9 The reviews found widespread problems with how government manages its service contracts. As well as testing for overbilling, 73 contracts were tested against the 8 areas of the NAO's 2008 good practice framework for contract management.1 Issues were found on all 8 areas, for example:
• Planning and governance (issues on 38 out of 73 contracts tested)
Departments lack visibility of contract management at board level and lacked senior-level involvement.
• People (40 issues)
Government does not have the right people in the right place for contract management. There were gaps between the numbers and capability of staff allocated to contract management and the level actually required.
• Administration (39 issues)
Contract management is not operating as a multi-disciplinary function. There was often limited interaction between finance, commercial and operational contract management functions.
• Payment and incentives (48 issues)
Government is not fully using commercial incentives to improve public services. Levels of payment deductions allowed by contracts are often insufficient to incentivise performance. Open-book clauses were rarely used.
• Managing performance (50 issues)
Contractual performance indicators are often weak and government is too reliant on data supplied by contractors.
• Risk (47 issues)
Government does not have sufficient understanding of the level of risk it is retaining on contracted-out services. None of those in the cross-government review shared risk registers with the contractors to ensure all understood who was managing what.
• Contract development (50 issues)
Departments are paying insufficient attention to the impact of contract change. For example, departments made changes at operational level in isolation from other service areas. Systems for maintaining up-to-date versions of contracts remain weak.
• Managing relationships (31 issues)
Not all departments have had a strategic approach to managing supplier relationships. Senior management engagement with suppliers has not been widespread across government. A lack of meaningful incentives for innovation can inhibit shared approaches to problem solving and service improvement.
10 Poor contract management is a long-standing issue. By the middle of the last decade there was a large number of mature contracted-out services across government. Our work started to highlight widespread problems with contract management. In our 2008 cross-government report on the management of service contracts we said that no commercial director or head of procurement rated the resources allocated to managing major contracts as 'good'. We highlighted poor risk management, inadequate performance measurement and limited use of performance incentives.2 Since then, we have reported on many contracts with weak contract management. These weaknesses have far-reaching consequences, including:
• Fraud and error
For instance, better scrutiny of payments and understanding of the contract could have prevented the overbilling found in the Ministry of Justice's contracts referred to authorities.
• Not managing risk
For instance, the Ministry of Defence's failure to provide ICT infrastructure critical to the success of the Army's recruitment contract with Capita impacted on recruitment activities and increased costs.3
• Risk of contractual dispute
For instance, ambiguities in the Home Office's immigration removal centre contracts meant that disagreements were difficult to settle.4
• Performance deductions are not always enforced
For instance, the Home Office did not enforce penalties for defects in asylum seeker accommodation as it felt that the contracts were at an early stage.5
• Not understanding how contracts meet policy objectives
For instance, poor senior oversight meant the risk profile on the Department for Work & Pensions' Work Programme was changed in the contractors' favour.6
• Use of commercial levers
For instance, pressures to find cost savings led HM Revenue & Customs (HMRC) to trade away some of its negotiating power and hindered its ability to get strategic value from its long-term Aspire ICT contract. When negotiating cost savings in response to successive funding settlements, HMRC conceded many of its commercial safeguards through major renegotiations of the contract between 2007 and 2009, including the right to share in supplier profits when they were higher than target and the right to compete services. HMRC estimates it achieved savings of £750 million through such negotiations. Since 2012, HMRC has negotiated some of these commercial controls back.7
11 Previous attempts to improve contract management have not delivered sufficient change. Government has sought to improve its general commercial capability since the early 1990s, most notably with the Gershon reforms from 1999 and the more recent efforts by the Cabinet Office. We published a good practice framework for contract management with our 2008 report 8 and the Committee of Public Accounts recommended how to improve contract management in 2009. The Office for Government Commerce (then part of HM Treasury) accepted this, but it failed to influence departments and focus drifted away. More recently, the Cabinet Office has focused on using government's collective buying power to make savings, rather than improving individual departments' contract management.
12 The underlying causes of problems in contract management go beyond poor administration and lapsed awareness. Although it is difficult to generalise across 17 departments, from our collective experience of looking at government contracts, we have identified 4 root causes of these problems with contract management:
• Government fails to recognise the value of contract management. The purpose of contract management is to use commercial mechanisms to improve services and reduce costs. Too often contract management has been seen as delivering the deal that was agreed when the contract was signed. This has meant that contract management has been seen as a way to avoid things going wrong, rather than unlocking value. Government needs to recognise that value is achieved over the life of the contract. This means designing policies it has the capability to deliver, planning for the contract management stage earlier, and paying it more attention.
• Senior managers in central government departments have not taken contract management seriously. Central government has yet to adapt to the commissioning role it aspires to. Departments have not adapted governance to the expanding role of government contracting: they have lacked the basic infrastructure of oversight, senior engagement, challenge and scrutiny. Systems of governance have focused on approving new projects, as if government's responsibility ends when the contract is signed.
• Senior managers have not demanded visibility over their contracts. Senior managers have not always acted as if they recognised that departments are responsible and carry the risk for the services they have contracted. Managers have rarely demanded combined portfolio information to scrutinise and challenge operational contracts. Senior managers have often only engaged on contracting issues to firefight problems. As a result, they have put little pressure on teams to improve the information they rely on to manage the contract.
• Government has a permanent disadvantage in commercial capability. There have been many initiatives aimed at improving commercial capability in the past and more improvement is possible. Traditionally, the procurement profession has had a low status in the civil service, while contract management has been seen as low status within the procurement profession. Cabinet Office estimates government as a whole deploys less of its specialist commercial resources on contract management than the private sector. The profession has lacked the sway over colleagues to implement good practice, and struggled to attract the best talent and skills. Furthermore, without a way to measure the value of this deployment, contract management has been vulnerable to administration cuts and under-investment. Yet it is doubtful that the government can improve its capability to be able to have the best contract managers on all its contracts. It will not pay either to bring in or retain commercial experts to match the combined expertise of its contractors.
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1 National Audit Office, Good practice contract management framework, December 2008.
2 Comptroller and Auditor General, Central government's management of service contracts, Session 2008-09, HC 65, National Audit Office, December 2008.
3 Comptroller and Auditor General, Army 2020, Session 2014-15, HC 263, National Audit Office, June 2014.
4 HM Government, Cross Government Review of Major Contracts, December 2013.
5 Comptroller and Auditor General, COMPASS contracts for the provision of accommodation for asylum seekers, Session 2013-14, HC 880, National Audit Office, January 2014.
6 Finding from cross-government review.
7 Comptroller and Auditor General, Managing and replacing the Aspire contract, Session 2014-15, HC 444, National Audit Office, July 2014.
8 National Audit Office, Good practice contract management framework, December 2008.