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From the collapse of Carillion, to failures within Capita’s £1 billion worth of public contracts, recent NAO reports starkly reiterate the importance of information in managing contracts. As the Comptroller & Auditor General said in his post Risks, resources and government-supplier relationships, government ‘needs to assess the financial health and sustainability of its major contractors […]

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The power of information for contracts

Posted on October 1, 2018 by

Concept image suggesting super importance of informationFrom the collapse of Carillion, to failures within Capita’s £1 billion worth of public contracts, recent NAO reports starkly reiterate the importance of information in managing contracts. As the Comptroller & Auditor General said in his post Risks, resources and government-supplier relationships, government ‘needs to assess the financial health and sustainability of its major contractors and use this information to protect the public interest’. Here we outline the crucial role of information throughout the commercial lifecycle.

CCM lifecycleOver the last two years we’ve used our Contract insights series of posts to share the latest findings from our commercially-related reports about what we see being done well and less well across government. These insights expand on the interactive ‘roadmap’ in our report, Commercial and contract management – insights and emerging best practice, which provides insights across seven stages in the contract lifecycle.

Two recent reports particularly highlight the importance of information.
 


 
Capita and Carillion contracts

Photo of Capita managed primary careNHS England’s contract with Capita to deliver primary care support services (May 2018)

The background:

  • Capita is one of the contractors with the biggest government work portfolio, with more than £1bn in public contracts.
  • It signed a £330m, seven-year contract with NHS England for nine primary care support services.
  • NHS England aimed to reduce its costs by 35% from the first year of the contract and transform and modernise the service.

Our report: We assessed whether NHS England managed the contract effectively to secure the intended benefits, including how the contract was set up, performance issues, and the reasons for contract failures.
 
 
Photo of a Carillion signInvestigation into Government’s handling of the collapse of Carillion (June 2018)

The background:

  • Carillion was the contractor with the sixth most government work, with around 420 contracts with the UK public sector.
  • It declared insolvency in January 2018.
  • The Cabinet Office asked the Insolvency Service to continue to operate Carillion’s service contracts to ensure continuity of public services.

Our report: Our investigation focused on the role of the UK Government in preparing for and managing the liquidation. Our report covers the Cabinet Office’s monitoring of Carillion, the government’s contingency planning for Carillion’s possible failure, and Carillion in liquidation.

 


 
Insights on information

Information is key throughout the commercial lifecycle.

Before a contract: set out what you need.

During a contract: monitor the performance of contractors against individual contracts and more widely.

At the end: plan for potential contract end and react accordingly.

But having the right information is just the start. Undertaking the right analysis to understand it is equally important.

 

BEFORE – Understanding requirements

We’ve seen repeatedly that where government does not a have a clear understanding of what it wants, or at what cost, its contracts generally fail to deliver desired outcomes unless this uncertainty has been built into the contract.

Our report on the NHS Capita contract reiterated this message. We found that NHS England lacked adequate data on the volume, performance and costs of the services it was contracting for. It therefore had to make assumptions about the volume and costs of services it required before awarding the contract. This included assumptions about the number of GP practices and the types of contract they held, to enable estimates of the number of GP payments that would be needed.

Such assumptions weaken government’s ability to understand whether contractors could meet the demands set out in the contract from their bid.
 
BEFORE – Understanding contractors

The public sector has improved its approach to understanding its contractors. The Cabinet Office introduced a new approach to strategic supplier management in 2012, changing the way it monitored the performance and financial health of strategic contractors. It aims to ensure contractors fulfil their contractual obligations to central government and that public services are maintained.

Our report on the government’s handling of Carillion found that it was closely monitoring risks relating to Carillion through the process shown in Figure 7 of the report, see below. As part of this process the government monitored risks, including the implications of poor contract performance and delayed payments to suppliers, but it did not respond to Carillion’s mounting financial problems by moving it to the highest risk category.

Monitoring the health of contractors and their ability to carry out the contracts ties in with several of the points we have made previously – that government should understand cost drivers, requirements, risk and opportunities.
 
Figure 7 showing government's supplier risk management policy
 
DURING – Performance measures

Understanding the performance measures and information needed to monitor a contract is as important as having clarity about requirements.

NHS England’s performance measures did not cover all service areas and NHS England could not tell whether the services met the needs of primary care providers. A review of the contract, carried out by NHS England in March 2016, found that of 78 key activities that Capita was contracted to carry out, 23 were not captured by performance measures and were therefore ‘invisible’ to NHS England. Some activities without performance measures could affect patient safety if not delivered to standard. NHS England is in ongoing discussions around extending performance monitoring.

Our report Commercial and contract management – insights and emerging best practice highlights the importance of getting the right performance measures:
 
Table summarising how to get measures right
 
It also highlights that less formal interactions with the supplier are important – a shared understanding of outcomes between government and contractors can help to overcome poorly designed contracts and the limitations of formal performance measures.
 
