Control framework for the procurement and management of major service contracts

Report: 6
Date: 4 October 2001
By: Treasurer

Summary

The Treasurer commissioned this report in response to concerns arising in respect of a number of major services contracts that have been outsourced. It draws on a number of different pieces of Internal Audit work that have already been carried out on outsourced contracts and places particular emphasis on bringing out the learning points for the future. The attached appendix defines the key controls that need to be in place to provide an effective procurement control framework. It also highlights points of best practice and refers to relevant legislation that governs the procurement process.

A. Recommendations

1. Members endorse the lessons learned for the future.

2. Members approve the implementation of the points of best practice contained in the appendix.

B. Supporting information

Background

3. The MPS has outsourced a number of major service contracts in the three years following the Support Services Review in 1996. The annual spend on these contracts for 2000/01 was £124 million, 31% of the total non-pay controllable costs of £401 million.

4. The MPA Internal Audit Directorate has reviewed in detail the control framework in place for the award and monitoring of the vehicle repair and maintenance contract and for the awarding, changes to and management of the vehicle removal contract. In addition, Internal Audit has previously reported on other aspects of the procurement process through their routine systems and investigative work. Such reviews and investigations have commented on tendering procedures, inventories and asset identification, the lack of monitoring of pay data under the payroll contract and overcharging by the contractors on dangerous dogs and outsourced catering services.

5. This report draws on the information gathered from previously reported review activity. It does not include matters arising from the current audit of the Client Unit for the Carrillion (formerly Tarmac) and Interserve FM (formerly Building and Property) contracts and ongoing reviews into matters relating to Information Services and Telecommunications unless the senior management concerned have confirmed the issue.

6. This report is structured to consider the objectives of each stage of major service outsourcing and consequential contract management, associated risks, the key controls needed to ensure the objective is achieved, and, where appropriate, any recommended best practices for the future.

Internal Audit Opinion

Procurement of service contracts

7. The initial processes to identify services for possible outsourcing were set up properly and carried out effectively. Professional advisers were used for legal aspects, business identification issues and calculating the public sector comparisons.

8. Existing MPS business and financial systems were poor in a number of the areas subsequently outsourced and in consequence not only were the true costs of the existing service difficult or impossible to obtain but also some poor practices and unnecessary bureaucracy were incorporated in the systems after outsourcing. In some areas inadequate steps were taken to identify existing assets and equipment prior to outsourcing. Without an ability to assess the true cost of an effective service and to identify accurately the assets transferring to the contractor’s responsibility, the MPS was placed at a disadvantage in its negotiations with bidders.

9. Procedures for the receipt, control and opening of tenders remained weak throughout the period of the major outsourcing projects.

10. Although the EC ‘Restricted’ procedure applied in the tendering instances that we have examined, we found that in practice the ‘Negotiated’ procedure had been applied for at least one contract.

11. Adequate written guidance existed to cover the main processes of procurement. However, some key aspects of internal procurement guidance were not followed (including separation of commercial and technical bid evaluation information) for those services outsourced as a result of the Support Services Review.

12. Commercial evaluations of bidding companies were not adequate or effective although they followed the laid down processes.

13. Effective reverse-out strategies were not prepared before outsourcing, nor were any contingency plans put in place until after contracts had started.

Management of service contracts

14. All the contracts we examined had performance measures and penalties or rewards built into the contract. However, adequate mechanisms were not put in place to gather the appropriate information to monitor performance effectively and in more than one instance performance penalties were either suspended or not applied.

15. Contract managers and contract management teams had only had limited guidance and little or no training to carry out their roles effectively. Some contracts have needed extensive on-going negotiations with resulting changes from the intended specification. The position of the MPS to carry out effective negotiations and to think proactively about the development of contracts has been hampered by the lack of appropriate skills in the client units and adequate management information prior to any negotiations.

16. Budgets for some contracts have not been set up properly nor have they been monitored effectively. In one instance considerable expenditure was incurred without any responsible budget holder in post and income related to the contract was not controlled or monitored by any budget process or responsible officer.

