Oral evidence: UKTI and the contract with PA Consulting, HC 772

Oral evidence, 28 November 2016.

Chair

Welcome to the Public Accounts Committee on 28 November 2016. We are here today to look at the NAO investigation into the UKTI specialist services contract with PA Consulting. We have a number of witnesses: Crispin Simon, the former chief executive officer at UKTI; Dr Catherine Raines, who is now director general and CEO for international trade and investment at the Department for International Trade; Alan Middleton, chief executive of PA Consulting; Dr Matt James, commercial managing director at the Department for International Trade; and Bob Driver, the former senior responsible officer at UKTI for this specialist services contract. We have had a number of bits of correspondence from you. Dr Raines, thank you for your comments about what the Department will be doing now. We will touch on that towards the end, but that is not really the focus today. We are particularly keen to look at what happened with this contract. It was signed in April 2014, started in May and terminated by the then UKTI in January 2016. At a cost of £19 million, it is not the size of contract that this Committee would normally take such a big interest in; although it is a lot of money, it is not the billions we would normally look at—in Government terms, it is a smallish contract. The NAO Report and the fact that there have been other investigations into this paints a sorry picture of how the procurement of the contract was handled and suggests, frankly, disappointing behaviour by both parties involved. I want to be really clear that we are looking at both parties in this. Mr Middleton, we will probably spend some time discussing the role of PA Consulting, as you defend how you were able to increase the profit on a contract while telling UKTI that you did not. You will get a chance to answer those questions during this hearing. UKTI is now at the heart of the new Department for International Trade and is supposed to understand business, yet there were a number of issues around this contract, which my colleagues will probe. It is important to remember that, whether it is millions or billions of pounds of taxpayers’ money being spent, this Committee’s job is to hold you all to account for how that money is spent, protect taxpayers’ money and ensure that it is being spent with probity and honesty. That is what we are trying to get to the bottom of today. We are here to hold you to account, and that is our role. I will ask Chris Evans to kick off with the questioning.

Chris Evans

Mr Simon, I would like to start with you. Could you walk us through the process of governance when signing contracts? What would you expect to see?

Crispin Simon

The contract would have specified what we were trying to purchase. We would have written a business case that was agreed with the Cabinet Office and that we had submitted to the Cabinet Office under the controls that were prevailing at the time. We would then have initiated the bid process that is described in the NAO Report. We selected PA as a preferred bidder and then we brought the final proposal from PA to our management group at UKTI for authorisation.

Chris Evans

Why wasn’t the contract published with the Official Journal of the European Union, as would be expected?

Crispin Simon

I am afraid I cannot answer that question.

Chris Evans

Okay. This question is to Mr Middleton. Do you think the problems with this contract are ones of competence, a lack thereof, a lack of ethics, or simply a case of both?

Alan Middleton

It is not a question of ethics. PA is very proud to be a very ethical firm. It has worked for the Government for 70 years and has delivered fantastic results over thousands and thousands of contracts. The contract in question was delivered exceptionally well. It delivered 167% of the contracted outcomes and it was billed in line with the contract value. I was clear on this in my letter to the Committee that we, during the course of the contract negotiation, could have been clearer on a number of points. The framework itself could have been clearer, and as a result both parties could have understood where they were at each stage. But at the point of contract signature, with the letter alongside, PA contracted in a certain manner, delivered financially against that, and delivered the outcomes at a rate of 167%.

Chair

So you’re saying that it’s neither a lack of competence nor a lack of ethics?

Alan Middleton

There is a competence issue in that early discussion period, but it is certainly not an issue of ethics.

Chris Evans

What is your opinion on that same question, Mr Driver?

Bob Driver

It is a competence issue.

Philip Boswell

Mr Simon said it was signed off by an ex-CEO, but in its investigation the NAO saw no evidence of that. Paragraph 8 on page 5 of the Report says, “UKTI’s governance of the procurement was weak. It is not clear that there was an agreed-upon commercial strategy. The procurement team had a poor understanding—”. Mr Simon, are you saying that you signed off on this?

Crispin Simon

Yes. I read the Report and was shocked to see it say, “There is no evidence that a number of key decisions were approved by any formal UKTI decision-making body”, because they would have been. We were quite thorough in our governance. We had monthly executive team meetings and we brought important decisions to them. They were minuted. We had a very capable company secretary—chief of staff, I think they were called—and there were two assistants, so there was always that person plus an assistant taking minutes. I can’t explain why there are no minutes.

Philip Boswell

In which case, could you possibly write to us and provide that evidence? What you are speaking about is due diligence—normal protocol and processes; a stage gate process—whereby a submission is made, a review is carried out and the box is ticked for it to go to the next phase, which we would expect. Like yourself, I was surprised to see that, so if you could write to us and pass that on, that would be helpful.

