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Learn Past Exp

  1. 1. Page 1 EFFICIENCY UNIT VISION AND MISSION Vision Statement To be the preferred consulting partner for all government bureaux and departments and to advance the delivery of world-class public services to the people of Hong Kong. Mission Statement To provide strategic and implementable solutions to all our clients as they seek to deliver people-based government services. We do this by combining our extensive understanding of policies, our specialised knowledge and our broad contacts and linkages throughout the Government and the private sector. In doing this, we join our clients in contributing to the advancement of the community while also providing a fulfilling career for all members of our team. This Brief was researched and authored by the Serco Institute, led by Gary L. Sturgess (www.serco. com/institute). The Serco Institute was established 13 years ago to study the role that competition and contracting can play in the provision of public services, and the conditions and practices that deliver the best outcomes. It acts as a practical source of ideas and information, drawn from a continuing dialogue with public officials, think tanks and academic researchers. It also draws on the extensive operational experience of Serco Group, embracing more than 600 contracts, in over 30 countries, with a history of more than 40 years in the public sector. Other Efficiency Unit Documents The Efficiency Unit has produced a number of detailed guides including on outsourcing and Public Private Partnerships (PPP). These may be found on the Efficiency Unit website at www.eu.gov.hk.
  2. 2. Page 2 Foreword Hong Kong has a long history of using the private sector to deliver public services. Elsewhere around the world outsourcing is also a major trend in both private and public service delivery. Nevertheless, the special concerns of our public service outsourcing, such as ensuring fair competition, providing speedy responses to citizens' requests, and promoting labour welfare continue to provide outsourcing project directors with fresh and demanding challenges. Learning from past experience is one of the keys to future success. Through a story-telling approach to international experience, this brief report highlights the acts and omissions during the design and management of public service contracts that can lead to outsourcing contract failures. These are useful lessons for our contract managers. This report does not argue the rationale for engaging the private sector. This is already firmly established public policy, and one that has a generally accepted rationale. The report does, however, demonstrate that we are not alone in the challenges we face. By knowing and understanding the difficulties others have faced we can avoid them ourselves. Head, Efficiency Unit January 2008 Competition and Contracting: Learning from Past Experience
  3. 3. Page 3 Contents Page Executive Summary 4 1. Introduction 6 2. Procurement Design 8 3. Managing the Procurement 14 4. Contract Design 18 5. Contractual Accountability 22 6. Contract Management 24 7. Market Design 28 8. Endnotes 31 Competition and Contracting: Learning from Past Experience
  4. 4. Page 4 Executive Summary C ontracting has been widely used by governments over many years for the contractual terms; (d) C o n t r a c t u a l A c c o u n t a b i l i t y – by purchase of goods and services from private which contractors are monitored and voluntary providers. Overwhelmingly, and motivated to deliver the desired this policy has been a success. Very little performance outcomes; research has been done on the scale of the (e) Contract Management – concerned public services industry, but a recent study with the ongoing contractual in the UK concluded that the sector is relationship; and three times the size of the pharmaceutical (f) M a r ke t D e s i g n – t h e d e s i g n a n d industry. Against such a background, the management of competitive markets controversies over contractual failure seem where there is a multiplicity of small. contracts for similar services. And yet, when contracts do stumble or In spite of decades of debate and discussion fail, they often attract significant public over the conditions that are necessary attention, and these case studies provide for successful competitive tendering, Procurement a fertile field for the study of best (and procurement officials still sometimes fail Design worst) practice. Real world case studies to obser ve the basics – clearly stating enable public officials to learn from past desired performance outcomes in advance, Procurement experience. specifying them in a relatively small officials and private number of relevant performance measures, sector bidders must Across the English-speaking world, it is monitoring performance and intelligently understand clearly traditional for government auditors to applying performance-linked rewards and what is wanted from investigate such failures and to study the deductions as a way of ensuring that the the service or project in underlying causes. In this brief study, desired outcomes are delivered. question. we have turned to these audit reports to understand how we might improve the Procurement Design: Procurement officials quality of competition and contracting. and private sector bidders must understand clearly what is wanted from the service or This report is a summary of 49 different project in question. In a number of case Managing the reports, many of which were themselves studies, the contract was signed and delivery Procurement summaries of a multiplicity of studies, was well underway before the scope of which makes it difficult to summarise the the project was fully defined. Public sector In the interest of findings in the traditional way. However, we auditors have repeatedly warned about the ensuring value-for- have organised the lessons learnt under the risks involved in undertaking complex and money, procurement following key issues of outsourcing process: large-scale contracts, recommending more officials need to have manageable projects wherever possible. some understanding (a) Procurement Design – the way in of supplier capacity, particularly where there which the procurement process is Managing the Procurement: In the interest is not already a well- structured; of ensuring value-for-money, procurement established market for (b) Managing the Procurement – how the officials need to have some understanding the asset, equipment or tendering process is actually conducted; of supplier capacity, particularly where there service in question. (c) Contract Design – seeks to align public is not already a well-established market for and private interests in defining the the asset, equipment or service in question. Competition and Contracting: Learning from Past Experience
  5. 5. Page 5 Executive Summary Contract Design In designing In some cases, it may be necessary for understood and that strategies for mitigation the contractual them to consult with potential providers are in place. They must ensure that there is performance incentives, in order to ensure that there will be robust appropriate governance of the partnership and in defining competition (which may involve ensuring on government's side, particularly where the scope of the contractor's authority, that there is effective competition from multiple departments and agencies are care must be taken to an in-house team). On the other hand, involved. But with complex and large-scale ensure that private and officials need to avoid competitions that are projects, they must also pay some attention public interests are excessively focused on price at the expense to the governance of the contract on the properly aligned. of quality, particularly where the service or provider's side. project is not well understood by potential Contractual suppliers. Market Design: Where government is Accountability involved in the purchase of the same public Contract Design: In designing the goods and services through a multiplicity The monitoring and contractual performance incentives, and of contracts, rather than just undertaking management of in defining the scope of the contractor's occasional procurements, attention may performance is one of authority, care must be taken to ensure need to be paid to the design of the market the keys to successful that private and public interests are itself. This may involve procurement contracting, requiring the appointment and properly aligned. While this may seem an officials in studying the market, ensuring retention of a sufficient obvious point, there have been a number that different public sector organisations number of experienced of controversial contracts where the are not competing for scarce resources, and officials. contractor was permitted to deliver services assisting in building supplier capacity. to end-users in ways that were profoundly Contract inconsistent with government policy. Infor med decisions need to be made Management about the scale and scope of contracts – Contractual Accountability: The if they are too large, they will weaken the In contracting for monitoring and management of competition and undermine the incentive complex performance, performance is one of the keys to successful of companies to invest in the market for particularly where contracting, requiring the appointment the long term. On the other hand, they have core public services and retention of a sufficient number of to be large enough to justify investment are involved, contract experienced officials. In the case of long- in bidding. Bidders will also want to be managers must work term contracts, it may not be sufficient to reassured that competition is fair between in close partnership with their private sector rely on the original competition to ensure public and independent providers. suppliers. value-for-money: ongoing benchmarking against current market conditions may be Finally, greater attention must be paid to Market Design required. capturing and communicating the lessons that have been learned from past mistakes. Where government is Contract Management: In contracting for It is evident that the promulgation of involved in the purchase complex performance, particularly where formal guidelines is not always sufficient. of the same public core public services are involved, contract Story-telling – drawing upon case studies of goods and services managers must work in close partnership past contractual failure – may be one of the through a multiplicity of contracts, with their private sector suppliers. In such ways that we can make these lessons more rather than just cases, it is not possible to outsource the memorable. undertaking occasional ultimate risk of failure to deliver, and public procurements, attention officials must ensure that business risks are may need to be paid to the design of the market itself. Competition and Contracting: Learning from Past Experience
