In October 2017 the NAO produced a report on The Nuclear Decommissioning Authority’s (NDA) Magnox contract after losses and legal proceedings necessitated an investigation into what went wrong, and why this £6bn contract was being cancelled at a nine-figure cost just a few years into its 14-year life. This article aims to review the key principles that brought the NDA to this point, how your organisation can avoid procurement compliance issue and we outline 11 key steps for a robust procurement strategy to ensure procurement success.
The NDA is a non-departmental public body ‘responsible for the operation, decommissioning and clean-up for 17 nuclear reactor and research sites in the UK’. Between 2012 and 2014 the NDA were tasked with finding suppliers to decommission ten Magnox sites and two research facilities.
In September 2014, Cavendish Fluor Partnership (CFP) was awarded the contract for the Magnox sites. Since then two members of the losing consortium have pursued legal complaints about the decision. In 2017 this finally resulted in a £97.3m settlement being agreed between the parties.
In an additional twist of events, the NDA decided to terminate its contract with CFP almost a decade early due to a ‘significant mismatch’ between the project’s specification and work that needed to be done. The reason for this mismatch is still not completely known, and, according to the NAO report, it seems to have not been thoroughly investigated by the NDA either.
A 12-month period was built into the agreement for parties to establish the extent of some of the due diligence work required, which it is alleged could only be determined after the project had begun. Two and a half years later, this process was still not completed and costs had spiralled significantly. A £3.8bn project had become a £6bn one, but not all of the additional costs could be accounted for.
Some of the predicted additional costs were due to there being more hazardous waste to clear than expected; some were forecast for, but some ‘may’ have been due to the NDA paying for work that had not actually been completed by the former contractor, although this is currently unconfirmed.
According to the NAO, ‘Since this interim internal audit report was published, the NDA has not undertaken any work to establish whether it may have paid for work that was not performed.’ The NAO report also says ‘the Department knew the proposed changes to the contract would have significant cost implications, but it did not make itself sufficiently aware of the scale of those costs for nearly two years.’
The legal action that was pursued by the losing bidders to the contract ended up in the High Court. According to the NAO report, ‘The High Court found that, had the NDA applied its evaluation criteria correctly, the winning bidder, Cavendish Fluor Partnership (CFP), would have been excluded from the competition. It also found that, with respect to record-keeping, the NDA had breached its obligation under public contracting regulations to act in a transparent way.’
One unfortunate aspect of this case was that the NDA did garner plenty of advice on the matter at the outset, conducting two internal audits, several external assurance reviews and it sought legal advice. But none of these uncovered the issues on which the High Court would later base its judgment.
The total cost footed by the taxpayer for this project’s failure has been estimated at £122m, the majority of which being the settlement the NDA reached with Energy Solutions and Bechtel, the two parties of the consortium that did not win the contract. A further £13.8m went on legal fees and external advisers.
While this case was predominately about the reportedly inequitable manner in which the supplier selection process was undertaken, questions have also been raised about the external legal assurance advice that was sought and provided. It has been reported that the client’s legal advisors had provided pre-contractual assurance that the procurement and its selection process were compliant. However, when the procurement compliance challenge was mounted by the unsuccessful suppliers, the same legal advisors that provided the pre-contractual assurance, subsequently then defended the client in its case against the challenging supplier. This reportedly raised questions over potential conflicts of interest by the external legal advisors.
Many of the issues identified in the legal judgment of this case could have been avoided on two fronts. The first being how the NDA breached EU procurement compliance and the second being fitness for purpose of the decommissioning service procured.
On the procurement compliance side, you can read one of our previous blogs – 8 steps to avoid supplier challenges when evaluating tenders.
To ensure the procurement itself is fit-for-purpose to meet the outcomes and objectives of the organisation, there are 11 key steps that could have been undertaken (and avoid failed procurement) which are outlined below.
Procurement Strategy Objective
The process of investing in the decommissioning solutions starts with having a clear articulation of what business outcomes and business operational workflows will change once the decommissioning service has been successfully implemented. These inputs inform the approach of the development/procurement strategy and how you will go to market for (1) suppliers that align with your own cultural values, and (2) fit for purpose decommissioning solutions that align to those workflow improvements to get the savings the NDA had anticipated.
