There are different perspectives on awarding public contracts. Some people focus on set processes for competition, whereas others focus on opportunities for flexibility and collaboration. In this guide we try to address both perspectives. Either way, the GO Lab views commissioning, procurement and related legal support as functions that should be more strategic than administrative in nature.
This guide is prepared for commissioner, procurement professionals and legal professionals in local government, and will also be of interest to those involved in SIBs in other countries. It will give you confidence in awarding the public contract for an outcome-based contract including one being used as part of a SIB.
Before reading this guide you may want to familiarise yourself with our technical guidance and UK government documents for designing and developing SIBs:
It is important to note that the “public” in public contract refers to the buyer being a public authority. It does not necessarily mean than the contract is publicly available, though issues around transparency are important are addressed in this guide.
● Help you understand what is different about awarding the public contract in a SIB.
● Explore best practices under the Public Contracts Regulations and Social Value Act.
● Explore the essential elements of the public contract in a SIB.
● Explore the common hurdles to closing the deal.
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The public contract in a SIB is different from other types of contracting such as fee-for-service or grant based agreements. Public contracts bind public authorities and spend public money, so they are regulated differently than other contracts. In a SIB, the public authority is not only buying a social intervention, it is also getting a deal to pay after and only if specified outcomes are achieved . As the provider will only get paid on outcomes, it is likely that there will need to be a social investor in order to cover the operating costs, as well as sharing some of the risk. Before we go on to explain how you go about it, this chapter will explore what is different about contracting for SIBs.
The public contract in a SIB is subject to the Public Contracts Regulations 2015 (PCR) which prescribes procurement procedures. For social services, PCR relaxes these procedural rules and provide procedural flexibility called the Light-Touch Regime. This guide explains how flexibility can be used to procure a SIB effectively.
The GO Lab offers five procurement pointerswhich address the differences stated above and the flexibility of the Light-Touch Regime.
If you are paying your providers after and only ifthey achieve outcomes, this changes the way you close the deal. It will be a contract requirement to describe the outcomes, how much you will pay for each and when and how you will find out if the outcomes were achieved.
The UK government provides a SIB Template Contract which provides a structure and important terms. However, the critical elements are mostly left blank because they are so dependent upon the specifics of each SIB. You will, therefore, need to apply the specifics of your SIB into this structure. This will include details on the authorities’ obligations, especially around the qualifying criteria for participants and number of referrals, and your data sharing policy and management information terms, which are important so you can monitor outcome achievement.
Some of the terms of the contract may clash with a contracting authority's standard terms and conditions, which can cause challenges in actually closing the deal. The GO Lab has identified five formation hurdles that can stop a deal from closing and offers ways to overcome them.
This technical guide will explore the procurement pointers and contract formation hurdles with short case examples throughout. Three more detailed examples are provided in Chapter 8.
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As SIBs are structured differently to other types of contracts such as fee-for-service or grants, it is important to set out how procurement works. This will help when you are ready to firm up the terms of the contract.
SIBs are often known as partnershipsaimed at improving the social outcomes for a specific group of citizens. The roles of the SIB partners are: the commissioner, the service provider, and the social investor. The roles are outlined in this overviewin our Introduction to Social Impact Bonds guide, and can be seen in the Figure below.
One thing that is different from other ways of contracting is the involvement of social investors. Most basic public contracts focus on two parties: the contracting authority (i.e. the buyer or payor) and the contractor (i.e. the provider). The government pays and the contractor provides.
However, in a SIB, the consequence of paying after the outcomes are achieved is that providers will get paid later. Many provider organisations are charities and other organisations that may not be able to afford to get paid only after they complete the work. They may need working capital funding from a third party and this is what the social investor can provide.
Furthermore, as payments are made only if outcomes are achieved, this puts a great risk on the provider organisation and this is not a risk that many organisations are willing to take on. One of the arguments for the benefits of a SIB is that the social investor takes on the risk so that innovative projects can be trialled.
The social investor may be a charitable foundation, a specialist team at a financial institution. Often they understand the intervention and they are experts in understanding and managing the risks throughout contract formation and performance.
To maximize the likelihood of success, the social investor will likely be involved in pricing the outcomes, developing the bid, and approving the public contract for the contractor to sign. They may be involved in managing the data that show whether people are being referred into the treatment and intervention, and whether outcomes are being achieved. Social investors may establish a special purpose vehicle (SPV) – a legal entity created solely for the SIB or multiple SIBs.
Social investors can be involved in different ways at different times in the development of a SIB. At one extreme, investors have led projects from the start. At the other, investors have dealt only with providers and had no contact at all with commissioners. The reality is usually somewhere between the two.
Whatever point in time the social investor joined and whether or not they are a party to the public contract, the social investor will likely play an important and influential role.
Having explained the role of the social investor, this section will outline how the three parties can configure themselves. There are three basic possibilities:
1. The public contract is between the commissioner and the provider(s). Investors can partner with a provider, who is the prime or principal contracting party. This is the simplest and works well when there is just one commissioner and one provider. However, if commissioners want to influence the type of investor that providers engage with (e.g. to ensure they are mission-led), this needs to be tested with the market and then built into the procurement process.
3. The public contract is between the commissioner and an intermediary, e.g. a special purpose vehicle (SPV).Instead of the investor being the prime or principal contractor, the advisor or intermediary can play this role. A special purpose vehicle is a legal entity (usually a limited company) that is created solely for a particular financial transaction or to fulfil a specific contractual objective. They are important if there are multiple investors.
Special Purpose Vehicle (SPV): advantages and disadvantages
Social investors and/or providers may establish a special purpose vehicle(SPV) - a legal entity created solely for the SIB or multiple SIBs. In many SIBs, the SPV is wholly owned by the social investor. It is worth thinking about the potential advantages and disadvantages of contracting with an SPV to see if they apply to you.