END – Contingency planning

Our commercial insights outline the importance of planning for potential failure and thinking about the end of a contract right from the beginning. Our investigation into the collapse of Carillion re-emphasised the important of contingency planning.

We reported that, starting in July 2017 – following Carillon’s announcement of  a major profit warning – the Cabinet Office called together Carillion’s government customers, and asked them to provide information on their contracts, including whether they had contingency plans. As well as lacking contingency plans in many cases, at that stage the Cabinet Office did not even have a complete list of public sector contracts beyond central government.

Following Carillion’s second profit warning, in September 2017, the Cabinet Office asked for contingency plans to be ready by the end of November. Though many organisations took until December, the information that the Cabinet Office collated before the collapse of Carillion was crucial to being able to plan and react to changing circumstances, and allowed it to successfully keep public services running.
 
Table of emerging best practice in winding down contracts

Examples of relevant guidance

NAO good practice contract management framework
Includes:
7.4 – Contingency plans are developed to handle supplier failure (temporary or long-term
failure/default); exit strategies are developed and updated through the life of the contract.
7.5 – Contractual terms around termination are understood and monitored by the
contract manager.

Principles Paper: Managing provider failure
Sets out principles to consider when planning for and managing failure. This includes:

  • Setting out a definition for failure
  • Developing contingency plans
  • Appropriate oversight arrangements
  • Monitoring failure
  • Considering market impacts
  • Learning lessonss

 
In conclusion

As the Comptroller & Auditor General said at the Public Sector Show, it’s right that before you let an organisation run a vital part of the public sector, you should ask it some searching questions (see Supply Management’s article). Our recent reports also show that government needs to ask searching questions of itself. Does it know its own requirements? Has it got the structures to monitor these? And does it have enough information on contractors and on its contracts to know what is happening?

Please do visit our Contract insights series of posts for further lessons from our work. We would also welcome your comments and invite you to contact us to discuss any of these issues in more detail. You can also sign-up to receive email alerts on future blogs to keep up-to-speed with our emerging thinking.
 
 

About the authors: Iain Forrester and Emma Willson work in the NAO’s 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.
 
 
Iain ForresterIain Forrester is an Audit Principal who works in the Cabinet Office and cross-government value for money team. Topics of past reports he has worked on include BBC radio, rural broadband and grants across government.
 
 
 
 
 
 
 
Emma WillsonEmma Willson is an Audit Manager who has managed work and pensions related studies and worked on reports covering contracted-out health and disability assessments, learning lessons from welfare reform and Personal Independence Payment.

 
 
 
 


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1 Comment

One response to “The power of information for contracts”

  1. @JagPatel3 says:

    It is true to say that information is key throughout the commercial lifecycle – before the contract is signed, during the performance of the contact and right at the end.

    However, what is missing is HOW to go about selecting the contractor from a choice of service provision providers in the market, which is an essential step in the commercial lifecycle. Even now, after a string of public sector disasters, sufficient attention is not being paid to this aspect of procurement and the importance of using the market-based instrument of competition to protect the public interest.

    What is also undeniable is the fact that, the type of competition used by the buyer to purchase goods, services and labour is the single most important factor that determines if value for money will be obtained, or not – especially so, if that buyer is the Government itself which, as a rule, always spends more than any other entity in any country around the world.

    Central to any effective competitive process is what some Governments call ‘keeping up competitive tension’ between suppliers throughout the entire period of the competition. It is just another way of saying that Bidders should be exposed to the full rigours of the free market, that is, not shielded from ‘feeling the heat’ of competitive market forces (which interferes with decisions relating to the allocation of private capital) – from the time the Government engages with the market for the provision of goods, services or labour, 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 when the Government enters the market for military equipment. This is because the Ministry of Defence’s preferred version of competition to procure defence equipment for the Armed Forces is the ‘sudden death’ competition, which abruptly reduces the field of Bidders from six to one following a one-off release of the invitation to tender. See this illustration pic.twitter.com/xk0d8phEAJ.

    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. See this illustration pic.twitter.com/BQV4KUgdNg. Worse still, MoD’s Project Team Leader 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 ditch 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 with the rules of the contest declared at the outset – to make sure it gets the very best value for money for the taxpayer.

    Using the market-based instrument of fair and 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 some people in the pay of the State with inflated egos 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 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.

    It is this ‘knock out’ nature of the competition and the fear that it will lead directly to a slump in the Company’s Share Price (not to mention attracting adverse publicity and comment in the press & media) that incentivises all Bidders to get serious about becoming fully compliant with the Requirement, as well as, raising standards of workmanship. The first, second and final Contract performance phases need not be years long – they can be some months or even just several weeks in duration, to dramatically cut the acquisition cycle time.

    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!

    It is these distortions and inefficiencies that is a distinguishing feature of the Defence Industry, which sets it apart from the rest of the UK’s world-class manufacturing economy. It is also the reason why engineered products manufactured by Defence Contractors cost substantially more than equivalent items in the non-defence sector – which would explain why they are seriously uncompetitive in both, the domestic market and in export markets.
    @JagPatel3

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