Contractors face tighter scrutiny of charges for local authority contracts after it was revealed they are overpaid by at least £300 million a year.
Cost consultant EC Harris carried out forensic accounting on more than £1 billion worth of former public sector contracts with the likes of utility and energy firms and discovered all were overcharged by between 3 per cent and 7 per cent.
It said local authorities typically spent 20 per cent of their income on contractors, paying more than £10bn each year through open book partnering, target cost and cost reimbursable contracts. Even by applying the lowest 3 per cent overcharge across the total contractor cost, the figure amounts to a minimum overspend of £300 million.
The Local Government Association’s partnership and project delivery arm 4ps has now called for authorities to ensure they have the right processes in place to cost contracts correctly.
4ps director of finance and commerce Brian Standen, who claimed that precise figures for overspending were difficult to ascertain, admitted: “EC Harris is right to suggest that councils need to make certain they have the correct processes and skills in place.
“This would ensure that both the correct contracts are let in the first place, but also appropriate processes are introduced to manage the contracts once let.
“Local authorities have already made significant steps to achieve this, but further improvements can still be made.”
Bill Green, head of local government at EC Harris, said there was no question of wrongdoing on the part of contractors. He said the problems occurred on open book partnering, target cost and cost reimbursable contracts.
Mr Green said issues also arose when contracts were not correctly analysed, resulting in unnecessary, unsubstantiated and disallowable charges.
“The overspend is a result of local authorities failing to exercise their contractual right to review charges and not being sufficiently rigorous in analysing payments to contractors and suppliers,” added Mr Green.
“The errors stem from councils not fully auditing these charges, often because of a lack of analytical skills in open book accounting and because of headcount reductions which are driven, ironically, by cost cutting initiatives.”
Mr Green said the impact of the oversight could be heightened if the Conservatives won power at the next general election, in June 2010.
Under Conservative plans, increased budgetary powers would be devolved to local authorities.
4ps said it had developed a project directors’ development programme – the first formal training course specifically designed for project directors working on PFI and PPP schemes – to ensure contracts were properly let.
Mr Standen said: “We have designed the PDDP with University College London and Constructing Excellence to improve the strategic awareness, leadership team working skills, procurement and negotiation expertise, and commercial awareness of the project directors working on these complex projects.”
PARTNERING UP: The new face of council contracts
A new body is being formed that will be responsible for public and private sector procurement and contracting for local authorities.
On 3 August, Local Partnerships is being formed jointly by the Local Government Association and Partnerships UK.
It will comprise all of the activities of local government’s project delivery specialist, 4ps, as well as a number of Partnerships UK’s activities.
Local Partnerships will provide expertise to support commissioning, market shaping and market management, project management, procurement and contracting in public bodies.
Partnerships UK chief executive James Stewart said: “We already work with 4ps in the schools and waste sectors and it makes good sense for us now to move forward by combining our respective strengths in a number of other areas.”