· It provides a single point of contact and management responsibility.
· It may provide performance management expertise, especially for data sharing.
· It can subcontract providers with expertise in many aspects of the social intervention(s).
· An existing SPV may provide similar services to other local councils or contracting authorities, so they may have reduced transaction costs.
· Public authority staff may have less direct oversight or influence over the provider staff.
· Provider retention is determined by the SPV.
· Decisions about closing the deal, accept changes, and/or continued performance are made by whoever controls the SPV rather than the provider.
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Having identified the different ways to configure a SIB, we now turn to how to award the public contract. This section will introduce and then explore the Public Contracts Regulations (PCR),Social Value Act (SVA), and the Local Government Acts (LGA), which provide the legal rules for the award of a public contract.
It is important to note that this guide is not a step-by-step manual to PCR and other rules. Nor does this guide address the potential remedies an aggrieved party may have if the contracting authority breaches its obligations under these rules. Also note that there are thresholds at play, but the assumption throughout this section is that the SIB exceeds the value of these thresholds.
If you feel confident on the regulations you can jump down to five procurement pointers for tips on the best way to go about it.
Public Contracts Regulations
The Public Contracts Regulations 2015 (PCR) need to be followed if you are buying services or works for public authorities. PCR provide rules for procurement preparation, publication and transparency, as well as various procurement procedures. Most relevant for SIBs, PCR provides for situations in which there is only one potential bidder and provides flexibility when there is more than one potential bidder. The flexibility in the second situation is called the Light-Touch Regime and allows a contracting authority to develop its own procedure or mix and match from other procedures. In both situations, transparency notices are required.
You can read Cabinet Office Guidance on PCR and see below for our guidance on procuring your SIB in line with the PCR.
Social Value Act
The Public Services (Social Value) Act 2012 (SVA) requires people who commission public services to think about how they can also secure wider social, economic and environmental benefits. You can read the publication The Public Services (Social Value) Act 2012: An introductory guide for commissioners and policymakers and see below for our guidance on procuring your SIB in line with the SVA. This issue is addressed in our fourth ‘procurement pointer,’ “Secure the SIB’s social value and strategic benefits.” (See Chapter 4.)
Local Government Act(s)
The Local Government Act 1999 (LGA) places a General Duty of Best Value on public authorities at the local level, including English local councils. These authorities are to have regard to “a combination of economy, efficiency and effectiveness” and work to secure continuous improvement in their functions. This duty requires authorities to consult representatives of persons who use or are likely to use services provided by the authority, and representatives of persons appearing to the authority to have an interest in any area within which the authority carries out functions. (See 2015 Revised Best Value Statutory Guidance.) This issue is addressed in our fifth ‘procurement pointer,’ which is about engaging beneficiaries and their representatives. (See Chapter 4.)
The following guidance will help you comply with requirements of PCR, SVA, and LGA.
A contracting authority pursuing a SIB is not just in the market for a provider of social intervention or treatment. The contracting authority is also in the market for providers and/or social investors who can perform under a contract which only pays them if the specified outcomes can be achieved.
It is important that provider access to capital and social investors’ interest are part of your market consultations. The provider’s access to grants or other funding may also be important.
The number of bidders will likely be smaller and it might be just one. The bidder may be a “special purpose vehicle.” You may need to co-commission with other public buyers to make the deal big enough to attract social investment. All this may affect your choice of procurement procedure.
It is possible that only one provider, social investor, or SPV may be able to offer the deal sought. This means that it may be appropriate to negotiate and make a direct award of the public contract for a SIB. PCR calls this “Use of the negotiated procedure without prior publication.” (See PCR Regulation 32.) This is sometimes referred to as contracting “without a procurement”.
It is important to remember that PCR still applies in these cases. PCR permits this where services can be supplied only by a particular economic operator. This may be because competition is absent for technical reasons or the protection of exclusive rights, including intellectual property rights.
Transparency notices when you have only one potential bidder
Even when you are negotiating with the only potential bidder, PCR requires you to publish a notice that you are about to award the contract. This gives others a last chance to put up their hand and declare that they are in the market and want the opportunity to bid. This mandatory notice is called a "voluntary ex-ante notice" (VEAT). At the time of writing, VEATs are to be published in the “Supplement to the Official Journal” of the EU and can be found in the official online version called Tenders Electronic Daily or “TED.” (See Box 3.1.)
Within a contracting authority, commissioners should expect their legal and procurement professionals to be especially diligent with negotiation without prior notification. A VEAT is not a quick rubber stamp. European and UK Courts have highlighted that “illegal” direct award of contracts is “the most serious breach of Community law in the field of public procurement.”
A voluntary ex-ante notice (VEAT) is required when negotiating directly with one potential contractor (i.e., “Use of the negotiated procedure without prior publication,” per PCR Regulation 32.) This process is sometimes referred to as awarding “without a procurement.” The mandatory VEAT must provide at least a 10-day notice before the contract is signed and must have enough detail about the contract.
PCR Regulation 99 describes what needs to be in a VEAT and this issue was the subject of a November 2018 Court of Appeal decision (Faraday Development Ltd v West Berkshire Council). Though not about a SIB, the Court in this case directly addressed the issue of detail in a VEAT saying, “it should provide enough by way of relevant objective detail about the contract to enable the third party to decide, in the short period allowed to him, whether to launch proceedings challenging the authority’s decision to go ahead with a regulated procurement.” (At Paragraph 87.) In this case, the Court of Appeal found the VEAT was not a valid notice and ruled that the contract award was ineffective.
This issue matters to SIBs for compliance and strategic reasons. Failure to comply with the regulations, including failure to provide enough objective detail may cause the award to be ineffective – long after the 10-day period. It does not matter if the VEAT was posted for 10 days or more if the VEAT does not provide enough relevant objective detail to allow a potential bidder to decide.
