Rural Services: Structuring a £38m Sourcing Deal
The Department for Rural Services needs a case management system for 2,300 staff. The market has three credible suppliers, all of which are on a government framework. The department's commercial team proposes a 10-year, £38m contract with a single prime contractor, including hosting and support, awarded through a framework call-off with a mini-competition. The permanent secretary wants the system live in 15 months. The department has no in-house delivery capability, but its shared services centre already runs two similar systems and could host the solution. Key risks: data migration from 11 legacy systems, integration with a 20-year-old payments platform, and supplier lock-in. The budget is fixed at £38m with no contingency.
1. Recommend a sourcing route and deal structure, justifying each choice against the department's constraints.
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The framework mini-competition is the right procurement route for the timescale: three credible bidders, competition preserved, and 15 months is achievable. An open-market procurement would not fit.
The proposed deal terms are the problem. A 10-year, £38m single-prime contract bundles application, hosting and support, creating maximum lock-in precisely where the risks are concentrated: data migration and legacy integration.
A better structure: buy the application through the framework on an initial 5-year term with two extension options, and separate hosting to the shared services centre that already runs comparable systems. This reduces single-supplier dependence, builds internal capability, lowers the annual cost base and provides a credible exit.
If a single prime is retained for integration accountability, require open architecture, IP escrow, a published exit plan and break points.
A fixed £38m with no contingency is not commercially sound: either include a risk allowance or transfer defined risks contractually, and confirm the price covers migration of all 11 legacy systems.
2. Allocate the three named risks between the department and the supplier, explaining the principle you are applying.
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Principle: allocate each risk to the party best placed to control it, and price whatever residual remains with the other party. Transferring uncontrollable risk produces a premium and then a dispute.
- Data migration: shared. The department owns data quality and cleansing; the supplier owns tooling and execution. Joint migration plan, agreed acceptance criteria, and a data-quality gate before milestone payment.
- Legacy payments integration: retained by the department, because it owns the platform and the third-party interface. The supplier carries effort risk within an agreed interface specification, so scope creep and poor specification are separated.
- Supplier lock-in: retained by the department. It cannot be transferred, only mitigated through contract design: open standards, escrow, exit plan, modular architecture and break points.
The allocation should be recorded in the commercial case with the cost of each transfer, so the board can see what it is paying for protection.
3. The preferred supplier's price comes in at £41m against a £38m budget. What are the commercial and financial implications, and what should the team do?
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Two questions must be kept apart. Commercial: is £41m value for money? That depends on evaluation against the specification, not on the budget. Financial: can the department afford it? At £41m against a fixed £38m, no. A 7.9% overrun cannot be absorbed by optimism.
Options: de-scope non-essential requirements; phase delivery so later years carry less cost; re-run the mini-competition if the framework permits and the other bidders are close; seek additional funding with an evidenced case; or accept a reduced specification.
The team should not sign a contract contingent on future funding, and should not accept an unaffordable bid simply to protect the 15-month timetable.
Escalate to the accounting officer with a written options paper. Approving an unaffordable contract is a governance failure before it is a commercial one.