3.21 Contractors need to make a profit. But government needs to know that these profits are made in ways that align with the taxpayers' interests. Contractors' profits should vary with the risk taken on, the level of innovation the contractor provides and, crucially, performance. Excessive profits can undermine public confidence and contractors should not be able to make a profit by acting against their customer's (the government's) interest. Expectations about profit levels and how they will vary by performance should be agreed in competition when the contract is let. Retrospective negotiations may be less likely to get a good deal for the taxpayer.
3.22 As with transparency, there is now broad consensus that open-book clauses should be used more, but little guidance on how to do so. The Cabinet Office has developed a new model contract 45 which includes open-book clauses and audit rights, and contractors are generally amenable to providing the data. Pockets of government such as the Ministry of Defence have particular experience in this area, which may help shape future guidance and approaches. The Cabinet Office and the Confederation of British Industry are piloting ways to implement greater use of open-book clauses.
3.23 Our recent work on both the Work Programme46 and Aspire47 contracts have shown how open-book can be used to see the contractors' incentives. In our view, an open-book approach should have 3 purposes:
• To build trust and confidence in the relationship.
• To provide assurance that incentives are aligned.
• To identify areas for cost savings.
3.24 Government needs to support an open-book approach with means to enforce the alignment of incentives. These include gain-share mechanisms, claw-back of excess profits and post-contract reviews to ensure profits are in alignment with the original intention. Common data standards within and across contracts would allow government to compare costs and margins across suppliers using analytical techniques.
3.25 Government also needs to ensure that it gets what it pays for. This means stricter use of incentive penalties when performance is not up to standard. It also means use of liquidated damages, with the amount agreed during the initial competition, for any substantial failure.
3.26 Government and contractors can then work together to identify cost savings.
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42 Comptroller and Auditor General, Memorandum on the provision of the out-of-hours GP service in Cornwall, Session 2012-13, HC 1016, National Audit Office, September 2013.
43 Available at: www.gov.uk/government/news/government-and-cbi-meet-with-industry-to-discuss-improvements-in-contracting-for-public-services, 2 May 2014.
44 HM Treasury, Treasury Minutes: government responses on reports from the Committee of Public Accounts, Cm 8871, June 2014.
45 Model Services Contract, available at: https://ccs.cabinetoffice.gov.uk/about-government-procurement-service/contracting-value-model-services-contract
46 Comptroller and Auditor General, The Work Programme, Session 2014-15, HC 266, National Audit Office, July 2014.
47 Comptroller and Auditor General, Managing and replacing the Aspire contract, Session 2014-15, HC 444, National Audit Office, July 2014.