Shetland

Islands Council

INTERNAL AUDIT REVIEWConfidential

To:Corporate Management Team

cc:Head of Capital Programmes

Contract Compliance Manager

From:Service Manager - Internal Audit

COUNCIL CONTRACTS AND TENDERING – Corporate Review

  1. Executive Summary

1.1From a sample of 25 suppliers, 64% of cases breached Council Standing Orders to some degree,primarily in relation to:

  • contracts not being in place where spends are higher than £50,000
  • tendering requirements not being observed
  • extensions of contracts
  • single sourcing of works and goods
  • reporting of emergency works

1.2Some of these issues have been, or are in the process of being, addressed as a result of our audit work.

1.3The Scottish Government has recently issued guidance to local authorities on the procurement of care and support services. Once fully addressed, this guidance should assist in ensuring that the Council is compliant with EU regulations on procurement in this area. However, compliance with Council Standing Orders and Financial Regulations will also need to be addressed.

1.4During the course of this review, it was ascertained that the Council is moving ahead with providing a dedicated procurement and contract compliance section under the Head of Capital Programmes. A number of the issues raised in this report relate to the procurement of goods and services and will beideally suited to review by this new section. Accordingly, this report is copied to the Head of Capital Programmes and the Contract Compliance Manager.

1.5Internal Audit reviewed a sample of twenty five suppliers. It is therefore highly probable that further similar breaches to 1.1 above are prevalent within the Council.

2.Background

2.1 This review of Council contracts has been undertaken as part of Internal Audit’s programme of corporate reviews and supplements the method of examining contracts as part of service-specific audits. It is intended that it will demonstrate areas of good practice across the Council as well as highlighting areas where improvement is required, to ensure consistent adherence to Standing Orders and EU procurement regulations.

2.2While this has not been a review of procurement generally within the Council, there has had to be an awareness of this issue and the Council’s current position with regard to it.

2.3According to the Council’s Financial Regulations, all procurement of goods, work and services must be progressed in accordance with the Procurement Strategy, Standing Orders relating to Tenders and Contracts and related policies and procedures.

2.4The Council’s Standing Orders relating to Tenders and Contracts is generally applicable for contracts relating to:

  • The supply of goods on a periodic basis
  • The execution of works where the estimated price is greater than £50,000

and

  • The provision of services where the estimated price is greater than £50,000,

i.e. five times the de minimis sum, which currently stands at £10,000.

2.5In addition, there is a Small Contracts Procedure in place which must be followed for procuring goods, works and services, where Council Standing Orders do not apply. An approved list of contractors, service providers and suppliers is currently being developed to work alongside these procedures.

2.6The Council is also progressing other collaborative procurement opportunities with Procurement Scotland, Scotland Excel and other public bodies where considered appropriate.

2.7The Council is also governed by the Public Contracts (Scotland) Regulations 2006 which require, inter alia, that there should be a degree of advertising which is sufficient to enable open competition and meet the requirements of the principles of equal treatment, non discrimination and transparency. This requirement is applicable to contracts of all values.

2.8The Council also has a statutory duty to achieve best value.

3. Audit Scope/Methodology

3.1This review has been carried out on contract payments made during the financial year 2009/10.

3.2The following methodology was used:

3.2.1A report was produced from Seagate showing the top 250 suppliers to the Council in 2009/10. The total paid to these suppliers ranged in value from £9,823,940 down to £44,248.

3.2.2This report was scrutinised in order to produce a sample of 25 suppliers. Certain suppliers were disregarded for the following reasons:

  • If they have been audited in recent service-specific audits eg Union Naval as part of the Ports & Harbours audit
  • One is the subject of a forthcoming specific capital project review, ie the new Mid Yell Junior High School
  • A number of organisations who featured on the list are recipients of grants or providers of services, eg Highland Council for Police and Fire services, and accordingly are not covered by this review

3.2.3Having made a sample of 25 suppliers, they were subsequently examined and from the overall spend for each, specific expenditures were selected in order to test the following:

  • Is there a contract in place?
  • If there is a contract in place, was it properly tendered?
  • If there is no contract in place, is there evidence that quotes were received?
  • Do invoices/certificates paid agree with the contracts/quotes?

4.Audit Findings / Concerns and Risks

4.1There appear to be a number of breaches of Standing Orders relating to payments, with an aggregate value higher than £50k, made to individual suppliers. In these cases, no contracts exist and/or they were not subject to a proper tendering procedure. In many of these instances, breaches would have been avoided through communication with Contract Compliance or Legal Services.

4.2A number of breaches of Standing Orders occurred in relation to maintenance contracts that had been let some years ago as one-year contracts but had been extended annually, generally with inflationary increases. These contracts were in the region of £30k to £40k per annum. This is now in the process of being addressed with a three-year maintenance programme having been advertised.

4.3Breaches have also occurred with contracts where it is judged by officers, without seeking appropriate advice from Legal Services or Contract Compliance, that there is only one possible company who can carry out works or provide goods or services. This has occurred for contract values above and below £50k and for a variety of goods and services.

