Public Sector IT Procurement: OGC Guidance and Models for Project Contracts

June 30, 2005

At the end of 2004 the Office of Government Commerce published Version 2 of its Decision Map Guidance for Project Strategy and Procurement, together with model contracts for government procurement. The broad intention is to provide a model which can be utilised within central and local government to facilitate the acquisition of technology. These contracts sit alongside, or perhaps above, the standard contracts for more commodity-based IT products and services which are in the process of being reformed under the Catalist procurement system being promoted by OGC Buying Solutions.

In order to appreciate these developments, it is essential to understand what the guidance and contracts contain. They are thorough and extremely lengthy. This article is in two parts: the first looks at the guidance and the second reviews the contract conditions.


Originally developed to focus on IT enabled business change, the Decision Map Guidance is now intended to be used by “Senior Responsible Owners” (SROs) in Government Departments, Agencies and Non Departmental Public Bodies (NDPBs) for all types of public sector project strategy and procurement and, following the July 2003 decision that there should be a presumption against PFI to deliver IT-enabled projects, the Decision Map Guidance now replaces and expands upon the previous Treasury Guidance “Standardisation of PFI Contracts – IT”. The Decision Map Guidance consists of the following five parts:

  • Part 1 Business Needs and Duration
  • Part 2 Key Strategic Issues – Internal and External
  • Part 3 Project Strategy
  • Part 4 Commercial Principles for Government ICT Projects
  • Part 5 Procurement Routes

Parts 1 to 3 of the Decision Map Guidance

Parts 1 to 3 of the Decision Map Guidance apply to all types of projects. The purpose of these parts of the Guidance is to help Departments and Agencies and NDPBs with the strategic planning needed before projects begin and also to determine which procurement approach best meets its particular needs for a particular project. The Decision Map Guidance also contains baseline contract terms and conditions as a starting point for use in projects, depending on whether the desired approach is seen to be a contract for an Outcome, a contract for an Output or a contract for an Input.

The Outcome of a project is described as the contribution it makes towards the goal of the government organisation. An example for a government department given in the Decision Map Guidance is the achievement of a Public Service Agreement (PSA) target.

Outputs are described as intermediary objectives that support the delivery of outcomes. An example provided is the procurement of fully serviced IT infrastructure enabling a department to process certain business operations. It is acknowledged that outputs are often very difficult to define and SROs are advised that, if after considerable effort they cannot define the output so that they and their suppliers understand exactly the same thing by it, they should contract for inputs instead. The efforts SROs might go to in defining outputs are covered in further guidance on “proof of concept”.

Inputs are described as procurements that secure Outputs and may include hardware, off-the-shelf software, additional work such as the design of databases and spreadsheets and wiring, etc. The Decision Map Guidance informs SROs that contracting for inputs is appropriate only where the department, agency or NPDB has the ability to integrate a variety of contracts for inputs to deliver the required output.

The Decision Map Guidance provides tools for SROs to look at the characteristics of their organisation and its business objectives in order to determine the appropriate strategic approach – ie contracts for outcomes, for outputs or for inputs. The approach of the Decision Map Guidance to this issue is as follows:

  • If there is confidence about the long-term goal, stability of the organisation and business objectives, and the outcome responsibility can be passed to a contractor, then there is scope for contracting for an outcome, using a partnering approach where appropriate.
  • Where there is stability of requirement, but a relatively simple set of objectives and processes, then contracting for outputs is described as the most likely path; and
  • in some circumstances where there is low stability, frequent change and new approaches are developing rapidly, contracting for inputs is described as the better option; often such contracts should be limited in scale and duration.

SROs are told that best procurement practice is also that risks should be allocated to the party best able to manage them and SROs are therefore encouraged to determine whether:

  • contractors in the market are well placed to manage all the key risks, and therefore the department or agency can contract for an outcome
  • the contractor is likely to be well placed to manage lower level (input to output) risks, but not the overall risk that the outputs will not yield the required outcome. In this case the Decision Map Guidance informs SROs that contracting for outputs is likely to be best or
  • if it is not possible to transfer many of the risks of creating outputs, contracting for inputs to a greater or lesser extent is more appropriate.

