6 We have found that inappropriate risk allocation, for example seeking to transfer too much risk to the private sector, can lead to reduced value for money. For example the private sector will charge a higher price to manage risks where it is not confident in its ability to manage and mitigate those risks. The private sector will also take the overall level of risk into account when pricing the contract, in order to protect itself from the cost of increased risk mitigation measures, and the potential additional costs (for example performance deductions) should that risk occur.
7 The importance of risk transfer and the impact on value for money decisions is highlighted in the case study below.