Transforming contract management: report published

contract, management, government, Public Accounts Committee

Public Accounts Committee publish twenty-third report of Session 2014-15 on Transforming contract management.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"The private sector delivers around £90 billion worth of complex services on behalf of the public sector – half of public sector expenditure on goods and services. We all expect these companies being paid for services by the taxpayer to have the highest ethical standards in their work.

However, too often the ethical standards of contractors have been found wanting. It seems that some suppliers have lost sight of the fact that they are delivering public services, and should do so in accordance with public service standards.

The case of G4S and Serco overcharging the Ministry of Justice for years on electronic tagging contracts was the starkest illustration of both contractors’ failure to work in the public interest and government failure to safeguard taxpayers’ money.

G4S apologised to us for getting it wrong and Serco said the affair was 'unacceptable and unethical; frankly, we are deeply ashamed of it'.

We have examined similar cases where there are allegations of the misuse of taxpayers’ money. Serco’s altering of performance data on its contract for out-of-hours GP services in Cornwall is an unacceptable example. Two other G4S contracts have been referred to the Serious Fraud Office to investigate, and another Serco contract has been referred to the City of London police.

The legitimate pursuit of profit does not justify the illegitimate failure to conduct the business in an ethical manner. A culture of revenue and profit driven performance incentives has too often been misaligned with the needs of the public who fund and depend on these services.

Contractors simply have not shown an appropriate duty of care to the taxpayer and users of public services. Contractors talk of corporate renewal and a need for a new way of thinking about how companies do business with the Government – but this must be turned into real action.

In our view, the present crisis could have been avoided if earlier recommendations from this Committee had been acted upon. The electronic tagging case has served as a belated wake up call to Government.

Departments have taken their eye off the ball and placed too much trust in contractors and relied too much on the information contractors supply. Contracts need to be managed at a sufficiently senior level, with strong accountability in place, by people with the right commercial expertise.

Government must guard against quasi-monopoly suppliers becoming too important to fail, and encourage competition through, for example, splitting up contracts to encourage SMEs to bid for work.

Government’s current approach to contracting gives too much advantage to contractors. Open book accounting and published contracts should be the norm.

Government needs to rebalance commercial relationships towards its own and the taxpayers’ interests - and avoid being locked into unreasonable costs and a victim of excessive profits."

Margaret Hodge was speaking as the Committee published its 23rd Report of this Session which – on the basis of evidence from Rupert Soames, Group Chief Executive, Serco, James Thorburn, Managing Director for Home Affairs, Serco, Peter Neden, Regional President UK and Ireland, G4S, Jean Pierre Taillon, Managing Director, UK Government Services, G4S, Dame Ursula Brennan, Permanent Secretary, Ministry of Justice, Ann Beasley, Director General of Finance, Ministry of Justice, Mark Sedwill, Permanent Secretary, Home Office, Mike Parsons, Chief Operating Officer, Home Office, Lord Bew, Chair, Committee on Standards in Public Life, Matthew Fells, Director for Competitive Markets, CBI, Ruby McGregor-Smith, Chair, Public Strategy Board, CBI, and CEO, Mitie, Bill Crothers, Chief Procurement Officer, Cabinet Office, Vincent Godfrey, Director of Procurement, Ministry of Justice and Crown Representative for Serco, Stephen Kelly, Chief Operating Officer, Cabinet Office and Ian Tyler, Crown Representative for G4S – examined Transforming contract management.

£90 billion of complex services

The private sector delivers complex services on behalf of the public sector, to the value of around £90 billion, which represents half of public sector expenditure on goods and services. The public needs to have confidence that contracts are managed well by both government departments and the contractors themselves. The case of G4S and Serco overcharging the Ministry of Justice for years on electronic tagging contracts was the starkest illustration of both contractors’ failure to work in the public interest and government failure to safeguard taxpayers’ money. In the course of our work we have identified and examined similar cases where there are allegations of the misuse of taxpayers’ money. In our view the present crisis could have been avoided if earlier recommendations from this Committee had been acted upon.

