Contract Administration: A Step-Child of Anticorruption Policy?

It is hard to imagine a more prosaic-sounding government job title than “contract administration.”  It is equally hard to imagine one more neglected, both by governments and the anticorruption community.  The House of Commons reports that British civil servants consider contract administration “mechanical and unimportant,” and with few exceptions those concerned with controlling corruption have paid the issue little attention.

But for those seeking to curb government corruption, contract administration is anything but prosaic or unimportant.  Once a firm has been awarded a contract to furnish goods, provide services, or build a building there are many ways it can cheat government: by delivering substandard goods, padding invoices or performing unneeded extra work to name but a few.  Zambia’s Auditor General found road construction companies had failed to provide the required cement, concrete, and gravel in all 18 roads projects it audited, meaning the roads will not last as long or carry as much traffic as the government contracted for. An IT firm New York City hired to computerize the city’s payroll system bilked it out of more than $600 million through inflated invoices and phantom extra work.  In India a medical equipment manufacturer supplied neonatal equipment that exposed babies and hospital staff to electrical shocks.

The bad news is that these are just a few examples of the ways government can be cheated during the execution of a public contract.  The good news is there are handful of steps governments can take to reduce if not eliminate corruption during contract performance.  They are:

* Establish criteria for monitoring the contractor’s progress and assessing its performance. Fraud or corruption cannot creep into contract execution if the contractor is held to the terms of the contract. That requires first benchmarks to ensure it is meeting those terms.  Ideally, the contract itself will contain the appropriate measures, in the case of a road construction contract how much of the highway is to be built each quarter and how the quality of the work will be gauged.  Where the contract does not contain adequate measures, the auditor for the U.S. state of Georgia recommends holding a post-award, pre-implementation meeting to establish a common understanding among agency and contractor personnel of what is expected.  That plan, the audit office further suggests, “should also consider that intense monitoring during the implementation phase of a new contract will likely benefit both the agency and vendor [for] intense monitoring will give the vendor a clear understanding of the agency’s expectations and will ‘set the tone’ for the relationship between the two entities.”

* Provide sufficient personnel with the appropriate technical skills and the time to monitor the contractor’s performance.  It goes without saying that monitoring a firm’s performance of a contract requires individuals who have the requisite technical understanding of what is to be done and the time to monitor the contractor’s performance.  If no one is watching, or those who are watching lack the requisite knowledge, a contractor will be able to sneak poor workmanship, unneeded extras, or other fraudulent, subpar performance through with ease.  While for less complex contracts government employees may be able to adequately monitor performance, the Australian National Audit Office suggests “[m]onitoring by a third party . . . where particular technical knowledge is needed to assess the data. . . .”  The best example of a third party monitor is the supervising engineer provided for in the standard form contract for use in civil engineering projects developed by International Federation of Consulting Engineers.  This contract requires the engineer to continually monitor the construction work, observe the work as it progresses, test completed portions of the structure to ensure they meet specifications, certify the contractor’s invoices, and pass on its requests to vary from the original plans. If the engineer finds that the builder is supplying substandard materials, or less material than required, or inflating invoices, or otherwise trying to cheat on the contract, it must refuse to certify the contractor’s requests for interim payments.

* Ensure the integrity of the monitor.  Whether the contract is monitored by government personnel or by a third party, the challenge is to ensure that the monitor is honest, that it neither accepts money to overlook contractor wrongdoing nor demands money to approve invoices or certify work has been done.  Clear ethics rules need to be in place for monitoring staff.  The most critical are whether monitors can accept meals or other gifts from a contractor and, if so, in what amount and what steps they must take if they or a close relative is offered a job by the contractor.  On contracts of any size, periodic audits of how well the monitoring staff is doing its job should be conducted by an independent technical auditor.  The technical auditor will review the monitoring staff’s work, running independent tests of the quality of the work, checking to see work that was invoiced was actually performed, seeing that adequate justification exists for any deviation from the terms of contract.  An example of the terms of reference for an independent technical audit is here.

* Foster civil society oversight of contract performance.  For contracts that are less technical and performance readily observable, civil society can be enlisted as an additional performance monitor.  As Stanford University Professor Bruce Cain suggests, monitoring works best when civil society has a stake in the how well the contract is performed: farmers who will profit from the construction of a road that will give them access to markets or parents whose children will benefit from the completion of a new school building.  But as posts on this blog have reported (here and here), there are examples of successful civil society monitoring motivated by altruistic concerns.

The above are the essential steps required to minimize if not prevent corruption in the execution of government contracts.  Additional measures include –

*Conduct a vulnerability analysis or risk assessment.  At the outset of the contract key contractor personnel and government staff can review the areas where fraud or corruption is likely to occur and develop an action plan to mitigate the risks.  For example, if a contractor has been commissioned to build a number of school houses scattered across a large territory, there is the risk that lower level contractor staff will collude with monitors to cheat the project.  In a large training project where trainees are transported to a central location and housed, attendance rolls may be padded or expenses inflated.  The Millennium Challenge Corporation, a U.S. government agency that promotes economic development in low and lower-middle income countries, requires all its grantees to conduct a risk assessment and develop an action plan to mitigate the more serious risks.  Agency staff (including this part-time consultant to MCC) have found the exercise, and the frank and open discussion it produces, to be a valuable technique for curbing corruption in contract execution.

* Require contractors to have an anticorruption compliance program.  As explained in an earlier post, since 2008 the American federal government has required any firm awarded a contract of $5 million or more or requiring at least 120 days to perform to establish an anticorruption compliance program that i) contains a written code of business ethics and conduct, ii) trains employees on ethics and compliance periodically, and iii) has an internal control system able to discover improper conduct.  The U.S. experience suggests these compliance programs are an important way to bolster a firm’s commitment to integrity when executing a contract, and indeed other countries are beginning to require them, most notably Brazil and the United Kingdom.  There is no reason why all countries shouldn’t.

* Recognize contract administration as a technical specialty within the civil service.  Transparency International’s first-rate handbook on controlling corruption in public procurement, Curbing Corruption in Public Procurement: A Practical Guide, one of the few publications by an anticorruption group to address contract administration, cites figures reporting that procurement spending averages between 13 per cent and 20 per cent of countries’ gross domestic product.  With this much of the national budget at stake, contract management should not be considered a backwater or treated as a dead-end career in the public service. Young civil engineers, IT specialists, and others graduating with technical and managerial backgrounds should be aggressively recruited into government service and offered a rewarding career in procurement and contract management.

Far from being “mechanical and unimportant,” contract administration is a core function of government and a critical element in any anticorruption program.  It demands the time and attention of senior policymakers.

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