  6. 6. Page 6 1. Introduction 'It is useful to erect beacons upon rocks whose existence has been made known by the shipwrecks they have caused.' – Jeremy Bentham, 1830 G overnments use competition and contracting to procure a wide range of goods and services, and aren't effectively communicated and learned: a report by the US Government Accountability Office (GAO) they have done, more or less often, over hundreds of published in December 2006 reported that after years years. Overwhelmingly, this policy has been a success of warnings, the Department of Defense (DoD) – the scale of public sector contracting and the still did not systematically ensure that institutional relative infrequency of controversy (given the scale knowledge gained from prior experience was collected of activity) suggests that competition and contracting and shared2. work well most of the time. This is not a new problem. After a detailed study It has been claimed that John Glenn, America's of British naval contracting in the late 18th and pioneering astronaut, once observed: 'As I hurtled early 19th centuries, one historian observed that through space, one thought kept crossing my the improvements recommended by successive mind: Every part of this capsule was supplied commissions of inquiry had not been long by the lowest bidder'. This wry (and apparently remembered: 'The problems with which they dealt apocryphal) statement reminds us of the crucial were not however peculiar to the period. The reports role that contractors have sometimes played in the would be forgotten, and similar mistakes would be delivery of public services1. And given the logistical made by future generations, and the same lesson and technological complexity involved in eventually would have to be re-learnt.'3 putting a man on the moon, and the part played by a variety of different contractors in the success This brief report brings together some of the best of that endeavour, it seems reasonable to conclude known examples of contracting controversies across that National Aeronautics and Space Administration the English-speaking world over the past two or three (NASA) and its private sector partners did an decades, based on some 49 different studies, some of outstanding job. which were themselves summaries of a multiplicity of other studies. We have drawn from the Anglo- But this anecdote also reminds us that competition American jurisdictions, partly because they have been and contracting have not always been done well. more active in the use of competition and contracting, When shipwrecks do occur, there is often a major and partly because of the public availability of audit controversy, and inquiries are established to uncover reports. This report summarises the key lessons from the rocks upon which the project foundered. those experiences which would be illustrated under Invariably, some attempt is made to erect beacons the six major issues of outsourcing in the following upon those rocks – flaws will be exposed, underlying chapters. causes identified, and recommendations made for the improvement of contractual processes. It is not a comprehensive handbook on effective competition and contracting. Rather, it looks to the And yet in reading many of the audits, reviews and controversies of the past and identifies some of the inquiries that have been conducted over the years, one lessons that were drawn at the time. In this sense, this is struck by how often the same recommendations report is like a mariner's map that plots the location have been repeated. For some reason, the lessons of hidden shoals and identifies some of the beacons Competition and Contracting: Learning from Past Experience
  7. 7. Page 7 1. Introduction that can be used by future travellers. Story-telling is one of the ways that we can make these lessons more memorable, and by paying closer attention to these 'exemplary failures', the lessons of the past can be communicated more effectively to future generations of procurement officers and contract managers. It is not enough for governments to publish regulations and guidance notes – by working with real-world case studies, contracting officers can better understand why it is wise to adopt particular policies and practices. Competition and Contracting: Learning from Past Experience
  8. 8. Page 8 2. Procurement Design T he success of government contracting is heavily influenced by the way in which the services Melbourne Trams and Trains are originally procured. If government has failed In December 1998, the state government in to understand or specify its requirements, if it has Victoria, Australia, awarded franchises to three selected the wrong partner, or if it has contracted at a private firms for the management of its trams and price that is not commercially sustainable, then it will trains. The handover occurred in August of the be difficult to ensure that the contract succeeds over following year. The government estimated at the the course of its life. Procurement matters because time that over the life of the five-year franchises, it contractual management depends so much on the would save A$1.8 billion, with increased patronage decisions made at the outset during specification, and service levels. competition and negotiation. From an operational perspective, the franchises Procurement officials must be honest and capable, have been a success. But in December 2002, the but that is not enough; the design of the procurement leading operator walked away from the franchise, rules also matter. For example, the timing and having suffered financial losses of almost A$300 sequencing of procurements may influence the quality million, and forfeited performance bonds of some of competition. Poorly constructed prequalification A$130 million. Industry experts have concluded and evaluation criteria may favour larger firms that this very experienced international transport or incumbent providers. Commissioners need to operator misunderstood the required level of be reassured about the capabilities of potential capital investment and that its bid team made contractors, but excessive reliance on prior experience unrealistic assessments of the patronage levels that may tend to exclude new entrants4. could be achieved. Policy analysts have concluded that the procurement officials generated 'bid fever', Those charged with procuring public services from resulting in a winner's curse5. private and voluntary sector providers must do more than just follow the rules – they must have regard to the broader environment within which procurement The winner's curse arises where price is the deciding is taking place. factor in the bid, and where competing firms have very different understandings of the service in The Winner's Curse question. It is made worse where the procurement team deliberately constructs the rules of competition Economists argue that under certain kinds of to increase the competitive tension. The solution tendering conditions, the winning bidder will always lies in communicating effectively with bidders and in pay an excessive price, resulting in the contract avoiding aggressive price-based competition where the being an unhappy experience for both customer and sources of value from the procurement are not clear contractor. In these situations, the winner always to the market. loses, a predicament that has become known as 'the winner's curse'. Central vs Local Control Striking the right balance between the autonomy of service managers and coordination at the centre of government is a difficult challenge. In the case of Competition and Contracting: Learning from Past Experience
