Risks in public contracts: Surer funding, a framework for improved public services

Based on research by NPC, published by acevo.

Problem: the allocation of risk between funder and provider
'Risk' is an everyday part of providing public services - the possibility of increased costs due to the uncertainties of delivering a service.

It is important that funding agreements explicitly distribute risks between funder and provider.
For funders, risk describes the responsibility for accounting for the use of public funds.
For charitable sector organisations, risk describes the possibility that costs incurred in delivering a service to the terms of the contract exceed the revenues from the funder.

Surer Funding shows that funding agreements tend to load a disproportionate amount of risk onto organisations in the charitable sector. (For some examples, click here).

How do funders load risk onto the provider?

• The use of short-term funding agreements: Funders prefer short-term arrangements because they satisfy a desire for flexibility, allowing them to withdraw at short notice without incurring any costs.
• The use of variable payment funding agreements, where providers receive payment related to a variable that they have very little or no control over (eg, the demand for the service). This protects funders from the possibility of increased financial burden due to these risks.

Both methods are common in government contracts.

Why is this a problem?
Loading as much risk as possible onto charitable sector providers does not achieve value for money. For charitable sector providers, managing risk has associated costs, such as problems with recruiting and retaining staff and a need to keep high reserves to insure against loss.
Changing the allocation of risk would result in a better deal for everyone: better value for money for the funder, greater stability for charitable sector organisations to carry out their services, and improved services for users.

Problem: the excessive demands of application processes and reporting requirements
Entering into a funding agreement has a cost in terms of the process of application and reporting on progress. Often this cost is excessive.

What causes these high costs?
Among a number of factors

• The large number of funding bodies providers have to deal with
• Demand for information and reporting requirements disproportionate to the size of contract
• A lack of consistency and uniformity between funders

The burden of transaction and reporting costs is a diversion of resources away from frontline 
service provision, which correspondingly, increases the overall cost of a service.

Why this demand for transaction and reporting?
It is related to funders' attitude to risk. Excessive costs can be seen as a result of an unwillingness to trust providers to deliver services. A less risk averse approach by the funder would lead to a material decline in the bureaucracy that threatens to overwhelm many organisations.

For more detail on these problems, read an essay on Surer funding.

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