Your starting point would normally be to clearly articulate and quantify (a) what business outcomes you aim to achieve, (b) what objectives, aligned to those business outcomes, you need to achieve, (c) the operating behaviours you want from both your side and that of your suppliers to achieve those objectives, (d) what key performance indicators (KPIs) and critical success factors (CSFs) will drive those behaviours between all of you in the right way, and (e) how these components will in principle be reverse engineered into an appropriate governance, contractual and procurement strategy to ensure fit for purpose outcomes for all involved.
As a result, your Procurement and Legal teams should be set up to conduct a more holistic form of internal due diligence. As part of the governance, external advisors such as Best Practice Group can usually act as internal ‘critical friends’ to ensure your organisation is ready to go out to market, procure fit-for-purpose solutions and be assured that it has the disciplines, resources, capability, skills and bandwidth to enable any appropriate solutions to be correctly procured and implemented and avoid failed procurement. This will assure that the organisation should achieve the benefits expected in the shortest realistic time. From this understanding, you can reverse-engineer a fit for purpose ‘Procurement Strategy’.
The procurement strategy and the engagement the Procurement and Legal teams will have with all appropriate stakeholders should, therefore, consist of the following 11 principles to avoid failed procurement:
Step 1 – Socialise the organisation vision
Work with your stakeholders so that you are assured the Business Case is clear and understood internally in terms of the organisation’s business change expectations about what it is trying to achieve.
Step 2 – Clarify the solution expectations
Assure that expectations of the benefits from the proposed decommissioning solutions are clearly documented in the Outline Business Case; that they have been understood and agreed internally.
Step 3 – Client/supplier behaviours
Assure that you are clear about what your own internal team needs to do and what behaviours are expected from both yourselves and potential suppliers in order to assist any potential suppliers to achieve the business outcomes required from the procured services.
Step 4 – Clarity of decommissioning requirements
The requirements will have been clearly articulated and aligned with the organisation’s business outcomes. This will help as far as is reasonably possible, to minimise both ambiguity and/or misunderstanding between internal stakeholders and potential suppliers.
Step 5 – Key contractual principles
The headline principles from a contractual perspective will be to reverse engineer the (a) organisation’s business outcomes and objectives you want to hold the supplier and your own internal team accountable for, (b) the measurement of your own performance and the performance of the supplier and (c) that ‘Agile’ behaviours are to be expected from both yourselves and the suppliers to achieve the business outcomes expected, rather than only penalising poor supplier behaviour.
Step 6 – Supplier assessment scoring criteria
The process of selecting a preferred supplier will involve transparent criteria in respect of your understanding of what to look for in terms of the holistic behaviours you need from supplier(s). This will include (a) quantification of the relevant experience, skills, supplier operating culture and commercial trust building skills necessary to achieve the specific business outcomes you need, and (b) articulation of an appropriate and objectively weighted scoring mechanism across each of these areas. In this manner, you are more likely to select the most appropriate supplier who can provide a fit for purpose service solution and achieve your business outcomes on an ongoing basis while remaining compliant with EU procurement regulations.
Step 7 – Early market engagement
Going out to the supplier market in early market engagement to trial your earlier assumptions will help to inform ‘the art of the possible’ within given financial constraints. You will quickly establish to what degree your expectations, budget and timescale for potential solutions are practical or a non-starter. From this early market engagement, you will then better align your expectations and requirements and can structure the formal market engagement and specific procurement process/method from what you have learned from the early market engagement exercise. Note that the early market engagement process may be preceded by the issue of a Prior Information Notice (PIN) to comply with appropriate EU legislation. In turn, this will help to reduce the risks of a procurement challenge by unsuccessful suppliers.
