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Contract types

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Grant

Public bodies most commonly use grants (rather than contracts) when they don’t need there to be a legal obligation to deliver. The use of grants is particularly encouraged for the delivery of small-scale services, where the work involved in competitive tendering processes would be disproportionate.

Organisations receiving a grant from a public body will most likely be expected to show evidence that they have done something with the money, although there isn’t usually the same level of accountability and scrutiny as with a contract.

Contract

The most common scenario in public service procurement is the award of a contract where, to put it simply, one party pays another party to deliver a service or outcome. Usually, only constituted organisations can enter into a contract.

Aggregated or prime contract

Over the last decade, there has been a move towards contracts being combined or aggregated into large contracts covering several services, or across a wider geographic area, or both. Whereas in the past a local authority may have had several funding arrangements for smoking cessation, weight management, sexual health promotion, and so on, we might now see a single ‘behaviour change’ contract being issued.

This often necessitates several organisations collaborating to deliver a service, rather than working in isolation. The organisation that holds the contract is the prime contractor, and they will hold subcontracts with delivery organisations. The prime contractor is responsible for delivering the contract, and therefore for the performance of all the subcontractors.

The impact of this for smaller voluntary organisations is that they may not have the scale or expertise required to bid for and manage a large contract. One way to ensure that small organisations can engage in the delivery of the service is through a consortium.

Commissioners often require providers to have a certain level of financial turnover to be eligible to bid for such contracts. Public Contracts Regulation 58 legislation now limits this at 2:1, meaning that for a £3m contract, a commissioner cannot ask for providers to demonstrate existing turnover of more than £6m.

Concession contract

When a commissioner issues a concession contract, the commissioner provides no funding. The provider must provide all the investment to get the service up and running, and find a way to fund the service. This would typically be by charging the service user. The provider makes all the investment, takes all the risk and reaps any reward, such as profit.

Example

Central government established the Commissioning Academy in 2013 with the aim of ‘improving the skills of public sector leaders so their teams can design service provision, influence external parties, and shape and manage markets to get the best outcomes’ (UK Government). In 2015, government decided to outsource the Academy and tendered a concession contract. The contract included provisions that government would make available to the provider all the resources and intelligence that had been developed over the few years that the Academy had already be running.

NCVO and a group of partners formed a new company, the Public Service Transformation Academy, that won this contract. Several of the partners invested some working capital on a loan basis so we could get going. Our company is non-profit making, so any profit that we make is reinvested into public service transformation work. Delegates (public service commissioners) pay a fee to attend events, and any surpluses are reinvested into the enterprise.

Network contract

Some commissioners use this term to describe a contract with stipulations that the contract must be delivered by a network of providers. One organisation must still bid for the contract and take overall responsibility for the delivery. For the commissioner, this guards against the risk of a prime contractor bringing a significant amount of delivery in-house during the lifetime of the contract, or, as has been done in the past, names small organisations in their bid and then fails to subcontract delivery to them.

The advantage for smaller voluntary sector providers is that they are guaranteed a role in the contract. However, it is recommended that a certain degree of flexibility is written into the contract that allows, for example, the lead partner to adjust the volumes of delivery between providers, or to recruit new providers during the contract, if the named providers under-perform.

Framework agreement

A commissioning authority (or sometimes a collaboration of authorities) recruits several providers to a framework that may last for a specific period– eg three years. Only providers that are on the framework may bid for contracts. Usually there is a rigorous selection process to admit providers to the framework (often a pre-qualification questionnaire), and (in theory) this saves time and effort in future because the commissioner has a marketplace of organisations that has been quality-checked.

The process by which a commissioner then procures services from the provider market is often called ‘call-off’.

Because this has the effect of limiting competition for a period, the term of a framework agreement may not usually exceed four years, ‘save in exceptional cases duly justified, in particular by the subject-matter of the framework agreement’ (Public Contract Regulations 2015, Reg. 33(3)).

Reserved contracts (or ring-fencing)

Certain health, social and cultural services may be reserved to employee-owned mutuals or social enterprises for a period of up to three years (Public Contract Regulations, Article 77). After this time, the commissioner may put the service out to open competition.

This process usually applies to situations where a public body spins out a service to an independent employee-owned entity (often called a ‘mutual’). Typically this new organisation will be a charity or social enterprise.

A qualifying organisation must fulfil all the following conditions.

  • Its objective is the pursuit of a public service mission linked to the delivery of the designated health, social and cultural services.
  • Profits are reinvested with a view to achieving the organisation’s objective. Where profits are distributed, or redistributed, this should be based on participatory considerations.
  • The structures of management or ownership of the organisation performing the contract are based on employee ownership or participatory principles, or require the active participation of employees, users or stakeholders.
  • The organisation has not been awarded a contract for the services concerned by the contracting authority concerned pursuant to this Article within the past three years.

Alliance contracting

Alliance contracting is a contractual arrangement that relies on all parties having an equal decision-making role in the delivery of services. It is a mechanism for delivering joined up care. In this model, commissioners and providers, rather than working in a transactional relationship where one party purchases something from another party, share the responsibilities and risks.

What’s the difference between traditional and alliance contracting?

Regular competitive contractingAlliance contracting
The emphasis is on transfer of risk - the commissioner pays the provider(s) to deliver a service and take on the associated risks. There is a shared risk and reward structure.
The commissioner has a single contract with a provider (or group of providers). All providers and the commissioner are involved in the alliance team and therefore in the joint oversight of project progress and performance.
Usually the provider retains any surplus or profit. Any surpluses or profits are shared between commissioner and providers, and any losses are shared.
This can lead to an adversarial relationship between commissioner and provider. This creates an environment where all parties in the structure feel a collective responsibility for the service to do well and meet financial targets.

Examples

There are only a few examples of alliance contracting to date, mostly in the health sector. ACEVO has produced a  detailed report on alliance contracting.

Page last edited Sep 12, 2017

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