Inflation means charities ‘cannot go on’ subsidising contracts, paper warns

08 Sep 2022 News

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High levels of inflation mean the ongoing practice of commissioners underpaying charities to provide contracted services must end, argues a paper published by NPC today.

NPC said commissioning for public contracts is in need of reform, and urged the government to do so in its procurement bill, currently going through Parliament.

The government’s definition of ‘value for money’ within the legislation should recognise social value and cost savings from reducing demand on other services, and commissioners must be mandated to score contracts against this definition, reads the paper.

NPC said some charities contribute to the problem of underpayment, by agreeing to contracts below price. It said some larger charities also inadvertently exploited smaller organisations with whom they partnered.

‘Real risk of failure’

NPC called for “a shift in how government, civil society and communities engage in commissioning services”.

The paper, built on the findings of research NPC conducted with Kent County Council (KCC), notes the British government spends around a third of its budget each year on procurement.

“Among those providing services are charities, community groups, and social enterprises – two thirds of whom are not paid enough to cover their costs,” it adds.

These organisations work on delivering 7,330 contracts, and the paper says: “With inflation pushing up costs, there is a very real risk of failure – with devastating consequences for the people who rely on these services.”

The paper reads: “Some charities contribute to this problem. By agreeing to contracts below cost-price, they undercut their peers and distort the market. Similarly, some larger charities engage in poor practice when bidding for contracts, such as engaging in partnerships with smaller organisations which, inadvertently or not, exploit their peers.”

Between 2016 and 2020, charities delivered £17bn worth of public contracts, around 5% of the total.

The report reads: “This is not an insignificant number and has potential to grow. Charities have a unique value-add. They bring a local connection, deep expertise on a specific topic area, and a values-driven approach which can benefit a whole community This can make charities vital partners in public service delivery.”

‘Charities are contributing to this problem’

Theo Clay, policy manager at NPC, said: “Commissioners underpaying charities has been going on for a long time, but inflation means this cannot go on. Charities who were already subsidising contracts from other income are going to find it increasingly hard to keep doing so. 

“This poses a risk to the services they deliver, the bodies who commission them, and the people who depend upon vital support.”

“Charities not being paid for the full cost of a service is a symptom of wider issues with how procurement is designed and implemented. 

“The government is not solely at fault – charities are contributing to this problem by agreeing to these contracts and distorting the market – but the government could make important changes to primary and secondary legislation, as well as guidance, to properly recognise social value and promote a better relationship between charities and government.”

The policy briefing was based on 41 structured interviews with KCC staff, charities and experts. This was then supplemented with six further conversations with sector bodies, and national stakeholders to look at these issues in a wider context.

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