Step 8 – Commence the procurement process
The early market engagement process will have helped you sanity check the key principles of what you are likely to achieve from potential decommissioning solutions and what you will not. If appropriate, you can at this point confirm the most effective procurement process and/or method to adopt in line with EU procurement regulations. Having gained all the knowledge outlined in the previous seven steps, you will then be able to determine the most appropriate EU procurement regulations to follow (Open, Restricted, Competitive Dialogue, Competitive Procedure with Negotiation, Innovation Partnership or one of the Public Sector procurement frameworks – of which there are many). The formal procurement process is then engaged. The procurement itself will be significantly faster and clearer, as any potential ambiguity over the expectations of your organisation will already have been ironed out during your earlier internal due diligence and early market testing. It is BPG’s experience that it helps to be sensitive to the fact that ‘Intelligent Suppliers’ like to deal with ‘Intelligent Clients’. It saves them significant amounts of time and enables them to reduce their risk pricing on any decommissioning solutions they engage in. Intelligent Client Behaviour means that you will be clear about your expectations, how you will achieve them, what behaviours you want from your solutions supplier(s) and how you will measure whether those expectations are being achieved or not.
Step 9 – Preferred supplier selection and supplier due diligence
At this stage, you will need to sanity check that the senior client-side stakeholders are asking the ‘right questions’ of suppliers. In turn, this should help suppliers to pick up on any misunderstandings/ambiguities that the client may have about the proposed solution. Remember that specialist suppliers are under a ‘Duty to Warn’. In this respect, suppliers are under an obligation to use their specialist expertise to make sure they ask the client ‘the right questions’ in order that they validate what the client will achieve from its proposed solution, validate what it will not, and also validate what the consequential impact is likely to be on the programme of what the supplier will not achieve. In this way, appropriate evidence will be in place, or can be provided by suppliers, to validate that their proposed solution will achieve the business outcomes your organisation is expecting to achieve. The output(s) from any supplier diligence work completed should also form part of the scoring process and, if the supplier is eventually selected, the contractual schedules.
Step 10 – Contract population and execution
At this point, the early collaboration undertaken by the senior stakeholders, procurement and legal teams from the outset of the process, means that there aren’t any surprises for the wider members of the team. Both Procurement and Legal will have given their advice as the project has progressed, which usually means everything to contract for, in order to create a fit for purpose solution in a legally compliant manner, has been considered, and an appropriately aligned supplier has already been addressed so the contract can be executed. You can reverse engineer the terms of the written contract to accurately reflect the ‘good’ behaviours you want from the supplier and your internal team to achieve the business objectives expected.
Step 11 – Implementation and Performance Management
The primary objective of the procurement process is to assure that the right foundations are in place for your organisation to have fit for purpose decommissioning solutions developed, implemented, and quickly deliver the benefits that you expected. It is important, therefore, that key members of the Procurement and Legal teams remain involved through the life cycle of the service delivery process and service/supplier governance processes are part of the Intelligent Client Function (ICF) team. This ‘external’ sanity check by having members of the procurement and legal teams involved is vital as relationships between supplier and key client stakeholders can become too relaxed on occasions, and appropriate outcome/objectives management can go by the wayside.
Conclusion
This ‘right environment’ means the setting of clear business outcomes and objectives with clear KPIs so that you drive the behaviours you want from your internal teams and external suppliers. In addition, this will facilitate the creation of unambiguous contractual agreements with built-in mechanisms to ensure regular realignment to your business outcomes, and the monitoring of progress against set targets and goals. Your relationship with your new provider will require nurturing and your contractual agreement will need to be allowed to evolve in order for you to maximise opportunities and achieve the best value.
When considering changing service providers, take your time, do it right – this will be your opportunity to get to ‘what good looks like’, not just fix the mistakes of the past. You now have a key opportunity to either completely reshape, or just enhance and improve, to tweak and optimise, in order to get the most from your relationships and the service your new provider provides.
In the case of the NDA and the Magnox decommissioning project, the NAO seem to clearly believe that not only was the NDA far too uncertain on the details of work completed by its previous contractor, but that this resulted in it selecting an ill-advised payment structure and being less aware of the scale of the task ahead than it should have been. The courts were also clear that the NDA should have had more understanding of the correct procurement procedures than it did, which inevitably resulted in two aggrieved parties being paid an immense sum in compensation for this error.
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