Before committing to a project departments must undertake a series of tests and processes to ensure that the project is "fit for purpose". Getting the judgements wrong not only reduces the chance of an efficient project result (the immediate output with time, cost and performance parameters met) but makes it highly unlikely the project will be effective (achieve the policy objectives and longer-term benefits anticipated).
A pre-condition for successfully starting a project and running an effective competition for commercial partners is that everyone involved in delivering the project needs to clearly understand what must be delivered, and when. Immature or incomplete specifications lead to scope creep,17 confusion across the supply chain18 and make it difficult to incentivise commercial partners to deliver effectively or to hold them to account for subsequent shortcomings. Developing commonly understood specifications can avoid tying contractors down too early to deliver the wrong things, which can make subsequent change expensive.19
Public sector projects are often started quickly to stimulate economic activity or to meet political priorities. It is vital that this pressure does not undermine the public sector negotiating position. If some of these impacts are unavoidable the procurement strategy should flex to take account of them. Building in sufficient flexibility and a prudent level of time and cost contingency to the project to enable it to deal with the greater level of uncertainty and the increased risk and of emerging changes can offer a way of mitigating the impact.
It is also important to be realistic about where the project risks should lie. A contract that tries to transfer inappropriate levels of risk to the contractor may not work as planned. Departments must evaluate who is best placed to manage the risks (and the opportunities) between departments and commercial providers.20 If a department feels it has more to lose than the contractor it will be pointless paying a cost premium to pass the risk on. A common theme running through our reports is that, irrespective of the contractual terms, the cost and performance risk of project failures reverts back to government when the contract goes wrong because it is reluctant to cancel and recognise failure. The risk increases further when contracts are placed with "special purpose vehicles" which can insulate partner companies from the effects of failure.
In setting projects up departments should recognise where they have capability gaps. These can include the lack of depth of expertise in commercial, project and programme management, financial management and technical aspects.21 Sufficient capability in these areas is essential if departments are to act as intelligent clients and deal with their private sector counterparts on an equal footing. Commercial arrangements can be put in place which mitigate the risks. Departments should take a more ruthlessly realistic and modest approach to their capacity and design of projects and the underpinning commercial arrangements in a way which best protects their interests.
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17 The BBC's Management of Three Major Estate Projects (Report to the BBC Trust, 30 November 2009).
18 The Failure of Metronet (HC 512, 2008-09) and London Underground PPP: Were they Good Deals? (HC 645, 2003-04).
19 The Administration of the Single Payment Scheme by the Rural Payments Agency (HC 10, 2007-08, HC 880, 2008-09 and HC 1631, 2005-06).
20 The Failure of Metronet (HC 512, 2008-09) and London Underground PPP: Were they Good Deals? (HC 645, 2003-04).
21 PFI in Housing (HC 71, 2010-11), Lessons from PFI and other projects (HC 920, 2010-12).