Outsourcing contracts can help local authorities manage budgets and deliver effective services but the aftermath of the collapse of Carillion has shown the importance of local authorities managing such contracts effectively and, when necessary, terminating them.

If local authorities are to get the most out of their contracts with external service providers, rather than having to use resources to get out of contracts and keep services going, they will need to take appropriate action when appointing their contractors, agreeing their contractual terms and monitoring and using their contracts.

Important issues to address are:

Procurement: Lawful and effective procurement is essential for a local authority to secure the right contractor and to enter into appropriate contract terms. The requirements of regulations and the rules in local authority constitutions mean that, subject to some exceptions, local authorities will usually need to have a competitive procurement process. The detailed requirements and processes set out in the Public Contracts Regulations 2015 will enable local authorities to establish whether those bidding for their contracts have committed any relevant offences and to know their economic and financial standing and their technical capacity and capability.

Authorities need to take this further by applying criteria which will enable them to identify and appoint the most appropriate contractor for any contract. It is essential that local authorities are transparent and consistent with the requirements and details that they advertise.

Change Control: Events of recent years have shown how the circumstances in which services are delivered can change suddenly and significantly. Local authorities need to have flexibility to address changes without using the benefits of their contracts. Contracts need to include provision to address anticipated changes and more general provisions for changes which cannot be anticipated but may have a significant effect.

Monitoring and reviewing contracts: Local authorities need to know about inadequate performance and difficulties affecting their contractors early, so they can take action to resolve issues and are not forced to react in a hurry when there is a crisis requiring urgent action. A contract should require regular reporting from the contractor to the local authority and should give the authority rights of access to information, premises and persons, which will ensure it is always aware of issues affecting quality of service provision and stability of contractors.

Exercising Step-in Rights and replacing a contractor: Local authorities should ensure that they have rights to step in and operate services under a contract themselves in the event of contractor insolvency or other circumstance which prevent a contractor from providing services. If a contractor is still in existence at the end of a contract, there should be obligations to assist and facilitate the appointment of a replacement contractor when this is necessary

Termination: If there are problems with a contract which cannot be resolved, a local authority needs to be able to leave the contract before the services fail or the contractor collapses. It needs to ensure that it has terms which allow it to terminate the contract and that any associated requirements, such as giving notice, will not cause the authority to suffer financially or jeopardise the continuity of services. The local authority must comply with any such requirements, so as avoid potential challenges and claims.

Good use of outsourcing can achieve benefits for local authorities and the people they serve, as well as for the contractors. Failure of outsourcing contracts can have serious consequences. Local authorities need to manage arrangements effectively throughout procurement and contract processes, so that they get the most out of their contracts and recognise and control any risks associated with them.

Tiffany Cloynes is partner and head of the regeneration and public services team in England at Geldards.