Lessons to be learned

17. Existing systems should be capable of achieving the desired objective and supporting financial and management information should be robust before any decision is taken about outsourcing or in-house provision.

18. Realistic timescales have to be set for any outsourcing process. The need to meet a deadline should not take priority over the need to get it right.

19. Effective reverse-out strategies must be in place and backed by realistic contingency plans that are up-to-date and practical.

20. Commercial evaluations of potentially winning bidders must be carried out professionally and effectively.

21. All outsourced contracts should be supported by the appointment of a suitably trained and experienced Contract Management Team and clear lines of authority and responsibility defined.

22. For major service contracts it increases the risk considerably when there is only one contracted supplier. Contractors need monitoring as much as the contract.

23. The appendix sets out the key controls and best practice that are designed to limit the risks to the organisation when engaging in significant outsourced procurement. There is always a role for management judgement in these circumstances but management should ensure that there is adequate documented justification for any decision to depart from the guidance set out here.

C. Financial implications

The risk of loss through fraud, abuse, waste or inefficiency if the points of best practice are not effectively implemented.

The robust procedures described in the appendix may add to the MPA’s costs but should represent an investment and avoid errors in the longer term. Resourcing for bid evaluation teams, recruiting and appointing experienced contract management teams and maintaining reverse-out strategies will need to be funded. Details of these costs will depend on the outsourcing under consideration and can only be accurately estimated as examples arise.

D. Contact details

Report author: Peter Tickner 020 785 8666

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix

This report sets out the objectives for each part of the procurement and contract management process. It defines the key controls that need to be in place for the objective to be achieved and also highlights points of best practice.

Service identification

Control objective

1. To ensure that only appropriate services are identified for contracting out.

Associated risks

2. Services may fail causing operational policing difficulties, targets and objectives may not be met and costs may increase.

Key control

3. The objectives of the contracting out process are clearly defined and properly approved.

Key control

4. An effective risk assessment is carried out to help determine those services that may be suitable for contracting out.

Recommended best practices

5. The MPA approve a comprehensive approach to risk assessment to be applied when considering areas for contracting out. This approach should include evaluating the adequacy of the existing control environment.

6. Particularly in areas of business where the MPS is relatively unique or proposes an activity little seen or supported in the existing market place, adequate and documented research should be undertaken to establish the likelihood of success before a major outsourcing activity is undertaken.

Key control

7. The cost of providing the in-house service at the required quality standard (Public Sector Comparator) is accurately estimated prior to contract action being approved.

Recommended best practices

8. The cost of providing the in-house service and the current quality of service for that cost (Public Sector Comparator) is calculated and approved before contract action is agreed.

9. This Public Sector Comparator is treated as a benchmark and used in the evaluation process to compare bids against continuing in-house provision. The Public Sector Comparator should be kept up to date and revised as risk assessments are developed.

10. The MPS provides comprehensive guidance for staff on procurement procedures for major service contracts.

Key control

11. Appropriate senior management approves the services identified as being suitable for Contracting out.

Contract specification

Control objective

12. To ensure that the contract requirements are clearly identified and specified and properly approved.

Associated risks

13. Inappropriate service provider may be appointed. The service may not meet requirements and costs may increase.

Relevant legislation and government guidance

14. SI 1993/3228. CUP Guidance 40 (The Competitive Tendering Procedure. CUP49 (Trident Works Programme).

MPS documented policy and guidance

15. DPCS Policy and Procedures. Sections 2 (Paragraphs 2.1-2.16) & 5 (Paragraph 5.4-5.7). DPCS Document Guidance. Guidance Note 2 (OJEC Notice).

Key control

16. Key stakeholders and users are appropriately consulted in determining the user requirement and contract specification.

Recommended best practice

17. Key stakeholders are consulted at appropriate intervals when drawing up the contract specification and throughout the outsourcing process.

Key control

18. The contract specification, including the user requirement, is clearly documented and properly assessed and incorporated in the approved contract terms and conditions.

Recommended best practice

19. That due consideration is given to ensuring that specifications are complete and appropriate (including mandatory provisions) and that realistic timescales are set.

