Local government procurement - Communities and Local Government Committee Contents

5  Managing risk

67. Procurement of services from third parties can increase risk for a council since there are often added complexities in managing such contracts compared to direct management of a service in-house. Effective risk management approaches which ensure the provision of consistent, high-quality services at the right cost are therefore needed. Some witnesses, such as Cipfa, considered that risk was better understood by practitioners in local government procurement than by many of their critics.[152] However others disagreed. CECA told us that contractors found public sector procurers to be risk averse and consequently they put the bulk of the risk onto the contractor. CECA noted that this immediately discouraged many contractors from tendering for work. It considered that the early engagement of suppliers would help to mitigate this risk.[153] Scape also considered that risk management in local government was not functioning properly and that, whilst there were "pockets of good practice," it was not being embedded into the daily activities of authorities. Instead councils required excessive provision of documentation, making suppliers "jump through the hoops".[154] Cipfa criticised the fact that councils were urged to apportion risk to the party best able to minimise it, even though this party had no incentive to do so. It considered the safest course to be minimising transfer of risk to contractors so that authorities would not pay for risks twice, "once when contractors build the cost of risks into their tenders, and again when failing contracts have to be rescued".[155]

68. Witnesses gave examples where councils had failed to manage risk effectively. Peter Challis from Unison told us that:

    We have had a catalogue of failures of large strategic service partnerships that have happened in recent months and years. It started with Bedfordshire County Council and Hyder Business Services, where a contract for 12 years let in 2001 was shut down in 2005. Sefton Council set up a contract with Capita for 10 years in 2008; it ended in September 2013. Rochdale and Mouchel Parkman had a contract for 15 years; it was let in 2006 and ended in 2011. Transform Sandwell: Sandwell Council and BT had a contract for 15 years being ended this year. West Berkshire and Amey was a contract let in 2002 and ended in 2005. There is a whole list. With these big contracts, sometimes we found later down the line that the benefits that were claimed and the savings that councillors were told they would achieve are not materialising.[156]

69. A fundamental tension in awarding of contracts is between keeping costs to a minimum and pricing a contract so as to ensure quality, including on social and environmental factors, and continuity of service delivery. Cipfa told us that "substantial savings" could be made by offering contracts on a "much reduced specification leaving the contractor to deal with all the ensuing redundancies in whatever is the cheapest way. Authorities could do the same without contracting out but they would then have to deal with the redundancies themselves, which in the past many authorities were reluctant to do".[157] Unison criticised the "flawed" practice of allowing contractors to make decisions on how to deliver services in order to optimise cost savings. The union considered that risk transfer was "frequently illusory" since it relied on the assumption that bidders would always make "commercially sensible judgements" that would not over-expose them to demand and other risks.[158] The NAO in its report Managing government suppliers wished to see the Government take a greater long-term focus, rather than emphasise short-term savings and warned that, although tough negotiations were necessary, these needed to a balance with maintaining supplier relationships in the long term if the government were to maintain competition in public sector markets.[159]

70. Witnesses suggested effective operational arrangements for managing risk. Scape recommended a structured project management approach that identified risks and mitigated them through the life of the procurement.[160] The Audit Commission considered that a corporate approach to commissioning, procurement and contract management helped to manage risks, stating that this did not necessarily mean centralising all functions.[161] The Commission also considered it to be better for councils to build flexibility into long-term contracts, to meet changing needs. It recommended the use of outcome measures that specified what was required, rather than how it would be achieved. Contracts should also contain incentives for councils and suppliers to "share gain and pain" including mechanisms such as profit sharing, and penalties for poor performance.[162] Sheffield City Council told us about their use of outcome measures for highways maintenance, such as the condition of verges, which ensured that service quality was delivered at a set price with the contractor bearing the risk that this might cost more than anticipated but also being incentivised to keep costs down without compromising quality.

