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Infrastructure blog

Government publishes new playbook for outsourcing contracts

27 February 2019

Disappointingly the reforms aren’t mandatory for the built environment, where they are urgently needed.

Government publishes new playbook for outsourcing contracts
The collapse of Carillion led to intense scrutiny of government outsourcing practices. Image credit: Elliot Brown/Flickr

The government has updated its polices relating to the outsourcing of public contracts by publishing The Outsourcing Playbook.

It follows the intense scrutiny that government outsourcing practices have been under since the collapse of Carillion in early 2018.

The playbook introduces 11 reforms aimed at improving the decision-making that underpins the awarding of outsourced contracts, while enhancing the overall quality of the contracts themselves.

Shortcomings recognised

The government’s honesty in recognising that there have been some significant shortcomings with the approaches that are currently used to outsource contracts is welcome.

Chief among these is an admission that on a number of large and complex projects there has been a bias to award on the basis of lowest cost rather than on whole-life value. There is wide-ranging agreement that this is no longer sustainable.

The reforms in brief

The 11 reforms include the introduction of should-cost modelling, a new approach to risk allocation, plus incentivised pricing and payment mechanisms.

Undertaking should-cost modelling will help to prevent the race to the bottom on lowest cost on complex projects, by providing government with the necessary intelligence to take a more realistic approach to cost when awarding contracts.

Moves away from awarding contracts based on lowest cost are more likely when there is robust evidence available that demonstrates this is not the most effective thing to do in the long term.

Apportioning risk on an equitable and incentivised payment basis to those project partners that are best placed to manage it is critical.

Simply transferring that risk from government, to tier 1 contractor and then gradually further down the supply chain leaves those without the necessary expertise and resources to fulfil complex contract terms.

This in turn leads to sub-optimal project outcomes, including overruns on cost and time, alongside issues relating to quality and performance.

The other reforms detailed in the handbook are as follows:

  • Publication of Commercial Pipelines
  • Market Health and Capability Assessments
  • Project Validation Reviews (PVR)
  • Make versus Buy assessments
  • Requirement for Pilots
  • Key Performance Indicators (KPIs)
  • Assessing the Economic and Financial Standing of Suppliers
  • Resolution Planning

No mandatory application to civil engineering and building

There is a great deal of value in these reforms and collectively they have real potential to positively impact on outsourcing where applied effectively.

However, what is disappointing is that the reforms are not mandatory for building and civil engineering.

This is a shame because in the built environment specifically there is a genuine need for change in relation to risk allocation and the incentivisation of behaviours and outcomes.

That said, government and industry must continue to work together in driving reform on a voluntary basis. For example, marrying up the principles set out in the playbook with the encouraging work that is already being undertaken as part of initiatives like the Infrastructure Client Group’s Project 13. Something that ICE has been supporting for some time.

The need to improve major project planning and delivery

Not all of the perceived shortcomings in the delivery of major projects and programmes can be linked to inadequate outsourcing and procurement practices.

There are a number of challenges in relation to project governance and management that have an impact, alongside a range of externalities that also hinder, such as key political events e.g. a change of governing party.

On this basis, ICE is currently undertaking a piece of work to understand in more general terms why projects run over both in terms of time and cost.

It is expected that a report summarising the key findings of this work will be published in the spring.

  • Ben Goodwin, lead policy manager at ICE