OGC's Smith defends non-use of penalty clauses

28 January 2009

28 January 2009 | Paul Snell

Routinely invoking penalty causes in contracts is the sign of a poor supplier relationship, the head of the OGC has told MPs.

Chief executive Nigel Smith was defending the government's management of services contracts after a National Audit Office (NAO) report found more than a third of central government contract managers did not always exercise the right to demand reductions from vendors for performance failures (Web news, 24 December 2008).

Smith said: "There are situations where we must apply penalties in contracts if they are not being delivered. What this says is that 37 per cent do not always apply penalties and I do not find that surprising. In fact, the application of routine penalties between a supplier and a customer is a sign of a poor relationship, in my view."

He added that as a supplier in the private sector he had sometimes taken on "massively onerous" penalty clauses in the past, but they were not used because of the relationship he had with the customer.

Labour MP Ian Davidson questioned if relationships between buyers and suppliers could become too cosy.

Smith said relationships should be challenging, not cosy, adding that penalties and incentive clauses should be included in contracts. However, the issue for him was whether government departments were achieving overall value for money on particular deals.

Tim Burr, head of the National Audit Office, agreed a balance had to be found between showing suppliers "you mean business" and "maintaining a constructive relationship" with the contract.

Smith conceded OGC advice for buyers on how to develop contract management plans should be sharper. "The guidance needs to be improved, but we have got to make sure that people understand that this [forming contract management plans] should be done."

SMjan2009

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