House of Commons - Transforming contract management

Transforming contract management - Public Accounts Committee Contents

4 Rebalancing power in favour of the taxpayer

45. Conclusion: Government's current approach to contracting gives too much advantage to contractors.

46. We acknowledge that it is not easy task to keep pace with the commercial and negotiating expertise of the private sector, and deal with large companies that dominate certain markets. In this section we make the point that there is still a great deal of scope for government to rebalance power in favour of the taxpayer. It can do more, for example, to improve the way it monitors performance, exploit open book access to companies, avoid excess profits at the taxpayer's expense, and ensure that spending the taxpayer's pound brings with it an expectation of greater transparency.

Monitoring performance

47. Government's ability to manage 'live' contracts is hindered by ineffective monitoring. The Ministry of Justice described how its electronic monitoring contract had key performance indicators but nothing that alerted managers to the overbilling problem, and how other contracts had far too many performance indicators.[67] The Cabinet Office also told us that government contracts have typically had too many KPIs, with staff measuring and managing hundreds of performance indicators but still missing what was important around performance.[68] The Cabinet Office cited good practice in the private sector of exception reports when KPI performance falls below a defined tolerance range, and said that Permanent Secretaries should get regular reports to see whether contracts are within or outside tolerance.[69] The NAO highlighted progress by the Ministry of Justice on improving the way it measures performance and validates payments, including the expansion of its internal audit coverage of contract management, introduction of 'data scorecards', and the likelihood that on some contracts it can reduce the amount of data it collects.[70]

48. Recommendation: The Cabinet Office standard operating procedures should require departments to set and regularly review KPI regimes, to ensure they are incentivising the right behaviours, with clearly specified indicators that are capable of highlighting poor performance at an early stage.

Using open book to align incentives

49. There is now a broad consensus that open-book clauses should be used more in contracts. Contractors need to make a profit, but government needs to know that these profits are made in ways that align with the taxpayers' interests. Profits should vary with the level of risk taken on, the level of innovation the contractor provides and, crucially, performance. The Cabinet Office has developed a new model contract which includes open-book clauses and audit rights.[71] For open book access to be effective, departments must understand contractors' business models and therefore be able, for example, to understand cost and profit calculations and identify efficiencies.

50. The Cabinet Office told us that government has open book arrangements on 34% of its contracts, 39% of its larger contracts.[72] However, open book access alone was not sufficient for the Ministry of Justice to identify the overbilling problem on electronic monitoring.[73] Both the Ministry and the Home Office have relied on unaudited contractor data and neither fully used their 'open-book' access rights to understand contractor costs and performance.[74] The Cabinet Office considered open book practice to be poor on many government contracts. It told us that government lacks the skills required to operate open book effectively and has struggled to recruit such skills.[75]

51. The NAO has stressed that government needs to recognise that value is achieved over the life of a contract, and that officials appear too often to have seen contract management as enforcing the deal that was made when the contract was signed. This approach may work for the simplest of contracts but, for more complex and longer-term contracts, the government needs flexibility to ensure that services continue to meet changing business requirements. If contract management is done well, a department has considerable influence over the contractor even after the initial competition is concluded.[76] The Cabinet Office described how government can get locked into contracts whose prices rise with inflation while the underlying costs for the contractor have fallen dramatically. It also described how contractors must be incentivised to achieve a reasonable level of profit, based on delivering a good service, and that exercising open book properly would help government to ensure it shared in any excess profits.[77] Contractors told us they are supportive of the use of open book approaches but it would require consistent treatment and responsibility in the amount of material requested.[78] The Cabinet Office agreed with the need to act responsibly and not demand unnecessary data.[79]