4.4There are a number of large-value and long-standing contracts in place for off-island social care placements. These are entered into based on individual client needs, sometimes in emergency situations. They are not subject to a tendering process as often there are limited placement opportunities. Accordingly, it appears that currently the Council is technically in breach of Standing Orders and some administrative elements of EU regulations with regard to these contracts. However, during the course of this review the Scottish Government issuedguidance on the procurement of care and support services, which should help to ensure that the Council is adhering to relevant EU procurement rules in this area.

4.5XXX

4.6One contract examined was let by the Roads Service under the Rules of Procedure for Contracting by Direct Service Organisations. While it appears that this was properly tendered, it was noted that these Rules were developed in June 1998, with the intention that they would be adopted for use by the Council, until such time as new Standing Orders were approved. This has not yet happened.

4.7XXX

4.8XXX

4.9This review has concentrated mainly on specific contracts but it was noted that large numbers of payments are made annually to companies for regularly occurring expenditure, often for repairs and maintenance. Because of the volume of payments, it has not been possible to ascertain whether quotes are regularly sought and if best value is being achieved.

4.10It was noted that when works contracts are managed by external consultants, original tender documents are often held by them rather than by the commissioning Council department.

The detailed findings are attached as Appendix 1 and identified breaches as Appendix 2.

5.Recommendations

5.1Officers should be reminded that Standing Orders must, without exception, be adhered to for contracts estimated to be equal to or greater than £50k and the small contracts procedure should be followed for contracts below this value. In particular, the requirement for the Council to advertise for works, goods and services should always be complied with except in specific circumstances, which should be recorded and reported to Committee, where applicable. Advice should be sought from Contract Compliance where any doubt exists.

5.2The Building Services maintenance contracts should be put in place as soon as practicable.

5.3Where officers propose to source goods and services from sole suppliers, either locally or nationally, advice must always be sought from Contract Compliance, to ensure Council policy is adhered to and that best value is being achieved.

5.4 With regard to Social Care placements, we acknowledge that the welfare of the individual is of paramount importance and that the Council has statutory obligations in this area. We would, however, suggest that these placements are looked at in the light of the new Scottish Government guidance to ensure there is also compliance with Financial Regulations, Standing Orders and EU procurement regulations.

5.5The issue of the use of consultants, as opposed to in-house staff, has been raised by Internal Audit and others frequently in the past but has never been adequately addressed. A rigorous reviewandcost/benefit analysis to determine whether best value (including appropriate quality of service) is being achieved requires to be undertaken in all cases where external consultants are utilised.

5.6Greater use should be made of framework agreements for regularly occurringpurchases of goods and services, in particular to address the use of local businesses on an ad-hoc or emergencybasis. We would anticipate that this will form part of the role of the soon to be formed Procurement Section.

5.7For projects that are managed by outside consultants, contract and payment documentation should be transferred to the commissioning Council departments on completion of the projects.

5.8Greater use should be made of Scotland Excel, Procurement Scotland and other collaborative arrangements, where appropriate, and this also will be part of the role of the new section.

5.9The Council’s Standing Orders relating to Tenders and Contracts should be updated to incorporate the current Rules of Procedure for Contracting by Direct Service Organisations and, if required, to reflect the guidance recently issued by the Scottish Government on the procurement of care services.

5.10A memo should be circulated to all officers with responsibility in this area in the name of the Chief Executive. Discussion with the Head of Capital Programmes and the Contract Compliance Manager indicates that they would be willing to formulate such a memo and also give consideration to what training may require to be delivered to officers.

6.Observations

6.1We would like to take this opportunity to thank the staff in all Services for the time, patience and assistance afforded to Internal Audit during the course of this review, in particular the Contract Compliance Manager and the Assistant Contract Compliance Officer.

6.2It is intended that corporate contract reviews will take place biennially with the next review planned for 2012/13.

7.Conclusion

7.1It is for the Corporate Management Team to consider the findings from this report and decide what actions require to be taken in conjunction with the Head of Capital Programmes and the Contract Compliance Manager. Requirements to adhere to policy should be communicated to all staff, in the Chief Executives name, to ensure that Financial Regulations and Standing Orders are observed Council-wide without exception. This memo should also indicate that officers who persist in ignoring relevant policy and procedure may be subject to disciplinary action. At present there are no consequences for officers who consistently ignore requirements.

7.2Audit Scotland have voiced concerns in relation to similar matters in the past unless the Council can be seen to be taking decisive action it is likely that further adverse comment will be forthcoming.

8.CMT Agreed Course of Action

8.1Recommendations were accepted.

8.2It was agreed that resolving the issues would be led by the Head of Capital Programmes on behalf of CMT.

8.3A memo would be issued to relevant staff by 31/1/11.

8.4Training and awareness to be progressedthat willinclude utilisation of a network ofprocurement contactsacross the Council.

8.5CMT managers would take action to address issues in their areasalthough Chief Executive and Head of Legal and Administration wished toretain option for alternative course of action if required,e.g. monitoring reports.

8.6Reports would be submitted where relevant to Committees / Council.

8.7Internal Audit will put interim report including Contracts Review to Audit & Scrutiny in February 2011.

8.8Investigating possibility of greater centralisation of procurement and changing de-minimis levels would be part of Head of Capital Programme’s remit.

Date: 21stDecember 2010Report No: IAR/CR/Cont

Page 1 of 7