Part 4 of the Decision Map Guidance

Part 4 of the Decision Map Guidance applies to IT projects only and covers the following four areas:

  • Section 1 – The basic positions and commercial principles that Government Departments should adopt when shaping a contract for outputs.
  • Section 2 – Additional principles that should be adopted when dealing with more than one supplier to achieve a particular objective.
  • Section 3 – Decision Map Guidance on how to approach contracts for inputs and how these contracts differ from contracts for outputs.
  • Contractual drafting in the form of Model Contracts for Output and Input based transactions: (i) Model Technology Supply Agreement (Baseline precedent clauses for consideration when contracting for Inputs or IT Supplies), (ii) Model IT Services Agreement (Baseline precedent clauses for consideration when contracting for outputs or outcomes).

Part 4 of the Decision Map Guidance also consists of an appendix of 10 modules with additional specific Decision Map Guidance on the key commercial principles and contracting issues in IT Projects. These modules are as follows:

Module 1 – Project viability

Module 2 – Requirements

Module 3 – Contracting strategy

Module 4 – IPR

Module 5 – Flexibility and Change Control

Module 6 – Implementation testing

Module 7 – Financial distress

Module 8 – Exit Management

Module 9 – Project Assets

Module 10 – Financial issues

Part 4 also provides information for SROs about the meaning of some of the more standard terms and conditions used in model terms and conditions and also indicates to SROs when a particular condition is important, and highlights in some cases those conditions which can be adapted to the circumstances.

Part 5 of the Decision Map Guidance

Finally Part 5 of the Decision Map Guidance provides SROs with some information as to whether a framework arrangement (the purpose of which is to establish the terms governing contracts during a given period) is the right approach for the particular procurement. The Government advises that this will usually be a value for money judgement for the contracting authority or authorities concerned, taking account of the kinds of procurements involved and the ability to specify such procurements with sufficient precision up-front.

Part 5 also provides advice for SROs where their procurement project is subject to the EU Procurement Directives and sets out a table of the key public sector (non-utility) EU procurement legislation and the main UK implementing legislation.


The Decision Map Guidance and the new model contracts adopt reasonable commercial positions in a number of areas but in others they reflect positions and contain provisions that are commonly adopted by customers who are in positions of strength in dealing with suppliers. These provisions will need very careful consideration by suppliers who are considering contracting in the public sector on the basis of the new model terms. Part II of this article will examine in more detail some of the positions and contractual drafting set out in Part 4 of the Decision Map Guidance – “The Commercial Principles for Government ICT Projects”


Part 4 of the Decision Map Guidance sets out the new commercial principles for Government ICT Projects and also includes the Model Contracts that are intended to be adopted by Government Departments when shaping contracts for ICT outputs and inputs. The Model Contracts are intended to be used by SROs as a starting point to assist with the drafting of agreements. The Model Contract terms are not expressed to be compulsory and the OGC assumes that SROs will develop the agreements to suit their projects with professional advice. What is not clear is the extent to which SROs will be willing to change the starting point positions that have been adopted in the Model Contracts. The summary set out below describes some of the more significant positions outlined in the Guidance that would apply if no changes were accepted to the Model Contracts.

Payment Profiles, Milestones and Delay Payments

In most projects, contractors will be paid by a combination of milestone payments and (in the case of output contracts) service charges. Milestone payments are intended to be used to reduce the amount of the contractor’s financing costs in relation to the project assets (for example, equipment costs and the cost of software or system development). SROs are advised that milestone payments should not, therefore, directly match the contractor’s costs as they are incurred. The amount paid should reflect the value delivered to the Government at the relevant milestone point and a demonstration of value (eg passing a performance test) will be required at each stage.

In output contracts, it is envisaged that there may be a series of milestones (for example the successful completion of pre-operational tests, the go-live date and the point after the go-live date at which the contractor has demonstrated that the solution is working satisfactorily in its “steady state” operating environment). In inputs contracts, it is likely that the only relevant milestone will be a formal acceptance procedure against specific criteria following contract delivery.

If the contractor misses a milestone date, the Government will be entitled to withhold milestone payments and, depending on the criticality of the commencement date of the service and the milestone, will also be able to charge delay payments.

