PLC Public Sector reports:
In long, drawn-out contractual negotiations, a great deal of time is, rightly, focused on what happens if things go wrong. For any major public service contract there is likely to be a complex service credit regime, with numerous complicated formulas. If a contractor finds themselves on the wrong side of one of these formulas, they will either have to pay back money to the authority or only be entitled to a reduced payment for the services they have provided.
This finance-driven model works well in the private sector and undoubtedly has its place in some public sector contracts. However, in this post PLC Public Sector asks if more thought needs to be given in public sector contracts to tailoring a more appropriate remedy.
The key objective of any public service contract must be service delivery. Yes, value-for-money is important, but a public authority will never be able to defend itself against accusations of poor service delivery on the basis that it got the services on the cheap. Therefore, a contract default mechanism based solely on reducing the cost of services will not normally be fit for purpose. This contrasts with the private sector, where a financial remedy is much more likely to meet the needs of a purchaser, as the bottom line on the balance sheet will be far more important.
For this reason, the ability to hit a private sector provider in the pocket does have a role to play. If the provider knows that poor performance will automatically reduce its charges, it will be keen to meet the applicable service levels. However, at some stage value judgements are likely to be drawn. If contract compliance will cost thousands but the service credit will only costs hundreds, a hard-nosed provider may prefer to take the service credit hit.
Therefore, a liquidated damages/service credit approach needs to be coupled with something more innovative. One solution is for public sector purchasers to consider what the obvious defaults may be on a contract-by-contract basis during the procurement stage. A plan can then be agreed with the successful provider setting out what actions must be taken to mitigate the impact of the default. These actions must be within the control of the provider and be focused on service delivery. If the plan is followed, the authority may lose the right to a service credit but the standard of service delivery should be maintained at the highest level possible in the circumstances. A “stick” will still be required, but if the actions have been properly thought through and are within the provider’s control, a provider will find it difficult to argue against a failure to carry out the action points having far more significant consequences than an occasional service credit payment. For example, a faster route to termination with an associated indemnity for re-tender and service interruption costs (which will be high if the competitive dialogue procedure needs to be used).
A good example of such an approach was adopted by the prison service in its food contracts. Service credits would be of little use if a prison had nothing with which to feed several thousand hungry prisoners. The contract therefore provides for various stages of provider response in the event that the provider is unable to make a delivery. These range from providing a suitable substitute, right down to the provider sending out as many of its staff as necessary to local supermarkets to buy up all available sustenance.
Public service contracts will never be addressed by a one size fits all approach. However, taking the time up front to consider what will happen if there is a problem will pay dividends more often than not. Too many contracts descend down the same route of arguing about the level of liquidated damages before actually considering if there is a better option. A recent National Audit Office report pointed out that service credit regimes are not even routinely enforced by central government in nearly 40% of cases. Surely there must be a better way.
I agree that local authgorities should give more thought to contract management and the system of using service credits really only lends itself to services with easily measurable outputs, such as IT support and certain waste contracts. As you say, there is a risk that such schemes could be used to such an extent that the contract becomes unattractive to the provider which then stops investing in the service. In the area of social care commissioning where the success of a service is measured by outcomes which can be quite subjective, a different mechanism for encouraging efficiencies and monitoring quality is required. I’d be interested to hear others’ views on this.
In the past I have used the incentive of the award of further work, for example where service providers are appointed to a framework agreement (or spot contract) where default under one contract will impact on their ability to be considered for further work under the framework. It is hoped that the move towards personalisation could incentivise providers to deliver more quality services as service user experiences and preferences are crucial to winning work.
I have also found using a device for shared savings can be a positive way of encouraging efficiencies, e.g. where the provider gets to keep X% of any efficiencies it indentifies. This mechanism was used to good effect in a highways maintenance contract.