The House of Commons public administration and constitutional affairs committee found there are fundamental flaws in the way the government awards contracts because of “an aggressive approach to risk transfer”.
The report, published on Monday, found that ministers try to spend as little money as possible when awarding contracts while forcing contractors to take unacceptable levels of financial risk.
Often the government does not fully understand the risks it is transferring to private companies, the committee says.
It’s a risk, so no one does understand it properly, of course.
But then that’s rather the point isn’t it? That the people carrying the risk have skin in the game? That capital is at risk as that buffer against that risk?
Given the State’s never ending increases in spending, it seems they’re not trying very hard to ‘pay as little as possible’.
The skin in the game is a strong motivator. A private firm with capital at risk will manage/ mitigate the risk. The public sector probably won’t.
A couple of decades back oil companies thought they’d stumbled upon the oh-so clever idea of forcing contractors to take massive risks on projects, even those that originate outside their scope. They have spent the time since complaining bitterly about the soaring costs of projects, the unreasonableness with which the contractors approach project execution, and endless delays which hit them more than anyone regardless of their cleverness.
@Tim Newman,
UK MoD came up with exactly the same wizard wheeze for developing defence kit: load all the risk onto the contractor. Which is not inherently a bad idea… until you then select your winning bid on price, and the one which included the least risk contingency and was most optimistic would inevitably win.
You also hit the point when a company is prepared to take on unfunded and large risks (which may bite years downstream, by which point the managers responsible will have moved on) to generate income in the short term: this was one part of the epic goat orgy that was Nimrod MRA.4, where DPA smugly congratulated themselves on properly pineappling BAe (at that point in dire straits and facing the imminent closure of their large aircraft site at Woodford) on price, and nobody senior seemed to ask questions like “…and if we hit any problems, how will we deal with them other than prayer?”
Risk doesn’t go away if offloaded, you’re just shifting around who’s paying directly and indirectly.
And what makes customers really upset is when you’re costing in the risk of indecision, delay, reduced order size, requirement change and specification creep – in other words when they’re shown how much their own poor practice costs them. Hilarious when it happens (by a supplier who wasn’t too bothered about a small UK MOD order – they were willing to take a profitable deal but not to lose money) and really ought to occur a lot more often…
The old ad age about how you can only achieve 2 of these 3 things – time, budget, quality – and it depends which one you want to sacrifice