  9. 9. Page 9 2. Procurement Design competition and contracting, there are sometimes opposition and difficulties in implementation, and economy-of-scale arguments for central purchasing. by 2001, it was being described in national papers For understandable reasons, line managers are as 'the federal government IT outsourcing fiasco'6. sometimes reluctant to have their services exposed to competition, so that without central policy direction, A further report was commissioned by the outsourcing can be overlooked as a tool of reform. Minister for Finance, which concluded that using And in some cases, markets need to be designed and one prime contractor for a number of different managed at a regional or national level to ensure that agencies could not address 'the complex multitude they are sustainable. of implementation risks, unless an organisation is presented with an extremely stable and predictable On the other hand, if decisions are over-centralised, future'. Insufficient attention had been paid to the services can become bureaucratised and unresponsive details of individual agencies' businesses: 'Priority to individual concerns and local conditions. Front-line has been given to executing outsourced contracts service managers spend their time complying with without adequate regard to the highly sensitive rules that contribute little to delivering better services risks and complex processes of transition and the to end-users, losing the flexibility they need to adapt ongoing management of the outsourced business to the changing environment. arrangement.' And without adequate consultation, a centrally Australia's Whole-Of-Government IT driven approach resulted in 'a general lack of buy- Outsourcing in by senior management', a factor that was widely recognised as crucial to successful management of In 1997, the Australian federal government large IT projects7. announced that over the next two years, it would outsource IT support across the whole of the public sector. Savings of up to A$1 billion In some cases, there is no alternative to central policy were forecast, and the Department of Finance direction and a coordinated approach. The Australian announced a programme of budget cuts for studies suggested that one way of addressing the lack departments to reflect the anticipated efficiencies. of procurement and project management expertise at In the interest of capturing economies of scale, agency level was to establish a central agency capable government departments and agencies were of providing support in managing transition and grouped together into clusters, and their IT services undertaking outsourcing. They suggested that whole- were outsourced in packages. of-government outcomes might be pursued through performance agreements with agency heads rather A report by the Auditor-General in 2000 found than mandating specific solutions from the top of that the ambitious timetable had slipped, and government. procurement costs had blown out. There had been protracted opposition from departments Understanding Clearly What Is Wanted and agencies who argued that a 'one-size-fits-all' approach failed to take account of their particular One of the most consistent themes to emerge needs. The programme remained controversial, from the many reviews of failed procurement is the with the media regularly reporting departmental importance of adequate planning and analysis. In Competition and Contracting: Learning from Past Experience
  10. 10. Page 10 2. Procurement Design some of the more notorious examples, particularly More than two-thirds of the value of these in contracts for IT support, failure was built into the contracts was tied up in two agreements for project from the very beginning because the customer developing the information system to support the and contractor were not clear about the desired registry. The first of these contracts took longer outcome. to complete than planned, and the cost was more than twice the original estimate. The Auditor- General concluded that this was because project Canada's Federal Gun Registry requirements were not well defined, and the passage of the enabling legislation was delayed by In 1995, the Canadian government introduced new more than two years. firearms legislation requiring all 2.5 million gun- owners to be licensed and all 8 million firearms In 2001, the Department of Justice reported that in the country to be registered. The Department the information system was not working well since of Justice advised parliament that the programme complexity had increased due to invalid design would cost C$119 million, with a net cost (after assumptions. The government approved a redesign accounting for revenues) of only C$2 million. By of the system, and a second contract was let. When 2000, the Department estimated that the total the Auditor-General looked at this contract in cost would be in excess of C$1 billion. When the 2006, it found that it was more than two years late Auditor-General investigated the programme in and the costs were almost three times over budget. 2002, the audit was suspended due to the lack of reliable information about the true cost. The Auditor-General subsequently reported that the Department had recognised that the budget Implementation of the programme has been for this second contract was insufficient to deliver controversial for reasons other than this: allegations the system's capabilities, and the timeline was too were made of impropriety in the procurement of short to complete the project, but steps were not key contracts, highly-sensitive information was taken to mitigate these risks. Costs had increased mistakenly dumped in public, and licenses were in part because the contractor did not receive the issued with the wrong names and photographs. user specifications until after receiving the letter Responsibility for the programme passed through of intent announcing it as the successful bidder, three separate departments. and work commenced before the formal contract was signed. Indeed, work on the second system To a considerable extent, the firearms registry commenced before the legislative and regulatory was delivered through contract. An investigation amendments had been completed, resulting in even by the Auditor-General in 2006 looked at the more changes to the scope of the project8. arrangements governing 3,642 contracts let between 1997 and 2005, revealing that government regulations mandating competition had been A recent report by the Canadian Auditor-General repeatedly overlooked. In 2006, the Standing has argued that most IT projects involve some Committee on Public Accounts wrote: 'There is element of business change. Where such projects sufficient evidence to conclude that there was a cross organisational boundaries, then the nature purposeful circumvention of contracting policies of the business change can be extremely complex. and regulations.' The Auditor-General advised that at the start of a major project, agencies should demonstrate that they Competition and Contracting: Learning from Past Experience
  11. 11. Page 11 2. Procurement Design understand and are prepared to accept the associated contract, insisting that the customer's requirements business transformation9. had changed since contract signature. The Attorney-General launched a legal action and the Dolphins Not Whales contractor submitted a counter-claim: the case was later settled out of court. One study, published as early as 1997, identified as one of the principal causes of failure in the A subsequent ministerial inquiry reported that the implementation of new IT systems is the tendency to reasons why the INCIS project did not achieve be overambitious. And a 2001 report on e-government its objectives were 'numerous, interrelated and by the Organisation for Economic Cooperation and complex', and they were not unique to the police. Development (OECD) warned that public sector 'No single cause resulted in the failure but the budgeting and political needs tend to encourage combined effect of these causes significantly the production of 'whales' – projects that are increased the potential for the project to fail.' 'large, expensive and spectacular' – in preference to 'dolphins' – smaller and more manageable projects. Key among the conclusions was a finding that: In 2006, a Canadian report observed that in spite of 'Police looked extensively for existing suitable repeated warnings, a bias towards large IT projects packages but were unable to find anything that met continued and warned of the need for strong the INCIS specification. This in itself should have governance10. been a warning of the complexity and magnitude of the problem.' In spite of public assurances that the police wanted to use tested technology, by the New Zealand's National Crime Investigation time of the Request for Tender, the specifications System demanded the use of emerging technologies that were mostly unproven in a project of such scale When the New Zealand Cabinet approved the and complexity. Integrated National Crime Investigation System (INCIS) in 1994, the police ser vice already The supplier had warned prior to contract that it had a twelve-year history of struggling with was impossible to deliver the technology specified, the implementation of major new IT systems. but the police believed that the supplier's scale and INCIS was to provide criminal information, case its extensive resources would enable it to overcome management and intelligence analysis for the police, any difficulties with new technologies11. and it was expected to free up 1.9 million hours of police time, and save more than NZ$14 million on the systems then being used. A contract was signed After reviewing 25 cases where the implementation of with a major IT multinational, at a cost of NZ$204 IT systems had resulted in delay, the Public Accounts million. Committee (PAC) of the UK House of Commons concluded: By mid-1999, the project was significantly over-time and over-budget, and the contractor announced "The scale and complexity of projects is a that it was not prepared to proceed without major influence on whether they succeed or not. further payment. The government responded that Departments should consider carefully whether the supplier was expected to fulfil the existing projects are too ambitious to undertake in one agreement, and the company repudiated the go"12. Competition and Contracting: Learning from Past Experience
