With the bulk of the risk placed on the shoulders of the service provider in a public-private partnership (P3) contract, there needs to be a clear system in place to show the relationship between performance and the scale of deductions. Ready access to accurate and up-to-date information is a necessity in order to reduce or eliminate potential financial losses, as well as enabling the service provider to demonstrate the quantity and quality of the activities performed for the public sector client. For this, spreadsheets are too unwieldy and unsophisticated; software with an integrated payment mechanism (or paymech) is hugely superior.
1) Consequential or deemed unavailability
The operation of public infrastructure is complex, and contracts must incorporate and respond to this in a sensible way. The concept of availability is one such complexity and can be much less straightforward than it appears. The unavailability of one part of a building can lead to the unavailability of another, such as the sports hall in a school being of limited value if the changing rooms are closed (consequential unavailability). If the changing rooms were notionally available for use, but in a condition where use would be hampered or unsafe, this an example of deemed unavailability. In both scenarios, arriving at the right deduction is hard to achieve through spreadsheets. Where a contract defines a threshold for unavailability, such as stating only two areas in a certain zone maybe unavailable at the same time, if a third instance occurs, total unavailability may result – along with a large deduction. This is calculated depending on the exact times each individual area was unavailable or became available again. This can be done in minutes through an integrated paymech but would take hours and be at risk of inaccuracy using spreadsheets. Complete auditability would also be lost.
2) Repeat ratchets
A ratchet mechanism imposes more performance points the longer a specific problem persists and / or how frequently it occurs. The accumulation of these performance points then subsequently leads to a deduction. As a problem can ratchet over several months, it must be established whether another failure in the same area with the same KPI has occurred within the relevant period. Recording service failures across multiple spreadsheets with no clearly identifiable running total makes it difficult to monitor the position of the service provider in relation to the thresholds, which in turn undermines their ability to mitigate income loss – a real-time system is needed.
3) Recording activity
As a partnership develops and matures, there will frequently be important components of service provision that are outside the formal scope of the contract. Such ‘out of scope’ or ‘going the extra mile’ elements of service provision may consume resources, and have an opportunity cost in terms of taking resources away from contracted activities; ultimately having an impact on deductions. In having no monetary element attached to them, such activities are often not reported, despite their silent impact. Unlike a spreadsheet system, an integrated, real-time paymech records these activities transparently and securely, giving the service provider a clearer view of how much it costs to provide them as well as the value they bring to the contract.
4) Mitigating circumstances
In mitigation meetings with public authorities, it may be agreed that certain events can be excluded from the penalty regime. However, this can have a major impact on other deductions as threshold boundaries, points thresholds and repeat ratchets may no longer apply and all must be recalculated. Because this is a time consuming process when conducted manually through spreadsheets, there may be a tendency to ignore the impact on deductions, resulting in inaccurate performance management and the occurrence of penalties unnecessarily. An integrated paymech allows service providers to access detailed information instantly, enabling them to take actions to avoid potential threshold breaches.
5) The costs and risks of operating the paymech
The problem with manual paymechs is the time and effort that their operation consumes. When using spreadsheets, the operation is a full-time process that needs specialist staffing resources. There are also risks to this method, as a considerable amount of contract-specific expertise and experience is required. As people leave, crucial knowledge about the complicated and interconnected nature of the spreadsheets may not be readily available to the new employees, raising the likelihood that inaccuracies and discrepancies will occur. With an integrated paymech, by contrast, the need for highly specialist human resources is limited and the smooth running of the system can be more reliably sustained over the entire contract period.
For more information about the benefits of an integrated paymech over spreadsheets, request our complimentary whitepaper, Delivering Better Value for Money Through PPP Payment Mechanisms.
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