Learn Past Exp

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.

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

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


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.


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.

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


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.


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, 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



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



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.



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



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.


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



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



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



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


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


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


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


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.


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


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.


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



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



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



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.


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