52. Open book access has to be backed up by the means to act on what it might find - for example, the means to claw-back excess profits or overcharging.[80] For example, under the Work Programme the Department for Work & Pensions has identified that, up to March 2014, it paid contractors an estimated £11 million in 'sustainment payments' in return for job outcomes which could not be validated. However, its estimate is based on an extrapolation from the sample that it checked, in which it could not verify 7% of payments. The Department did not include a clause in Work Programme contracts to claw back invalid sustainment payments based on extrapolation, and so it is dependent on successful renegotiation with contractors to recover any taxpayers' money. This contrasts with the situation on 'job outcome payments' under the Work Programme, where the Department is dealing with the same contactors. For job outcome payments the Department also found that 7% of payments in its sample were invalid, but was entitled to extrapolate across the wider population of payments, and so has recovered £21 million.[81]

53. Recommendations: The Cabinet Office should mandate the inclusion of open book provisions in all government service contracts and set clear expectations for how these provisions should be utilised to manage the contract throughout its life.

54. Open book provisions need to be supported by means of aligning incentives, such as: sanctions if contractors provide incorrect information; the means to recoup any overpayments identified; and mechanisms for profit sharing and ensuring the taxpayer shares in efficiency gains in long term contracts.

55. Departments should avoid unnecessarily fixing prices in long term contracts, particularly in areas of rapidly changing technology, without any flexibility to adapt or the means to share in excess profits.

Transparency to the public

56. Transparency is fundamental to accountability, and supports scrutiny of both government and its contractors. We have stressed before the public's right to more visibility of the taxpayers' pound, wherever it is spent. A citizen, whether from the perspective of funding or receiving contracted out public services, should have easy access to meaningful performance information, and be able to draw matters to government's attention where local knowledge and experience casts doubt on what is being reported. The Cabinet Office remarked that parliamentary and press scrutiny has helped focus government attention on poor practice and the need for improvement.[82] Referring to companies delivering services on behalf of government, the CBI stated "It brings with it a greater degree of scrutiny, transparency and behaviour that is commensurate with operating in and delivering public services. That should, rightly, be a given."[83]

57. Both G4S and Serco said they were willing to be more transparent to the public about performance. G4S told us it was working with the CBI on new transparency arrangements, relating to both freedom of information requests and to openness with government departments. Serco described how publication of performance information would itself help drive much better measurement of performance, while also cautioning on the potential barrier to entry that freedom of information obligations could be for SMEs.[84] On extending freedom of information to the taxpayer funded parts of businesses, the CBI was clear that more transparency was required, and that every contract should stipulate the right level of transparency. It also said that both government and contractors have hidden too much behind claims of commercial confidentiality when revealing information publicly.[85] The NAO report highlighted the Cabinet Office's intention to improve the contract details published on its Contract Finder website.[86]

58. We have also said before how there is too much reliance on whistleblowers bringing problems to light. In our March 2014 report we recommended that departments include a standard term in contracts requiring suppliers to have whistleblowing policies in place, and include a requirement for contractors to nominate designated officials within departments to receive disclosures from whistleblowers.[87] The Government disagreed with our recommendation, arguing that the existing legal framework provides substantial protection for whistleblowers and stating that it "expects all suppliers to fully implement the spirit of this legislation". It did not believe additional contractual terms were required.[88] In our view, it is clear that current arrangements have not proved to be adequate and the Chair of the Committee on standards in Public Life also made this point to us.[89] But in any case we are surprised that there is any reluctance in the current climate to implement a fairly straightforward safeguard against contractors not acting fully in the spirit of legislation. We therefore repeat our recommendation in this report and hope to receive a more constructive response.

59. Recommendations: The Cabinet Office should require all service contracts to be published, including a clear expression of the performance the service user can expect and then how contractors are performing.

60. Departments should include a standard term in contracts requiring suppliers to have whistleblowing policies in place. This should require contractors to nominate designated officials within departments to receive disclosures from whistleblowers.