Strategically, you are more likely to get social value from the SIB if more providers can understand what you are awarding so they can be ready to bid on a SIB in the future. Therefore, erron the side of providing moreinformation in the VEAT. Describe the social intervention, payment after and only if outcomes are achieved, and any co-commissioning or top-up funding from other public sources.
PCR provides rules for when you have more than one potential bidder, where there are many different procurement procedures available. However, PCR significantly relaxes these rules for social and other specific services. The Light-Touch Regime is part of the PCR regulations and this gives the contracting authority the freedom and flexibility to set up their own process and timeline. (See PCR Regulations 74-77 and Schedule 3.)
As shown in the table below, the procurement procedures under PCR include Open Procedure (Regulation 27), Restricted Procedure (Regulation 28), Competitive Procedure with Negotiation (Regulation 29), Competitive Dialogue (Regulation 30), and Innovation Partnership (Regulation 31). The difference between the procedures is basically that they have an increasing number of steps that allow increasing levels of interaction with the preferred vendor(s).
The procedures listed below apply to all public contracts. For social services, the PCR Light-Touch Regime allows contracting authorities to develop their own process or “mix and match” the other procedures. The procedure adopted by the public authority must be in compliance with European Treaty principles of transparency and equal treatment.
The timeline of the process set by the contracting authority must be reasonable and proportionate, but there are no mandated minimum time periods under the Light-Touch Regime. While relaxed, the PCR does have specific requirements for transparency notices, as explained below.
** See The Art of The Possible by Frank Villeneuve-Smith and Julian Blake for a discussion of Innovation Partnerships.
In many SIB contexts, contracting authorities want the freedom to have a dialogue with one preferred bidder. In these cases, the Light-Touch Regime allows the contracting authority to design the process and include dialogue with the preferred bidder. The timeline of the process set by the contracting authority must be reasonable and proportionate, but there are no mandated minimum time periods under the Light-Touch Regime.
For these reasons, in many SIB procurements, the contracting authority takes advantage of Light-Touch Regime to design a process that looks like a light version of competitive dialogue. This means that there is often some sort of initial qualitative assessment (such as a Pre-Qualification Questionnaire or “PQQ”), followed by invited tenders, followed by competitive dialogue with the preferred bidder.
It is important to note that whatever process you design, it must comply with European Treaty principles of transparencyand equal treatment. PCR and these principles still require you to publish transparency notices.
Transparency notices when you have more than one potential bidder
The PCR procedures include mandatory transparency notices that tell potential bidders in the market about the opportunity and the awarded contract. The PIN, CN, and CAN regulations point to the EU Procurement Directive Annex V, which includes the detailed requirements for each.
For social services being procured under the Light-Touch Regime, PCR allows you to publish two notices: The PIN or theCN, plus the CAN (Regulation 75). If you are publishing a PIN rather than a CN, you need to indicate that the contracts will be awarded without further publication and invite interested economic operators to express their interest in writing.
The CN, PIN, and CANs are published in the “Supplement to the Official Journal” of the EU and can be found in the official online version called Tenders Electronic Daily or “TED.”
Importantly, the contracting authority must conduct the procurement in accordance with the published notices or specifications. Basically, you need to do what you said you were going to do.
Note that you cannot use a PIN or CN when you are negotiating with and awarding directly to one contractor, as described in the previous section. The Light-Touch Regime cannot be used to avoid the VEAT. Unlike the VEAT, neither the PIN or the CN is designed to invite a challenge, but rather, to genuinely invite competing bids.
These issues are important for current SIBs and for future SIBs. Transparency notices help providers, social investors, and public authorities to understand what’s already been awarded and prepare for what may happen in the future. These issues are addressed further in our procurement pointers.
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After ensuring that you are following the laws and regulations around procurement for your SIB it is now helpful to provide guidance for how to procure effectively. Public procurement is complex and there are many options to consider for your SIB. We have developed five procurement pointers to support you through this process.
Consider co-commissioning.Every local place and beneficiary is unique, but many social problems extend beyond local council boundaries. Increasing the number of beneficiaries can reduce the per-beneficiary costs and attract more potential providers and social investors. The transaction costs involved in a SIB could be shared by contracting authorities. You might want to consider co-commissioning with other authorities as part of procurement preparations. One benefit of co-commissioning is that risks around referral rates can be mitigated and shared by the commissioners.
SIB with friends. An example of co-commissioning in London.
Five London borough councils have come together to co-commission the Pan-London SIB for Children on the Edge of Care. The co-commissioners are the London Boroughs of Bexley, Merton, Newham, Sutton, and Tower Hamlets. (A sixth borough council, Barking and Dagenham, joined after the award of the public contract.) The co-commissioning relationship is formalised in a 2017 “Inter-Borough Partnership Agreement.” See Chapter 7 Case Profiles for more information, including access to a template version of the Borough partnership agreement.
Be clear in notices that the public contract is to be part of a SIB, in other words that (a) that some or all payments will be made after and only if specific outcomes are achieved and (b) social investment will be required.
As emphasised in previous subsections, the direct negotiation and award of a contract without prior information requires publication of a VEAT. The other procedures, even under Light-Touch Regime rules, require the publication of either a contract notice (CN) or a prior information notice (PIN), plus a contract award notice (CAN) after award.
The GO Lab suggests that contracting authorities should provide enough relevant objective detail so that any economic operator can understand what is being procured or awarded. This requires both a short description of the intervention outcomes anda short description of the “after and only if” payments deal. This suggestion is based in part on a November 2018 Court of Appeal decision which found a VEAT invalid and the public contract award ineffective.
Additionally, this suggestion has transparency benefits. Clear notices will help develop your market in the long term by helping other providers understand that you are procuring SIBs, and allowing other providers to understand that you are buying with “after and only if” terms so they can prepare for such a deal in the future.
