When agreeing contracts with suppliers for goods and services, public sector organisations will have a number of goals, including cost efficiency and value for money. Achieving these goals can be challenging.
Open Book Contract Management Guidance
The Open Book Contract Management (OBCM) Guidance was published by the Crown Commercial Service in 2016. It contains checklists designed to assist government departments and public bodies in assessing whether costs presented by suppliers are ‘allowable’ for the purposes of bid comparison. The Guidance states that allowable costs should meet three criteria. They need to be:
- Attributable to the contract
The checklists for the different assessment criteria are outlined below:
- Is it a cost that would be expected to be incurred in the delivery of the service?
- Is the cost suitable for the purpose of the qualifying service?
- Would the inclusion of the cost withstand public scrutiny?
- Is the inclusion of the cost fair and equitable?
- Is the treatment of the cost consistent with normal business practices?
- Is it consistent with the firm's normal accounting practices?
- Is there a causality of the cost to the contract?
- Is the cost identifiable?
- Is the cost incurred in fulfilling the specification of the contract?
- Can it be evidenced that the cost has not been recovered elsewhere?
- Is it congruent with meeting the contract performance requirements?
- Would the cost withstand public scrutiny?
- Are cost estimates based on empirical evidence, where this is possible?
- Is the cost consistent with any sector/market benchmarks?
- Is the quantum of cost consistent with good business practice?
- Do the costs deliver good value for money to the UK taxpayer?
Key themes identified during public sector OBCM reviews
OBCM reviews have revealed some key themes in public sector contract management. We outline three common issues and suggest how these could be addressed.
Issue 1: Agreed rates differ from costs incurred
Rates or fixed costs that have been agreed in a contract may not correspond to the actual costs incurred by the supplier in delivering the associated goods or services.
BDO Perspective - Review the appropriateness of the cost-plus contract mechanism based on contractually-agreed costs:
- Assess rates agreed vs costs incurred
- Agreeing labour rates and fixed costs in a contract makes forecasting and budgeting easier for public sector organisations. For example, labour costs will not be subject to variations in employment contracts and factors that cannot be shared due to personal data protection requirements.
- However, suppliers need to demonstrate that their rates were market-tested and represent good value. There is also a potential downside of contractually-agreed rates and costs in that these may not correspond to the actual costs incurred by a supplier – any volume discounts and cost efficiencies the supplier enjoys are not passed on.
- Conduct reconciliations to actual costs
- Where one-off set up or mobilisation fees have been agreed, a reconciliation to actual costs incurred should be completed.
- Introduce incentives to reduce costs / procure cheaper alternatives
- Suppliers have no incentive to reduce costs in pure cost-plus contracts. KPIs and service credits / incentive fees tend to focus on performance in delivering the contract.
- Cost reduction and efficiency incentives can be introduced though pain-gain mechanisms. For example, the supplier could also retain some benefit from reducing contract costs. This in turn will encourage main suppliers to manage their own subcontractor / supplier costs that are then passed on to the commissioning organisation.
Issue 2: Records are maintained manually
When suppliers record staff time on manually-maintained spreadsheets, this increases the risk of human error or data manipulation, and fails to provide a clear audit trail and review of time worked on the contract.
Charges for payroll costs, including bonuses, may not be maintained in a transparent way eg the supplier may not be able to confirm that reward elements were attributable to the work completed for the contract.
BDO Perspective - Investigate or recover unsubstantiated charges:
- Standard contract clauses will include supplier obligations to retain sufficient supporting information. A firm interpretation of such clauses would trigger non-payment or retrospective recovery of any costs that could not be substantiated.
- Going forward, organisations should invoke their right to withhold or dispute payments on items where there is a lack of supporting information provided with invoices.
Issue 3: Failure to maintain asset registers
When asset registers are not kept or maintained by suppliers, public sector organisations may be paying in full for equipment or items that will be used elsewhere by the supplier after the contract ends. This also poses a risk to the smooth transition of assets at contract end.
BDO Perspective – Ensure clarity of contract terms and rates:
- Contracts should require suppliers to maintain asset registers. However, where there is a need to draw up contracts at speed, some important principles (eg Exit Management, Asset Management and Business Continuity) may not be comprehensively agreed before contract commencement.
- Best practice suggests that, where certain principles could not be agreed in time for contract commencement, there should be clear timelines of when these plans or working practices should be in place.
How BDO can help
Our Contract & Commercial Risk team offers a range of services to optimise your organisation’s contract management:
Pre-award - Business case and procurement
- Business case assessments
- Financial establishment audits
- Procurement reviews
- Commercial terms analysis
- Contract and commercial management frameworks: design and implementation
- Lessons learned review of existing contracts ahead of renewal /retender
- Supplier onboarding.
Post award – Contract and commercial management
- Cost reduction and recovery programmes
- Cost verification
- Contract management effectiveness
- Contract audit programmes (expenditure and revenue)
- Supplier risk profiling and management
- Contract performance and compliance
- Customer profitability/cost to serve.
Post award – Contract renegotiations and exit
- Negotiation strategy development
- Contract exit and transition management
- Final account settlement
- M&A: contract portfolio risk management and optimisation
- Lessons learned and commercial improvement advice
Contract lifecycle management – Digital transformation of contracts
- Contract Lifecycle Management (CLM) system implementation
- Commercial capability assessment and transformation
- CLM effectiveness reviews
If you would like to discuss any aspect of contract management, please get in touch.