Key control

20. Appropriate senior management authorises contract action.

Key control

21. An effective Reverse-out strategy is in place, including a fully documented and regularly updated contingency plan.

Recommended best practices

22. Effective Reverse-out strategies are determined for all major outsourced service contracts.

23. A specific contingency plan to enable a major contract to be placed with other service providers or, if necessary, taken back in-house is drawn up at the specification stage and regularly updated to ensure that it can be operated during the life of the contract.

Project management

Control objective

24. To ensure that the contract is delivered to specification within the agreed budget and time scales.

Associated risks

25. Costs are exceeded and deadlines are not met. Service failure. Targets and objectives are not met.

Legislation and government guidance

26. CUP Guidance 49 Trident Works Programme. CUP43 Project Management. CUP60 Supplier Appraisal.

MPS documented policy and guidance

27. CIS Guide to Managing Projects (Published 1996).

Key control

28. The Project is organised in line with recognised project management principles.

Recommended best practice

29. A recognised project management methodology is applied to the procurement of all major service contracts.

Key control

30. The Management Board approves the Project Terms of Reference or Project Initiation Document.

Key control

31. A Project Board is established to ensure the effective direction of the project.

Recommended best practice

32. A Project Board is set up to direct the outsourcing of any future major service contracts in line with the PRINCE guidelines generally adopted by the MPS.

Key control

33. The Project Board appoints appropriately skilled and trained personnel. Roles and responsibilities of all those involved in the project are clearly defined and properly approved.

Recommended best practices

34. The Project Board appoints appropriately skilled and experienced personnel to the project.

35. Roles and responsibilities of all those involved in the project are clearly documented and approved by the Project Board and where appropriate Management Board.

Key control

36. Reporting lines between Senior Management, the Project Board, the Project Manager and the Tender Evaluation Panel are clearly defined and approved.

Recommended best practices

37. The respective roles of the Programme Board, Project Board, Project Manager and Evaluation Teams are clearly defined and approved by Management Board and the MPA.

38. The work of the Evaluation Panel is monitored and approved by the Project Board.

Prequalification and invitation to tender

Control objective

39. To ensure that only appropriately qualified potential service providers are identified for tender action.

Associated risk

40. Penalty action may be imposed against the MPA. Fraud and Corruption. Unqualified potential service providers may be invited to tender. MPS resources may be wasted.

Legislation and government guidance

41. S1 1993/3228. Part 1 Regulation 6. Part III. Regulations 9 - 13. Part IV. Selection of Service Providers. Regulations 12, 14-20. CUP Guidance 40. The Competitive Tendering Process and Tender Evaluation; CUP60 Supplier Appraisal; CUP 51 Introduction to EC Procurement Rules.

MPS documented policy and guidance

42. DPCS Policy and Procedures. Sections 5 (Contracting Actions), 6 (Exceptions to Policy) & 12 (EC Services Directive). DPCS Standard Documentation Guidance Manual. Guidance Notes 1-4 and 16.

Key control

43. Contract and pre-qualification requirements are advertised in OJEC.

Recommended best practice

44. All contracts are appropriately advertised in line with current legislation.

Key control

45. Suitably skilled and experienced staff are appointed to the commercial and technical evaluation panels by the Project Board.

Recommended best practices

46. Appropriately skilled and experienced staff are appointed to the commercial and technical evaluation panels by the Project Board.

47. The Project Board approves all changes to the commercial and technical evaluation panels and this approval is clearly recorded.

Key control

48. Completed pre-qualification questionnaires and supporting documentation is checked and evaluated properly by appropriately trained staff against the approved criteria.

Recommended best practices

49. All pre-qualification questionnaires are marked by appropriately skilled and trained evaluation panel members and the scores accurately recorded on file.

50. A commercially qualified accountant carries out appropriate financial checks at the pre-qualification stage.

51. DPCS guidance is expanded to include the pre-qualification stage in more detail.

Key control

52. The results of the pre-qualification evaluation are independently verified.

Recommended best practice

53. The Project Board reviews and approves the work of the Evaluation Panel and the Project Manager.

Key control

54. Complete Invitation to Tender packs are promptly sent to all approved bidders, their despatch is accurately recorded and the bidder acknowledges their receipt.