Your specifications should focus on the social outcomes rather than on how they are to be achieved.In your communications to the market, be as flexible as possible regarding the inputs and activities required to achieve the outcomes, allowing the provider to propose how they will achieve them. The same goes for the transparency notices and for the contract.(See Chapter 3.)
There are both strategic benefits to this flexibility. During procurement, you may receive more bids and more alternative solutions or innovation in the bids. During contract performance, all parties may be more responsive to lessons learnt if the service delivery can be adjusted. If you are too detailed about the inputs and activities in your notices and invitation to tender documents, then changes may require a contract cancellation and re-procurement. As fun as procurement is for everyone, nobody wants contract cancellation and re-procurement for the same outcomes!
Notes: (i) This pointer is not about flexibility on the outcomes or beneficiaries. See our Setting and measuring outcomes guide for more information. (ii)This flexibility around the “how” is sometimes called “black box' procurement. The concept of a black box is that you don’t focus on see the inner workings of the black box – you just see inputs and outputs. Whether the box should remain closed is a different issue – the point here relates to the specifications. In a “grey box” scenario there may be a mix of flexibility alongside ‘minimum service standards. (iii) This pointer is about the contracting authority’s notices and procurement documents, but it is not a comment on whether activity and output payments should be part of the bidders’ solution or financial model or payment terms. This pointer is more about what is communicated to the market, not the solutions proposed and negotiated in response.
Being Flexible about How Outcomes are to Be Achieved. Example from Birmingham.
In December 2012, Birmingham County Council advertised a contract titled, “Children in Care Services – Payment by Results.” The contract was to reduce the number of children in residential care because of evidence that foster placement can be better for children. Foster care is also less expensive than residential care for the council.
The advertisement stated, “The Council has chosen not to prescribe the services to be deployed, the provider will identify the most appropriate service offer through access to the needs profile, current service take up of the cohorts and the application of their expertise.”
The Specifications included a high-level outcome: “The improvement of outcomes of the young people within the defined Cohorts of Children in Care, by ensuring that young people remain or are returned home, where appropriate, or placed in family placements. Additional outcomes were also provided, but were very flexible about how the outcomes could be achieved.
The specification stated: “Due to the nature of this procurement i.e. service interventions are not being prescribed by the Council at the outset this service specification should be regarded as being subject of dialogue through the procurement process. It sets out the principles of what we wish to and will be modified as the procurement progresses.” (Cover page of the specifications.)
The Specifications also stated that, “The majority of inputs will be determined by the service proposed by Tenderers and will be developed as the procurement progresses.”See Chapter 7 Case Profiles for another example in North Somerset Council’s “Turning The Tide” SIB
As noted in Chapter 3, the Public Services (Social Value) Act of 2012 or “Social Value Act” or “SVA” requires people who commission public services to think about how they can also secure wider social, economic and environmental benefits.
Commissioners may be missing an opportunity to leverage-in more social value commitments from social investors and providers on SIBs. Social value is not automatic to SIBs because the words ‘social impact’ appear in the title. Commissioners should consider whether the extent to which the SIB can address social value priorities that may have already been identified by the public authorities. Bidders can be asked to address this issue in their tenders.
You can read the publication The Public Services (Social Value) Act 2012: An introductory guide for commissioners and policymakersand see below for our guidance on procuring your SIB in line with the SVA[PR1] . Another potentially helpful resource is a Social Value “National TOMs Framework” which describes 5 social value themes, 18 outcomes and 35 measures.
The potential strategic benefits of a SIB include increased collaboration, prevention, and innovation. (These are highlighted along with the potential limitations in the debate around social impact bonds). Public procurement and the contract play a critical role in securing these strategic SIB benefits for the contracting authority. On the flip side, if this is not done well, too much knowledge and power may be transferred out of the contracting authority and into a few economic operators.
To secure increased collaboration, prevention, and innovation, Commissioners are encouraged to do some of all of the following:
To avoid outsourcing oversight of the intervention along with performance management, the contracting authority should secure a good Data Sharing Agreement. Recall that the social investor or provider will be doing a lot of performance measurement to manage progress towards the outcomes. The contracting authority should consider how much of these performance data they need under the contract.
The requirement for Data Sharing Agreement should be in notices, pre-qualification materials, full tenders, and the contract. Consider including this issue in the tender evaluation/award criteria scoring.
The contracting authority should ensure that the Data Sharing Agreement includes delivery of data in a reusable format with clear data definitions. The Data Sharing Agreement and/or reporting terms should describe regular points in time when data are shared and their meaning explained. Note that the contracting authority should not focus on reporting on inputs. The focus of these data should be primarily on outputs and outcomes.
The SIB structure is potentially opaque to existing providers. As described in the previous Section, the contracting authority must comply with PCR regarding notices in any public procurement or contract award process. Beyond compliance, the notices have an opportunity to help providers understand what is happening so they can participate and/or prepare for participation later.
A separate issue is transparency in outcome pricing and performance. Contracting authorities should also seek to secure the appropriate agreements around disclosure from providers (and from other government funders where relevant) to share data on price per outcome and performance. Contracting authorities in new SIBs have the opportunity to set expectations that contract documents will be redacted and shared. The GO Lab believes that more transparency in this matter would increase the social value of the SIB and be consistent with the SVA.
The contracting authority should consider procuring a separate evaluation or asking for an evaluation to be included in the tender. There are many benefits to conducting an evaluation that are highlighted in the GO Lab’s introduction to evaluation.In the latter scenario, include the evaluation requirement in notices, pre-qualification materials, full tenders, and the contract. Include this issue in the tender evaluation/award criteria scoring.
Most of this guide focuses on the contracting authority, the provider, and the social investor. However, we cannot not lose sight of the beneficiary. Allhigh-quality providers likely have high levels of engagement with beneficiaries. Nonetheless, public authorities may want to consider how they can more explicitly include beneficiaries in SIB development and implementation. This could be achieved by running a consultation alongside a market warming initiative and/or asking the bidders to describe the ways in which beneficiaries have been engaged in the design of the intervention and are to be engaged during performance.
