The collapse of outsourcing giant Carillion has exposed fundamental flaws in the government’s approach to contracting, MPs said in a report.
The Government’s overriding priority for outsourcing is spending as little money as possible while forcing contractors to take unacceptable levels of financial risk, the Commons public administration select committee said.
As a result of the government’s preoccupation with cost, MPs found that the government has had to renegotiate over £120m of contracts since the beginning of 2016 to ensure public services would continue.
Sir Bernard Jenkin MP said: “It is staggering that the government has attempted to push risks that it does not understand onto contractors, and has so misunderstood its costs.”
He added: “It has accepted bids below what it costs to provide the service, so that the contract has had to be renegotiated.”
Carillion, which employed 19,000 staff in the UK at the time of its demise in January, had 420 public sector contracts.
The committee said Carillion’s collapse has “badly shaken public confidence in outsourcing.”
It said the government’s approach to outsourcing has been made “more damaging by the fact that the information” used to inform the outsourcing process can be “either incomplete or simply incorrect.”
This has meant the government has written contracts that force contractors to pay out when it gets its own data wrong and has been known to forego performance penalties in the initial phases of contracts.
“Ultimately, this has led to worse public services as companies have been sent a clear signal that cost, rather than quality of services, is the government’s consistent priority,” the committee’s report said.
It added: “Contractors told us that the Government was known to prioritise cost over all other factors in procurements, driving prices down to below the cost of the services they were asking firms to provide.
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“Worse, the Government was unable to provide significant evidence for the basic assertion behind outsourcing: that it provides better services for less public money, or a rationale for why or how it decides to outsource a service.
“This was especially true for PFI (Public Finance Inititive). Shockingly, the government admitted to the committee that the “entire [PFI] structure is to keep the debt of the balance sheet.”