The price tag for failure

This was no ordinary commissioning balls-up. In March, justice secretary Chris Grayling announced that contractor G4S is refunding the government more than £100m (plus VAT) for overpayments on its contract relating to electronic monitoring of offenders. The payment followed a similar reimbursement of £70.5m made in December by supplier Serco, relating to overpayments in the areas of the country where it had responsibility for tagging.

Both contractors had for years been overcharging in a number of ways. They had billed multiple times for offenders with more than one tagging order, even though they only required one monitoring regime. In addition, monitoring fees were charged whether or not the suppliers had managed to tag offenders. And they had taken fees in some cases when electronic monitoring had ceased – even, on occasions, when the offender was dead.

G4S and Serco are currently subject to an investigation by the Serious Fraud Office into their actions relating to the contracts, with both strenuously denying any deliberate attempt to defraud the taxpayer. The contractors have, however, admitted to flawed judgement in the way they interpreted the contracts, and have undertaken separate processes of ‘corporate renewal’. Meanwhile, the glaring omissions in the MoJ’s own monitoring of its contractors have offered very clear evidence of the gaps in civil service procurement and contract management, leading to a substantial set of reforms led by the Crown Commercial Service (CCS).

Problems with the tagging contracts, which were awarded in 2005, only came to light as part of the exercise to retender them upon their expiry in April 2013. According to a National Audit Office report into the fiasco, the MoJ’s procurement team was “unable to obtain the assurance it required” after seeking clarification on information requested from the two firms – both if which were bidding for new contracts. Alarm bells clanging, the department commissioned consultant PricewaterhouseCoopers to conduct a “forensic audit” of the G4S contract; this was then extended to cover Serco’s.

In July, Grayling stood before the House of Commons to reveal the early findings, which indicated that overcharging had indeed taken place. Tellingly, the audit revealed that contract managers in the department had discovered some issues around billing practices as far back as 2008, but had taken no action. Grayling announced the MoJ’s contract management team was to be replaced immediately. However, he said that none of the weaknesses identified within the civil service “justifies the billing practices followed by the suppliers”. Immediately, Serco announced that it was withdrawing its bid for the next generation of electronic monitoring contracts, and G4S followed on on 6 August. Both also pulled out of the MoJ’s procurement for the forthcoming probation contracts.

An evidence session of the Public Accounts Committee held in December shed more light on the actions of the two suppliers. There Ashley Almanza, G4S’s new chief executive, appeared beside Alastair Lyons, chairman of Serco. Almanza said previous contracts had allowed companies to bill when orders were received, rather than on the fitting of tags. He said that the 2005 contract had changed this arrangement, and that the company informed the MoJ that it would bill from the day after its initial visit to an offender. “The company believed the customer had accepted that and continued to bill on that basis,” he said.

Lyons said that Serco’s managers had interpreted the contract as allowing them to bill in the way they did, but added: “That is not the point. It was never right that we should bill where we were not doing work. It was ethically wrong.” Almanza also admitted flawed judgement by G4S managers, saying that although the firm had been transparent on its billing arrangements, “I don’t think we did correctly tell the difference between right and wrong.”

Having been informed that they were barred from being awarded new government contracts until they had proved they had changed their ways, both companies donned their hair shirts. Serco, in particular, saw its share price plummet in the wake of the scandal, because it relies for such a big proportion of its work on central government contracts: they comprise around a quarter of its revenue, compared to 10% of G4S’s.

Both firms embarked on a process of reform, monitored closely by government. Serco has divided its operations into two separate divisions, including one dealing exclusively with UK central government work and offering a single point of contact for officials. It has created three new non-executive director posts, with one chairing a new sub-committee on corporate responsibility. And it has introduced new training in corporate governance procedures for senior managers. A spokesman for Serco says: “We have estimated that all the measures we have taken will cost the company around £10m a year.”

For its part, G4S has appointed a new regional CEO for the UK; hired more than 30 new executives including a group head of risk, a chief procurement officer and a chief information officer; and restructured its central finance function. A spokesman says: “We hope that these changes will allow the government to restore its trust in G4S and its position as a strategic supplier to government.”

At the end of January, Cabinet Office minister Francis Maude declared that Serco’s plan “represents the right direction of travel to meet our expectations as a customer”. The company has since been awarded two contracts, including a £15m radar contract at RAF Fylingdales in North Yorkshire. G4S is further behind in the monitoring process, with a Cabinet Office spokesperson saying: “Reaching agreement on financial compensation is a good first step, and these are encouraging signs of progress, but the process is not complete.” It will provide a final opinion on the adequacy on G4S plan following input from independent adviser Grant Thornton.

Simultaneously, the government has undertaken its own shake-up, with both the Cabinet Office and MoJ undertaking reviews of their major contracts. The Cabinet Office report, authored by government chief procurement officer Bill Crothers (since made chair of the CCS), found that on 22 out of the 28 contracts reviewed “there is a general over-reliance on suppliers self-reporting their performance with insufficient verification checks being performed by the department.” Crothers’ recommendations, accepted by Maude, require the creation of contract management plans – approved by departmental commercial directors – before any new contract award, and involve greater oversight from the Crown Commercial Service.

Following the MoJ’s departmental review, a spokesperson says: “We have put in place a programme to implement these recommendations in full. Significant action has already been taken – a detailed action plan has been produced, senior staff are receiving commercial awareness training, and strong guidance has been issued to all senior contract managers.”

For Andrew Coulcher, business solutions director at the Chartered Institute of Purchasing and Supply, the moves are welcome. “Details on how services are going to be billed and verified need to be nailed down as part of the contract,” he says. But he believes that more needs to be done to address what he sees as the main problem with contracts such as those relating to tagging: they’re often negotiated by one set of civil servants, but monitored by another team – often more junior – which has little detailed knowledge of the terms.

Grayling said that the G4S repayment deal “represents a good deal for the taxpayer”. Both suppliers are repairing their relationships with government, along with the reputational damage they have suffered. Yet just as much reputational damage has accrued to the civil service, which failed to properly monitor these contracts or to pick up on problems which persisted for years. As departments increase the amount of work they outsource to businesses, this sorry tale emphasises yet again the the weaknesses in skills and capacity which so often trip the civil service up in its interactions with private sector suppliers.