Open Book Contract Management

Louise Bennett, Browne Jacobson

The Crown Commercial Service on the 24 May 2016 published a Procurement Policy Note (PPN) setting out the government’s approach to Open Book Contract Management (OBCM).

The purpose of the PPN is to ensure that there is a proportionate and consistent approach of the open book strategy by central government departments, their executive agencies and non-departmental public bodies. This PPN is not mandatory for the remainder of the public sector.

What is OBCM?

OBCM is described as “the scrutiny of a supplier’s costs and margins through the reporting of, or accessing accounting data”. It is essentially, a structured process for the sharing and management of charges and costs and operational and performance data between the public body and the client. It is hoped that this financial transparency will encourage a pattern of collaborative behaviour between public bodies and suppliers.

OBCM will mainly be used for the management and delivery of large and complex contracts which have significant value and risk attached to them.

What steps need to be taken?

The type of contract that OBMC applies to is wide ranging, but it is likely to be very relevant to those contracts that are procured through one of the complex procurement procedures, competitive dialogue and competitive procedure with negotiation. That said, OBMC should always be applied in a proportionate way. Guidance is issued alongside the PPN which sets outs the process organisations should follow. In summary, the steps that organisations should take are:

1. Review contract portfolios:
Firstly, review the contract portfolio to establish which Tier of OBCM to apply. This includes deciding, by 24 June 2016, if third party support is required to conduct the review. Where third party support is required, organisations should contact the Complex Transactions Team in Cabinet Office to access these services. Alternatively, start the review of contract portfolios using internal resources.

2. Decide on the appropriate level of OBMC:
The guidance provides a decision tool to help organisations apply contracts to one of the four available ‘Tiers’. This is designed to assess the optimal level of OBCM application for the contract in question. The decision tool considers various different factors that categorise most contracts. These include:

  • the scope of the contract
  • the number of service lines involved
  • the complexity of the supply chain and the number of suppliers
  • the complexity of the pricing model
  • the volumes under the contract
  • any dependencies
  • any saving potential
  • innovations.

Those contracts falling into Tier 1 are likely to share characteristics such as a fixed scope and price with a single supplier. Whereas on the other end of the scale, a Tier 4 contract will potentially involve a joint venture or partnership, with uncertain volumes and an incentivised pricing model.

3. Use the Application Model
Once the correct Tier has been identified organisations should use the Application Model. This identifies the proportionate set of tools and processes that should be applied to that model. The tools should only be applied fully for more complex contracts (typically in Tiers 3 or 4). They are built around agreeing and tracking allowable costs: those that qualify as being appropriate and attributable and so valid costs within the contract. A clear definition of allowable costs is then used in assessing whether the costs incurred are reasonable.

It is important for organisations to remember that whilst assigning a Tier to each contract may determine the most appropriate processes to apply and how to apply them, this should not be applied in isolation. It remains critical for appropriate people within the organisation to ‘commercial sense check’ the identified tool. Whilst, the model provides an answer, consideration needs to be given to whether the Tier to be allocated will deliver good benefits without being outweighed by the costs.

How will this impact your organisation?

Reviewing existing portfolios of contracts could initially be quite an intensive task. Assistance is available through a third party provider but a cost of approximately £15,000 per organisation is attached to this service.

The PPN suggests that organisations should begin assessing their contract portfolios by no later than 24 June 2016 and mobilising resources to begin implementing OBMC no later than 24 July 2016.
Organisations will need to commit to building a strong resource capability to successfully roll-out and maintain good OBCM practices.