For significant future SIB projects that cause changes for beneficiaries, public authorities may have a ‘duty to consult’ with beneficiaries and their representatives. As noted above in Chapter 3, the Local Government Act 1999(LGA) places a General Duty of Best Value on public authorities at the local level, including English local councils. LGA requires these local authorities to consult “representatives of persons who use or are likely to use services provided by the authority.” To our knowledge, no SIB has run into an LGA or ‘duty to consult’ compliance problem. Perhaps this is because the SIBs are offered as an additional alternative to a public service. However, if SIBs are to scale and have the promised impact, the issue of consultation and engagement will likely grow in importance in the future.
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The UK Government provides a SIB Template Contract and SIB Template Contract Guidance. The SIB Template Contract provides contract terms that reference key attachments or “schedules,” which are appendices for essential elements of the SIB. If the SIB Template Contract is the bones of the SIB, the schedules are the organs. The schedules include Authority Requirements and Obligations,Payment Schedule, Data Sharing Policy, Management Information, Change Procedure, and Commercially Sensitive Information. The Deed of Assuranceispotentially a very helpful schedule depending upon SIB structure. These schedules are blank slates to be drafted to a particular project.
The blank gaps in the SIB Template Contract schedules are somewhat necessary due to the variation between differentSIB projects. Nonetheless, the GO Lab believes templates or examples from existing SIBs would be helpful. If parties to existing SIB parties shared more of their contractual documents, this would likely reduce the transaction costs for other local authorities. Parties to new SIBs could set expectations that contract documents will be redacted and shared. (This was one of the issues made in the fifth procurement pointer “Secure the SIB’s strategic objectives.” See Chapter 4.)
· “Providing a balanced document that should be broadly acceptable to commissioners, service providers and investors.
· “Striking a balance between simplicity, materiality and proportionality.
· “Providing a clear position on substantive issues (to limit time spent negotiating those) but leaving it open for genuine project specifics or issues of particular concern to commissioners, service providers and investors (if any) to be added in”
(Drafting Principles in the SIB Template Contract Guidance Document.)
There are now many SIBs that have been entered into based on the SIB Template Contract This means that potential parties in the market are more familiar with this contract and the balances it established. As a result, you may get a quicker and cheaper process closing the deal than if you to create something different.
The SIB Template contract has ten different attachments or “schedules” where key elements of the specific SIB are described. The SIB Template schedules are mostly blank and need to be completed according to the needs of the specific SIB. As noted above, these schedules are the organs to the bones that is the SIB Template Contract. Three of the most important schedules are addressed below.
Outcomes Specification and Payment Terms
The reason you are doing a SIB is to achieve specific outcomes. The most essential elements of the SIB are outcomes specification and the deal to make payments after and only ifthe specific outcomes are achieved. The SIB Template Contract addresses these elements as Schedule 1 Authority Requirements and Obligations, which includes the outcomes specification, and Schedule 2 Payment Schedule.
The content of these schedules will be a combination of the specification, the bid, and the negotiations. The GO Lab guide “Setting and measuring outcomes” can be consulted during this process. The main point for procurement and legal professionals here is to avoid additional requirements about inputs or implementation. Earlier in this guide, the second procurement pointer highlights that transparency notices and specifications should be specific on the outcomes to be achieved,but flexible on howthe outcomes should be achieved. (See Chapter 4.) The same reasoning exists here. During contract performance, all parties may be more responsive to lessons learnt if the service delivery can be adjusted without the need for a contract amendment or re-procurement
Depending upon the SIB structure and context, the contracting authority may want to tie-in a subcontractor. (See Chapter 1 for discussion of SIB structures.) For example, if your prime contractor is an SPV or social investor, you may want some control over changes to the subcontractor providers. Alternatively, if your prime contractor is a provider, you may want some control over any changes to a subcontractor who is providing performance monitoring data. The SIB Template Contract includes a Schedule 3 Deed of Assurance with a number of helpful clauses to address these examples, including Step-In Rights in Favour of the Authority which can result in the authority becoming the direct client of the subcontractor. (See Schedule 3, Section 7.)
Data and Information Schedules
Another consequence of a deal to pay after and only if specific outcomes are achieved is the need to monitor outcome achievement. The SIB Contract Template provides a Schedule 4Data Sharing Policy andSchedule 8 Management Information, but these schedules are both blank slates. Earlier in this guide, the fifth procurement pointer highlights the importance of having a good data sharing policy to secure the SIB’s strategic objectives. (See Chapter 4.) Later in this guide, the issue comes up again as a fourth hurdle to closing the deal in the context of inappropriate monitoring terms. (See Chapter 6.)
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· Involve contracting authority lawyers and procurement professionals early in the process.
· Start with the SIB Template Contract
· Consider using “conditions precedent,” in which a list of issues must be resolved during the start-up period before performance can begin.
· Do not over go over-board with complexity and keep the contract as light and simple as possible.
One promising practice comes from an interesting element of the Pan-London SIB contract mentioned earlier: the use of “conditions precedent.” The contract was awarded on September 1, 2017, but performance could not begin unless a number of issues were resolved during a six-month initiation phase. Issues to be resolved after award and before performance included:
· Clarification on definitions around what is “in care” and “out of care”
· Tracking Process
· License agreement
· Referral Criteria
· Referral Process
· Data Processing Agreement
A different approach was taken by North Somerset Council in their “Turning The Tide” SIB, where they tried to secure agreement on the SIB during competitive stages of the competitive dialogue procedure.
See Chapter 7 Case Profiles for more information on both these SIBs.
Suggestions: Consider using the UK Government’s SIB contract template and focus on how the outcome achievement is to be verified.Avoid adding standard terms and conditions that create new risks of non-payment for outcomes. Alternatively, allow actors to address and/or price-in your standard payment terms by including them in preliminary market consultations, notices and/or specifications.
