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Cost savings failing to materialise. Customers hit with poor service and financial losses from public services. Contracts disputed and terminated. Contracts can go badly wrong before they even begin if the set up and management aren’t right. Since launching Commercial and contract management: insights and emerging best practice we’ve reported on three contracts that have […]


Setting up successful contracts

Posted on February 10, 2017 by

Incentivising contractsCost savings failing to materialise. Customers hit with poor service and financial losses from public services. Contracts disputed and terminated. Contracts can go badly wrong before they even begin if the set up and management aren’t right. Since launching Commercial and contract management: insights and emerging best practice we’ve reported on three contracts that have enjoyed varying degrees of success. As part of our series to share insights into best practice contracting, in this blog-post we explore lessons from these three contracts.

HMRC expected to save £1 billion by contracting Concentrix to detect and prevent error and fraud in personal tax credits, but it had to terminate the contact after two years of missed performance targets, errors and poor customer service. The reasons why are detailed in our recent Investigation into HMRC’s contract with Concentrix – summarised below. Similarly, we’ve blogged previously about the NHS UnitingCare Partnership contract that was terminated after 8 months when the contractor needed 21% more funding for the first year – see Contracting: A minimal open book approach.

Insights methodologyNo one wants a contract to fail, especially when it results in hardship for citizens. There’s no easy road to success, but there are insights into aspects that can make or break a contract.

We introduced our interactive ‘roadmap’, Commercial and contract management – insights and emerging best practice, in our blog post Government’s contracts – new insights into best practice. Looking at seven stages in the contract lifecycle, this guide 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 – and we plan to continue to build insights through our work.

Fresh insights from our recent work relate particularly to stage 4 and 5: Contract approach and Contract management.

Design performance measures that work

Measure warning signsAs part of our insights and emerging best practice work we highlighted the importance of performance measures when designing the contract approach. Without relevant and workable measures, business outcomes may fail or perverse incentives be created.

Good practice is built on:

  • Developing a clear and shared understanding with contractors about the outcomes needed
  • Aligning business outcomes to contractual performance measures
  • Reviewing measures when appropriate.

This is easy to say, but much harder to get right, as the following insights from our three recent reports show.


National Citizenship Service

Our National Citizen Service report looks at the early performance for this programme for young people, aimed at improving social cohesion, responsibility and engagement. Contracted out to eight providers, the programme has shown some success. However, current projections suggest it will have 213,000 participants in 2020-21, significantly less that the target of 360,000.


Insight 1: Devise contractual incentives for all your aims – National Citizen Service (NCS) providers received an additional 5% payment aligned to the aim of improved social cohesion. However, the contract did not necessarily encourage providers to consider other aims set out alongside this, such as improving social engagement and responsibility.

Insight 2: Give providers reason to invest when needed – NCS providers have not been given the security about the programme and their role that was needed for them to invest in processes and contracts to support growth of NCS beyond 2018 – thereby undermining a key aim of the programme and creating additional risks for the future of the NCS programme.

Defence estate reportDefence estate

Delivering the defence estate includes an assessment of the Ministry of Defence’s (MoD) contract for a strategic business partner to run its estate management arm. We found that the overall model hasn’t worked, partly due to unclear roles and responsibilities, confused governance arrangements, and fundamental weaknesses in the contracting arrangements, resulting in the contractor’s performance not meeting all expectations.

See Our defence estate – right size, right condition, right price? for a wider discussion of this report.


Insight 3: Ensure performance measures are the right ones to drive action – The Defence estate contract did not explicitly measure improvements in key areas such as data, controls and IT systems. Without this information, it was not apparent that the contractor had not achieved the level of transformation needed.

Insight 4: Without agreed performance measures at the start of a contract, performance cannot be monitored – The MoD agreed a number of changes to the original baseline of the Defence Infrastructure Organisation’s costs as agreed in the contract, to reflect changes in its operations. However, these were not formally agreed in the contract, meaning that related performance measures were not clearly agreed and could be a source of confusion, dispute and challenge.

Insight 5: Incentivising good customer service can be difficult to achieve: Creating incentives that support both financial and customer service aims isn’t easy, as HMRC found in its contract with Concentrix (see below). We have also seen similar issues previously in the Department for Work and Pensions’ Contracted-out health and disability assessments and the Ministry of Justice’s Transforming rehabilitation programme.


