81. The Government's approach over several years has led to the market concentrating in a small number of large suppliers that are effectively the only businesses able to compete for large, aggregated, public sector contracts. A focus on price has reduced margins for prime contractors, which have cascaded down the supply chain, placing some subcontractors on the edge of sustainability. The combination of risk transfer, poor data and specification with low margins has meant that some government contracts are not only financially unsustainable but may also be effectively undeliverable, even at a loss. When those conditions prevail, it is inevitable that quality is squeezed to such an extent that those reliant on the service will be negatively affected.
82. The Government has a responsibility to deliver value for money for the taxpayer and cannot ignore price. Similarly, the Government should not ignore quality. Gareth Rhys Williams, Government Chief Commercial Officer, explained that:
What we need to make sure is that the bid that we get is sustainable for the life of the contract. Now, it could well be that a vendor will bid at a marginal cost in order to take market share from one of their competitors. Well, as long as we believe that that's sustainable, that actually generates good value for the taxpayer, as long as the vendor delivers the service. So it is not as simple as, "Are they absolutely profitable at a certain level?"88
83. The current procurement environment encourages Government and suppliers to place too much emphasis on price at the expense of quality. Tendering exercises must have an appropriate quality threshold and contracting bodies need to have sufficient understanding of the market to identify bids that are too low to enable the supplier to sustainably deliver to the required standard.
84. Our evidence suggests that some companies have bid at a price that provides little or no margin with the expectation that subsequent variations will enable them to make a reasonable return.
85. We have real concerns about a race to the bottom in pricing. A number of suppliers are now going through corporate cleansing and refusing to bid for contracts where the profit margins are low. Such cleansing has not stopped them doing this in the past. Too often suppliers will also pass cost-cutting down the supplier chain without due regard for long-term implications. Government has to be an intelligent customer and be clearer about the impact of pricing models on the long-term delivery of a project. A saving today can simply shunt costs into the future.
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88 Q 769