The SIB Contract has payment provisions which wrap around and complement Schedule 2 Payment Schedule. The clauses anticipate both Service Payments and Outcome Payments. Fundamental to a SIB is that Outcome Payments are made after and only if the specified outcomes are achieved. The Schedule 2 Payment Schedule is blank because there are different approaches to specifying the outcomes, defining the prices to be paid for outcomes, and determining that a specified outcome has been achieved (i.e. what triggers payment). The GO Lab offers a technical guide to setting and measuring outcomes and a guide to setting the price of outcomes. (The SIB Template Contract guidance also suggests a basic model for payment mechanisms and outlines some of the issues in designing them)
Many standard terms for traditional fee-for-service contracts with inspection, acceptance, and payment are not appropriate for outcome payments. One simple reason is that the amount to be paid will vary depending on the contractor's success in achieving the outcomes. Furthermore, if the contracting authority or another public body controls the data for determining whether the outcome has been achieved, then there needs to be a process around mutual access and validation of the data.
Once the specific process of verifying outcome achievement is defined and priced-into the financial model, the subsequent addition of standard terms may introduce new risks of non-payment and change the prices. If standard terms are to be included in the SIB contract, consider including the terms in preliminary market consultations, notices and/or specifications, so that contractors can address them in their tender and/or discussions as appropriate.
The SIB Template Contract clauses provide Service Fee payments on a monthly basis and Outcome Payments within twenty days of invoicing. Authorities may want to consider whether twenty days is sufficient time to process the Outcome Payment in circumstances where the trigger may rely on a third-party evaluation or not be a fixed date in time.
Suggestions: Include contracting authority budget constraints or minimum and maximum referral rates in the contract procurement documents. Consider and address early the implications of an authority obligation to meet the minimum or pay anyway. Consider “roll-over” options, especially if co-commissioning.
One of the most important aspects to specify in an outcome-based contract is the type of people the contractor will be expected to work with. It is important to consider and describe a "qualified" referral, paying attention to the risk of the contractor undertaking so-called "creaming” (only taking easy referrals) and “parking” (diverting attention from more difficult cases after they have been referred). Criteria for a qualified referral and/or supporting data should be included in the procurement documents.
Linked to, and following on from this issue of the quality of referrals, is the quantity of the referrals. In many SIBs the Outcome Payment is dependent upon the number of service users worked with by the Contractor. The SIB Template does not provide clauses on the minimum or a maximum number of people that will be served, but this can be included in Schedule 1 Authority Requirements and Obligations and/or Schedule 2 Payment Schedule
If too many people use the service, the total cost of outcomes generated may be too high for the authority to bear. A maximum total number of service users will help ensure the authority budgets for outcome payments. An alternative way to address this issue is to specify a maximum or ceiling contract value. This information is important for potential contractors to build their financial models. There is more information on setting payment caps in the GO Lab’s guide to setting and measuring outcomes.
At the other end of the scale, if too few people use the service then the contractor may not be able to cover their mobilisation or set-up costs. If generating referrals is to be the contractor’s responsibility, then it may be appropriate to let them carry the risk of too few referrals. However, if the contractor is reliant upon the authority referring eligible users and too few are referred, the contractor (provider or investor) could lose money for reasons beyond their control.
Even if it is up to the contractor to drive referrals, they may be concerned that they have insufficient data about the referral numbers or the referral process is unclear. In these circumstances, the authority should consider whether it is appropriate to guarantee a minimum number of eligible referrals, with a guaranteed payment for that minimum number whether or not the referrals are actually made - i.e. “meet the minimum or pay anyway.” This could be done in Schedule 1 Authority Requirements and Obligationsor via a termination sum, as described below. Whether or not this is appropriate will depend on the circumstances in question.
Making and then operating under an obligation to meet the “minimum or pay anyway” may seem surprising for the authority staff and is not appropriate in all situations. If there is a small number of potential service users then the margin between minimum and maximums may be very narrow. If the margin is too narrow, the authority may too easily fall below the minimum. If maximum or minimum referral rates are to be set, consider including these rates and/or supporting data in market consultations and the contract procurement documents.
One alternative approach may be to detail how the authority will facilitate eligible referrals (which can be done in the Schedule 1 Authority Requirements and Obligations) and not specify a minimum. This would be focusing on the how and who, but not how many. A further alternative approach would be to pay the contractor different amounts for different ranges or numbers of referrals. This may give the authority extra value for money where the programme was scaled up, but could also be used to protect the contractor in circumstances where the level of referrals is lower than expected.
Suggestion(s): Use the termination clauses in the SIB Template Contract, which includes voluntary termination after 24 months with payment to the contractor of an “Authority Default Termination Sum.” If not using these terms, the authority should make cancellation terms explicit as early as possible.
In order to develop its financial model, the contractor needs to understand what will be paid if the authority makes a voluntary termination or defaults. This is because the contractor may not have had the chance to achieve enough outcomes at the point of termination to cover their costs up to that point and the termination will deny them the chance to achieve more outcomes in the future and recoup their upfront costs.
One way to work out how much to pay a contractor on termination is to include a mechanism to estimate what outcome payments would have been made if the contract had been continued. On the one hand, the SIB is premised on the possibility that some or all of the potential outcomes may not be achieved. On the other hand, the contractor has signed up for the opportunity to achieve all the outcomes and receive all potential outcome payments (or at least enough to get back their up-front investment).
The SIB Template Contract strikes a balance by providing a voluntary termination mechanism with an "Authority Default Termination Sum," calculated on a gross "Minimum Expected Outcomes" amount to be specified. However, the voluntary termination mechanism allows termination after 18 months of performance following services commencement and requires at least 6 months' notice (in other words, voluntary termination is not possible within 24 months under the template). This might give the contractor a chance to achieve some outcomes and give an indication of likely level of performance for the rest of the contract – but whether this is long enough will depend entirely on the payment terms of the particular contract.
