What’s the cost of poor contract design and management? When it comes to our nuclear deterrent here in the UK, the answer is reportedly £1.35 billion. That is the figure the Public Accounts Committee (PAC) has placed on the cost increases suffered on three MoD projects, resulting from bad contractual decisions.
Your choice of contract model will have a fundamental impact on the likelihood of success in your strategic supplier relationship.
As the anchor supporting the behaviours and performance of parties in a relationship, your contract model must be well considered and carefully selected to put your relationship on the right path with the right strategic partner.
The points listed below look to break down the reasons behind this significant cost to the UK taxpayer, why it came about, and what you can do in your procurement governance process to minimise the chances of this happening to you.
The Cost of Repeated Mistakes
The UK’s nuclear deterrent comes in the form of a fleet of nuclear-armed submarines. The vehicles, equipment, weapons and facilities that make up and support our nuclear deterrent require quite some looking after throughout their life cycle – from construction/manufacturing to decommissioning.
Three ongoing infrastructure projects – the Core Production Capability facilities at Raynesway, the Primary Build Facility for the Dreadnought-class submarines, and the construction of a new facility to assemble and disassemble nuclear warheads at Burghfield – were singled out by the PAC for their ‘poor management’.
Almost 80% of the £1.35 billion cost increase incurred on those three MoD projects was from just one of them, Project Mensa, the construction of a new facility at Burghfield.
According to the PAC’s findings, almost 50% of the £1.07 billion additional cost incurred on this project was down to construction starting on the facility before the ‘requirements and designs’ had been clearly defined, resulting in significant rectification costs and time delays.
PAC Chair Meg Hillier is reported to have said that this was a spectacular repeat of the same mistakes the MoD had been making for decades and will come “at huge cost to confidence in our defence capabilities”.
The committee had six recommendations to offer:
- “In the future, the Department must more explicitly identify and manage the risks of initiating infrastructure projects without a fully mature programme design, and plan using appropriate checkpoints within contracts to assess progress.
- In the 2020 report to Parliament on the Dreadnought programme, the Department should update us on how it is taking full advantage of the Single Source Contract Regulations, making full use of target cost or firm price contracts, and ensuring that it effectively shares risk with site owners when negotiating commercial arrangements.
- Given its impact on the overall defence budget, the Department should make a case to the Treasury for ring-fencing the nuclear budget in the course of the discussions in 2020 for the current Integrated Review and the Spending Review.
- To secure performance improvements across infrastructure programmes, the Department must continue the commendable practice of admitting failures early and learning from its mistakes. We expect to see as standard more robust liaison arrangements between the Department, site owners and regulators, including the use of co-location of teams, consistent with practice in the civil sector, to accelerate the process of reviewing and learning.
- Given the specialist nature of this field, it is essential that the Department has in place effective arrangements to maintain corporate memory, and works with industry and other government departments to develop the skills needed to be able to take forward nuclear work in line with best practice. The Department should update us on the progress it is making in this regard in the 2020 report to Parliament on the Dreadnought programme.
- The Department must avoid writing contracts which purport to transfer risk to the private sector when in reality this is illusory. The Department must only write contracts which are explicit about where risks lie and how those risks will be monitored and managed by both the Department and the contractor. The Department should write to us by 31 December 2020 to provide a detailed assessment of whether the current ownership arrangements for nuclear regulated sites are in the best interests of the taxpayer and whether more could be done to exploit the intellectual property arising from developments on the sites in the national interest.”
Delays to the three nuclear infrastructure projects have been estimated to be anything up to six years and four months long.
7 Steps to Minimise Misunderstandings when Procuring Complex Solutions
The procurement process has to have two primary outcomes in mind:
1) the selection of the right supplier, and
2) the creation of the most appropriate contract deliverables from all the information gathered to determine #1.
So, procurement involves a deep dive into analysis, research and information gathering to understand ‘what is’, to realistically assess ‘what could be’ or ‘the art of the possible’, and to evaluate the most appropriate route to take and the risks you’ll face along the way. All of which can go to determine how a strategic relationship can be supported by an agile, outcomes-based contract, that encourages the right behaviours and standards while discouraging the wrong ones.
Step 1: Analysis phase
Involve all stakeholders in determining and quantifying the business outcomes and objectives you anticipate achieving, the key performance indicators that may be required to identify milestones along the route to success, and the way this can best be communicated to all parties to ensure understanding and appreciation of the ramifications of not achieving desired outcomes.
