On 29 January 2014 the Cabinet Office published version 1.0 of its new Model Services Contract.[1] Considering the modest fanfare surrounding its publication, those outside of government could be forgiven for missing its arrival. That would be a shame, as the new Model Services Contract is a vital new part of the government procurement landscape and will shape the way government engages with industry for many years.
Developed by the Crown Commercial Service,[2] the new Model Services Contract is the successor to the OGC Model ICT Contract and is for use by all of the public sector when procuring services, particularly ICT and BPO services with a value in excess of £10m.
The Cabinet Office has since issued a Procurement Policy Note confirming that it is developing guidance that will be made available around summer 2014.[3] Use of the Model Services Contract is to be encouraged and monitored by Cabinet Office, but not mandated.
The market will therefore be watching intently as procuring Authorities begin to use the new contract. It remains to be seen how the market will react to the contract, and how much will be adapted or negotiated. In the meantime this article summarises – as informal guidance for ‘early adopters’ – the background to the contract, and some of the key content and considerations.
Background
Implementation of the coalition’s March 2011 ICT Strategy[4] continues; among other themes, it aims to reduce the risk of project failure, stimulate economic growth, and strengthen governance.
It is well known that ICT forms a significant part of government spend – perhaps in the order of £7bn annually.[5] ICT procurements are rightly the subject of rigorous scrutiny by bodies such as the Public Accounts Committee and the National Audit Office. An increasing trend across government ICT has been to seek to leverage shared services – and the Cabinet Office itself is increasingly procuring pan-government ICT/BPO services contracts to centralise policy, to maximise government buying power and drive out efficiencies from common platforms and processes.
Against this backdrop, a refreshed Model Services Contract is to be welcomed, as it represents significant investment by government in the clarification of the commercial and contractual relationship it wants with its major service providers.
It is also timely, given renewed pressure on government from the Public Accounts Committee, among others, to improve procurement and contract management skills and transparency.[6]
The Model Services Contract
The Model Services Contract should enable a clear and more balanced approach to procurement and to the delivery of major projects. Overall, the new Model Services Contract has been drafted to be more accessible and user-friendly than its predecessor[7] and it is set out in a new and more accessible structure.
The ‘modernised’ Model Services Contract also promises better alignment with government ICT policies and ways of working and, in particular, seeks to address criticism levied at the OGC Model ICT Contract – often decried as ‘draconian’.[8] The Cabinet Office ran a series of engagements with the market (including suppliers and lawyers) to test their approach and positions. This has been welcomed in light of the criticism levelled at its predecessor by the supplier community. The new contract also reflects recent developments in law[9] and some other more practical matters.[10]
For all of that, the changes are generally evolutionary rather than revolutionary. Some of the more noteworthy provisions in the new contract are summarised below. Of course, most – if not all – of the mechanisms referred to below are not new to the market.
Purpose
· Whilst the stated purpose of the Model Services Contract is for use in both ICT and BPO contexts, it is at least reasonably clear that it is first and foremost an ICT contract.[11] Although many aspects are reasonably generic,[12] the absence of provisions directed toward the operation of BPO services does mean that any Authority using the Model Services Contract as a BPO services contract will probably need to spend a reasonable amount of time amending it. It may be that the Cabinet Office’s forthcoming guidance will address this.
Commercial
· Post-contract verification process. One of the most notable developments in the new contract is that ‘Allowable Assumptions’ can now be specified – in Annex 5 of Schedule 7.1 (Charges and Invoicing). Once agreed, these Allowable Assumptions are to be verified by the Supplier within a certain period following signature – each one has the potential to affect the implementation plan and the cost to the Authority (see Part C of Schedule 7.1 (Charges and Invoicing)). The incorporation of this mechanism reflects the practical reality that in some cases full due diligence is not possible prior to contract signature and where it is not appropriate for this risk to be borne fully by the Supplier. Where this is the case, Authorities will be keen to ensure that any Allowable Assumptions and associated consequences are tightly defined in the contract..
· ‘Target Cost’ pricing mechanism. The contract’s Schedule 7.1 (Charges and Invoicing) includes a ‘menu’ of different pricing methodologies which can be used or combined as considered suitable by the procuring Authority.[13] One of the new and more complex systems is the ‘Guaranteed Maximum Price with Target Cost’ payment mechanism – which requires the setting of a guaranteed maximum price, and a target cost. The aim is to incentivise the Parties to reduce the total cost, principally by enabling the Supplier to earn increased margin as the cost to the Authority reduces below the Target Cost. Conversely, the Supplier’s margin is reduced if the cost exceeds the Target Cost. Clearly each mechanism is better suited to use in different scenarios, and procuring Authorities will need to consider the options carefully. Those using this mechanism should be aware that ‘Target Cost’ pricing mechanisms are not new—they are in place in existing public sector projects – and should seek to take advantage of relevant knowledge.