  12. 12. Page 12 2. Procurement Design Sometimes governments have no alternative to governance and management of the project – the designing and procuring an entirely new system decision to build the ferries was not supported by through a single contract, but numerous case studies information to demonstrate that they would meet remind us that the larger and more complex the the community's needs in a cost-effective way, and project, the greater the chance of failure. The OECD an unrealistic timetable led to a rushed process. recommended that government agencies design smaller projects that are capable of being scaled up as The Auditor-General reported that: '. . . the they learn from the outcomes of previous projects. proposal presented to cabinet did not identify that the cost estimate included was optimistic Optimism Bias (the risk of not meeting it was high), and that a slight increase in capital or operating costs would It is now widely recognised that those involved in make fast ferries financially less attractive than developing the business case for large and complex conventional ferries.' projects are inclined to overestimate the benefits and underestimate the risks, a phenomenon that has come Public commitment by the government to a three- to be known as 'optimism bias'. And yet in spite of year timetable had meant that important steps in an extensive literature warning about this risk, public design and construction were rushed. Construction officials responsible for the procurement of complex began before drawings were sufficiently complete, projects and services continue to make this mistake. and before contracts had been agreed with the shipbuilders. Major changes were made to the scope of the project without review of the implications Fast Ferries in British Columbia for the costs and schedule13. In 1994, the provincial government of British Columbia in Canada, announced a programme to The risks associated with the design, construction commission three catamaran-style high-speed ferries and operation of large and complex projects must be over a three-year period. A budget of C$230 million identified up front, and the potential impact on costs was approved and the relevant public authority, BC and schedules realistically assessed. After reviewing Ferries, created a subsidiary to manage the project. the fast ferries case study, the Auditor-General concluded that good project management should The last of the three vessels was not completed include a disciplined evaluation process for new until August 2000, almost three years late, and capital projects of financial significance, including the the cost had more than doubled. Moreover, the development of a rigorously prepared business case. completed ferries were unsuitable in terms of travel time, carrying capacity and operating costs, Understanding the Stakeholders' and it emerged that they caused environment and Experience property damage along the shoreline as they passed. The ferries were sold in 2003 for a fraction of their cost. Sydney's Cross-City Tunnel Inquiries by the Auditor-General and the PAC In February 2003, an international consortium was found that there had been breakdowns in the announced as the builder and operator of Sydney's Competition and Contracting: Learning from Past Experience
  13. 13. Page 13 2. Procurement Design cross-city tunnel, a public-private partnership (PPP) The UK's Criminal Records Bureau that was to take traffic under the central business district. During the tendering process, competition In 2002, the UK government introduced a new had focused around an upfront capital charge that certification system to scrutinise the background the operator would pay to the government for the of individuals working with children and vulnerable right to operate the franchise. adults. Employers were required to undertake background checks on prospective employees The 30-year contract was worth more than A$1 through a new Criminal Records Bureau. billion, and the tunnel opened in August 2005. In early 2007, the PPP went into receivership, and in The Bureau was formed as a PPP: the private June it was sold to a new consortium for A$700 partner operated the call centre, maintained the IT million, with the original operators having lost infrastructure, collected fees and issued disclosures, around A$560 million. while public officials accessed the police national database and managed relations with policing There was a public outcry surrounding the opening forces and agencies. On going live, the new system of the new tunnel, principally because of road immediately ran into difficulties, as the Bureau closures and traffic forcing measures that were found itself unable to respond to applications built into the design. It is probable that identical in a timely way. While the system shortfalls were measures would have been used if the government addressed in a matter of weeks, there was a public had designed and built, owned and operated the controversy and when it reviewed the experience, tunnel. But there was a widespread belief in Sydney the National Audit Office (NAO) identified some that the traffic changes had been necessary to important lessons. support the upfront payment to government, and that a 30-year contract had made rectification of Perhaps the most important shortfall lay in the the mistakes virtually impossible. failure to anticipate how the public would use the new system. It had been assumed that applications Two subsequent investigations concluded that there would come from individuals; employers tended to had been inadequate community consultation, so send them in batches, which required a different that the impact on local road users was poorly kind of relationship with end-users. It had also understood14. been assumed that more than 70% of applications would come by phone; in practice, more than 80% were submitted on paper. Another lesson that surfaces throughout the literature is the importance of understanding the way in which Some of these issues had been uncovered during services will be used by end-users and delivered by consultations with end-users in the months prior staff, and how the project will impact on the wider to launch. The contractor adapted to take account community. This is particularly important in public of these demands, but the system had not been service contracting where reforms are potentially designed to cope with so many paper forms, and more disruptive than in-house initiatives, and where staff were not appropriately skilled. Once the the formality of a legal contract means that the problems were identified, they were resolved within implications must be considered carefully in advance. a period of some eight weeks15. Competition and Contracting: Learning from Past Experience
  14. 14. Page 14 3. Managing the Procurement C ompetitive tendering has long been used by governments for the procurement of goods and price competition was the norm. And yet the proportion of contracting dollars awarded on a services from external suppliers, although it seems competitive basis continued to fall throughout the that some of the most basic lessons, such as the need 1970s and early 1980s. to maintain competitive tension among suppliers, and the dangers of using competition to drive down In 1983, Congress and the media exposed a price at the expense of quality, have still not been fully succession of contracting scandals caused grasped. by inadequate competition and the following year, the Competition in Contracting Act was Using Competition passed, mandating competition with only limited exceptions. However, this approach resulted in For most public services, it is competition that federal procurements becoming mired in red tape delivers value-for-money, rather than private sector – the Federal Acquisition Regulations extended to delivery. In one of the earliest studies of public some 2,000 pages – and in 1988, it was reported service contracting, Harvard academic John D. that government officials had still 'improperly Donahue concluded: 'Public versus private matters, steered contracts to preferred contractors'. but competitive versus non-competitive usually matters more.'16 Throughout the 1990s, federal procurement processes were reformed, but with the vast increase Competition regulators recognise that restricted in the use of contracting in defence, homeland competition and sole source contracting are security and emergency management (where sometimes necessary where a national emergency there is often the need for rapid response to crisis demands immediate action, or where the complexity situations), sole-source contracting has once again of the requirement means that procurement costs are become commonplace. Whereas 33% of federal high and there are few competent suppliers17. But contract spending was awarded without full and great care needs to be exercised when competitive open competition in the year 2000, by 2005, this tendering is not employed – public confidence in figure had risen to 38%18. contracting for public services is heavily contingent on the existence of transparent competition processes. A 2006 study by the GAO reported that out of 57 contracts for guard services at Army installations, 46 had been awarded without competition 19 . US Federal Procurement A congressional report on waste and fraud in contracting during the aftermath of Hurricane The US federal government has long placed Katrina (which hit New Orleans in August 2005) contracting at the heart of public sector reform, found that, as of 30 June 2006, less than one-third and yet it has continued to struggle to maintain of contracts had been awarded with full and open competitive pressure. The very first government- competition. As late as December of that year, the wide policy on contracting in 1949, specified that Federal Emergency Management Agency was still there should be 'competition in the marketplace awarding well over half of its contracts (by value) whenever practicable'. From 1972 when the first without full competition20. national procurement guidelines were published, formal advertising with contract award based on Competition and Contracting: Learning from Past Experience
