Payment-by-results commissioners should understand how charities fit into the supply chain, says NAO

National Audit Office
National Audit Office

The National Audit Office has advised government commissioners of payment-by-results contracts that they stand a greater chance of success if they understand how charities fit into the supply chain.

The publication today of the spending watchdog’s report on central government’s use of payment by results comes in the wake of concerns that such contracts are difficult for charities to handle.

Last year the National Council for Voluntary Organisations warned that cash-flow problems associated with PBR contracts can be a major barrier to voluntary sector organisations taking up contracts and said commissioners should consider offering up-front payments to them.

The NAO, which took evidence from organisations including the NCVO, recommends in its report that commissioners should justify their selection of PBR over alternative delivery mechanisms and reminds them that PBR "is not suited to all public services".

Describing PBR as "a technically challenging form of contracting", it offers a number of lessons for designing a PBR scheme.

It draws commissioners’ attention to the fact that charities "tend to have a lower appetite for risk and lower working capital" than larger private providers and "find it harder to sustain themselves financially in the period between intervention and payment".

It also acknowledges that the voluntary sector has raised concerns about how some prime contractors work with subcontractors, including the extent to which risk is fairly allocated and the amount and types of work referred to subcontractors.

"It is not enough, therefore, for commissioners to understand just those providers with whom they have a direct relationship; they also need to understand how those providers are likely to work with subcontractors further down the delivery chain," the report says.

It observes that the Department for Work and Pensions has introduced a code of conduct that it uses to assess prime providers’ treatment of subcontractors, called the Merlin standard.

The NAO also suggests that to incentivise third-sector providers to bid for PBR contracts commissioners should "consider a source of social investment to run alongside the PBR contract", such as the social impact bond used on an offender rehabilitation pilot in Peterborough.

Reacting to the report, Karl Wilding, the NCVO’s policy director, said: "The principle of payment by results is hard to object to, but the practicalities of getting the mechanism right mean it is often far more effective and efficient to use straightforward contracts and grants."

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