· No excessive profits. The contract includes an acknowledgement that the Supplier’s profit margin over the term will not exceed the ‘Maximum Permitted Profit Margin’ – the profit margin identified in the Supplier’s Financial Model plus 5%. This mechanism gives the Authority the ability to renegotiate the charges should this point be reached, or, if suitable adjustments to the charges cannot be agreed, terminate for convenience (see Part D of Schedule 7.1 (Charges and Invoicing)). In principle this provides a reasonably straightforward mechanism to minimise the risk of paying excessive or unanticipated profits – however, as the mechanism operates across the entirety of the contract and its term, contracting Authorities may need to be able to interrogate Financial Models in some detail to operate the mechanism effectively.
Performance
· Standards. The Supplier’s performance must adhere to relevant standards and policies, including that the Supplier must ‘adopt the applicable elements of’ government’s Technology Code of Practice[14] and comply – to the extent within its control – with government’s Open Standards Principles in relation to ‘software interoperability, data and document formats’[15] (Schedule 2.3 (Standards)). Again, we note that these tend to be IT-focussed standards. Negotiations will likely focus on identifying the ‘applicable elements’.
· Changes to Performance Indicators and Service Credits. The Model Services Contract includes a mechanism that enables the Authority to ‘recalibrate’ Performance Indicators and Service Credits annually – and if this is within stated parameters the Supplier may not object (Clauses 7.7 to 7.8). Although flexibility of this nature can certainly be beneficial to Authorities in contract delivery, it will be interesting to see whether this requirement has cost and other impacts. The mechanism requires the Supplier’s solution to be designed, delivered and operated with a high degree of in-built flexibility – ie so as to be able to meet any recalibrated service levels. As this may not represent best value for money, procuring Authorities may want to consider whether and to what extent such recalibration will actually be necessary.
· Transparency. The contract includes revised confidentiality provisions that enable the sharing of certain information by the Authority in line with the government’s transparency agenda (Clauses 21.6 and 21.8-21.10) and simplified open-book arrangements, including the use of summary financial reports and balanced scorecards (Schedule 7.5 (Financial Reports and Audit Rights)).
· Clarified intellectual property requirements. A major development for the supplier community is the recognition that the Authority does not, in general, need to own specially-written or project-specific IPR but that a perpetual, royalty-free licence (and the right to sub-licence) will suffice in most cases (Clauses 16 and 17). In relation to any COTS software to be used in the Supplier’s solution, the contract recognises that the terms on which this software is typically provided are often not negotiable (Clause 17.13) but nevertheless requires that the Authority have certain rights (to sub-license, assign and novate) any COTS software that is owned by the Supplier (Clause 17(3)(b)). Using these points as a starting position is likely to reduce the level of negotiations and could provide a better value for money position if the supplier is able to derive benefit from the IPR. However, this is something to be tested in the negotiations.
· Modified supply chain rights. These rights include requiring the transfer by the Supplier of warranties and indemnities afforded in its supply chain, together with the appointment of the Authority as the Supplier’s ‘agent and attorney’ so as to enable it to enforce those obligations directly (Clauses 5.5(g) and 5.13). The provisions also include more ‘typical’ supply chain rights, such as the requirement to flow-down key conditions to Key Sub-contractors (Clause 15.8) and to other subcontractors (Clause 15.10). Although reasonably extensive, the Authority’s supply chain rights reflect the need for contracting Authorities to be aware of, and able to manage risks in, Suppliers’ supply chains.
Remedies and Liability
· Rationalised rectification process. The rights the Authority has in relation to performance failures, delays and defaults have been rationalised and consolidated into what is largely a single rectification process (see eg Clauses 6, 27, 28, 29, 30), and the Supplier is required to follow the process even if it disputes that it is responsible for the default. Many of the timeframes for the operation of this process are now ‘hard-wired’. Termination rights have been similarly consolidated (Clause 33).
· New ‘Remedial Advisor’ process. Certain delay/breach trigger events give the Authority the option to invoke the new ‘Remedial Adviser’ process. In essence, this involves the appointment of an independent Remedial Adviser that is approved by the Authority, and which then monitors the Supplier’s performance. Although Authority step-in rights remain (Clause 30) they are little used in practice, so the Remedial Advisor process is intended to provide a more practicable and constructive alternative. The Remedial Adviser’s objective is to mitigate the effects and remedy the applicable ‘Intervention Cause’ and to avoid the occurrence of similar circumstances in the future. If the process is invoked, it will usually suspend the Authority’s right to terminate for 60 Working days (Clause 29.2(c)).
· Delay Payments. Much as with the OGC Model Contract, Delay Payments in the new contract are liquidated damages that can apply in transition scenarios if a Key Milestone has not been achieved by the relevant Milestone Date. These are the Authority’s exclusive remedy for such delay, unless the Authority is also entitled to terminate, or unless the delay exceeds the Delay Deduction Period (which is 100 days by default) (Clause 28).
