Corruption Matters - May 2017 - Issue 49

Choosing a contracting model: more rigour now for less risk later

In February this year, the ICAC released a report aimed at those who oversee facilities maintenance contracts and are accountable for related decisions. It highlighted how the overall effectiveness and suitability of a contracting model, including its resistance to corruption, depends on a number of factors that need to be addressed from the outset. 

floor polishing

There are a variety of maintenance contracting models that an agency can adopt. These include arrangements where payments to a contractor are based on achieving pre-agreed outcomes or business results rather than prescribed activities. Agencies can also adopt more traditional arrangements; for example, where payments to a contractor are calculated on an input basis, such as the cost of labour and supplies, with an added profit margin.

An agency’s internal skill capabilities are critical to the success of large-scale and complex maintenance contracts. Along with contract management skills, the successful negotiation and governance of large and complex contracts involves financial expertise, and leadership, communication and organisational abilities.

In the case of complex contracts, which typically extend over a long period of time, the impact of any internal skills deficit can be far-reaching for an agency. Furthermore, an opportunistic contractor can easily spot deficiencies when an agency’s internal skill capabilities do not match the contract arrangement it has adopted, making it easier for a contractor to defraud an agency. 

The potential for information imbalance between a contractor and government agency regarding maintenance costs, as well as planned and reactive maintenance needs, is an important consideration when contemplating a contracting arrangement and an agency’s exposure to potential corruption. For some government agencies, maintaining assets is not core business; in contrast, maintenance providers are experts in their field.

There are abundant opportunities for corruption arising from information imbalance in complex outcomes-based contracting arrangements. For example, the payment structures for such arrangements can be based on complex concepts, such as sharing risks and rewards with contractors.

When an agency lacks in-depth knowledge of the direct and indirect costs involved in its maintenance operations – for instance, because of poor costing practices in the past – it is not in a position to independently verify cost information. The agency becomes vulnerable to improper behaviour on the part of contractors, including colluding with staff to falsify costs.

While some types of commercial arrangements require specialised knowledge and high-level skills, other types of contracting models can be resource-intensive for different reasons.

Out-tasking maintenance models, where agencies directly contract numerous service providers but retain their management in-house, require extensive internal contract monitoring and the internal segregation of duties to avoid corruption.  Corruption opportunities related to out-tasking are created when public officials become more closely aligned with contractors’ interests that are competing with the interests of their own agencies. This realignment, combined with the likelihood that procurement decisions and the monitoring of contractor performance are vested in the same public official because of the low value of transactions, creates a corruption risk.

Controlling corruption opportunities in the provision of maintenance services is available from the ICAC website.

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