Posted on April 7, 2017 by Emma Willson
When 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.
As 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.
Our 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.
Carbon 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
As 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?
Make 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.
Keeping 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.
Consider 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.
Consider 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
One 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?
Keep 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.
Government 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.
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 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.
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