The question, is contracting right for us is an important one for the voluntary sector, particularly small organisations historically funded principally from grants or donations. With government increasingly funding the voluntary sector through contracts, it may also be a valuable question for those traditionally receiving statutory grants.
A contract is a legally enforceable agreement between two or more parties. A contract exists (regardless of what it is called) when:
- both parties have accepted something, i.e. one person makes an offer and another person accepts it by performing the offer's terms or communicating approval
- there is an exchange of consideration (anything of material value)
- there is an intention to create a legally binding relationship.
In some cases the agreement between the voluntary organisation and a public sector organisation might be a Service Level Agreement (SLA). An SLA may or may not be a contract, depending on its content.
Legal issues to consider
As a legally binding relationship, contracting is a significant step for a voluntary organisation and there are a number of implications and risks to consider. Trustees of a charity, or the senior staff with responsibility for the governance of a voluntary organisation, should understand the precise nature of the contractual relationship – particularly if the relationship has changed from a grant to a contract.
Sustainability of your organisation
Contracting is one of a number of income streams that could support an organisation to be financially sustainable. As part of strategic planning it is worth conducting a review of all current and potential sources of income.
To enter into a contract, an organisation should be incorporated, in other words set up as a legal entity of some kind. If you are not incorporated, a contracting agency would have to enter into contracts with individual trustees or senior members of staff. The person who signs the contract is liable for contractual obligations entered into by an unincorporated organisation.
Reputation and independence
In signing a contract, a voluntary organisation must ensure that it maintains its independence and does not stray from its overall purposes. Will the delivery of the contract be compatible with the voluntary organisation’s aims, priorities and values?
The voluntary organisation’s governing document must permit the voluntary organisation to deliver the contract. The contract must be consistent with the voluntary organisation’s objects or be carried out by a trading subsidiary, or classified as small-scale trading.
Trustees of charities, or staff responsible for a voluntary organisation’s governance, have a duty of care and must exercise prudence, acting in the best interests of the voluntary organisation and its beneficiaries. For example, conflicts of interest must be considered in circumstances where a member of the trustee board, or a staff member, is involved with the contracting organisation. Do trustees, and senior staff, understand the degree of risk and potential personal liability arising from a contract?
Trustees or senior staff should ensure that contract negotiations are in the interests of the voluntary organisation and that they understand the terms and conditions. For example:
- repercussions of contract underperformance
- requirements to purchase insurance
- monitoring of the contract
- contract termination. Terms for terminating the contract by either party should provide a balance between security and flexibility for the voluntary organisation.
An organisation will want to answer these five financial questions:
- will the contract value cover the full costs of delivering the service, including indirect costs and overheads?
- if the contract is paid in arrears (after a service has been provided) will the voluntary organisation have sufficient cash flow?
- have VAT implications been considered?
- will the voluntary organisation need to register for VAT?
- should the contract be delivered by a trading subsidiary to manage the risks associated with trading?
Skills and capacity
Particularly if an organisation is new to contracting it may want to ask, does the organisation have the capacity and skills to tender for the contract, negotiate the agreement, and manage and report on the contract?
Funders are increasingly using more complex funding arrangements, for example, payment by results. Many small voluntary organisations have reported being held to contract terms they were not aware of, or were unclear about. Be rigorous in understanding what the contract requires, and always take the time to discuss any doubts with a commissioner.
TUPE refers to the Transfer of Undertakings (Protection of Employment) Regulations 2006. This legislation requires that if a service delivered by one provider goes out to tender, and is won by another provider, and the service is substantially the same, the staff delivering the contract have the right to be transferred to the new provider. This is a complex area of law, and it is very important to seek advice on this if you are thinking of bidding to deliver a service that another organisation is already running.
With the recent trend towards commissioners tendering out very large contracts, the landscape for the voluntary sector is changing. Increasingly a large voluntary organisation or a private sector company (‘prime contractor’) will win a contract, then sub-contract to a group of provider organisations (‘supply chain’) to deliver all aspects of the contract.
A small, locally based organisation, delivering a niche service, could be a very valuable part of the overall service offer, and may therefore find itself negotiating a contract with a prime contractor, possibly from the voluntary or private sectors.
Some voluntary organisations are forming consortia. These offer economy of scale and added value to bids for, and delivery of, large contracts. Consortia tend to be developed through a ‘bottom up’ rather than ‘top down’ approach, with organisations coming together as equal partners to deliver more effective and efficient services to local people.
The culture and motivations of different types of organisation may diverge – for example priorities of a public body, a commercial prime contractor or a large voluntary organisation may vary. It is important to know the agendas of partners.
A Compact is a voluntary agreement that aims to foster strong, effective partnerships between public bodies and voluntary organisations. Its principles apply to all relationships between voluntary organisations and public bodies distributing funds on behalf of the government.
At a borough, district or county level, Compacts cover partnerships between voluntary organisations and local public bodies (such as councils, police and fire services, and health commissioners).
If a public sector body acts against Compact principles in the tendering or awarding of a Compact, there should be a process in place locally to raise this as a concern. Your local infrastructure organisation or council for voluntary service should be able to advise on this.
Compact Voice provides useful information and case studies on partnership working and the creation and implementation of local Compacts.
Further information and support
- Before you sign a contract. Knowhow's checklist of points to consider before signing on the dotted line with links to sources of legal advice.
- Good Guide to Trading (NCVO publication).
- Sustainable Funding – A Guide for Trustees (NCVO publication).
- Government guidance on VAT for charities.
- Scoping contracts and finding tender opportunities.
- Gov.Uk Tendering for public service contracts.
- Contracts Finder.