Contracts spread the red ink

Savings from tendering are being lost. By Paul Gosling

The cost of monitoring contracts may be greater than the savings achieved from compulsory competitive tendering, particularly for small local authorities, according to a study of CCT and market-testing just published by the Chartered Institute of Public Finance and Accountancy.

Until now, academics and the government have claimed that CCT has achieved savings of about 25 per cent, but Cipfa's research found cost reductions to be typically between 2 and 5 per cent, compared with 10 per cent extra administrative costs for drawing up contracts and monitoring performance. While the administrative costs fall for subsequent tendering exercises, so, too, do the savings achieved by contracting-out.

Cipfa examined 11 public-sector contracts in Northern Ireland. Conclusions from the study will mostly apply elsewhere, though the province's weak private sector and small size of local authorities reduce the scope for contract savings. The warning that small councils may spend more administering contracts than they save is likely to apply to many of the new smaller unitary councils, particularly in Wales and Scotland.

Previous overestimates for savings arose because public bodies have not always properly undertaken the client/contractor split, or allocated costs accordingly. One direct service organisation was not being charged for two-thirds of its central support service costs, Cipfa found. Savings were accordingly overstated, and the DSO was being unfairly subsidised against private-sector bidders.

Government departments are also guilty; one had transferred staff away from activities subject to market testing, moving them to sections where they were not obviously needed. "We have given a warning to auditors to check that organisations have not been hiding staff elsewhere," says David Nicholl, Cipfa manager for Northern Ireland, who headed the study.

It is in the drawing up of contract specifications that CCT has been of greatest benefit. Many public bodies had never before consciously decided what standards they expected for their services. Most savings were achieved before the implementation of CCT through these service standard reviews, and the use of more efficient systems. The threat of competition has generally led to better management: staff absenteeism has fallen, surplus staff made redundant, and ordering procedures speeded-up.