At the end of last year, the UK’s National Audit Office issued a very useful document titled “Commercial and contract management: insights and emerging best practice”. We did provide an initial overview of it here, and now we are into a more detailed review of its content and findings. For each area the NAO has covered, we will look at their content and then give any additional analysis or thoughts we would add to the mix. Today, we will take a look at number 10 of the NAO insights (as they call them) – Ensure shared understanding. This falls under the “Contract approach “wider heading.
This sounds like a genuine cry for help from the NAO!
“Far too often we find contracts that are unreadable, and misunderstandings about how they work or are priced, resulting in contract or service failures. Government contracts deal with complex services, systems and infrastructure, but that does not mean they need to be made harder to read by poor drafting, jargon and inconsistency”.
We have a vision of an NAO auditor, trying to assess why a particular government programme has run into trouble, being handed a huge document (or probably a pile of huge documents) and then wading through pages of incomprehensible text to try and understand exactly what was intended in the contract. Contracts should be readable and easy to understand, but too often they’re not – it is people without legal training who will use them I most cases, so that should be appreciated by those doing the drafting.
NAO also points out that there is limited standardisation across government contracts, and that overly complex terms and language do not lead to better contracts – on the contrary, that is likely to introduce ambiguity once we move into the delivery phase. Another useful tip is to produce a ‘contract summary’ that can sit alongside the full contract, define main terms and lay out the most important points of the agreement.
What is clear from the NAO guidance and our experience is that some of the high profile issues with public sector suppliers and contracts have some misunderstanding of contracts close to the heart of the problem. That includes the disastrous UnitingCare elderly care contract in Cambridge which we wrote about extensively.
As NAO says, “One month into the contract, the supplier asked for 21% more revenue for the first year. The two sides differed in their understanding of the extent to which contract clauses allowed the supplier to negotiate extra funding after signing the contract”.
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We have seen many examples over the years that illustrate this point well. Sometimes it may be lawyers just following the same old approach without really thinking about it; on other occasions, you have to wonder whether the legal profession guards its own territory by deliberately complicating matters. If you have to ask the lawyers what the contract means then something is wrong.
There are other factors driving complexity in contracts though. The public sector tends to be very risk averse, so the lawyers are often responding to the demands of their clients, the civil or public servants who are “covering their backs” and want every possible risk mitigated in the contract. Other complexity creeps in where legislation and policy issues lead to more detail in the contracts – that might be including “social value” clauses, issues around modern slavery, tax compliance and so on. They are all worthwhile causes but they add length and detail to the contract documents.
There is greater use these days of standard or model contracts developed for use across sectors such as central government. “HM Treasury has maintained standard contract terms for private finance initiative (PFI) projects, and we see standard terms across the health and defence areas. However, most contracts we came across are not standardised”.
Even here, some are better than others, and there is a danger that in trying to satisfy everyone, these documents end up being long and complex themselves.
Of course, the contract should not simply be easy to understand; it also needs to promote the right behaviour, incentivise the supplier appropriately, provide a basis for good relationships, and cover key risk issues and allocation. It’s not easy, but getting this right is fundamental to the whole successful delivery of the contract.