Every year the British government spends £284bn on goods and services bought from external suppliers, according to the Institute for Government. In fact, this vast sum constitutes a third of all public expenditure in the UK.
The goods and services purchased range from discreet items such as stationery and medicine through to IT systems and the construction of roads and schools.
‘In my experience, when you’re in an unhappy situation, it’s rarely wholly the supplier’s fault’
Regardless of exactly how taxpayers’ money is used, public bodies are under pressure to ensure those funds are spent efficiently and in ways that deliver for British citizens.
Pressure to better manage contractors in particular has intensified since the collapse of outsourcing giant Carillion in 2018. As a major provider of construction services to the NHS, the liquidation of Carillion directly impacted a number of hospitals.
No easy task
But managing contractors is no easy task for public bodies, as Yusuf Erol, group managing director of Langbrook Finance, knows from personal experience. He was head of finance for the London Borough of Hackney before founding his own firm, working for the council for nearly a decade.
‘Local authorities find it very difficult to put the necessary thought into effective contract management,’ he says.
A major reason for this is that while local authorities and other public bodies employ able procurement professionals and contract managers, these individuals are rarely experts in what the organisation is buying.
‘There are so many examples of organisations getting what they ask for, but not getting what they want’
Therefore, they rely on staff who are working on the frontline – for example, in education, property or social care – to specify exactly what is needed, identify key performance indicators (KPIs) and report on whether contractors are delivering on their commitments. Yet these staff often lack expertise and training in procurement and contract management.
A lack of focus on contract management means that problems with contracts can easily arise. ‘The major challenges often come from a lack of clarity around roles and responsibilities,’ explains Rizwan Khalid, interim director of procurement at housing association A2Dominion.
He also highlights the problems of ‘vaguely specified requirements that do not get clarified in the tender process’, as well as suppliers that underperform.
As Erol says: ‘There are so many examples of public sector organisations getting what they ask for, but not getting what they want.’ So how can they avoid this predicament?
Often contract management is only considered once a contract has been awarded to a supplier. Erol believes that public sector organisations should be giving far more consideration to this at the initial stage, before a contract is even advertised.
He recommends that stakeholders ‘brainstorm around what is actually required from the supplier and the best performance measures for those deliverables’. It’s also vital to consider how the contract will be managed on an ongoing basis.
It can be possible for organisations to renegotiate terms with their suppliers after a contract has been signed
Research is important. ‘Whatever good or service you're buying, nine times out of 10, other public-sector organisations are also buying the same or similar,’ Erol notes. ‘So staff should call their counterparts in other organisations and say: I assume you buy this? How do you manage the contract? What performance measures do you have in place?’
Khalid has a number of measures in place to support effective contract management. These include a central contracts database (which includes a pipeline of upcoming contracts), risk profiles for all contracts that help to determine how much focus each contract gets, and benefits-realisation reporting for major contracts throughout their lifecycles.
He also ensures that key stakeholders receive robust training in contract management ‘so that this learning is reflected in their behaviour when they are putting the contract together’.
Due diligence tips
- Don’t automatically rely on credit reference agencies as the default method of risk assessment for all suppliers – see the AB article ‘A guide to choosing contractors’. Only in the case of low-risk, low-value contracts is it appropriate to use credit reference agencies alone for risk assessment.
- Make use of the Cabinet Office’s Contract Tiering Tool. This can help to classify the contract as ‘gold’, ‘silver’ or ‘bronze’ on the basis of three criteria: value, complexity and level of risk. It can also help to determine the criticality of the contract and the level of contract management required.
- Get industry benchmark data on your suppliers where possible. This will help you to understand how they perform compared with their competitors.
- Do an internet search on your suppliers. This should reveal any adverse news reports.
- When awarding a contract, strike a balance between applying strict criteria and allowing reasonable judgment. Consider all available information when reaching conclusions about your prospective suppliers.
When it all goes wrong
Managing a contract becomes harder when it is an afterthought once the contract is actually in place, according to Erol. Nevertheless, it can be possible for organisations to renegotiate terms with their suppliers after a contract has been signed, as most suppliers will naturally want to keep their customers happy.
When a contract isn’t working because it hasn’t been designed correctly, Erol’s advice is to consider how it should have been set up, how the organisation could better manage its relationship with the supplier, and what the right performance measures are. ‘Then have an open conversation with the supplier to try to get them to agree to any changes you might need'.
If a contract is going very badly and a supplier is underperforming, it may be necessary to look at how vital the services are and how quickly the organisation could move to a new supplier that would do a better job.
‘Decide how much effort you want to put into helping this supplier improve their performance,’ says Erol. ‘Or you might want to be strict about the application of the contract clauses, which may eventually mean that you exit the contract.’ Third-party professional advice can be useful here.
Ultimately, as with any relationship, both parties to a contract must share the responsibility for making it a success. ‘In my experience, when you’re in an unhappy situation, it’s rarely wholly the supplier’s fault,’ says Erol. ‘Quite often they’re doing what they think they should be doing.’