Like any contract, the SIB Template Contract also provides a mechanism for contractor termination under certain defined circumstances (for example, bribery, corruption, gifts, and fraud), or following a performance improvement plan.
Suggestion(s): Start with the UK Government’s SIB Template Contract and avoid adding standard terms that create an additional administrative burden or operational costs.
Proponents of SIBsoften argue that they promote innovation by bringing private sector management approaches to public sector challenges, and that they enable the contractor to have greater flexibility to problem-solve during delivery. Therefore, typical monitoring requirements based on inputs or service quality measures may not be appropriate in an outcome-based contract. Nonetheless, the authority still has obligations to protect service users and guarantee accountability to taxpayers.
The SIB Template Contract seeks to strike a balance with clauses on monitoringand information and audits that complement Schedule 8 Management Informationand Schedule 2 Data Sharing Policy. The clauses allow an authority to inspect the contractor three times a year or more times if required by statutory duty or under a performance improvement plan. Additionally, the authority can audit the contractor twice a year. Adding additional monitoring requirements may increase contractor costs or constrain the contractor’s flexibility during delivery.
The SIB Template Contract Clause 10 and Schedule 1 Authority Requirements and Obligationsare designed to clarify authority obligations during the mobilization (set-up) and performance of the contract. The authority is not to do anything that may jeopardise the ability of the contractor to perform the service or achieve the outcomes. However, the template also provides that “Nothing in this clause 10 shall fetter or constrain the Authority’s discretion in the carrying out of its statutory functions.”
Suggestion(s): Maintain contract flexibility and avoid re-procurement by using the change provisions and change procedure in the SIB Template Contract. Also, avoid over specification of the inputs and activities.
Whilst it can feel counter-intuitive, you should not expect to have nailed down everything at the point of contract signing. SIBs are a new way to address complex social issues so it may be reasonable to expect some changes to the contract during performance, especially adjustments to Schedule 1 Authority Requirements and Obligations, Schedule 2 Payment Schedule, and Schedule 8 Management Information.The SIB Contract provides change clauses wrapped around and complimentary to Schedule 6 Change Procedure. Unlike some of the other schedules, a detailed change process is offered. The SIB Template Contract change provisions are designed to be consistent with the Public Contracts Regulations (2015) and to avoid re-procurement.
The SIB Template Contract change provisions require the agreement of both parties.
The template also provides for a meeting every three months to review the performance and progress in which the parties should consider amendments to the agreement that would not have “a material adverse effect on the Parties, the Investor or the Service Users.”
In periodic review meetings parties can assess whether the overall objective of the contract is being met and whether changes are appropriate to make that more likely. This is a significant departure from the usual situation in which parties sign a contract and then each side then try to work the contract to their advantage. In contrast, this approach recognises the common purpose of the parties – including the investors – in entering into the contract and commits them to working together to achieve that purpose consistently throughout the contract period.
The SIB Template Contract includes the presentation of a financial proposal for the requested change to the Authority, “for review and testing to ensure that this presents value for money and is affordable.”
As detailed in Chapter 4, the Go Lab’s second procurement pointer is, “Be flexible about how outcomes are achieved.” Avoiding over-specification of the inputs and activities will make it easier to implement changes by avoiding contract cancellation and re-procurement.
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As of March 2019, this chapter includes one case profile: North Somerset Council “Turning the Tide” SIB. Additional case studies are coming soon.
North Somerset Council is the commissioner in a SIB called “Turning the Tide”, in which the provider works with families to help children stay at home safely and/or reuniting children with their families as soon as possible. This case profile focuses on procurement and contracting issues. For a broader view, see the profile and links on the GO Lab Project Database profile for this SIB.
· Warm the market:Hold preliminary market consultations in the form of events with both social investors and providers.
· Procure an evaluation:Ensure that learning is captured and shared with an evaluation.
Closing the Deal:
· Take time to resolve contract issues before award and during competitive stage(s):Engage legal professionals during competitive dialogue before the preferred bidder is selected.
The public contract is between the Commissioner and the Provider, who secured investment from a social investor. The Commissioner separately procured an independent evaluation.
North Somerset Council held a briefing for providers and investors on 12 February 2016. The Council issued a Prior Information Notice (PIN) as an advertisement for this event in the EU’s official journal (OJEU), which is available on the EU’s Electronic Tenders Daily (TED) website. (See here.) This advertisement explains that the Council received a grant from the Commissioning Better Outcomes Big Lottery fund for the development of a business case in March 2015. The advertisement also stated that, “The council holds an initial view that the intervention would be an intensive intervention on the lines of a Family Preservation Service (FPS). While this type of intervention remains the most likely option, the council is open to considering other options proposed by those bidding for the contract… The council does not intend to specify a specific intervention and will allow providers the flexibility to propose how they will deliver the intervention within the parameters set by the Council.”
The objectives of the February 2016 market event were described in the Council’s presentations: to share information about their SIBproposal and the draft procurement plan, gain insight from potential providers and investors to enable their approach to be refined, and provide opportunities for discussion and networking between the Council, investors/intermediaries and providers.
The market event provided project background information and detailed assumptions, the proposed procurement process and timeline, and an opportunity for networking and informal discussions. The Council described the beneficiaries, challenges, and the desired outcomes. For example, the Council proposed that 90% outcomes payments could be focused on primary outcomes.
A specific intervention was deliberately not defined by North Somerset. On the contrary, the Council stated in its presentation at the market event:“The market knows as much as we do – we wish to avoid being prescriptive. Therefore, we have no preconceptions on: The contractual relationship between all parties; How risk will be apportioned; How much the Council will be involved in developing consortia. …We may get different solutions/models that all meet our outcomes. We want a solution that is locally driven, utilises local businesses, engages the VCSE sector properly, and delivers social value over and above the primary outcomes.”
