1. Contract management is especially important where suppliers are engaged to provide services over a long period of time—for 10 years or more on occasion—and customers need to ensure that service levels and value for money are maintained over the duration of the contract. Having performance measures and keeping them up-to-date is essential for managing supplier performance. In most cases, central government regularly collects performance information and discusses performance with suppliers, though key performance indicators are not always updated to keep pace with changing business requirements. An exception at the time of the National Audit Office's work was the Foreign and Commonwealth Office, which had no formal performance measures for managing its contract for travel services, worth £23 million a year, although the contract had been in place since December 2007.[2]

2. Good contract management should also include financial incentives to encourage suppliers to improve performance, and 80% of the suppliers surveyed confirmed that incentives did encourage them to perform. Central government makes limited use of financial incentives, however, with over a third of the contracts covered by the National Audit Office's survey having no provision for such incentives. Furthermore 38% of contract managers did not always invoke payment deductions where suppliers under-performed, even where the contract entitled them to do so.[3]

3. The Office of Government Commerce did not consider it surprising that contract managers did not always apply financial penalties. In its view, this finding did not indicate that relationships with suppliers were too cosy since there were situations where customers and suppliers were working closely together to improve performance and applying penalties would not be helpful. Nevertheless, the Office of Government Commerce accepted that there would also have been instances where penalties had not been applied but should have been. To secure value for money, relationships should be challenging, contracts should contain provision for financial incentives and penalties, and customers should not set penalties aside simply to avoid upsetting their suppliers.[4]

4. Where contracts run for a long time, the value for money of ongoing services and of major changes to the contract should be assessed regularly, for example, through price benchmarking or market testing. Doing this can result in significant savings. The Home Office, for example, saved £17 million a year on its IT contract by benchmarking the service against market prices. Of the contract managers surveyed, however, 25% of those responsible for contracts that had been running for at least three years had undertaken no value for money testing of ongoing services. And 41% of contract managers had not tested the value for money of new services.[5]

5. The Office of Government Commerce confirmed that periodic value for money testing, particularly where there are changes to a contract, is an important requisite of managing complex contracts. While the very large contracts usually did provide for benchmarking or other kinds of value for money testing, many contracts did not. The Office of Government Commerce would therefore stress in its guidance the importance of building regular opportunities to test value for money into future contracts.[6]

3   C&AG's Report, para 2.19 Back

4   Qq 10-12, 64-65, 90 Back

5   C&AG's Report, paras 2.25-2.28 Back

6   Q 14 Back