  15. 15. Page 15 3. Managing the Procurement Building Competition Department signed a PPP with a national supplier to develop a standard IT system for some 380 Where competition is weak, with few bidders, magistrates courts nationwide. The contract procurement officials need to exercise great care encountered difficulties early in its life, and was to ensure that that they deliver value-for-money renegotiated twice: on the first occasion because for taxpayers. In such situations, the in-house bid the contractor had overestimated the revenues or the public sector comparator – the cost of the and underestimated the costs, and on the second public sector delivering the same service – will serve occasion, after delays in implementation caused as a benchmark against which to assess market costs to escalate. competitiveness. By mid-2001, the supplier was unable to deliver the core application at the first site, and it Kentucky's Otter Creek Correctional Facility claimed that it would incur massive losses on the project. The contract was renegotiated yet again, The tender for a 400-bed female prison at Otter significantly reducing the requirements and delaying Creek in Kentucky closed in June 2005, with only implementation. It has been estimated that the final one bidder. Under state law, successful tenders had costs were more than twice the original contract to be at least 10% less than the cost to the public price. sector of delivering the same facility. The tender documentation had disclosed the public sector's When the contract was scrutinised by the NAO, cost comparator, and unsurprisingly, the final bid a number of issues were identified. Following was 10% below the comparator, less a small amount earlier contract failures, the competition was for overheads. initially confined to two firms, and in the course of the tender, one of these two bidders, a major However, the State Auditor later found that the IT company, withdrew, leaving a sole-source department had underestimated the costs for procurement. The remaining bidder was at that time monitoring and administration, and when a more in serious difficulty with another major government reasonable estimate for overheads was included, IT contract (which was later cancelled for non- the Otter Creek bid was only 7.5% less than the performance)22. comparator21. It is usually not enough for government agencies to Where officials find that they are dealing with a issue a Request for Proposals and wait to see who single bidder, questions need to be asked about the submits a response. In order to ensure sufficient deliverability of the project, given current market competition, it is often necessary to survey the market interest and capacity. to establish the level of market interest and to ensure that the project is structured in a way that will be attractive to suppliers. In some cases, it may involve New IT Systems for UK Magistrates' Courts early engagement with potential suppliers to inform them of the opportunities and to ascertain their needs In 1998, following two failed IT projects going and priorities. back more than five years, the Lord Chancellor's Competition and Contracting: Learning from Past Experience
  16. 16. Page 16 3. Managing the Procurement Price-Based Tenders light. The UK PAC issued this warning about project management: 'what seems a clear objective at the In the UK, the Office of Fair Trading (a competition beginning can easily become blurred and confused as regulator) has argued that: 'Even where a contract is events progress'25. not awarded explicitly on the basis of lowest price, bidders will form expectations about the relative Similar difficulties can emerge in the management weight given to price compared to other criteria. of public services, where the client's demands or the [Clients] can influence these expectations by being wider political and policy context changes without more explicit about how they weight different adjustment to the underlying contract. selection criteria.'23 In many cases, these problems can be avoided through Where bidding success is largely determined by the careful planning, but with complex and long-term willingness to assume demand risk, in effect, this will contracts, this is not always possible. Regardless of operate very much like price-based tender, and the the cause, the financial costs of project drift can be project may suffer from the same failing. For reasons considerable and the success of the entire service or that are not entirely clear, franchises for the delivery project can be compromised. of public transportation services seem particularly vulnerable to this flaw. Successive studies over many years have pointed to optimism bias on the part of Yarl's Wood Detention Centre bidders in relation to traffic risk in transportation projects. This phenomenon has been documented in The new immigration detention centre at Yarl's relation to tollroads, bridge and tunnel projects, and Wood in England was finally opened in January urban transit24. 2002, almost a year late. The original procurement timetable had planned for bidders to be briefed in late May 2000, with short-listing in early June and Sydney's Cross-City Tunnel contract award at the end of the month. Work was to start on-site in early July and the centre was to be The successful consortium for this high-profile fully operational by April 2001. Some ten months tollroad had overestimated patronage by some 200% after the facility became fully operational, there was (yet another example of the winner's curse). Tolls a riot among the detainees, and a fire destroyed a were widely regarded by the public in Sydney as large part of the complex. having been set too high, and it was concluded that this had been caused in part by the government's According to a later review by the Prison decision to base the competitive tension around an Ombudsman, this timetable was undeliverable, and upfront payment from bidders to government. bidders progressively dropped out, finally leaving only one bidder remaining. The government's advisers warned that the timetable was not Project Drift achievable, and a subsequent review concluded, 'the speed with which things started to go wrong It is not unusual for the client's requirements to suggests it was at best over-ambitious and at worst change over the course of the procurement as shifts wholly ill-conceived'26. take place in the wider political, economic and policy environment, and as unanticipated issues come to Competition and Contracting: Learning from Past Experience
  17. 17. Page 17 3. Managing the Procurement One of the consequences of accelerated delivery in November 2007 by the PAC of the House of was a decision to construct the facility out of wood Commons concluded that 'One-third of procuring rather than concrete, and some of the interior authorities admit that they have insufficient resources walls were described as flimsy. If the facility had or in-house expertise for part or all of the. . . been used as originally intended, this might not tendering process [for PPPs].' have mattered, but shortly after opening, a decision was made to transfer in detainees with a criminal The same week, a report by the Audit Commission on background, some of whom had been involved competition and contestability in local public services in disturbances at previous centres. The Prison reported that 'councils generally lack sufficient people Ombudsman later concluded that the change with the procurement, risk or contract management was implemented too quickly, with a lack of skills to make effective use of market mechanisms'28. discrimination and with insufficient attention to the In the US, a succession of reports has commented likely consequences. on the lack of qualified programme managers, most notably in the Departments of Defense and Some claimed that this shift occurred as the result Homeland Security29. of a sudden change in policy, driven by a political timetable designed to relieve pressure on the prisons. The Prison Ombudsman concluded that New Zealand's National Crime Investigation while the shift in policy had not been driven by System Ministers, officials may well have misconstrued their intentions27. The factual details of this failed IT project have been outlined on Page 11. One of the many reasons for failure was the refusal to appoint an experienced The use of fixed-price contracts involving significant project manager to oversee this large, complex and risk transfer (such as those typically used in PPPs) unique contract. The police department had insisted has sometimes helped to focus the parties' attention that a sworn police office be chosen as Project on such questions up front. On the other hand, the Director, and in spite of strong policing credentials, legal formality of contractual arrangements involving he lacked experience in managing such a complex significant risk transfer may make contractual refresh project. Moreover, his place in the command-line to take account of environmental change more culture in policing made open and frank reporting difficult. of emerging problems difficult30. Many of the inquiries into failed and challenged contracts have addressed this question. The solutions lie in strong governance and management frameworks – clear ownership, good communication and periodic review. Contracting Capabilities Perhaps the most common of findings in contracting reviews is a lack of capability on the part of procurement officers. In the UK, a report published Competition and Contracting: Learning from Past Experience