Recommended best practices

55. The Procurement Officer, or Project Manager, ensures that invitation to tender receipts are received from invited suppliers and these are retained on the contract file.

56. All invitation to tender action, including management approval, is clearly recorded in the contract file.

The tendering process

Control objective

57. All potential bidders are treated equally and fairly throughout the tender process.

Key control

58. Adequate records are kept to prove that bidders have been treated equally and fairly.

Recommended best practices

59. All bidders are informed of any changes at the same time and this is accurately recorded on the contract file together with the approved changes.

60. DPCS provide detailed guidance on the principles to be applied when contact takes place with bidders during the tender process.

Key control

61. Changes to the contract specification are properly approved and do not exceed the original parameters of the specification as set out in the OJEC Notice and do not favour one bidder or group of bidders.

Recommended best practice

62. Decisions taken comply with the legally enacted EC regulations in the UK in force at the time.

Key control

63. All tender invitees are given controlled and monitored access to sufficient relevant information.

Recommended best practices

64. Dates, names and other essential details of bidder due diligence visits are recorded at the time and that information together with any related correspondence is retained with the contract files

65. All valuable assets are properly identified and recorded before any transfer of either assets or maintenance responsibilities to a third party.

Receipt of tenders

Control objective

66. To ensure that all tenders are received by the deadline and held securely throughout the process.

Associated risks

67. Award of contract to inappropriate suppliers. Fraud and/or corruption. Penalty action is taken against the MPA

Legislation and government guidance

68. S1 1993/3228. Part III Regulation 12. CUP Guidance 40 Paragraph 12.1.

MPS documented policy and guidance

69. DPCS Policy and Procedures. Paragraphs 5.21-5.26. DPCS Document Guidance. Guidance Notes 5&6. (See also MPA Contract Regulations section 9)

Key control

70. Anonymity of tender is maintained until the tenders are opened in a controlled environment.

Recommended best practices

71. The anonymity of bidders is strictly maintained for all tender action within the MPS.

72. DPCS guidance is amended in line with MPA regulations.

Key control

73. Receipt of tender is immediately recorded and tenders are securely held throughout the process.

Recommended best practices

74. A central team, independent of all contract action, is set up to receive and immediately record all MPS tenders.

75. The central team securely stores all tenders in an area separate from the procurement, business and user teams.

Key control

76. Late tenders are identified, clearly recorded and not taken forward for evaluation.

Recommended best practices

77. All late tenders are identified and not forwarded to the tender opening panel for further procurement action.

78. If the MPA wishes to accept late tenders in certain circumstances, then the criteria for the acceptance of late tenders will need to be clearly laid down and approved by Management Board.

79. The Director of Procurement and Commercial Services seeks MPA approval for the inclusion of all late tenders in the MPS that may be taken forward for evaluation. In every case, the reason and decision to take forward are clearly recorded in the contract file.

Key control

80. A Tender Opening Team is appointed and tenders are opened in a controlled environment soon after the tender deadline.

Recommended best practices

81. Tenders are opened in the presence of two people who are independent of the procurement process.

82. DPCS guidance is expanded to include opening panel procedures.

Key control

83. Only complete tenders are accepted.

Recommended best practice

84. DPCS draw up clear guidance on action to take for incomplete tenders. Any material omission by the bidder should lead to rejection of the tender.

Tender evaluation

Control objective

85. To ensure tenders are properly processed and evaluated in accordance with EC and UK legislation.

Associated risks

86. Appointment of unsuitable supplier. Poor performance and/or Service Failure. Increased costs. Financial Penalties imposed against the MPA. Allegations of fraud and corruption.