71. We heard evidence that, if councils were to deliver high quality services consistently, risks must be managed effectively through all stages of procurement, from first decisions on the aims of the procurement exercise through to letting the contract, managing its implementation and preparing for re-tendering on completion. Cipfa noted that most losses from fraud crystallised during the delivery phase rather than during the initial procurement phase.[163] IACCM told us that there was a need to manage a contract pro-actively through its lifespan since greater management at the implementation phase could contribute greatly to achieving value for money by, for example, avoiding problems such as unreasonably low price offers which allowed suppliers to drive up the price at a later date.[164] Barry Mellor, Sheffield City Council's Director of Commercial Services, told us that robust contract management required a "proper dialogue" with suppliers and contractors, for example about efficiency improvements, and pointed to the council's good track record on joint working.[165]

72. Furthermore, witnesses highlighted the need for councils to retain responsibility and accountability for services, even when delivery was outsourced to a third party. Councillor Jack Scott from Sheffield City Council noted that local authorities needed to be very clear with management of outsourced contracts since politicians and lead members remained accountable for the spending of public money.[166] During our visit to Sheffield we discussed the need to ensure that residents had a clear idea about who was accountable for services, including through the provision of a central point of contact for customer service. Councillors told us that Sheffield City Council had taken back in-house the customer contact point for some of its outsourced contracts such as highways management to ensure that residents received a seamless service from the council. DCLG also told us that where councils contracted to other parties they were accountable for ensuring that appropriate arrangements were in place to ensure that the service was delivered, value for money was achieved and, where necessary, contingency plans were in place should the contractor fail to deliver the service.[167]

73. It is self-evident that outsourcing of a contract does not mean outsourcing responsibility for ensuring the quality and consistency of service to residents. However, we question whether current approaches are sufficient to ensure effective control by local authoritiesof outsourced contracts in many councils. There are regrettable examples across the public sector, not only in local government, of complex outsourcing arrangements failing to safeguard service delivery and quality. It is vital that councils are fully equipped to manage complex contracts, particularly in their implementation phase. Councils must future-proof contracts so that contractors bear their share of the effect of any further budget cuts. With the proportion of services delivered in-house reducing in many councils, financial constraints will impact disproportionately harder on these services if flexibility is not built into contracts to allow changes to reflect tightened budgets. Furthermore, local authorities need to ensure that there is clarity within contracting organisations and the council itself on the point of responsibility for contract delivery and on the provision of a seamless customer service to residents.

74. In the worst cases local authorities not only fail to monitor quality but also end up carrying excessive risk when a contractor fails to deliver. Councils must develop and support a culture which embeds appropriate risk management across the council, not simply in procurement teams. The Local Government Association should undertake, with relevant professional bodies, a detailed assessment of the level of contract and risk management skills and resources available across the local authority sector. It should work with those councils that have a proven record of effectiveness to disseminate best practice and to put in place arrangements to share and provide additional resources on an ad-hoc basis to councils as required.

152   Chartered Institute of Public Finance and Accountancy Commissioning Joint Committee (LGP 07) para 28 Back

153   Civil Engineering Contractors Association (LGP 08) Back

154   Scape (LGP 36) Back

155   Cipfa (LGP 07) para 28 Back

156   Q73 [Peter Challis] Back

157   Chartered Institute of Public Finance and Accountancy Commissioning Joint Committee (LGP 07) para 45 Back

158   Unison (LGP 27) para 14 Back

159   National Audit Office, Memorandum for Parliament; Managing government suppliers, HC 811, November 2013, p 13 Back

160   Scape (LGP 36) Back

161   Audit Commission (LGP 11) para 29 Back

162   Audit Commission (LGP 11) para 27 Back

163   Q229 Back

164   Q238 [Paul Mallory] Back

165   Q305 [Barry Mellor] Back

166   Q305 [Councillor Scott] Back

167   Department for Communities and Local Government (LGP 63)


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Prepared 13 March 2014