72. The Government's focus on cost and aggressive risk transfer during negotiations has led to difficulties during the operational phase of contracts. The Government has responded to this in some cases by forgoing performance penalties that were available to it. For example, in the Compass contracts for asylum seekers' accommodation, the Home Office did not apply performance penalties to contractors during its transition phase, because, as they told PAC, they were engaged in "commercial discussions" with their contractors about the failure to provide them with adequate information.172
73. The Government has also renegotiated the terms of some contracts. In July 2017, David Lidington MP, who was then Secretary of State for Justice and Lord Chancellor wrote an open letter confirming that "we have adjusted the CRCs' contracts to reflect more accurately the cost of providing critical frontline services".173 The Justice Select Committee in their report in June 2018 criticised what they described as the "constant renegotiation" of the Transforming Rehabilitation contracts and said that the changes the Ministry made raised "serious questions" about the Ministry's capacity to let contracts.174
74. Transforming Rehabilitation is not the only example of a programme in which the Government has had to renegotiate contracts. The Government has written to the Committee saying that, since 2016, there have been 12 contracts worth more than £10 million each which have been altered in this way.175 Peter Smith, a former Government procurement director, has written about the potential legal dangers that this may expose the Government to, as UK and EU regulations on contracting are "pretty prescriptive when it comes to changing major contracts post-award".176 Presumably, such renegotiations involve additional costs to the public sector for legal and other work.
75. The Government's decision to revise the terms of some contracts underlines the failure of contracting within government. We agree with the Justice Select Committee that these renegotiations point to underlying issues with the capacity of the Government to successfully let contracts. Renegotiation often reflects poor risk allocation and poor information about the original service that was contracted out. The Government is also potentially exposed to legal risk through doing this. We have not received evidence about the costs of bringing in these changes but presume they are substantial. While it may be unavoidable that the Government has to re-negotiate some contracts to ensure services continue to function, the fact that it has had to renegotiate over £120 million of contracts in the last two and a half years is an indictment of its initial negotiating approach.
76. In each case where the Government has had to renegotiate a contract because its initial assumptions about cost, risk transfer or contractual structure have proved incorrect, we believe the Government should undertake a lessons learned exercise to identify what went wrong. The lessons identified in this exercise should be shared with the Comptroller and Auditor General and his officials to decide whether there are any issues to report to Parliament.
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172 Report by the Comptroller and Auditor General COMPASS contracts for the provision of accommodation for asylum seekers, Session 2013-14, HC 880 p. 23. Public Accounts Committee, COMPASS: provision of asylum accommodation, Forty-fifth Report of Session 2013-14, HC 1000, p. 11
173 Ministry of Justice, Probation reform: open letter from the Secretary of State for Justice, July 2017
174 Justice Select Committee, Transforming Rehabilitation, Ninth Report of Session 2017-19, HC 482, p. 3
176 Peter Smith, Are Top UK Civil Servants Breaking The (Procurement) Law? Yes, According to PACAC Committee Evidence, Spend Matters, May 2018