Relevant legislation and guidance

87. S1 1993/3228. Part IV. Selection of Service Providers. Regulations 14-20. CUP Guidance 40 Section 15 Tender Evaluation; CUP 60 Supplier Appraisal; CUP 55 Ethics in Purchasing;

MPS documented policy and guidance

88. DPCS Policy and Procedures Paragraphs 5.27-5.36 and 12.78-12.114. DPCS Document Guidance sections 2-6. Guidance Notes 7a-7d (Evaluation of Tenders), 18 (Assessment of Accounts), 12 (Site Visits), 13 (Suppliers Visits), and 14 (Presentations).

Key control

89. Each bid received is checked to ensure that it is compliant with MPS tender qualification requirements.

Recommended best practice

90. All tenders are checked to for compliance with the tender qualification criteria and tender specification and that these checks are clearly recorded.

Key control

91. Commercial and Technical team members are independent of each other and commercial and technical details are not exchanged between teams.

Recommended best practice

92. Commercial and Technical team members are independent of each other and commercial and technical details are not shared between the teams.

Key control

93. A thorough commercial evaluation of all companies is performed against the approved criteria. Where appropriate, parent company guarantees are sought that are sufficient to safeguard the interests of the MPA.

Recommended best practices

94. All commercial evaluations are properly performed against approved criteria and the results are clearly recorded for management and audit review.

95. If a company likely to be awarded a contract is not financially substantial enough a parent company guarantee must be sought and obtained from a company that can meet the likely obligations of the contract before contract award.

96. Only suitably professionally qualified officers carry out commercial evaluations.

Key control

97. A thorough technical evaluation of all companies is performed against the approved criteria.

Recommended best practice

98. Technical evaluations are carried out against pre-agreed and approved written criteria and these results are clearly recorded in the contract file for management review.

Key control

99. Bidders premises and facilities are checked and assessed by qualified staff and the results of these visits are assessed and included in the final evaluation.

Recommended best practice

100. Where applicable, site visits are always made and the results clearly recorded and used in the evaluation process.

Key control

101. The quality and price evaluations are based on a systematic and approved model.

Recommended best practices

102. The criteria for marking price and quality, and the use of mathematical models, is clearly recorded and agreed before tender receipt.

103. Presentation of the results from the price and quality models and inclusion in the evaluation is agreed and consistently applied throughout the evaluation process.

Key control

104. Independent references are checked and found to be satisfactory before any award of contract.

Recommended best practice

105. Bidders are required to list companies and public organisations for whom they have provided similar services to that specified in the contract and that two of these are independently selected and reviewed by the evaluation team to validate information provided by bidders.

Bid clarification, post tender negotiation and due diligence

(Bid Clarification is the process by which the MPS ensures a mutual understanding with the contractor of what has been agreed. Post Tender Negotiation is the means by which the MPS then ensures best value within the agreed contract specification. Due Diligence is the contractor’s responsibility to ensure they understand the business for which they are bidding.)

Control objective

106. To ensure that the contractor agrees with the MPS about the service under contract and that the final contract price represents best value.

Associated risks

107. Value for money is not achieved. Penalties imposed on the MPS for improper actions. Disputes with the contractor over the nature of the service to be provided.

Legislation and government guidance

108. SI 1993/3228 Part V. CUP Guidance 1 & 55.

MPS documented policy and guidance

109. DPCS Policy and Procedures. Paragraphs 5.38-5.40 and 12.91-96. DPCS Document Guidance. Section 7 (Shortlisting). Guidance Note 12 (Site Visits),Guidance Note 13 (Suppliers Visits), Guidance Note 14 (Presentations), Guidance Note 14 (Post Presentation visits)

Key control

110. The results of Bid Clarification are clearly and accurately recorded and any action required approved by the Project Board.

Recommended best practice

111. Where a bidder has not met any key aspect of the tender they should be excluded from the next stage of the process.

Key control

112. Appropriate Post Tender Negotiation action is only taken with qualified bidders.

Recommended best practices

113. DPCS issue strict criteria and guidance on procedures to follow when considering post tender negotiations.

114. If Steering Groups or Programme Boards are not satisfied with the decisions of panels or groups set up to provide a professional evaluation then further clarification and explanation should be sought before any overrule of their decisions. If it is then determined to set aside the professional evaluation then the reasons must be clearly documented and evidenced

115. Post Tender Negotiations under the auspices of the restricted EC procedure must stay within the bounds of the enacted legislation.

