NCVO report attacks “crude” implementation of payment by results contracts

There is general support among charities for ‘payment by results’ but its implementation has often been “crude” and “seriously flawed”, a report for the National Council for Voluntary Organisations has argued.

The NCVO report, written by Bates Wells & Braithwaite lawyer David Hunter, analysed a sample of contracts entered into by charities to run public services. It was also based on interviews with those responsible for delivering the services.

The report found that:

• contracts analysed contained targets which were “either irrelevant to, or even detrimental to, the desired outcomes”;
• contracts often failed to account for the complex nature of the services they were for, “meaning providers could be penalised for circumstances outside their control”;
• there was frequently “a significant and worrying gap” between on-the-ground experience and what was reported back up the supply chain;
• some PbR contracts were crudely converted from previous payment for activity contracts, “and therefore contained unnecessary clauses stipulating how the activity should be delivered that hamper innovation”;
• excessive use of PbR, “with its attendant high financial risks for providers”, could push charities who cannot bear the risk level out of public service provision, “with their expertise lost to the service users who would benefit from it.”

In its conclusion, the report said: “Still in its infancy across most public service markets, it is unsurprising that there remains much to learn about better contracting processes for PbR.

“However, it is noticeable that many of these problems are inherited from previous poor contracting practice. They suggest a fundamental failure to accept as essential the involvement of providers, in particular VCSE providers, at the design, commissioning, and negotiation stages of contracting, and to prioritise the need to be flexible and proportionate to the strengths and requirements of a diverse provider market.”

The report said the most often raised complaint voiced by interviewees was that PbR should only be implemented when it really is known to be the most appropriate mechanism to secure the commissioner’s clearly articulated goals.

“Notably, reducing PbR to purely changing the payment terms within contracts, to shift risk away from the commissioner, will not deliver on its potential to stimulate service innovations and deliver quality outcomes,” it said.

The report makes a number of recommendations on ways to improve the contracting process. It also includes a checklist for commissioners considering using PbR contracts.

Bates Wells’ Hunter said: “Whilst payment by results, as an approach, has its merits, the concern is that to date PbR has been used crudely, with little appreciation either of its negative impact, or of the opportunity missed.”

Hunter said his law firm had seen a steady increase in charities seeking legal advice because of problems in PbR contracts.

“As PbR proliferates as a payment mechanism, it’s crucial that commissioners seek input from providers and service users on realistic targets and contractual terms at the very start of the process,” he argued.

“Poor contracts are detrimental to all parties, not only the service providers and service users, but the commissioners themselves ultimately.”

Sir Stuart Etherington, chief executive of NCVO, said: “Implementing PbR effectively requires intelligent thought and carefully crafted incentives, but many PbR contracts fall well short of this. Crudely designed targets and contracts risk pushing expert voluntary sector providers out of public service provision.

“Paying public service providers for the outcomes they achieve rather than the activity they undertake is a worthwhile principle. Charities have an important role to play in improving public services, but commissioners must work with them in order to design effective contracts.”

To read Payment by Results contracts: a legal analysis of terms and process, click here.