A common accord for subcontracting

With the Adult Skills Budget for 2015-16 now announced and reductions in some budgets of up to 30%, the focus on delivering value for money (VFM) is more important than ever. It is inevitable that questions about the level and some of the quality of subcontracting within the sector will come under scrutiny as part of this.

It’s important to recognise that subcontracting is a legitimate business arrangement that can be found across all areas of public service delivery and its practice does not automatically imply a negative impact on VFM. In fact when done well, the taxpayer can benefit in terms of less bureaucracy required to directly manage supplier contracts which should mean that more funding goes to the front line. Subcontracting can be a very effective way for specialist providers to remain involved in the sector without the high cost of direct contract management.

However where subcontracting is not managed well, it can create uncertainty and barriers to effective delivery. Ministers express concern about some of the subcontracting in FE and skills with some providers charging high levels of fees without adding value. We have seen lead providers creating short term arrangements with subcontractors just to support their contract volumes. Recently the SFA allocated funds to FE colleges only and within a few days, much of it was subcontracted out to independent training providers (ITPs) whose growth requests had just been turned down.

However, one implication of significant government intervention to reduce the overall level of subcontracting would be a need for the Skills Funding Agency to increase the number of direct contracts that it currently manages with providers, hardly a desirable outcome for a government agency looking for further efficiency savings. So we need a more effective supply chain management process.

The responsibility for the quality of subcontracting arrangements lies with the lead provider. The SFA holds the lead responsible for the complete supply chain and this has been reinforced through changes to the funding rules for 2015-16. We believe that this is the right approach. The agency requires transparent information on the lead provider’s website about its supply chain fees and charges, including how management fees are calculated and what support the subcontractor can expect in return. The policies posted on websites typically have a statement saying that fees can vary between 15 and 30%, but AELP members often complain that 30% is the norm rather than the maximum and they even report cases where the percentage is higher.

This is why over two years ago AELP and AoC decided that the SFA rules would be strengthened by the existence of a self-regulatory Common Accord whereby a lead contractor and a subcontractor could show that they were following a guiding set of principles which characterised their relationship. Published at the same time as the Accord was a document called ‘Supply Chain Management – Good Practice Guide’ and both of these are available for download on the AELP website.

The Common Accord requires that the fees retained by the lead contractor must be related to the costs of the services provided and the fees and services must be clearly documented by all parties. Where disputes between supply chain partners cannot be resolved through mutually agreed internal resolution procedures, signatories commit to submission of the dispute to independent outside arbitration or mediation and to abide by its findings.

We know that on an informal basis the Common Accord has been used not only to resolve disputes well before they arise into any formal situations, but also to demonstrate goodwill and good practice at the start of a subcontracting arrangement, thus eliminating many potential disputes from arising in the first place. In fact, although the Common Accord details a process for independent arbitration or mediation, we are not aware of any case where this has needed to happen, but of several where the Common Accord itself has been at the basis of a satisfactory agreement all round. More typically it has been used to help settle supply chain disputes.

AELP is also involved in the subcontracting arrangements in DWP contracts where there is a different set of principles governing the arrangements called Merlin. It is our view that we need to look at common principles for subcontracting across all government departments involved in the employment and skills sector.

The recent announcements on allocations will mean that many providers will have to review the subcontracting arrangements for 2015-16. This re-contracting process needs to be managed effectively and transparently. The Common Accord and its principles must play a vital role in upholding mutually beneficial partnerships and resolving any potential tensions that may arise. If providers aren’t referring to the Accord already, as the SFA rules recommend, then I would urge them to make it a fundamental part of their contracting arrangement s for 2015-16 and beyond.

Stewart Segal is chief executive of the Association of Employment and Learning Providers