  18. 18. Page 18 4. Contract Design A successful partnership for the management of complex public services depends on much more than a well-designed contract. However, since the franchisee at a premium. A new chief executive of the medical centre commented: 'When you are charging so much to park, the person is mad before the contract is a legally enforceable arrangement, the they even walk in the door.'31 structure of the formal agreement, the shape of the performance incentives and the way in which financial rewards and performance-linked deductions are applied will have a significant impact on the success Ontario's Highway 407 in delivering project outcomes and the way in which the relationship works. Good contract design has long In 1999, the provincial government of Ontario in been regarded as the essence of the contractual art. Canada franchised a newly-constructed highway to a private consortium for C$3.1 billion. Over the next five years, the new owners raised the Ensuring Public and Private Interests are tolls by 250%, provoking public outrage. In 2004, Aligned following the election of a new government, the Minister for Transport took the company to court Contractual incentives must ensure that the interests over their failure to seek permission for the toll of the private provider are aligned with those of the increases. Two years later, after several unsuccessful government customer – that private interest is joined court challenges, the government reached an to public duty. Failure by procurement officers to accommodation with the company, which agreed to understand the government's underlying policy needs minor concessions on toll increases. can result in a performance regime that motivates contractors to act in a manner that is inconsistent with The (former) Transport Minister was quoted at the public interest. Lack of control over the pricing the time as saying: 'It's inconceivable that any of public services has been one source of conflict. government would have given a private consortium the unfettered right to raise tolls for 99 years. . . Car Parking at a Public Medical Centre This was a very bad contract.'32 The PPP for the car park at the publicly owned In a lengthy study of Highway 407, former officials Westchester County Medical Center in New York from the Ontario Ministry of Transport accepted State was originally hailed as a model contract when that one of the lessons was that: 'A clearly defined it was signed in the early 1990s. The private car park process should ensure that public interest needs operator designed and built the facility at no cost to are balanced with private interests. . . Government the county, and was contracted to operate all of the must ensure that its rights are protected and that its parking lots at the suburban complex. Within three obligations (real and perceived) can be achieved.' years, parking fees had doubled, and the families of low-income patients were complaining about the Defining the Core Task cost. The importance of a well-defined business case Under the contract, the operator had been given the and rigorous checkpoint reviews has long been right to set parking rates for 20 years, and in 1999 understood. In the US, the GAO has stressed the a new administration purchased the complex from importance of commissioners understanding their Competition and Contracting: Learning from Past Experience
  19. 19. Page 19 4. Contract Design requirements and defining them in realistic terms. Establishing an Appropriate Performance For reasons that are entirely understandable, the Regime DoD employed incomplete contracts – 'undefinitised contractual actions' or 'letter contracts' – in the early Designing a performance regime that delivers the stages of reconstruction in Iraq. customer's core outcomes is a challenging task. It requires procurement officials to understand the The GAO concluded there were often good reasons service model (the way in which inputs are connected for such informal arrangements at the outset of a to outputs and outcomes), to identify a small number contract where there was insufficient time to negotiate of key deliverables and the measures that will contractual conditions in advance. However, there motivate appropriate conduct, and to ensure that the were legal requirements for prompt clarification and performance regime is flexible enough to take account finalisation of contractual conditions thereafter that of different service conditions. were not always followed. The GAO pointed out that this left the government exposed to escalating costs33. Performance Regimes for Light Rail Contracts Iraq Reconstruction A recent study of contractual perfor mance In March 2003, the US Ar my Field Support measurement by the Serco Institute compared the Command issued a contract to support the incentives created under several different kinds of Coalition Provisional Authority, the body charged rail contracts. In one case, the performance regime with the reconstruction of Iraq in the aftermath focused on 'headways' – the intervals between of the war. The estimated cost of the work to trains – for reasons of safety and service regularity. be performed under the contract was originally However, strong performance-linked deductions $858,803. But over a period of six months, the created an incentive to maintain headways above statement of work had been modified nine times. all else, so that if one train was running late, it By September, the cost had increased to $204 made sense to ensure that following trains were million, an increase of almost 25,000 percent. As proportionately late. late as March 2004, the statement of work under this contract had still not been finalised. Another contract focused on journey length, with a requirement to complete the total journey within The GAO recognised that, in order to meet urgent a specified timeframe. Since this contract failed to operational needs, it was sometimes necessary for address headways, where a train was running late, contractors to begin work before the key contractual the service operator had an incentive to bunch the terms, including price, had been finalised. In this subsequent services as closely as possible. case, much of the delay in finalising the contractual requirements lay in the continued growth of A third contract addressed both journey length and reconstruction efforts. However, the failure to service intervals, but was so inflexible that in some finalise contractual requirements in a timely way circumstances the contractor faced performance- could have a significant impact on contract costs linked deductions no matter what course was and related risks34. adopted. This still caused the contractor to make operating decisions based on what minimised the Competition and Contracting: Learning from Past Experience
  20. 20. Page 20 4. Contract Design performance-linked deductions, rather than what prisoner education, rather than just mandating the was best for the travelling public35. number of hours of classroom attendance. The US DoD has started contracting for launch services rather than rockets. And some local authorities in the UK Contracting for Outputs have made part of their financial payments for waste collection and street cleaning contingent on public Where services are complex, and client and provider perceptions of the cleanliness of municipal spaces. are unclear about the linkages between inputs and outputs, and where public officials have a low level of However, output-based contracts carry significant trust in the private sector's capacity to understand and costs, and immense risks, where there is significant deliver public sector outcomes, then there are good risk transfer and the quality of the outputs are poorly reasons why procurement officials should specify understood. inputs in the contractual performance regime. However, detailed specification of inputs narrows the London Underground PPP scope for innovation, which may limit the opportunity for contractors to deliver savings and experiment with Between December 2002 and April 2003, London better ways of serving end-users. Underground signed three 30-year partnerships w i t h t wo c o n s o r t i a f o r t h e m a i n t e n a n c e and renewal of the city's underground rail US Federal Procurement infrastructure. The net present value of the three contracts was valued at £ 15.7 billion. In July 2007, In 1995, US Vice President Al Gore mocked little more than four years into the contract, one of the rigidity of federal government procurement the two consortia was forced into administration, rules. Government wasn't a smart shopper, he after the shareholders and creditors refused said, spending too much in demanding goods and to provide more funding. The contractor had services that were custom-made to government overspent by some £ 2 billion. specifications: A detailed analysis of the collapse has yet to be 'For example, instead of buying Chips Ahoy undertaken, but an analysis by the NAO in 2004 cookies at wholesale – say, for the Army – it created identified some of the challenges associated with 700 pages of procurement specifications defining these three PPPs. for contract bakers how to make chocolate chip cookies. The specifications, as many soldiers no • The parties had a limited understanding of doubt would tell you, don't require the cookies to the state of the least accessible infrastructure. taste good.'36 • Responsibility was split between operations and infrastructure, a division that did not exist in any other major metro system in the world. A common trend in public ser vice contracting • The contracts were outcome-based, which, over the past decade has been the transition from given the uncertain state of the infrastructure, the specification of inputs towards contracting for made it difficult to measure success. Given the outputs and outcomes. Prison contracts increasingly lack of knowledge of historical performance, specify the desired educational outcomes from Competition and Contracting: Learning from Past Experience
