This page is part of our successful commissioning toolkit.

Constructing and maintaining good financial relationships between public bodies and third sector organisations (TSOs) has never been straightforward. If anything, achieving this has become more difficult as more and more financial relationships are made through public sector commissioning processes. But good financial relationships are important – to help achieve public bodies’ goals, good value for money and a healthy third society.

In 2005, the National Audit Office (NAO) report ‘Working with the Third Sector’ recognised that financial relationships between TSOs and government bodies were not as good as they should be. Although the government’s financial principles in this area were sound, there was a large gap between those principles and the practical task of designing and operating a funding model that was good for a particular set of circumstances. Public money was wasted on funding arrangements that were not fit for purpose. In 2006, the NAO produced guidance, known as the decision support tool, to help central government close that gap.

Since then, commissioning has increasingly become the process through which public bodies interact with TSOs and establish or review financial relationships with them (see model). It was clear to us and others that while our original guidance still held good it could be improved. In particular, by aiming it more at commissioners in local public bodies.

So, while this guidance applies to central government bodies, it is primarily aimed at commissioners in:

  • local authorities (and their partnerships such as Local Strategic Partnerships); and
  • local NHS bodies (such as Primary Care Trusts).

It is also relevant to others involved in the commissioning process, such as those in procurement, and we discuss these other roles in ‘Who is involved‘.

This guidance is designed to help commissioners make sense of some of the major issues involved in working with third sector organisations. The guidance provides:

  • an overview of the general principles that underpin all effective financial relationships;
  • guidance on establishing effective financial relationships with TSOs; and
  • examples of effective practice drawn from real experience.

It aims to provide practical support for ‘real-life’ decisions to help you ensure your financial relationships with TSOs are economical, efficient and effective.

Although addessed to commissioners, the guidance may also help other readers within the public sector and TSOs to understand better some of the issues that commissioners face and what commissioners have to think about when dealing with them.

The guidance is web-based so that we can keep it up-to-date and add to the practical examples, case studies and links to other guidance that it contains. If you have any that we could add; or suggestions, questions or comments about the guidance, please get in touch with us at

In July 2011, we expanded on this guidance to cover issues around ending services or relationships with TSO service providers. You can find this ‘Decommissioning’ guidance on this website.

How has it been developed?

This guidance has been developed by the National Audit Office and is based on detailed guidance issued by a wide range of bodies. It supplements rather than replaces this more detailed guidance, which you should draw on as needed.

Through interviews and workshops with commissioners and stakeholders from central government, local government, the health service and TSOs, we have focused on the most common and difficult issues raised with us that affect commissioning and financial relationships with TSOs.

The guidance has been reviewed by an expert advisory panel and potential users have ‘road-tested’ it in practical workshops.

We are grateful for all the help given to us in its production.


This guidance covers legal issues in general terms only. This is not a substitute for legal advice, which a public body should seek in any area of doubt on a case-by-case basis.

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Who is involved?