3.13 Most departments will need to achieve further cost savings by 2020. This may result in departments using more fixed-price contracts. Fixing the price at the start of the contract allows commissioners to transfer some financial risk to the provider. This is attractive for departments that have to achieve challenging budget cuts, as it means they can, in effect, 'bank' the saving from the procurement. However, providers must be willing and able to take on this risk. SMEs may not have the resources or financial support (eg from a parent company) to be able to do this so commissioners can perceive them as more risky than larger providers.
3.14 SMEs may be excluded from bidding or winning contracts by requirements intended to reduce a department's risk. Some requirements are difficult for SMEs to fulfil. For example, bidders for one of 40 prime contracts for the Work Programme had to demonstrate annual turnover of at least £20 million.23 This is because it was a payment by results contract with payment not made for at least the first six months. Our focus group told us that for the Transforming Rehabilitation programme, bidding requirements were refined at the last minute to include a parent company guarantee for all bidders - a requirement that VCSEs were unable to meet. Many bidders had spent significant amounts on tendering before being told they were no longer eligible.
3.15 Our recent principles paper on provider failure set out our view, based on our experience of auditing government, that government could improve the way it considers and manages failure of providers.24 Departments often believe that in contracting out services they have transferred the risks to the provider. But when a contract fails the provider can walk away from delivering a service, government cannot. Overly rigid controls to ensure an SME is not a credit risk, such as a requirement to have a financial history or parent guarantee, do not always protect a department from failure.
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23 House of Commons Library, Work Programme: background and statistics, Number 6340, 26 June 2015.
24 Comptroller and Auditor General, Principles Paper: Managing provider failure, Session 2015-16, HC 89, National Audit Office, July 2015.