  21. 21. Page 21 4. Contract Design it was difficult to know how difficult the targets would be to achieve. Some of the deliverables could only be measured some years in the future. • There was uncertainty as to the allocation of risk. An official closely involved in negotiating the contract has recently argued that the customer thought it was a fixed price contract, while the contractor thought it was cost plus. • In some areas, the customer could issue corrective notices, but there were no direct performance-linked deductions. What financial incentives there were impacted only at the margins of profitability. As a result, the contract neg otiations were extraordinarily complex – they had taken twice as long as expected and they had been conducted at a cost of £ 455m. One of the contracts was said to be almost 3,000 pages in length. Because of the uncertainty, it was fully expected that the price would change over time, and the flexibility mechanism proved to be insufficient when one of the franchise holders fell behind on its contractual obligations37. Competition and Contracting: Learning from Past Experience
  22. 22. Page 22 5. Contractual Accountability I f contractual incentives are to be effective, then the performance of service providers must be 20 hours a month, whereas 52% of traditionally contract prisons were monitored for more than 80 monitored, results must be publicly reported, and hours a month. The lack of monitoring has been contractors must be motivated through financial and identified as one reason why standards in the 'spec' reputational incentives. However obvious this may facilities have not been as high as in the traditionally appear in theory, it has not always been implemented contracted prisons38. in practice. Monitoring Performance US Defence Contracting At its simplest, good contractual accountability lies in the recruitment of a sufficient number of experienced As part of a move to deregulate federal contracting public officials who are capable of monitoring the and to reduce costs, there was significant performance of the contractor and ensuring that downscaling of contract monitoring and inspection the contractual conditions are met. The quantity staff throughout the 1990s. Staffing numbers at and quality of contract management staff has been the office of the DoD Inspector General were cut a matter of comment right across the industrialised by 21% between 1994 and 1997. At the Defense world, but for a variety of reasons, it has received Contract Management Command, staff were cut particular attention in the US. by 27% between 1993 and 1997. This was followed by a massive increase in demand for contract management brought about by the conflicts in Spot Contracting for Prison Places Afghanistan and Iraq. One of the most interesting developments in A GAO study in 2005 found that in nearly a third the US prison market over the past two decades of 90 defence service contracts that had been has been the emergence of a 'spot' market for reviewed, oversight had been inadequate due to prison places. Most prisons have been constructed a failure to assign performance monitors. And a and operated by private companies following a subsequent study concluded that DoD still did not formal procurement initiated by state and federal have sufficient contractor oversight at deployed authorities. However, a number of private providers locations39. and municipal authorities have constructed new prisons on a speculative basis, expecting that state In looking at major defence procurements in 2007, and federal governments would contract for places the UK PAC noted that key Ministry of Defence staff on a short-term basis. were neither held to account for a project's failure, nor rewarded for its success. The department had For much of the past decade, this has been a sellers' committed to promote staff in post in order to retain market, so that prison providers have been in a key skills, and to move staff in the case of failure. strong negotiating position, with greater capacity However, the committee pointed to the need to to dictate terms than under traditional competitive establish and publish an objective means of measuring tendering arrangements. This has contributed to success, and share its learning with other departments lower monitoring standards: according to one study, of government40. 90% of 'spec' prisons were monitored fewer than Competition and Contracting: Learning from Past Experience
  23. 23. Page 23 5. Contractual Accountability 4. Managing For Results Benchmarking Performance POGO argued that it was not sufficient for contract managers to extrapolate old prices or rely on the Benchmarking ongoing performance is probably outcome of the original competition. Particularly for the only way of ensuring value-for-money in long- long-term contracts, government needs to benchmark term contracts. Over time, the competitiveness of ongoing performance based on a 'should cost' basis. the original contract price can cease to represent For the same reason, in order to ensure that they are value-for-money as market conditions change, and as getting value-for-money, governments need to track suppliers remain aloof from market pressures. performance. Rewarding Performance The $620 Ashtray The principal tool for holding contractors to account Throughout the early 1980s, media reports and on service quality lies in the financial incentives congressional hearings identified outrageous associated with the agreement – bonuses for superior examples of overcharging in the US defence performance and, more often, performance-linked contracting sector that quickly became legendary deductions for underperformance. But for contractual – light bulbs worth $0.67 that were charged to the incentives to work, the rewards and performance- Pentagon at $18, ashtrays for the Navy Hawkeye linked deductions must be associated with success or Radar Plane priced at $620, and coffee brewers failure in delivering the key performance indicators for the C-5A Transport that were valued at $283 under the contract. in the market but charged to the government at $7,600 apiece. After a decade of tightening up, the problems surfaced again in the late 1990s – screws US Defence Contracting costing 57 cents, charged at $76; electric bells worth $46.68, charged at $714. Senior GAO officials have claimed that in too many cases, award fees are paid on the basis of effort and There were a number of explanations for this not results. In one instance, a defence contractor overcharging. In a famous episode of the David was paid $849 million in award fees in spite of cost Letterman Show in the 1990s, Vice President Al overruns of $10.2 billion and delays of more than Gore smashed one of these over-priced ashtrays, two years. This amounted to more than 90% of the arguing that it was over-detailed government available award fee42. specifications that had resulted in excessive pricing. Others claimed that they arose from a The GAO found that the DoD routinely failed practice of allowing overheads to be allocated to hold contractors accountable for achieving disproportionately to such minor items. But outcomes and in a sample of contracts studied by according to the Project on Government Oversight the GAO, the DoD paid out $8 billion in award (POGO), one of the organisations that first fees regardless of whether companies had met exposed the issue, the root of the problem lay in contractual expectations43. the fact that the military were not benchmarking the goods and services being sold to them by existing contractors41. Competition and Contracting: Learning from Past Experience