Conclusions and Recommendations

Achieving value for money from contracts

1. Conclusion: The government will not achieve value for money from its contracts until it pays much more attention to contract management

2. Recommendation: The Cabinet Office must lead efforts to make sure that the current emphasis on improving contract management is embedded across all departments and that tendering processes did not discriminate against small and medium sized enterprises. It must not lose focus and should report back to this Committee by the end of 2015 on the progress made in implementing reforms across government

3. Recommendation: Accounting Officers remain accountable for spending throughout the life of contracts. They should put in place an accountability framework for contracts which specifies how senior oversight of major contracts should work in practice - including the information needed to scrutinise and challenge contractor performance, cost and progress in making further savings—and the personal responsibilities of senior managers, with appropriate sanctions and rewards for performance.

4. Recommendation: We welcome progress to improve the government's commercial and contract management skills, but this needs to be supported by concerted Cabinet Office action in two areas: to increase the attractiveness of careers in commercial disciplines including pay, status and career development; and do more to raise the commercial awareness of operational managers so they can work with the commercial professionals to achieve value for money throughout the life of contracts.

5. Recommendation: Alongside the Cabinet Office reporting back to us at the end of 2015, both the Ministry of Justice and the Home Office should report back to us specifically on progress with their contract management improvement plans:

· For the Ministry we will be particularly interested in arrangements for running the 'Transforming Rehabilitation' contracts (for outsourcing probation services) which we see as a litmus test for better management of high risk and complex contracts.

· For the Home Office we will be particularly interested in what it has done to extend improvement plans beyond its commercial directorate and into the operational management of contracts.

Contractor's duty of care to the taxpayer

6. Conclusion: Contractors have not shown an appropriate duty of care to the taxpayer and users of public services.

7. Recommendation: The Cabinet Office should work with industry to define what obligations a duty of care should entail, what sanctions would apply should performance fall short, and require senior executives to attest annually to the strength of their internal controls over public contracts and to be personally accountable to parliament for performance.

8. Recommendation: The 'corporate renewal' process is a new concept for many. The Cabinet Office and HM Treasury should publish a review of this process and its outcome, and, when disseminating findings, make clear to all departments what it expects them to do differently and what different behaviours departments should expect from the contractors.

Management of public service markets

9. Conclusion: Public service markets are becoming more difficult for government to manage.

10. Recommendation: Led by the Cabinet Office, departments must take concerted action to develop competitive markets for public services. Government must use its contractual powers to intervene in market consolidation - so that taxpayers and public service users benefit from the innovation and competition a thriving market can offer.

11. Recommendation: All government contracts should include robust sanctions for underperformance or weak control which should be applied rigorously when performance falls short, and performance on previous contracts must always be taken into account when awarding new work.

12. Recommendation: The Cabinet Office should look at the barriers to SMEs joining markets and develop a plan to address each barrier. Departments should be required to demonstrate that they have considered disaggregated models for each major contract

Rebalancing power in favour of the taxpayer

13. Conclusion: Government's current approach to contracting gives too much advantage to contractors.

14. Recommendation: The Cabinet Office standard operating procedures should require departments to set and regularly review KPI regimes, to ensure they are incentivising the right behaviours, with clearly specified indicators that are capable of highlighting poor performance at an early stage.

15. Recommendation: The Cabinet Office should mandate the inclusion of open book provisions in all government service contracts and set clear expectations for how these provisions should be utilised to manage the contract throughout its life.

16. Recommendation: The Cabinet Office should require all service contracts to be published, including a clear expression of the performance the service user can expect and then how contractors are performing.

67 AQ 191, AQ 196 Back

68 BQ 85 Back

69 BQ 121 Back

70 C&AG's Report Ministry of Justice and the Home Office, Transforming Contract Management, paragraphs 36-37. Back

71 C&AG's Report, Transforming government's contract management, para 3.22-3.23. Back

72 BQ 98 Back

73 AQ 191 Back

74 C&AG's Report Home Office and the Ministry of Justice, Transforming contract management, paragraph 34. Back

75 BQ 98, BQ 100, 139 Back

76 C&AG's Report, Transforming government's contract management, paras 2.9-2.11 Back

77 BQ 85, 139 Back

78 AQ 66, AQ 81 Back