Value for Money Provisions

For outputs contracts, especially longer-term contracts, there are provisions in the Model Contracts that will assist the Government in obtaining value for money throughout the duration of the project. Before the contract is awarded, contractors must submit for scrutiny a financial model of the project showing the budgeted items of initial set-up and ongoing service delivery costs and assumed profitability. On the basis of the agreed financial model, the Government will require the contractor to provide annual accounts in relation to the services. The accounts should expose the contractor’s actual cost of and return from the service provision over the life of the agreement. Annual review meetings must also take place to consider the extent to which savings have been found and implemented in the preceding year as well as future opportunities to be investigated and a target saving for the forthcoming year. It is envisaged that the Government and contractors will share in any achieved savings via a reduction in charges in a proportion which will be bid for by the contractor during the bid stage. Benchmarking will also be applied to service performance in output contracts as well as service payments with improvements or price reductions specified in a benchmarking report to be implemented within specified periods of time.

Service Levels and Service Credits

In output-based contracts, the contractor will be required to meet agreed service levels during the life of the contract. In the event of a failure to meet service levels, the first obligation of the contractor will be to restore the service, regardless of fault. Service credits will be payable for a failure to meet service levels (at a higher rate for more serious or persistent failures). The Government suggests that service credits should be capped at a certain “threshold” level so that critical or chronic failures can be dealt with outside the service credits regime so that other remedies such as damages (liquidated or general) and ultimately termination will be available.

Due Diligence

The Government will not provide any warranties as to the state of affairs at the commencement of a contract. If it is not possible in certain areas for meaningful due diligence to be carried out or the urgency of the project does not permit it prior to the award of contract, then the Government says that it will as an exception consider agreeing certain clearly defined pricing assumptions and agreeing a process to vary the pricing if those assumptions are wrong and this has a demonstrable impact on the original pricing.

Intellectual Property Rights

The general principle, which is reflected in the model contracts but can be waived (eg for security reasons), is that IPR should be owned by the party best placed to exploit the rights. It is acknowledged that this is usually the contractor and that the Government can achieve its business objectives by ensuring that it has sufficiently wide licence rights. The Model Contracts therefore grant the Government a perpetual and royalty free licence to: (i) use specifically created deliverables within the relevant organisations without restriction; (ii) allow other public sector users to use the services provided by the contractor; (iii) transfer the benefit of the licence to other public sector bodies; (iv) allow other service providers to deliver inter-connecting services; and (v) allow other service providers to provide the services or replacement services upon termination of the contract, the triggering of step-in rights or upon the expiry of the contract. The Government can also require that source code and underlying programmer’s materials for specially written software are delivered up at appropriate intervals (eg upon the delivery of the software application, module, or update).

Where the IPR in specifically created deliverables remains with the contractor and it also has the potential for wider commercial exploitation on its own or as part of another product, the Government is also likely to seek to ensure that the value of their contribution to the creation of the IPR is reflected in either: (i) a reduced contract price; and/or (ii) some agreed method of participation in the future commercial exploitation of the rights.

Key Personnel

In all contracts, the Government will require, as a minimum, the following rights in relation to key technical and management personnel:

(i) the right to require use of staff designated key personnel in the provision of the services whilst they are employed by the contractor;

(ii) the right to approve the replacement staff designated key personnel; and

(iii) the right to deal with an excessive level of turnover of key personnel.

Financial Distress

In business critical or major output-based projects, the Government will be able to take measures in response to events indicating financial distress on the part of the contractor. This may include the contractor being required to set up an escrow account in the joint names of the parties into which the Government pays the charges – with the balance in the account released to the contractor when the sub-contractors have been paid. An amount may be retained in the escrow account after payment of sub-contractors to create a fund to compensate the Government for the cost of re-procuring the services if it terminates the agreement for contractor insolvency or breach.

Termination for Convenience

The Government will be permitted to terminate contracts for convenience in accordance with the following principles: (i) if the contractor has no un-recovered capital costs and 12 months’ notice or more is given, then the contractor will not be entitled to any compensation; (ii) where the contractor is given less than 12 months’ notice it should be paid an amount that should not exceed 12 months’ “Contractor’s Return” (as referenced in the financial model agreed prior to contract award) dependent on, and directly related to, the actual amount of notice that has been given; (iii) the Government should also pay “Breakage Costs” (for key sub-contractors) if less than 12 months’ notice is given. The OGC advises that what amounts to recoverable Breakage Costs needs to be carefully defined and that the onus is on the contractor to ensure that the same definition is used in its sub-contracts.