  24. 24. Page 24 6. Contract Management S uccessful contract management involves much more than monitoring performance under the for staff to adapt to the new system. However, the Agency also failed to undertake adequate contractual regime and imposing performance-linked contingency planning in the event that delays did deductions for the failure to deliver. With contracts occur. A failure to communicate effectively with for complex services, and particularly those involving the public resulted in a loss of confidence when core public services, contract managers cannot shift problems developed and a sharp increase in demand to the contractor the responsibility for successful ahead of the summer holidays. According to the outcomes. It is in these circumstances that the term NAO: 'partnership' is more appropriately used, with both client and contractor working together to deliver the 'Many of the risks associated with implementation. service or project in question. . . had been identified by the Agency at the planning stage, including delay and lower productivity. But Managing Risk the risks and the response required had not all been realistically assessed. . .'44 In some cases, government agencies have expected that in negotiating a legally enforceable contract, they have shifted the entire responsibility for the In 2000, the UK PAC warned: delivery of the service to their private sector partners. Contract management certainly involves a different set "Departments need to be clear about those risks of responsibilities from direct supervision, but when that cannot be transferred to the supplier, in it comes to core public services, there is no prospect particular, the wider business risks that might that the ultimate risk of delivery can be outsourced. mature if they do not have a fully operational system on the date required"45. The UK Passport Agency Appropriate Governance Contracts were let in 1997 for the introduction of Failure on the par t of the customer and/or a new computer system to manage the issuance of the contractor to establish suitable governance new British passports. Project delays, combined arrangements can be a major cause of project failure. with a tight timetable for the rollout meant that the Passport Agency was still struggling to introduce the London Underground PPP new system as the busy holiday season approached. Processing times increased to as much as 50 days The factual background to these very large and (compared with a target of ten), and by June 1999, very complex PPPs has been detailed on Page there was a backlog of more than half a million 20. As noted, less than four years into a 30-year applications. The Agency's telephone service was contract, one of the consortia contracted to unable to cope with the additional pressure, and maintain the London Underground was forced into long queues developed outside offices. administration after costs overran and shareholders and creditors refused to provide additional funding. The NAO found that the principal cause of the crisis lay in the tight timetable, combined with the Future reviews will identify the lessons to be failure to adequately assess the time it would take learned from this contracting disaster, but some Competition and Contracting: Learning from Past Experience
  25. 25. Page 25 6. Contract Management of the former public officials closest to the project work was immediately sub-contracted and then sub- have argued that governance was inadequate given contracted again, with each tier adding its margin. the complexity of the arrangements: 'According to one published account, the costs • The failed consortium was a five-party joint to the taxpayer under the tiered contracts were venture and lacked a strong executive. sometimes 1,700% higher than the job's actual • Much of the work was assigned to sub- cost. A second account reported that the taxpayer contractors, so that the consortium was a paid an average of $2,480 per roof for a job that complex organisation with a long contractual should have cost under $300.' In one case, the chain. subcontractor who actually performed the work • On the customer's side, responsibility was was paid $0.02 per square foot, while the prime also fragmented, with one of the stakeholders contractor was paid 36 times that value merely for actively hostile to the PPPs. As a result, passing the work down46. monitoring and regulation were weak. Successful Partnering Where the governance of a project is complex – because there are multiple stakeholders on the Long-term arrangements, and contracts that involve government side, or because there are several parties close interaction with end-users (and are thus (joint venture partners or prime and sub-contractors) politically sensitive), require public officials and involved on the supply – then attention must be paid private sector managers to work closely together in to the high-level structures and processes through true partnerships. Problems are inevitable where the which the project will be managed. parties do not develop a common appreciation of the challenges and a shared understanding of the Managing the Contractual Chain solutions. Where contractors themselves are sub-contracting to other suppliers to a significant part of the services in The National Insurance Recording System question, then it may be necessary for the customer to (NIRS) maintain scrutiny of the contractual chain, both as a way of ensuring that service quality is maintained and NIRS maintained the details of more than 65 in order to ensure that it is getting value-for-money. million national insurance accounts in the UK. In 1995, a contract was awarded by the Benefits Agency to a private firm to develop an entirely new Blue Roofs in the Wake of Hurricane Katrina system in less than two years. Within a brief time, it became clear to the contractor that the scale and In the aftermath of the hurricane that devastated scope of the project were such that it could not be New Orleans in August 2005, the Federal completed in the timescale, and a phased approach Emergency Management Agency and the Army was recommended and adopted. Corps of Engineers awarded so-called 'blue roof' contracts to three large contractors to cover However, the project still encountered major damaged roofs with plastic sheeting. Much of this difficulties and was delayed even further, resulting in Competition and Contracting: Learning from Past Experience
  26. 26. Page 26 6. Contract Management hardship for some individuals receiving retirement Commission subsequently established that the cause pensions and incapacity benefits. It was necessary was an O-ring on one of the solid rocket boosters to make payments on an interim basis, which in that had become brittle at low temperatures. As some cases resulted in vulnerable individuals being a result, hot gas had leaked from the booster and underpaid. pierced a fuel tank, causing the explosion. The PAC discovered that the parties to the There had been different problems with the O-rings contract did not have a common understanding for several years, but NASA had taken the view that on key commitments around delivery, nor did a two-year delay to the shuttle programme, while they have a shared understanding of each other's the joints were re-designed, was not warranted. responsibilities. The PAC stressed that: 'In complex major systems of this nature, which affect millions In particular, engineers working for the contractor of citizens, the relationship between the Agency had identified a risk to the O-rings at low and its contractors is crucial to success.'47 temperatures (and raised this with NASA), and when it became clear that the morning would be extremely cold, they recommended against Partnering involves an overhead in terms of cost and launch. Management accepted their advice and effort, but where complex services are involved, this passed on the recommendation to NASA. Officials is more than justified in terms of the results. Even told the contractor that they were appalled by at its simplest, it demands greater time and effort their recommendation and asked for evidence in communication than under a simple contractual that Challenger was not flight-ready. One of arrangement. the engineers later wrote of 'intense customer intimidation'. Partnerships in Complex Structures Faced with a threat to their relationship with NASA, Even where client and contractor organisations are the contractor's senior management team reversed working closely together, systemic failure is possible their stand, denying their engineers a further role due to the sheer complexity of the way in which in the deliberations. NASA immediately accepted various teams work together. This is true even the launch recommendation without question, only of unitary structures, so that where two or more demanding a signed copy of the rationale for the organisations are working in partnership, and where records. processes are tightly interconnected, the way in which organisational structures and professional cultures The Presidential Commission blamed operator interact is fundamental to success. failure, but professional studies of the Challenger disaster have since focused on organisational culture. It was not so much the individuals who NASA and the Challenger disaster were to blame as the social framework within which they worked to resolve complex technological On 28 January 1986, ten miles off the ground and problems. seventy-three seconds after take-off, the Space Shuttle Challenger exploded, killing the seven The problem was not that the two organisations astronauts on board, including Christa McAuliffe, were not working closely tog ether. NASA NASA's first 'teacher-in-space'. A Presidential Competition and Contracting: Learning from Past Experience
  27. 27. Page 27 6. Contract Management personnel were located at the contractor's plant, there were regular face-to-face meetings, and teleconferences were a way of life. NASA officials robustly challenged the contractor's research, and sophisticated risk assessment processes were in place. Moreover, the engineers from the two organisations had worked together to resolve emerging problems associated with the joints and O-rings over several years. One of the factors that may have influenced the contractor's management team to acquiesce was their heavy reliance on NASA for work. In this case, authority relations between the government client and the private contractor probably worked against mission safety. But in deciding to recommend the launch, managers within NASA and the contractor were working within a decision-making framework that had evolved over a series of successful shuttle launches in which together they had adjusted to heightened risk levels48. Competition and Contracting: Learning from Past Experience