Carillion’s collapse and the future of commercial contracting for INGOs
5 February 2018
The past year has been tumultuous for organisations that deliver DFID and other UK aid contracts. Major changes have been introduced to the way DFID does its contracting and the media spotlight has been constant in the international development sector.
While we may want to breathe a sigh of relief that Carillion is not a DFID contractor, its collapse is likely to have implications across government and compound a number of trends we have witnessed over the past few years.
What does this mean in development?
There are various reasons for Carillion’s demise – overtrading, under-pricing, over leveraging, to name a few. But while the company undoubtedly played a large role in their own downfall, the characteristics of the market in which they were operating are not unfamiliar to the development sector. Rising costs, increased competition, unrealistic risk exposure and contract delays are challenges to government contractors in every sector.
As INGOs increasingly seek to bid for DFID contracts, Carillion’s fate should be a wake up call and a cause for collective action.
3 trends the sector needs to prepare for
- Heavy scrutiny on INGOs’ financial standing
DFID procurement has already set a higher bar than most other government departments in terms of its compliance and reporting requirements. DFID consistently outperforms government targets on the number of SMEs in its supply chain and in October, then-secretary of state Priti Patel announced a set of reforms which introduced a new set of terms and conditions and code of conduct. Despite this, it is likely that we will see a defensive reaction across government to Carillion’s collapse – with much greater interest in the financial standing of INGOs and other contractors including pensions deficits. The potential negative unintended consequence of this is organisations may be more heavily judged on criteria that do not necessarily provide insight into their ability to deliver good quality programmes.
- Quality of programmes will suffer
Despite the intention of DFID reforms to diversify its supply chain, drive better value and development outcomes, it is likely that they will do the opposite. Suppliers have been continually encouraged to bring down the costs of delivery, whilst taking on increasing risk. This prejudices organisations who cannot absorb such an approach - contractors in a market which encourages competition around uneconomic contracts, are more likely to struggle. It also affects quality, deliverability and the value of programmes. As Stephen Twigg MP acknowledged in the IDC’s most recent oral evidence session on DFID’s priorities, delivering quality in education costs money. This is true of most, if not all, of DFID’s work.
- More risk on contractors and less accountability for government
There has been a growing government tendency to push risk onto suppliers – without regard for capacity in smaller organisations or without providing the necessary supporting resource in terms of government oversight. Contractors in the development sector should be wary of the amount of risk they are taking on – especially in the complex and challenging environments in which they work – and should seek genuine partnership with government in sharing risk. As we have seen with Carillion, outsourcing does not mean an end of risk for government and the taxpayer. It cannot mean an end for responsibility for oversight of delivery.
Contracting continues to be an effective way to extend government capacity and deliver better value – especially when working in the complex and challenging environments in which DFID’s suppliers operate. It is an important part of the government’s tool kit to deliver its objectives.
If government wants to encourage best practice, enhance development outcomes, and diversify its supply chain, it should seek to enhance partnership and consultation with suppliers, rather than shift risk and encourage competition on lowest cost. INGOs can work with other contractors in the sector to ensure government is truly supporting a diverse development sector that delivers value for the UK taxpayer and results for the people who need it most.
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