Rights on Termination or Expiry

On the termination or expiry of an output-based contract, the Government will have the option (but not the obligation) to (i) acquire ownership (ie legal title) of sole use assets (where assets are used to provide the services to the Government only); (ii) acquire further use of assets shared with other customers of the contractor for a transition period or to require the contractor to provide substitutes for shared use assets; (iii) require the novation of sub-contracts; and (iv) require ongoing services and support on an agreed basis from the contractor for an agreed transition period. In input-based contracts, if the contract terminates before acceptance, the OGC envisages that the assets are likely to be of limited value, although the Government may wish to retain the option to acquire assets and IPR to transfer the project to a replacement contractor.

Step-in Rights

In output-based contracts the Government will have rights to step-in and take control of the provision of the services both as an alternative and as a precursor to termination (eg in the event of certain actual or anticipated breaches). The Government will be able to exercise the rights of step-in itself or through a third party. In the event of step-in due to a default of the contractor, no charges will be payable for any suspended services and the contractor will be required to pay the extra costs over and above the normal amount of the charges incurred as a result of exercising its rights of step-in.


Any claim by a contractor for indirect, special or consequential losses, or for loss of profit or expected turnover, will be explicitly excluded. Subject to certain exceptions, all other liabilities will be limited in financial terms by financial caps on liability. However, losses recoverable under the agreement will be defined to include additional administrative costs, wasted expenditure, wasted management time and third-party costs. The Government may also look to cover loss of anticipated revenue/savings and loss of or degradation of data explicitly to the extent that it requires this risk to be transferred to the contractor. The Government acknowledges that whether this is appropriate will depend on the nature and purpose of the agreement and the extent to which the contractor is in a position to manage the risk.

Supply Chain Rights

Where appropriate, in output-based contracts, the Government will have the following rights in relation to the contractor’s supply chain: (i) a right to ensure that no sub-contractor may be engaged without prior written consent; (ii) a right to ensure that no sub-contract may be materially amended or terminated without prior written consent; (iii) where an act or omission of a sub-contractor gives rise to a contractor event of default, a right that the relevant sub-contract be terminated by the contractor as an alternative to terminating the agreement with the contractor; (iv) exceptionally, a right to terminate the agreement in the event of a change in control of a material sub-contractor (a sub-contractor that is critical to the project and not one that supplies commodity deliverables or services); (v) a right to particular third-party rights under a material sub-contract including the right to have the sub-contract assigned; (vi) a right to step-in to a sub-contract; and (vii) a right to require the contractor to take advantage of (and reflect in reduced charges) any better terms negotiated by the Government in relation to goods or a service supplied under a sub-contract entered into by the contractor.

Change Control and Changes in Law

All contracts will contain a procedure to deal with change on the basis that where possible, certain categories of change may be called off from a pre-agreed catalogue. Also, where the Government proposes a change, the contractor will be required to implement it if it is technically capable of doing so. Responsibility for changes in the law during the life of the contract will also be addressed. As a general rule, general changes in the law that affect all suppliers doing the same type of business will be the contractor’s responsibility whereas specific changes in the law, that would not apply to the contractor but for the fact that it has entered into the particular deal with the Government, will be the Government’s responsibility.


Whilst extremely laudable, the OGC’s project contract initiative pre-supposes two key assumptions:

  • effective take up within the government which has a variety of different constituencies from the sophisticated procurement processes within the MOD to the smallest local authority acquiring e-government systems with little in house IT procurement experience;and
  • effective and willing participation by understanding suppliers who believe the models will offer them an opportunity to provide IT to the public sector while still achieving a reasonable return.

There are many issues still being debated concerning these processes by the government and industry representatives. Nevertheless the starting point must be an understanding of the government’s proposed approach. In order to promote successful IT procurement, both sides in this debate need to avoid the “one hand clapping” syndrome. In order to improve the sad statistic that only 30% of major government IT procurement projects are delivered on time and to budget, there does need to be an environment of co-operation and understanding between the supplier and customer community. At the end of the day, all the standard terms and conditions imaginable, however well thought through and drafted, are no substitute for an effective IT procurement which represents a win-win for both sides: the government having successful IT delivered which works in practice; the private sector suppliers have project opportunities from which they can make a reasonable financial return. We propose that this equation is essential to the ongoing success of IT procurement in the UK.

Clive Davies is a Partner at Olswang: Owen Williams is a Solicitor there: