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    Intelligent contract competition and risk management

  • Posted on April 7, 2017 by

    Climbing competitionWhen it comes to public sector contracts, running proper competitions simply isn’t enough. Government needs to act intelligently to take advantage of competition between potential suppliers, weighing up options and considering who carries the risks, and at what cost. Since launching Commercial and contract management – insights and emerging best practice we’ve reported on two contracts that shed further light on these issues. We explore the new insights from these reports in this blog-post, the latest in our series on key issues for contracts and commercial relationships.


    Commercial and contract management – insights and emerging best practice

    CCM lifecycleAs detailed in previous blog posts, this interactive ‘roadmap’ considers seven stages in the contract lifecycle. It identifies warning indicators of impending trouble and characteristics of good processes. The insights have come from our analysis of more than 140 contracts or portfolios of contracts over the last 15 years.

    As we continue to study contracts and commercial relationships, we are embellishing these insights and exploring them in this series of blog-posts.

    Previous posts: Government’s contracts – new insights into best practice and Setting up successful contracts.


    New reports, new insight

    We recently looked at two projects that shed further light on competition and risk management in contracts.

    BBC reportOur report on BBC TV licence fee collection looks at the how the BBC fulfils its responsibility for issuing TV licences and collecting the licence fee. It holds contracts with various providers for activities related to collection, the two largest of which are with Capita and Proximity.
    CCS reportCarbon Capture and Storage: the second competition for government support considers the government’s approach to carbon capture and storage (CCS), an important part of its plans to reduce carbon dioxide emissions. The Department for Business, Energy and Industrial Strategy (BEIS) launched a new CCS programme in 2012, with an objective to enable developers to invest in CCS in the early 2020s. The second competition was the start of this plan, with BEIS hoping it would demonstrate the commercial and technical viability of deploying CCS in the UK.

    Take an intelligent approach to contract options and competition

    Intelligent clientAs part of our insights and emerging best practice work we highlighted a number of insights around market management and sourcing. One was the importance of government acting as ‘an intelligent client’. This means public sector organisations should understand both what they want to buy and at what cost. Doing so helps to put them in the best position to negotiate or understand how contractual changes affect service and price.

    Good practice is built on:

    • Engaging the market early to improve knowledge of suppliers and their capabilities
    • Building a should-cost model (proportionate to the complexity of the service)
    • Evaluating potential solutions on the market

    Another insight was the value of ‘keeping up competitive tension’. Competition between suppliers shouldn’t just be encouraged in the pre-bid and bid stages. During the contract, ongoing market engagement helps to sustain future suppliers and to benchmark performances, and enables good performance to be rewarded by varying contract volumes. In the case studies we pointed to some innovative approaches to generating greater competitive tension for longer, including in the Department for Work & Pensions’ Work Programme, where it can shift referrals between suppliers based on performance measures.

    What further insights and evidence do our recent reports add?

    InsightMake an early assessment of the market: For example, before a procurement exercise, the BBC’s Licence Fee Unit collects information on the wider market of providers delivering customer or enforcement services similar to that of TV Licensing but in different sectors, as well as its own suppliers. The BBC does this to understand providers’ capability to bid for future BBC contracts and to increase evidence to support oversight and commercial management of its contracts.

    InsightKeeping up competitive tension: For example, the BBC report reinforces the value of sustaining competition. Through the two contracts our BBC report looked at, the BBC had sustained market competition throughout multi-stage procurement processes. For each contract, three shortlisted bidders submitted final offers meeting quality and cost requirements, which gave the BBC wider choice. Demonstrating the health of the market helps to increase the pressure on a supplier to provide a good service.

    InsightCompetition optionsConsider a range of options: For example, in our report on the government’s first Carbon Capture and Storage (CCS) competition, we found that BEIS opted to run a competition without considering alternative options. Having learnt from this experience, in the second competition BEIS initially appraised 21 delivery options to determine the best one for meeting its objective. It narrowed down the options to the five highest-scoring ones according to a set of criteria. These included whether the option:

    • could be adjusted during delivery;
    • would advance the understanding of CCS; and
    • would allow the department to test the UK regulatory, legal and licensing frameworks.

    InsightConsider costs in detail: For example, in the case of CCS, BEIS analysed costs and benefits of five highest-scoring project options based on their contribution to its aim of reducing technology costs and increasing investor confidence. This analysis was important in determining its approach. When it found that the technical and commercial uncertainties around CCS meant that it could not estimate the projects’ costs and benefits with great confidence, it opted for an outcome-based competition. However, although this was a good approach for the shortlist, we found that the overall process suffered as a result of not having fully considered the cost and benefits of some of the other options discarded for policy reasons, particularly the prospect of the government taking a greater stake in projects.

    Tailor your approach to the risks you face

    Risk managementOne of our contract management insights highlights the importance of measuring, understanding and allocating contract risks to those best able to manage them. We have often seen inappropriate allocation of risks between government and its suppliers, subcontractors and others. Although the importance of risk is widely recognised across government, we rarely see proper risk management processes in place.

    To address risks better, we suggest that organisations might:

    • Ensure that planning for contracts includes a commercial risk assessment, and analysis to outline options and assess the impact of various risk allocation approaches.
    • Create a risk allocation matrix which reflects all parties’ ability to manage risk and capacity to bear risk.
    • Establish a systematic, project management style approach to risk management.

    Our previous blog-post, Setting up successful contracts, included the need to transfer risk appropriately, and how management of obligations and risks together was needed to avoid unexpectedly taking on more risk than planned.

    What further insights and evidence do our recent reports add?

    InsightKeep risk allocation flexible enough: For example, the CCS competition model meant that BEIS could not easily amend the allocation of risk once it had awarded contracts as it could have faced legal challenge from unsuccessful bidders. Both of the two developers selected told us that they had tried to amend risk allocations as part of the negotiations, but that BEIS was inflexible about changing it. BEIS has stated that the bidders could have amended the risk allocation in their bids for capital funding and that it would have examined whether transferring more risk to the government would have been value for money.

    Allocating riskInsightGovernment can carry more risk as an incentive: In some areas, particularly where there is a need to motivate suppliers to be innovative, it may be necessary for the public sector to carry more risk than would otherwise be the case. For example, following the CCS competition, many stakeholders have concluded that the government needs to carry more of the project risk if it is to deploy CCS affordably in the future. The Parliamentary Advisory Group on Carbon Capture and Storage has recently recommended that the government should take full ownership and bear all of the risk in developing CCS.

    Similarly, in our BBC report, we reported that the Capita contract was renegotiated to change the balance of financial risk, with the BBC forecasting that net revenue levels will be at least equal to those under the previous arrangements. However, there remains a risk that revised contract terms will provide insufficient incentives for Capita to increase revenue and reduce evasion to the levels originally planned when the contract was awarded in 2011.

    We will continue to glean and share the insights from the catalogue of NAO reports with the hope this will get people talking, reduce problems and better share and implement good practice. This post follows our previous ones, Setting up successful contracts and Government’s contracts – new insights into best practice, and we will blog again with further insights from our new reports.

    As always, we welcome your comments, invite you to contact us to discuss this in more detail – and encourage you to sign-up to receive email alerts about our blogs to ensure you keep up to speed with our emerging thinking.

    Emma Willson

    About the authors:
    Emma Willson
    is an Audit Manager working in the Commercial and Contracting Community of Practice. The practice generates cross-government insight on commercial and contracting matters, develops best practice approaches and ensures these are applied across the NAO. Emma previously managed work and pensions related studies. Topics of past reports include contracted-out health and disability assessments, learning lessons from welfare reform and Personal Independence Payment.
    Iain Forrester
    Iain Forrester is an Audit Principal who works in the Cabinet Office and cross-government value for money team and is part of the NAO’s Commercial and Contracting Community of Practice. Topics of past reports he has worked on include BBC radio, rural broadband and grants across government.



