Stop wasting public money: get contract management right

12-07-2017

By Marcel Holder Robinson, Finance Policy Manager (Governments), CIPFA

Value for money?

Society demands transparency and openness in public procurement and expects value for money to be obtained by those entrusted with the public purse. UK central government spends over £65bn each year to procure goods and services. For the entire UK public sector, that amount almost quadruples to £242bn per year on external suppliers. Mindful of the need to be prudent in its spending, the government has responded with various initiatives such as centralising key procurement services.

Despite such initiatives, the public continues to learn of repeated episodes of poor contracting, inefficiencies and waste of public money. Mohamed Hans’s article Achieving value for money through effective contract management cites some alarming examples of contract management gone wrong.

Higher standards needed

This signals that sustainable and effective contract management behaviours and practices are necessary. Public service must embed higher standards in government contracting and should take heed to act now. Lessons abound on what constitute good contract management so public sector organisations should stop wasting public money and get it right.

The UK National Audit Office, based on its research and audit findings, have identified some leading practices of some government institutions which address commercial and contracting issues.

It recommends seven key areas to consider namely: commercial strategy, contract management, contract life-cycle, contract capability, marketing management & sourcing, contract approach, and transition & termination.

The NAO’s 2016 publication ‘Commercial and contract management: insights and emerging best practice’ offers some suggestions which are adapted here. 

1. Devote time to develop a robust commercial/contract management strategy

• Develop an overarching commercial strategy, with clear rationale to support the commercial and contracting activities of departments.  

• Ensure the commercial strategy aligns with the organisation’s strategy and reflects value for money targets.

• Spend sufficient time understanding the associated risks; engage those relevant and evaluate all options to shape the approach, contract and relationships of the agreed strategy.

2. Modify the organisation’s commercial capability, taking account of its associated risks and opportunities

• Consider organisational and contract perspectives when establishing a staffing model, so that such resources are placed where they can be used most effectively.

• Assess whether the capability to manage contracts across their life-cycles exists within the organisation. Most importantly, take steps to develop those capabilities so that the organisation can meet its future capability needs.

• Establish clearly defined roles, responsibilities and processes for monitoring, decision making, ownership and oversight. Capable professionals are more likely to succeed in their roles where effective governance and systems occurs.

3. Adopt intelligent marketing management and sourcing behaviours

• Research and engage others to have a sound understanding of the required contract specification and the way contractors will deliver it.

• Analyse, determine and discuss the overall cost of the contract and the contractors’ cost drivers. It is very important that procurement and contract managers fully understand the risk transfer in contracts and do not sign up to terms which are going to be difficult or impossible to deliver. 

• Become acquainted with the market in which you operate so as to benchmark and develop contingency plans and re-competition strategies.

4. Bolster the contract approach with good risk management and practical performance measures

• Ensure all contracts are subject to a commercial risk assessment and that there are regular risk reviews across the entire contract portfolio.

• Engage suppliers to understand the risks (to large contracts), carry out analyses and assessments to determine the impact of such exposures and apply appropriate risk responses to manage them.

• Design performance measures that work and focus on what matters, ie measures which flow from the strategy to outline expected outcomes. Performance measures should kept to a manageable number. It is of no use to have pages and pages of measures which are never managed.

• Ensure that there is agreement on the purpose, definition, measurements and data collection methods of each performance measure.

5. Apply common-sense contract management principles

• Manage every contract with a mind-set of ensuring that agreed costs and benefits are realised.  

• Develop assurance strategies early and incorporate them into the contract management plan.

• Adopt a blend of self-reporting, independent monitoring and other routine assurances to track performance and associated costs. Consideration must be given to the resources to do so, taking into account the risks and effectiveness of existing controls measures to address them.

• Clarify, at the start of the contract cycle, what outcomes are most critical to service users and government.

• Inform suppliers to plan for those outcomes and where possible, align achievement of those outcomes with contract incentives.

• Set timetables that are clear and agreed on and use contract provisions that promote continuous improvement and innovation.

6. Plan for uncertainties throughout the contract life-cycle

• Establish a mobilisation plan to allow for sufficient and effective transitioning throughout the contract life-cycle. Create shared transition goals and responsibilities.

• Dedicate time and resources to allow both government and the suppliers to prepare, recognising and addressing any challenges identified.

• Use effective processes that will allow both the suppliers and government to work together and monitor the results.

7. Factor transition and termination considerations

• Plan thoroughly so that contracts are clear on contract end options and timings.

• Define transition responsibilities with detailed timings and clarification of what should be delivered, providing for some flexibility to address modification through agreed contract reviews processes. 

• Evaluate the risks of failure and alternative approaches to end the contract, putting in contingency plans early into contract engagement.

Summary

Pressure is mounting for better contract management in government. Now is the time for public sector organisations to put their ‘A game’ on. Contract management and commercial professionals are encouraged to take a closer look at these seven tips, and tailor those that will propel their organisation towards achieving a higher standard in public service delivery.