Key control

116. The MPS ensures that bidders have accepted their responsibility for evaluating any due diligence data provided by the MPS before contract award.

Recommended best practice

117. Formal acknowledgement is sought at final bid stage from tenderers that they have had sufficient accurate information to enable them to bid.

Key control

118. Final bids are properly recorded and the results incorporated in the final evaluation.

Recommended best practice

119. All post tender negotiations and final bid markings following evaluation are clearly recorded and vetted by a suitably qualified Project Board, independent of those with the authority to evaluate and award the contract.

Contract award

Control objective

120. To ensure that contract terms and conditions meet the requirements of the MPS and safeguard its interests and that the contract is awarded to the most appropriate service provider.

Associated risks

121. Additional Costs are incurred through poor performance. Service failure. Fraud and corruption.

Legislation and government guidance

122. SI 1993/3228 Part V. CUP Guidance 59D (Model Conditions of Contract).

MPS documented policy and guidance

123. DPCS Policy and Procedures Paragraphs 5.47-5.50. DPCS Document Guidance. Guidance Note 8 (Award of Contract). Guidance Note 15 (De-briefing).

Key control

124. Legal representatives in order to safeguard MPA interests approve contract Terms and Conditions.

Recommended best practice

125. Where there is any risk of legal challenge formal advice should be sought, recorded and acted upon.

Key control

126. Senior management’s decision to award contract is clearly recorded.

Contract management

Control objective

127. To ensure that the required level of service is delivered and best value achieved throughout the life of the contract.

Associated risks

128. Service failure. Public embarrassment. Loss of income and/or increased expenditure. Fraud and Corruption. Litigation.

Legislation and government guidance

129. CUP Guidance 61 (Contract Management).

MPS documented policy and guidance

130. DPCS Policy and Procedures. DPCS Document Guidance. Guidance Note 10 (Contract Management), 17 (Contract Performance Questionnaire).

Key control

131. An effective contract management framework is in place.

Recommended best practice

132. All outsourced contracts are supported by the appointment of a suitably trained and experienced Contract Management Team and clear lines of authority and responsibility are defined.

Key control

133. Information on the contractor’s performance is checked for timeliness, relevance and accuracy by officers appointed to manage the contract.

Recommended best practice

134. The accuracy, completeness and timeliness of information on the performance of service providers is verified by MPS officers appointed to manage contracts.

Key control

135. Actual performance is effectively monitored against the performance targets agreed as part of the contract and appropriate action taken.

Recommended best practice

136. Performance is effectively monitored and penalties invoked where appropriate.

Key control

137. Contract expenditure and income, where appropriate, is effectively monitored.

Recommended best practices

138. Effective budgetary controls are applied to the management of outsourced contracts.

139. Adequate checks are carried out to confirm the level of service provided prior to the authorisation of payments to outsourced contractors.

140. Where income is received in relation to items that can also generate expenditure, these aspects are effectively analysed, checked and monitored before any payment is made to the contractor.

Key control

141. A post implementation review of the outsourced area is conducted.

Recommended best practice

142. A comprehensive post implementation review of outsourced services is carried out within a year of the contract being let. This should enable any lessons to be learned for future outsourcings to be found. The post implementation review should also include financial checks on the contractor, reviewing insurance certificates and revisiting the original business case to see if the benefits have been realised.

Key control

143. Regular reviews of the contract and the financial, insurance and business position of the contractor are carried out throughout the lifetime of the contract.

Recommended best practices

144. All major outsource service providers are constantly financially monitored for major changes to owners, Directors, share structures, financial statements and other relevant matters that may impact on the financial viability of a contractor.

145. At least annually, the latest position of the contractor on insurance, contingency plans, quality processes, monitoring and vetting of staff, and other significant specific contract issues is checked to ensure that the fundamental aspects of the contract are being met.

Send an e-mail linking to this page

Feedback