What charities should watch out for in Payment by Results contracts

Ruth Breidenbach-Roe was part of the the Public Services and Partnerships team but has now left NCVO. Her blog posts have been archived here for reference.

Considering a Payment by Results contract? Consider this…

This week we published our report ‘Payment by Results contracts: a legal analysis of terms and process’. It presents the findings from a review carried out by solicitors at BWB of a sample of Payment by Results (PbR) contracts held by voluntary sector providers.

The report identifies some crucial flaws in PbR contracts—poorly designed targets, commercially unfeasible payments, unstable allocation of risk—and provides guidance to commissioners to address these failings.

We also offer advice to providers about what to look out for and think about when considering a PbR contract, and in this blog post I highlight some of this.

Beware of prescriptive terms

A key problem we found was the use of overly prescriptive terms. This commonly occurred where a contract had been retendered as a PbR contract—the way payments are made has been changed, but the contract retains terms which dictate how the service should be delivered, as such restricting the provider’s ability to innovate.

This review has seen terms which require providers to deliver the service “strictly in accordance with the specification”. If the specification is limited to setting out the outcomes which are required, then this might not be problematic; however, where it includes detail about how the service should be delivered, this could cause difficulties.

Also, think carefully about similar clauses which require delivery to be “in all respects to the satisfaction of the commissioner.” If the commissioner requires this level of involvement in the service, why are they not paying for it through upfront fees?

Remember that when you are being paid for the results you achieve, as opposed to your activities, this shift in financial risk needs to be reflected in the contract. On their own some prescriptive terms may not seem damaging, but the cumulative impact of them all being applied at once could be.

What additional rights does the commissioner have?

Beware of sub-clauses which allow the commissioner to change its requirements throughout the contract.

A clause within other provisions which says something like “or such additional/ alternative requirements as the Commissioner may impose from time to time” potentially expose you to having to change the service, or the way it’s provided, without the ability to reflect any price implications of this in the payments you receive.

Flexibility for amending the contract shouldn’t necessarily be resisted: this could allow adjustments which make achieving desired outcomes more likely. However, such a mechanism should allow for a discussion process with the commissioner about any changes to ensure that the impact on you is not disproportionate.

Subcontractors, what risks are you being asked to bear?

We have seen examples of providers bearing the financial risk for achieving targets not within their control. Commonly, this is because the terms the prime contractor has signed up to are being fully flowed down to the subcontractor. This means that although you don’t have significant influence over the overall outcome, the payments you receive are dependent on achieving it.

Be aware too of provisions in subcontracts which state that the prime will not pay its subcontractors unless it has itself been paid by the commissioner. This might put you in the dangerous position where you have met all your contractual obligations, but your payment hinges on how the prime is managing their relationship with the commissioner.

A further area of bad practice is where the prime has developed a standard subcontract for their whole supply chain, and have then used a shortened version of this when subcontracting to particular providers. Take extra care with this as it is difficult to get a complete picture of all risks and obligations. There may also be inconsistencies between the two documents: it is important to know which one takes precedent.

Are you being told to “take it or leave it”?

The above problems are often resulting from a ‘take it or leave it’ attitude from commissioners and primes. Providers have known the dangers contained within the contracts, but have not been given the opportunity to negotiate a better, more sensible one.

Payment targets, for example, are often presented as non-negotiable. This has led to targets which are disconnected from, or even detrimental to, the desired outcomes. A proper negotiation process may have revealed these problems—it is in the interest of all parties that these can be resolved before delivery starts.

Ultimately, when pre-procurement engagement to improve the design of the programme has been resisted by commissioners, or when you are being presented with contracts without any opportunity to negotiate, you should think very closely about what kind of working relationship this signals.

Questions or thoughts?

Do get in touch with any questions.

Are you a provider with experience of delivering a service within a PbR model? Tell us what’s worked, and what hasn’t, for you—these experiences will inform our future work on the viability of PbR.

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3 Responses to What charities should watch out for in Payment by Results contracts

  1. Kim Dawson says:

    Your article on the PbR model is very interesting, but I don’t think these practices are restricted to this model alone but are applied in much of the procurement and commissioning processes undertaken by the public sector at this time. It seems to me, working for a charity that is entirely dependent on public funding to exist, that we are merely an extension of the public sector but a poor relation with cap in hand. While charities are prepared to compete against each other for business, undercutting just to secure business, we have sold out and it benefits no one: not employees or service users.

  2. Pingback: Flaws in Payment by Results contracts | VoluntaryNews

  3. In my experience the best of the third sector has nothing to worry about in terms of being able to justify the results of its work. Generally it exceeds by some multipliers the impact of results from programmes led or managed by other sectors, particularly those from most of the current large scale ‘primes’ that are presently asset stripping and blundering their way around communities and programmes. However, that is completely different to having to deal with these kind of payment by results contracts which are profoundly flawed. As well as the kind of operational nonsense that has to be tolerated which is highlighted in this study, the ‘results’ are inevitably measured by the most narrow of metrics, which lose completely the wide range of intended and unintended outcomes that arise from more sensible approaches to procurement in public investment strategies; not to mention the loss of social capital. Is it here to stay? Lets hope not, lets hope its a fad which, when someone actually sits down and studies properly what a disaster it has been, is consigned to history.