  • 1 Comment

    One response to “Intelligent contract competition and risk management”

    1. @JagPatel3 says:

      ‘Keeping up competitive tension’ between suppliers throughout the entire period of the competition is just another way of saying that all Bidders should ‘feel the heat’ of competitive market forces – from the time the Government engages with the market for the provision of goods or services, to the moment the single Bidder is selected, as the preferred Contractor to receive the contract.

      Whatever it is called, it is certainly not happening during the ‘sudden death’ competition (which reduces the field of Bidders from six to one following a one-off release of the invitation to tender, as shown in this illustration pic.twitter.com/xk0d8phEAJ) currently used by the Ministry of Defence to procure defence equipment for the Armed Forces.

      During the course of its research into competition and risk management in contracts across Whitehall, the NAO may have found that the presently applied ‘sudden death’ competition used by MoD has been rendered ineffective by Defence Contractors, who are quoting identical bottom-line Selling Prices against the same Requirement – which amounts to price-fixing on a grand scale, with the active connivance of the Secretary of State for Defence. Worse still, MoD’s Project Team Leader at Abbey Wood, Bristol is being denied the opportunity to choose the single Contractor on the basis of price competitiveness, and therefore value for money.

      This has come about because MoD’s long-standing policy of disclosing the total budgeted expenditure figure or associated year-on-year financial funding profile in the ITT has resulted in Defence Contractors quoting identical bottom-line Selling Prices in their ITT responses – an entirely predictable result!

      What’s more, the single Contractor has no incentive to perform or keep prices down the moment all five Competitors disappear suddenly, which would explain why defence equipment procurement programmes have been plagued by persistent delays and cost over-runs, for as long anyone can remember.

      It is precisely to avoid this sort of disastrous situation from arising that the Government should do the sensible thing and quietly retire this tried-and-failed competition policy and instead, set the objective of selecting the winning Contractor from a choice of industry teams, by running a multiple-phase winner-takes-all competition on the basis of a level playing field genuinely open to all-comers, including non-domiciled suppliers – to make sure it gets the very best value for money for the taxpayer.

      Using the market-based instrument of open competition to select a single Contractor has the beneficial effect of incentivising all Bidders to get serious about identifying, quantifying and controlling the prime equipment and its associated Support Assets costs – a process that begins at the time of preparing the response to the ITT for the first Contract performance phase. Bidders who fail to do so run the risk of being excluded from the next phase of the competition.

      Normal commercial pressures and market forces inherent within the context of a multiple-phase winner-takes-all competition will, in themselves, compel Bidders to produce and deliver competitively priced, fully compliant ITT responses – not, because the Government says so, as people in the pay of the State seem to think, but because of the omnipresent threat from the Competition.

      The policy of Progressive Elimination – removing Bidders one-by-one during the winner-takes-all competition requires that, a Bidder who scores worst against the selection criteria should be eliminated immediately after the Project Delivery Team has taken receipt of ITT responses and another, who has performed least well, at the end of each Contract performance phase, as shown in this second illustration pic.twitter.com/RUToAZ6thx.

      That is to say:

      (a) From seven Bidders to five immediately after taking receipt of responses to the ITT for the first Contract performance phase.

      (b) From five to four at the end of the first Contract performance phase.

      (c) From four to three immediately after taking receipt of responses to the revised ITT for the second Contract performance phase.

      (d) From three to two at the end of the second Contract performance phase.

      (e) And finally, from two to one after taking receipt of responses to the revised ITT for the final manufacture and in-service sustainment phase.

      The ultimate result is one winner and six losers at the end of the multiple-phase competition.

      Another beneficial side-effect of applying this fully inclusive, winner-takes-all competition policy is that it will remove long-standing distortions and inefficiencies in the Supply Chain – by identifying and rooting out those Subcontractors who have positioned themselves in the extended Supply Chain but are not actually adding any value, that is to say, people who are acting as middle-men by simply raising invoices against the value of goods and services produced by lower-level, small and medium-sized enterprises suitably marked-up to reflect their cut of the action!
      @JagPatel3 on twitter

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