Public sector paying over odds for contracts

12 Jul 07
Public bodies are undermining Prime Minister Gordon Brown's efficiency drive by paying up to two-thirds above the market rate for equipment and services, a study of the sector's procurement habits has found.

13 July 2007

Public bodies are undermining Prime Minister Gordon Brown's efficiency drive by paying up to two-thirds above the market rate for equipment and services, a study of the sector's procurement habits has found.

Research by consultancy Compass, seen by Public Finance, warns that despite some examples of improved purchasing across public bodies, top-quality performance is 'rare' because many organisations use 'irrelevant' measures of value. Consequently, they are wasting taxpayers' cash just as the Comprehensive Spending Review is shortly to impose tight financial constraints across central and local government.

'Too many [organisations] are still focused on the front-end costs of their contracts and have little idea about the whole-life costs that they enter into,' Simon Scarrot, head of marketing at Compass, told PF.

'Costs can appear low in the early years with this approach, but it ignores the impact of policy adjustments, changing departmental needs and transformational projects over the life of outsourcing deals that can last seven years or more.

'The cost impact of these changes often eliminates any original savings and leads to poor value for money and poor governance over the longer term.'

But a senior Whitehall procurement specialist said that the study 'appeared not to fully reflect recent improvements to whole-life estimates and general procurement practices'.

Compass assessed 240 procurement deals undertaken in the past two years, all worth £20m and above, and found a government agency paying 65% above the market rate for IT servers and storage; a major government department paying 20% more for outsourced computers, servers and infrastructure, despite its scale; and an executive agency paying 17% above the industry standard for basic professional services.

Excessive use of procurement advisers, rather than in-house specialists working with suppliers once the contract was in place, exacerbated costs. Compass found that some outsourced firms, keen to win a share of the growing market, priced contracts at 'uneconomic levels' at up to 18% below the market rate.

But these costs had risen significantly by year three of a contract, sometimes to 30% above the market rate, often because monitoring was poor and suppliers used market changes to glean extra cash.

Compass also criticised the public bidding process for making the situation worse: suppliers do not want to write off bid costs, so do everything that they can to land contracts.

Scarrot criticised public bodies for 'poor governance, no accountability and no way of calibrating value for money as the contract runs'. The solution, he argued, was to monitor contracts closely and to introduce benchmarking and market comparisons throughout the contract.

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