly.
What this means for procurement directors
- The CPR’s value-for-money principle already accommodates capacity-based contracting — the obstacle is interpretive practice, not the rules themselves.
- Vendor evaluation for a capacity-based engagement must test transparency practices and product-model operating experience; prior project delivery track record is insufficient.
- The evidentiary trail for value for money is the Sprint Review record and throughput reports, not a milestone completion register — this requires deliberate contract design from day one.
- A panel call-off structured around team capacity rather than deliverables is workable under existing APS procurement frameworks (Department of Finance, 2024).
- The governance cadence — Sprint Reviews, monthly utilisation reviews, and quarterly strategic reviews — makes the capacity model auditable without a deliverable list.
This guide is a Zen Ex Machina implementation resource, extending Appendix B of Evolve: The Operating Model AI Demands (Hodgson, 2026).
References
- Department of Finance. (2024). Commonwealth procurement rules. Australian Government. https://www.finance.gov.au/government/procurement/commonwealth-procurement-rules
- Hodgson, M. (2026). Evolve: The operating model AI demands. Zen Ex Machina.
