NAO Guidance on Commercial and Contract Management

This month the National Audit Office (NAO) published a paper setting out its insights on some of the areas where contracts go wrong, the warning signs that it looks for, and the examples of emerging good practice it has seen across government. It draws on many of its previous reports, its engagement with government as it has sought to improve its commercial capability, and its discussions with practitioners about the challenges they face.

The paper recognises that the public sector now buys more in than it spends on delivering services, buying increasingly complex things in increasingly complex ways.  As suppliers now play a significant role, there has been an increasing focus on developing good commercial management skills within the public sector in the last few years, recognising the value of managing contracts properly.

The NAO's paper takes a holistic look at contract management, analysing the key steps in any commercial relationship lifecycle, from procurement planning, to operational management and termination.  The result is 20 issues across seven areas that the NAO believe need to be improved.

There is undoubtedly more work to be done in the planning and procurement stages to get the best out of any contractual arrangement, but as someone involved in advising clients on contracts that are already in operation, what interested me most in the NAO's report were their conclusions on contract management.  They had 4 key recommendations:

1.  Manage your own obligations

Most services contracts contain obligations on both parties.  Both parties must perform their obligations in order for the contract to succeed in delivering its objectives.  If the public sector does not deliver on its own obligations then it can lead to extra costs being incurred, or a limit on the ability of the public sector to hold its supplier to account.  For example, the NAO notes that Trusts with PFI hospitals sometimes have difficulty in meeting their obligations to vacate wards to allow maintenance to be carried out.  As they did not always allow scheduled maintenance, Trusts found themselves accepting the maintenance risk despite having paid for the risk to be transferred.

Of course, the first stage in delivering on your own obligations is to understand what those obligations are.  These should be set out in the contract in clear terms, and the key is to analyse precisely what they are (contract manuals are invaluable for this), and their timescales for delivery, and then to use a project and programme management approach to establish formal processes for meeting contractual and wider obligations. Devoting resources to meeting each contract requirement is essential, and this is where the difficulty can arise from already stretched public sector teams.  Nevertheless, a clear framework of contract obligations should allow for a more informed discussion on resource allocation.

2. Know what suppliers are doing

The NAO notes that "Government needs a "hands on" approach to understanding suppliers' performance".  However, what is needed is a balance between cases where there is not enough assurance over reporting and case where there is too much compliance testing without it being targeted effectively. 

For those contracts that are "self-monitoring" that does not mean that the contracting Authority need do nothing or very little to monitor performance.  However, there needs to be a sensible degree of auditing and challenge, which is aligned to the risk and value of that contract.  For example, if your PFI contract is one of the highest costs to your organisation each year, and is fundamental to the provision of clinical services/education/waste management/highway condition etc. then it is sensible to assign a commensurate level of resource to monitoring performance of the "self-monitored" contract.  As the NAO report recognises, a rolling programme of routine auditing could reduce the need for compliance testing of all contracts.  The private sector knows that key elements of the contract will be tested at intervals and responds accordingly.

3. Show what you care about

The NAO notes that a shared understanding of outcomes between government and suppliers, and strong client leadership, can help to overcome poorly designed contracts and the limitations of formal performance measures.  Effective client leadership gives government an opportunity to keep suppliers focused on what really matters to them and service users.

What really matters to your organisation or to service users?  Once you have indemnified what that is, is it being clearly and consistently communication with your supplier at every interaction – progress meetings, site visits, information requests etc.  As you manage the relationship with your supplier, are you explicitly managing any trade-offs in order to deliver the outcomes that really matter to you?  For example, might you agree to forgo deductions which you are entitled to under your contract, for improved performance in other areas (the measurement of such improvements to be agreed in advance and documented)?

4. Understand suppliers' motivations

The NAO recognises that whilst it is undoubtedly the case that suppliers are motivated by maximising the profits on their contracts, they may also be motivated by other factors e.g. the protection of their reputation if a high profile contract is seen to be failing.  The high profile issues affecting the delivery of the security services at the London Olympics are an obvious example of the reputational impact some contracts can have. The NAO report that their work with suppliers has shown how important reputation is to them and how some manage this at least as strongly as formal performance management mechanisms against contractual incentives.  Other factor alongside reputation might include their organisational values and how staff are engaged and included.

The NAO report that the national performance ratings system used in the prison service has increased the level of transparency in performance and brought a reputational incentive to deliver good service, regardless of the contractual measures.  They also report that at the National Physical Laboratory, contract managers could "trade-off" service credit deductions for extra activity outside the scope of the contract, and so Amey developed an energy reduction plan that benefitted the client whilst also aligning with Amey's corporate objective to protect and enhance the environment.

There is a considerable amount of best practice analysis set out in the NAO's report and some of it, such are the national performance rating mentioned above, will require central government co-ordination.  However, the majority of the analysis can be applied on a local level. The availability of the resources for contract management is and will remain an issue within the public sector, but if the best practice analysis highlighted by NAO is implemented then it should result in the resources that are available being targeted where they can have the most impact, starting with the contract terms and developing out into more sophisticated relationship as well as contract management.