The electronic tagging case has served as a belated wake up call and, led by the Cabinet Office, the Government is now working to improve the way it manages its suppliers and contracted-out providers of public services. But the problems with contracting are widespread, long standing and rooted in the culture of the civil service. There is a long way to go, and the focus on improvement must not be allowed to drift away as it has done in the past. In this report we set out four key areas for attention.

Key areas for attention

First, government will not achieve value for money from its contracts until it pays much more attention to contract management. In essence, the Civil Service has prioritised the work involved in letting contracts and deemed the monitoring of contracts as mechanical and unimportant. Government acknowledges that departments have long neglected to devote enough resource and expertise to the ongoing oversight and monitoring of 'live' contracts; taking their eye off the ball and placing too much trust in contractors and too much reliance on the information contractors supply. Government recognises that contracts have not been managed at a sufficiently senior level and that there has not been enough personal accountability for performance. Indeed, some departments have been cutting staff numbers working on contract management just when the Government has been growing the role of the private sector in delivering public services. It is also trying to tackle the long standing problem of government not having the commercial expertise to compete with their counterparts in the private sector—a difficult battle to win. The recruitment of crown representatives, although at present too many are appointed from within the civil service, and the commercial fast stream programme are moves in the right direction. Strong accountability and appropriate sanctions and rewards for staff managing contracts should become the norm.

Second, contractors have not shown an appropriate duty of care in the use of public funds. Too often the ethical standards of contractors have been found wanting. It seems that some suppliers have lost sight of the fact that they are delivering public services, and that brings with it an expectation to do so in accordance with public service standards. The legitimate pursuit of profit does not justify the illegitimate failure to conduct the business in an ethical manner. A culture of revenue and profit driven performance incentives has too often been misaligned with the needs of the public who fund and depend on these services. In that context it is refreshing to hear contractors now talking about the need for "a new way of thinking about how companies do business with the Government, which is that companies owe a duty of care to the taxpayer". The challenge, for both the contractors and for government departments, is to turn that sentiment into meaningful changes in behaviour.

"Encourage SMEs to bid"

Third, as public service markets develop, quasi-monopoly suppliers are emerging who squeeze out competition, often from smaller companies with specific experience. Competition for government business should bring with it a constant pressure to innovate and improve. But for competition to be meaningful, there must be real consequences for contractors who fail to deliver and the realistic prospect that other companies can step in. It was not acceptable for government to give the impression that all business with Serco and G4S was halted whilst investigations took place, when in fact contracts were extended, new contracts were awarded and negotiations for new business continued. Suppliers have become increasingly dominant in certain markets, often through acquisitions, while also failing to maintain effective control over all parts of their business. Government must guard against suppliers becoming too important to fail, and encourage competition through, for example, disaggregating contracts to encourage SMEs to bid for work. It must also make sure that all suppliers have effective internal controls commensurate with their size and responsibilities at simplifying and accelerating the procurement process.

Finally, the way government contracts gives too much advantage to the contractors. Government needs to rebalance commercial relationships towards its own and the taxpayers’ interests. For example, long term service contracts need to be let in a way that allows government to manage costs and performance throughout the contract’s life, and avoids the taxpayer being locked into unreasonable and out-dated costs and a victim of excessive profits. Government needs to extend its open book access arrangements in order to better understand contractors’ performance and costs and ensure that contractors can only increase profits by performing better or cutting the cost to the taxpayer. Contractors also need to accept that spending public money brings with it a greater degree of public scrutiny and transparency; they must be far more open through, for example, the publication of contracts and performance indicators being standard practice.

For this report we took evidence on the basis of two reports by the Comptroller and Auditor General. We took evidence from G4S and Serco, from the Confederation of British Industry, Chair of the Committee on Standards in Public Life, Cabinet Office, Ministry of Justice and Home Office. This report builds further on the report and recommendations we published in March 2014.

Conclusions and Recommendations

Achieving value for money from contracts

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

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

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.

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.

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

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

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.

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

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

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.

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.

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

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

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.

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.

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.