· Dispute resolution. The Dispute Resolution Procedure in Schedule 8.3 sets out the stages through which the Parties are to resolve issues in dispute related to the contract. The stages begin with an attempt at ‘good faith’ resolution by the Parties’ Representatives, failing which the Parties must use ‘reasonable endeavours’ to resolve through ‘commercial negotiation’. Failing this, either Party may opt for mediation conducted in accordance with the CEDR model mediation agreement.[16] If the Parties agree that a matter remaining unresolved relates to ‘the technology underlying the provision of the Services or otherwise relates to a matter of an IT technical, financial technical or other technical nature’, they may obtain a binding decision by a (single) expert chosen either by the Parties or, failing agreement, by the president of certain stated bodies. Unresolved disputes otherwise fall to be resolved in the courts of England and Wales – which have exclusive jurisdiction for all contractual and non-contractual disputes – unless the Authority elects for resolution by arbitration, utilising the Rules of the London Court of International Arbitration.[17] The steps above need not be followed if a Party requires certain forms of urgent relief (the seeking of interim or interlocutory remedies, or matters relating to either infringement of intellectual property rights, or the expiry of a limitation period), in which case that Party may apply directly to the relevant court or tribunal.
· Supplier liability. Importantly, the new contract sets out standard exclusions and limits for the Supplier’s liability in many of the scenarios that were previously left to the procuring Authority to determine on a case-by-case basis. This approach should be welcomed by the market, as the new positions will establish market norms and ultimately save time and money in procurement processes. The provisions can be summarised as follows:
o indemnified claims are uncapped (Clause 25.2) as are liabilities that cannot legally be limited or excluded;
o liability for property damage caused in any Contract Year is capped at £10 million (Clause 25.4(a)) – by contrast, and perhaps unusually, losses arising from data- or confidentiality-related breaches by either Party are subject to the general liability caps, and not a higher or uncapped amount;
o liability for service failures caused in any rolling 12 months is capped at the ‘Service Credit Cap’ – to be calculated as a percentage of the relevant charges (Clause 25.4(b)); and
o liability for all other losses caused by Supplier Defaults are capped at 150% of the relevant year’s charges estimated, due or paid – increasing to 200% in the cases of ‘abandonment’, ‘ wilful default’, ‘wilful breach of a fundamental term’, or ‘wilful repudiatory breach’ (Clause 25.4(c)).
· Authority liability. The Authority’s liability for Default is generally limited to 100% of the relevant year’s charges estimated, due or paid (Clause 25.6(b)) – except where there are to be payments by the Authority in relation to certain termination scenarios – for example, termination by the Authority for convenience (Clause 25.6(a)). The Authority’s liability in relation to the employee-transfer related indemnities is not capped (Clause 25.3).
· Indirect/consequential losses. Liability of either Party for indirect/consequential losses, or for any ‘loss of profits, turnover, business opportunities or damage to goodwill’, is excluded. However, this does not apply to Losses that are recoverable by the Authority in accordance with Clause 25.8. This enables the Authority to recover certain additional costs resulting from Supplier Default, as well as anticipated savings that are lost as a result of Default if these are described in Schedule 7.6 (Anticipated Savings). Despite the British Gas case,[18] it clearly remains best practice to state that these types of losses will not be irrecoverable by virtue of being classified as indirect.
Chris Mann is a TMT Associate at Pinsent Masons LLP
[1] See http://ccs.cabinetoffice.gov.uk/about-government-procurement-service/contracting-value-model-services-contract
[2] The Crown Commercial Service includes the Government Legal Service.
[3] See https://www.gov.uk/government/publications/procurement-policy-note-0414-model-services-contract
[4] See https://www.gov.uk/government/publications/uk-government-ict-strategy-resources.
[5] See eg http://www.nao.org.uk/wp-content/uploads/2013/03/ICT-savings-Exec-Summ.pdf
[6] ‘There is significant scope for government to improve its approach to contracting for public services. The Cabinet Office told us that there is a long way to go before government has the right commercial and financial skills to manage contracts and it needs to use the full range of powers at its disposal’. See http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/public-services-private-contractors-report/
[7] The new Model Service Contract apparently has two-thirds fewer square brackets requiring completion.
[8] Particular criticism was directed by industry at the OGC Model Contract requirements for extensive supply chain rights, and the passing of risk in relation to due diligence to the Supplier.
[9] Including the Bribery Act 2010, the Equality Act 2010 and issues applicable to entire agreement clauses following the Axa Sun Life and BSkyB cases.
[10] For example, Clause 1.3 provides a process for updating ‘dead’ hyperlinks where these are used to provide eg policies or other details.
[11] See, for example, the generally IT-specific standards and policies listed in Schedule 2.3 (Standards).
[12] See, for example, the extensive Supplier covenants required at Clause 5.5.
[13] For example, ‘Time and Materials’, ‘Volume Based’ pricing, etc. See paragraph 1 of Schedule 7.1 (Charges and Invoicing).
[14] See https://www.gov.uk/service-manual/technology/code-of-practice.html
[15] See https://www.gov.uk/government/publications/open-standards-principles
[16] See http://www.cedr.com/about_us/modeldocs/
[17] See http://www.lcia.org/Dispute_Resolution_Services/LCIA_Arbitration_Rules.aspx
[18] See GB Gas Holdings Limited v Accenture (UK) Limited and Others [2010] EWCA Civ 912.