Concentrix reportHMRC’s contract with Concentrix

We conducted an Investigation into HMRC’s contract with Concentrix, which aimed to provide additional capacity to review and correct personal tax credits, thereby reducing error and fraud. After performance targets continued to be missed, with negative impacts on the public, the contract was terminated.

In setting up this contract, HMRC adopted some good practice including:

  • Having a thorough set of performance measures, applying penalties to incentivise customer service, and adjusting the commission structure with the aim of incentivising better performance.
  • Conducting regular performance review meetings with Concentrix, and requiring it to provide open book performance data (for more on open book see our post Contracting: A minimal open book approach).
  • Reviewing the quality of Concentrix’s decisions through a monthly random sampling approach.
  • Negotiating to strengthen the incentives, impose new penalties and the need for more formal performance improvement plans.

So why did the contract fail?

Issues may have arisen from the decision to use an outcome-based, payment-by-results model, although this had been agreed with HMT and Cabinet Office. This model was not tested in the pilot and, as the Social Security Advisory Committee subsequently noted, “there is an incentive for Concentrix staff not to overturn decisions given it would impact negatively on their revenue” – thereby impacting on customer service.

The HMRC Permanent Secretary highlighted lessons HMRC learnt. These included the need to:

  • Prioritise claimants (customers) in delivering a public service;
  • Have more thorough assurance about contingency planning;
  • Escalating issues to decision-makers quickly for resolution;
  • Question whether third parties can understand the subtleties of delivering a public service; and
  • Ensure that financial incentive mechanism are right for ensuring good customer service.

In the end, HMRC decided not to replace Concentrix after concluding that the risks of a third-party arrangement to customer service outweighed the financial benefits.


Manage your own obligations

In our emerging best practice work we found that if contracts are to work as effectively as possible and achieve their objectives, it’s crucial that the public sector manages its own obligations.

Obligation warning signsThe contracting organisation should:

  • Include a complete schedule of obligations in the contract.
  • Use a benefits realisation plan to understand wider context and what it can achieve from the contract.
  • Use a project and programme management approach to manage obligations.

We set out in our previous blog-post, Government’s contracts – new insights into best practice, the need to avoid creating extra costs and delays; to understand and challenge supplier performance; to transfer risk appropriately; and to be clear about how benefits are to be achieved.

What insights and evidence do our recent reports add?

Insight 6: Ensure the IT works

ComputerIn the Concentrix contract, an HMRC system error prevented Concentrix from updating cases on HMRC’s system, causing 9,000 cases to be held back for 10 days while the issue was fixed. Issues with HMRC’s test environment also meant HMRC could not fully test Concentrix’s system update ahead of it carrying out tax credits compliance work. HMRC identified a solution during the tax credits renewals process and HMRC had to carry out additional work to reinstate tax credits awards.

ComputerIT has also caused a delay in the case of the Defence estate contract. A new IT system is being implemented (called the Infrastructure Management System – IMS) to replace more than 100 legacy systems and spreadsheets and improve the collection and use of data to manage the estate. The system is running three years late, partly due to poor management in the early years of implementation when the MOD failed to appreciate fully the scope and volume of data to be transferred from legacy systems. A lack of controls and a decision to customise the software meant the IMS became more complex and took longer to implement.

ComputerWe’ve seen similar issues previously, such as in our earlier review of the Army 2020 programme. We found then that the Ministry of Defence failed to deliver IT systems to support its supplier’s management of the recruitment of regular and reserve soldiers; contributing to lower than expected levels of recruitment.

Insight 7: Ensure the process works for contractors

ProcessesIn the case of the National Citizen Service (NCS), the Office for Civil Society agrees the NCS Trust’s business plan and annual grant each March for the following financial year, meaning that precise funding and targets cannot be confirmed with the Trust until six months into the planning cycle. This has a number of negative impacts on operational processes and the timeliness of decision-making, which in turn impacts on the achievement of the contractual objectives, in this instance increasing young people’s participation in the NCS.


It’s easy to be wise in hindsight. In practice, managing contracts is highly challenging. By their nature, our studies tend to focus on where things went wrong. But even in these cases, much has often gone well along the way.

From our contract reviews, we will continue to glean and share the insights that can help reduce the problems and increase the good practice. Over the coming months, we will blog about further insights, including looking at the profit sharing arrangements and commercial strategy behind the BBC TV licence fee collection arrangements and Carbon Capture and Storage: the second competition for government support.

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.


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