In a move that is likely to send government suppliers into a mild paperwork frenzy, the UK government has announced a significant push for the implementation of across-the-board, harmonised Open Book Contract Management for its public contracts.
On 24 May 2016, the UK Crown Commercial Service issued a policy note setting out the UK government’s move towards Open Book Contract Management (OBCM) as a way to scrutinize suppliers’ costs and margins.
We recently commented on how the UK government has made transparency a central plank in its policy proposals, and the policy note is certainly in line with the UK government’s broader commercial and political goals for greater transparency. However, in practice, OBCM risks placing a greater compliance burden on businesses involved in UK government contracts.
Affected UK public bodies are required to begin a review of their contract portfolios by 24 June 2016, to establish which tier of open book management review to adopt. Departments must start their implementation of OBCM by 24 July 2016.
What is OBCM?
The proposed UK government approach to OBCM involves the structured scrutiny of a supplier’s costs and margins through the reporting of, or access to, accounting data. The proposed new approach follows previous reports of the UK Public Accounts Committee which have concluded that the system of UK public sector contracting gives too much advantage to suppliers, and that a more transparent open book policy is one way to redress a perceived imbalance.
The goal is to allow contracting authorities to be clear about their suppliers’ charges, costs and planned returns. OBCM supposedly provides a collaborative basis to be able to (i) review performance, (ii) agree on the impact of change and (iii) bring forward ideas for efficiency improvements. The government hopes that OBCM will help contracting authorities improve value for money outcomes and build mutual understanding and trust with government suppliers.
In the past, OBCM has been criticised for being too resource intensive, costly to deliver and prone to poor execution, all of which are factors that have the potential to damage commercial relationships between governmental departments and suppliers. Contractors have also complained that there is limited common understanding of OBCM, and that a successful implementation of OBCM relies too heavily on a mix of specialist skills.
Also, of course, many suppliers strive to avoid open book contracts and, indeed, for many years the UK government was a leading advocate of large private finance/public-private partnership contracts based around a bundled service charge where an open book policy has limited application.
What does the UK government plan to do?
To tackle the perceived problems of open book accounting, the policy note is intended to ensure that a proportionate and consistent approach is applied to a variety of contracts. It applies to all central government departments, their executive agencies and non-departmental public bodies—n particular, departments which plan the management of contracts for IT, business process outsourcing and facilities management.
Fundamentally, the government’s view is that, in the future, an open book approach should be used on all contracts where the additional cost is justified by the perceived level of benefits and risk. If the open book approach is thought to be appropriate, a supplier should then assess the requirements of the contract to determine the type and level of open book practices that should be applied. The policy note introduces a tiered framework, which allows contracting authorities to determine the most appropriate processes and tools to apply to each public contract.
For example, a low-risk, unspecialised contract with low innovation and easily understood costs would be described as a “Tier 1” contract. Tier 1 contracts are the simplest forms of contract, so there is little need for sophisticated processes or tools; therefore, managing the contract would only require that the charges being invoiced are verified as accurate and true. In practice, it should be clear from the contract how the supplier measures the costs (i.e., the costs which suppliers actually incur or expect to incur in delivering their services) and how it calculates the charges (i.e., the price paid for these services, which includes costs plus any margin or contingency). Practically, these figures could be compiled in a simple spreadsheet to clarify how fixed costs are assembled.
Perhaps the best that one can say is that the new policy should help to standardise OBCM’s usage across contracts. It encourages contracting authorities to apply a rigorous assessment of their contracts from the start, in order to determine the likely resource demand that will occur over time. It is hoped that this will, in turn, incentivise departments to prioritise their contract portfolio.
But commercial resistance to OBCM is likely to be high, and there remains a legitimate question over whether, in practice, the new policy will adequately harmonise the myriad contracts that are handled on a daily basis by UK governmental bodies. The tiered system will no doubt assist with the prioritisation of contracts, but the descriptions for each tier are broad and imprecise. Further, contracting authorities are told to use “good commercial judgment” when reviewing their contracts, which is arguably no different than what they already do—“good commercial judgment” doesn’t necessarily move the conversation forward.
In addition, neither the policy note, nor its accompanying guidance notes, set out a particular timeframe within which any existing contracts must be reviewed. If the proposal is designed to operate retroactively across all existing contracts, this could place a significant administrative burden on contractors—and, of course, ignores the very real issue of how departments should go about retroactively negotiating open book audit clauses.