Preparing for the contracts

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Working with others on a contract

Commissioners may require the service to deliver a broad set of outcomes – for example for all disabled people rather than just those with a specific impairment. They may also want the service to cover a wider geographical area, such as the whole region, rather than the area you usually serve. Some commissioners may also prefer to let a small number of large contracts rather than having lots of smaller ones, involving more complex and more costly management arrangements.

For smaller, more specialist or local organisations to compete successfully, especially against larger, national organisations, they may well need to consider different types of partnership working, such as consortia and subcontracting.

How you operate during contract delivery

Constitutional changes for charities

There are certain constitutional changes that charities can make to manage some of the risks associated with public service delivery, including using the form of a limited company or delivering the service via a trading company.

If the charity is unincorporated, then any contractual liabilities would fall on the trustees personally. By incorporating, the liability falls on the charity itself rather than on the trustees. An alternative to incorporation is to set up a trading company to deliver the contracted services; this would enable the trustees to keep the liabilities arising from the contract separate from the charity’s other activities and funds.

For further discussion of these options see the Charity Commission’s guidance on charities and public service delivery.

Cultural changes

Competing for public service contracts is different from asking the general public for a donation or seeking a grant from a trust or foundation. Important behavioural changes are needed in order to be successful. These involve a shift from a stance of being reactive, asking and costing to being proactive, selling and pricing.

For further discussion read this article in Public Finance on the cultural changes required for successful contracting.

Benchmarks for success

The Finance Hub has identified 13 Benchmarks of Success for third sector organisations delivering public services under contract to meet.

Finance and employment during contract delivery

VAT

VAT is payable on business activities. A contract is likely to be considered a business activity if the public authority is purchasing a service from the nonprofit organisation. A grant, on the other hand, is classified as a non-business activity and is, therefore, not subject to VAT.

This means that when tendering you should always make clear whether your price is inclusive or exclusive of VAT. You should also incorporate a clause in all contracts that states that any fees payable under the agreement are subject to VAT if it applies. This will allow you to add VAT to the fees charged, otherwise the fee has to include VAT.

If you change from providing services under grant to a contractual basis you may have to register for VAT. This is a complicated area and you should seek professional advice. For further information see the Finance Hub guide to VAT on contracts.

Accounting issues

Contract income should be treated as unrestricted income. Although you are obliged to meet the terms of the contract, you are not required to spend all of the contract fees on the specified activity. You can make a surplus on a contract, which you are allowed to keep and can add to your reserves.

Contract fees are only due when you have delivered the service in line with the contract terms. If you have received part of the payment in advance, this should be deferred and shown as a current liability on your balance sheet. If you are a charity, the Statement of Recommended Practice provides further recommendations for accounting and reporting. This is a complex area and you should seek professional advice.

Payment by results

Some contracts specify that you will only receive the final instalment of the contract fee, when you can demonstrate particular results eg that a specified number of people have secured employment and have remained in employment for at least a year. This can create considerable cash flow difficulties and you may need to borrow funds in the expectation of future payment. If this is the case, you should include the cost of borrowing in your tender price.

Personalisation and spot contracts

The increased emphasis on the personalisation of services, and the introduction of individual budgets for disabled and older people to enable them to purchase their own services direct to meet their needs, will bring major changes for service users and providers, including:

• replacement of block contracts by spot contracts
• a multiplicity of different contracts and income streams
• the need to market services direct to service users
• a need to help service users access the right services to meet their needs
• new employment and financial management challenges for both service users and providers.

A different business model will be required to succeed in this new environment. New marketing, budgeting and accounting arrangements will also have to put in place. Richard Gutch has written an article on personalisation challenges and opportunities.

TUPE

TUPE stands for Transfer of Undertakings (Protection of Employment) regulations. TUPE often applies when an existing service is tendered and the current provider is replaced by a new one. It means that the employees in the original services often have the right to be transferred to the new organisation on their current terms and conditions of employment. They then have all their previous rights protected, such as hours of work, pay, holiday and pension entitlement.

Organisations tendering for services will need to examine whether TUPE will apply if they win a tender and consider what this will mean in the future. It is really important that providers consider the risk of TUPE when bidding for contracts, and receive all the necessary information to be able to properly assess their liabilities and costs. Sometimes providers will be asked to complete a Confidentiality Agreement before the Procurement Department will release such information.

Check:

• whether the submission should include TUPE costs - the tender pack may be silent on the matter
• whether the TUPE costs lead to an uncompetitive price
• assess the likely impact on the organisation and the time and investment required to deal with culture change and changes in working practices
• take into account the numbers of staff transferring. Assess the number of staff required to deliver the contract against the number of staff eligible for transfer, and properly cost into the bid any redundancy costs that result.

Source: Tendering and Bidding Briefing: Give your tender a winning chance (Finance Hub).

Help with contracts

The Compact

The Compact is an agreement that sets out the ‘rules of engagement’ for how government and the nonprofit sector should work together for the benefit of the people they serve. 

Training and consultancy

There are a growing number of courses and consultancies offering help with bid writing, tendering and contract management. The following agencies can signpost you to these, as well as offering courses of their own:

• National Programme for Third Sector Commissioning
• NCVO Sustainable Funding Project
• NAVCA Commissioning and Procurement Unit
• ACEVO professional development events and courses

Funding

Funders such as Social Investment Business may be able to help you with capacity building loans and grants.

Have your say

What experience do you have of preparing for contracts? What steps did you go through. Could you have prepared better in hindsight?

Share your experience in the Commissioning and procurement forum.