49. There is now a broad consensus that open-book clauses should be used more in contracts. Contractors need to make a profit, but government needs to know that these profits are made in ways that align with the taxpayers' interests. Profits should vary with the level of risk taken on, the level of innovation the contractor provides and, crucially, performance. The Cabinet Office has developed a new model contract which includes open-book clauses and audit rights.[71] For open book access to be effective, departments must understand contractors' business models and therefore be able, for example, to understand cost and profit calculations and identify efficiencies.
50. The Cabinet Office told us that government has open book arrangements on 34% of its contracts, 39% of its larger contracts.[72] However, open book access alone was not sufficient for the Ministry of Justice to identify the overbilling problem on electronic monitoring.[73] Both the Ministry and the Home Office have relied on unaudited contractor data and neither fully used their 'open-book' access rights to understand contractor costs and performance.[74] The Cabinet Office considered open book practice to be poor on many government contracts. It told us that government lacks the skills required to operate open book effectively and has struggled to recruit such skills.[75]
51. The NAO has stressed that government needs to recognise that value is achieved over the life of a contract, and that officials appear too often to have seen contract management as enforcing the deal that was made when the contract was signed. This approach may work for the simplest of contracts but, for more complex and longer-term contracts, the government needs flexibility to ensure that services continue to meet changing business requirements. If contract management is done well, a department has considerable influence over the contractor even after the initial competition is concluded.[76] The Cabinet Office described how government can get locked into contracts whose prices rise with inflation while the underlying costs for the contractor have fallen dramatically. It also described how contractors must be incentivised to achieve a reasonable level of profit, based on delivering a good service, and that exercising open book properly would help government to ensure it shared in any excess profits.[77] Contractors told us they are supportive of the use of open book approaches but it would require consistent treatment and responsibility in the amount of material requested.[78] The Cabinet Office agreed with the need to act responsibly and not demand unnecessary data.[79]
52. Open book access has to be backed up by the means to act on what it might find - for example, the means to claw-back excess profits or overcharging.[80] For example, under the Work Programme the Department for Work & Pensions has identified that, up to March 2014, it paid contractors an estimated £11 million in 'sustainment payments' in return for job outcomes which could not be validated. However, its estimate is based on an extrapolation from the sample that it checked, in which it could not verify 7% of payments. The Department did not include a clause in Work Programme contracts to claw back invalid sustainment payments based on extrapolation, and so it is dependent on successful renegotiation with contractors to recover any taxpayers' money. This contrasts with the situation on 'job outcome payments' under the Work Programme, where the Department is dealing with the same contactors. For job outcome payments the Department also found that 7% of payments in its sample were invalid, but was entitled to extrapolate across the wider population of payments, and so has recovered £21 million.[81]
53. Recommendations: The Cabinet Office should mandate the inclusion of open book provisions in all government service contracts and set clear expectations for how these provisions should be utilised to manage the contract throughout its life.
54. Open book provisions need to be supported by means of aligning incentives, such as: sanctions if contractors provide incorrect information; the means to recoup any overpayments identified; and mechanisms for profit sharing and ensuring the taxpayer shares in efficiency gains in long term contracts.
55. Departments should avoid unnecessarily fixing prices in long term contracts, particularly in areas of rapidly changing technology, without any flexibility to adapt or the means to share in excess profits.
___________________________________________________________________
71 C&AG's Report, Transforming government's contract management, para 3.22-3.23.
72 BQ 98
73 AQ 191
74 C&AG's Report Home Office and the Ministry of Justice, Transforming contract management, paragraph 34.
75 BQ 98, BQ 100, 139
76 C&AG's Report, Transforming government's contract management, paras 2.9-2.11
77 BQ 85, 139
78 AQ 66, AQ 81
79 BQ 98
80 C&AG's Report, Transforming government's contract management, paras 3.24-3.25
81 C&AG's Report, The Work Programme, HC 266, Session 2014-15, 2 July 2014, paras 4.10-4.16; Written submission from NAO