Step 2: Internal alignment
All strategic partnerships have more than one side. While it can be tempting to place total responsibility for all aspects of delivery on the shoulders of your supplier, it is vital that your internal team must also play their part. They need to understand the business case, and they must appreciate the responsibilities and the behaviours that are expected of them throughout. And your team must also recognise the importance of working collaboratively towards a common goal and that their role in the process can either oil the wheels of productivity or seize them up.
Step 3: Supplier alignment
The understanding of your goals, expectations and ramifications of failure by your strategic supplier should never be assumed. Even if you take the view that you have clearly communicated these matters, there is no guarantee that they have been understood or at least understood with the intricacy and nuance that is required for both you and your supplier to be pulling in the same direction. Understanding your supplier means knowing the most effective mechanisms to communicate, the questions you must ask to qualify that understanding, and knowing once this has been achieved.
Step 4: Early market testing (the art of the possible)
Your ideal supplier often has a wider perspective and greater market knowledge and experience in their field than you do, otherwise you would be more likely to handle this demand in-house. Use their expertise to critically analyse the viability of the outcomes you are looking to achieve and your assumptions about the route needed to achieve them.
Early market testing often identifies both small and material issues you may have thought were unimportant or were unaware existed. The process will often reveal solutions that could optimise strategies ahead of putting together the procurement information that interested suppliers will want to engage with you on. This ensures that the procurement process itself can more accurately place the project on the right road to success.
Step 5: Scoring criteria
If you are in the public sector, in order to comply with EU procurement regulations (the equivalent of which will still exist post-Brexit) and assure best practice and outcomes from your selection phase, it’s vital to develop a clearly understood (by all parties) and objectively weighted scoring mechanism. Each element in that mechanism – skills, experience, evidence of operating culture, and ability to develop and maintain commercial trust (to name but a few) – must be quantifiable so you can assess the relative suitability of your potential partners.
Step 6: Supplier due diligence and their ‘Duty to Warn’
Your strategic supplier is likely to have a much wider and extensive market, operational, solution and situational knowledge over and above your own organisation. More often than not, your supplier will undertake a due diligence exercise on your expectations (also known as ‘blueprinting’, and usually paid for) to develop a much greater and specific understanding of your organisation and the outcomes it expects to achieve from the delivery of the supplier’s solution. In this respect, the law will regard them as an ‘expert’ and as such, they will have ‘specialist responsibilities’.
As an ‘expert’ in its field, specialist suppliers have a ‘Duty to Warn’ if there is anything in their proposed solution which a) they believe will not enable them to achieve your objective, b) if there is any missing information that you have not supplied them with to enable to them make that assessment, and c) whether there is any expertise or resource that they are lacking in which would jeopardise their ability to achieve the outcomes you have identified for them, and what the ramifications of this may be.
The output suppliers create upon completion of their due diligence at this stage should be incorporated into the procurement scoring criteria if undertaken at a pre-contractual stage to assist in the supplier selection process, but should also to be incorporated into further objective and KPI development and ultimately the contract that will guide the relationship.
If this supplier’s due diligence is completed post-contractually, it should form the first part of a two-part award process so that consideration can be given to award the second part of the contract (the solution to be delivered) once you have confirmation from the supplier that its due diligence exercise has not identified any material issues or costs over and above its original proposal.
Step 7: Agile, outcome-based contract considerations
With all of the above followed diligently for every new relationship, you will have the information you will need for the creation of a strategic partnership contract that will focus the right behaviours for your relationship to have its best chance of success.
Reverse engineer your contract terms from the outcomes you are looking to achieve and the information you have gathered along the way, including the due diligence/blueprinting outputs. Orientate its drafting to be clearly understood by all parties and include process flow-chart mapping of the key contractual terms so that a fair and a clear guide to the contract drives the right behaviours. Do not forget that this document is not just aimed at your suppliers, it must guide the actions and reactions of your own teams to support the process and their supplier counterparts.
According to the PAC, the major issues faced on these contracts occurred in their “early stages” and “Since 2016, the Department has negotiated some changes to the contract at one of the three programmes – Mensa – to reduce its financial risk exposure.” So, while £1.35 billion is a significant overspend, and the repetition of mistakes that PAC highlighted paint a troubling picture, it does look as though things are moving in the right direction now. We hope to see their lessons learned from this experience.
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