The procurement procedure used was a Competitive Dialogue, including a Past Performance Questionnaire (PPQ), followed by an Invitation to Participate (ITP) in a series of discussions, followed by an Invitation to Tender (ITT). The Contract Notice advertising the opportunity appears on Contracts Finder here and on TED here.
The Council provided a questionnaire at the February 2016 market event and provided answers in response. In one answer, the Council said, “Our preferred approach is to take three bidders through to competitive dialogue. The PQQ will focus on previous experience and qualifications whereas the final evaluation will be based on the proposed intervention and financial model.”
In answer to another question the Council said, “We do not expect investors to be lined up before the end of the PQQ, therefore we will be evaluating the provider at this stage. However, providers who have a clear idea of where their investment might come from will be scored higher than those who do not.”
The ITP describes four separate meetings for channels of discussion:
· Intervention and cohort
· Risk Management workshop
· Costs and Operating Model
· Mobilisation and Implementation
Each of the bidders were invited to each of these discussions separately. The dialogue period ran from 14th June to mid-September, and there were approximately 10 meetings or calls audios with each supplier. After the discussions the Council invited final tenders in an ITT.
The contract award was based on the most economically advantageous tender (MEAT) as assessed against the section criteria. These criteria were in three categories: financial, quality, and implementation.
One financial criterion was “Contractual Delivery Model,” including “Security of investment, Balance of risk between parties, Provider incentivisation, Overall financial viability.” This was worth 15% of the overall tender evaluation.
One quality criterion was, “Quality Assurance/Governance,” including “Performance Management, Performance Measurement, Quality Assurance, Continuous improvement, and Management of sub-contractors”.
Though not referenced in the ITT or selection criteria, North Somerset took steps to secure the SIB’s strategic benefits by running a separate procurement for an independent evaluation.The Council sought an evaluator service to be in place for a period of 5 years. (See Chapter 4 for discussion of why it is important to capture and share learning.) The Contract Notice for the independent evaluation is on Contracts Finder here.
The independent evaluation Contract Notice stated, “The Council seeks to commission an independent evaluation of both the Council itself and the SIB provider, to enable a clear and robust understanding of the impact of the SIB to improve outcomes for children and young people. The evaluation will have two elements; the impact of the SIB in improving the specific and individual outcomes of service users and their families and; how the process of the SIB has improved the position of the Council as a whole.”
North Somerset Council’s activity developing the contract and closing the deal informed some GO Lab suggestions for avoiding hurdles discussed in Chapter 6: Involve legal processionals early in the process – including in discussions before identifying a preferred bidder.
North Somerset awarded the SIB contract to Core Assets Group. The contract has a value of £3.3M and a period beginning 4thJanuary 2017 and ending 3rdJanuary 2024. The Contract Award Notice appears on Contracts Finder here.
A promising practice was the involvement of the legal teams early in the process – especially before one preferred bidder has been identified. North Somerset used the SIB Template Contract and discussed the details of contractual terms and Schedules during discussions. Significantly, the discussions were happening concurrently with more than one potential awardee. The Council likely had a strong position to secure agreement on details regarding the SIB Contract Schedules. The Council’s position may have been weaker later in process, for example when having discussions with only the preferred bidder or after the contract award. In the ITP, the Council stated that the dialogue phase would last about two months.
The contract awardee and provider, Core Assets Group, may also have benefited from holding contract related discussions in this competitive stage of the procurement. At the same time as Core Assets Group was negotiating with the Council, they were negotiating with the social investor, Bridges Fund Management. Just as the Council may have benefited from having discussions with the provider in an environment of competition, the provider may have benefited from having discussions with investors in that environment. This situation would not arise if the bidder was the social investor or an SPV controlled by the social investor.
The independent evaluation contract was awarded for a value of £151K and a period beginning 29th October 2017 and ending 28th October 2018. This amount was for the entire contract period. The independent evaluation CAN is on Contracts Finder here.
Resources supporting this case study (coming soon) on the GO Lab Website:
· Advertisement of the Market Event
· Presentation at the Market Event
· Contract Notice for the SIB
· Pre-Qualification Questionnaire (PQQ)
· Invitation to Participate
· Contract Award Notice for the SIB
· Contract Notice for the Independent Evaluation
· Contract Award Notice for the Independent Evaluation
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James Ruairi Macdonald (Ruairi) is a research associate at the University of Oxford, Blavatnik School of Government, Government Outcomes Lab (GO Lab). Qualified as an attorney in New York State, Ruairi is pursuing a Ph.D. in Public Policy and Public Administration at the George Washington University in Washington, DC. He has a Master's degree in Government Procurement Law (LL.M.) from the George Washington University and a Bachelor's degree in Law from Queen's University Belfast. Ruairi has over 10 years of management experience on contracts with the U.S. Department of Health and Human Services, U.S. Department of Education, and other federal agencies. Ruairi is available at email@example.com and firstname.lastname@example.org.
Grace Young edited and reworked this guide to ensure it was accessible and understandable. She leads policy and communications at the GO Lab.
The GO Lab is grateful to the following people who contributed comments and feedback on guide (and the shorter predecessor guide): Julian Blake (Stone King LLP), Roger Bullen (Triodos Bank), Terry Clark (London Borough of Sutton), David Hunter (Bates Wells Braithwaite), Duncan Kellaway and Daniella James (Freshfields Bruckhaus Deringer LLP), Suzanne Kay (NHS Northern, Eastern and Western Devon Clinical Commissioning Group), Mark Lovell (The Social Assistance Partnership), Paul Riley (Outcomes UK), Mark Roddan (North Somerset Council and South Gloucestershire Council) and Grace Young and Nigel Ball (Government Outcomes Lab). Any errors are those of the author.