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 […]
Posted on October 1, 2018 by Iain Forrester
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 and use this information to protect the public interest’. Here we outline the crucial role of information throughout the commercial lifecycle.
Over 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
- 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.
Investigation into Government’s handling of the collapse of Carillion (June 2018)
- 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.
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:
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.
Examples of relevant guidance
NAO good practice contract management framework
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
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
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 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 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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