Crispin Simon

I can’t provide the evidence, I’m afraid. I accept that the NAO has said that there is no evidence. I presume that it looked for it. I am sorry that there is no evidence but, as far as I am concerned, the contract was authorised by our executive management team.

Philip Boswell

Okay.

Chris Evans

Mr Driver, I want to go back to the point you made earlier. What do you mean by “competence”? Mr Middleton has been very defensive of his position. According to him, there was neither an issue of competence, nor one of ethics, so why did you pick up on competence?

Bob Driver

It certainly wasn’t an ethical issue; I think it was to do with competence. Certainly, I picked up this job to do this contract, but I had no formal procurement training and was reliant on professional advice.

Chris Evans

What was the professional advice that you were reliant on?

Bob Driver

I had a part-time procurement adviser.

Chris Evans

What about the things that I have laid out, such as the business case before the contract that Mr Simon set out? Was an investment committee formed and was due procedure followed in this case?

Bob Driver

Yes. The procurement and the governance during the procurement process was actually strong. I chaired a wide committee formed of a number of different directors from across the organisation, including finance managers and other people, along with the Shared Business Services’ specialist on procurement. I had one project manager to deal with this. It was quite a substantial framework contract that required the evaluation of 35 separate bids, so it was quite a complicated process. I was satisfied that all the bids were satisfactorily tested. We kept that wider group together during the negotiating period. I was also involved earlier on—in late 2012 and early 2013—with getting the business case sorted out and the necessary approvals from the Cabinet Office. I don’t understand why this documentation has not been available. Throughout the procurement process, I did recommend a formal and separate governance structure for the contract management of the framework contract. That was very important because more than one supplier was going to be involved in the delivery of the framework. That was something UKTI needed to sort out. I have to say that I don’t think that cross-departmental management structure within UKTI was established at the time.

Chris Evans

So you are saying that your concerns about a formal and separate governance structure were not listened to then.

Bob Driver

No, they were not.

Chris Evans

So you were on your own.

Bob Driver

No, I wasn’t on my own; I was chairing—

Chris Evans

Could you help me then? Who did you report to when you said this, and why did it fall on deaf ears?

Bob Driver

I was chairing that procurement process, and reporting to two separate managing directors and, effectively, the executive team.

Chris Evans

And they just ignored that proposal completely.

Bob Driver

It was a little bit more complex than that, in that I put my proposals through on a number of occasions to the central finance hub of UKTI at the time.

Chris Evans

I asked this question to Mr Simon earlier: why was the contract not published in the Official Journal of the European Union, as is legal requirement?

Bob Driver

I am surprised, because I have only just found that out.

Chris Evans

But that is a very crucial element in this.

Bob Driver

Yes, it is very normal for these contracts to be published.

Chris Evans

It is not normal; it’s—

Bob Driver

Yes, it is mandatory. I agree. It is something that one would normally expect the procurement adviser to deliver. That is something that they did, usually. I have not been able to look into that—I am no longer a civil servant—but I would be very surprised if the framework was not published in the Official Journal. Whether this lot within the framework was published, I simply do not know. I am surprised it was not.

Chair

Dr Raines, we have heard about procedures that were followed and that should have been documented. You now have overall responsibility for this organisation. What has happened to that paperwork? Did it ever exist?

Dr Catherine Raines

I can’t answer the question about what happened to the paperwork, but I can tell you that we have now procured a document management system.

Chair

Forgive me. I am privileged enough to have been a Minister, so I know that one thing the civil service is usually very good at is holding on to bits of paper and ensuring that records are intact. Are you saying that there was not a good record keeping system in UKTI?

Dr Catherine Raines

I do not know what record keeping system was in place at that time. I can only tell you what we have put in place, which is a document management system that will ensure that in future—

Chair

But you have taken over. You must have put a document management system in place because you didn’t think that what was there was good enough.

Dr Catherine Raines

On the basis of the NAO Report, with which we fully concur, we believe that the document management system cannot have been good enough, and therefore we have put in place something better.

Chair

Mr Simon, you were there at the time.

Crispin Simon

I can only repeat what I said earlier. I believe that it was approved, and it looks as if the document management system was not adequate if we cannot find the piece of paper. I am sorry for that.

Chris Evans

Was your relationship with the contractor far too close on this?

Crispin Simon

The contractor?

Chris Evans

Yes.

Crispin Simon

My personal relationship with the contractor was not particularly close. I do not think that was a factor at all. In relation to the points Mr Boswell was alluding to earlier at the bottom of page 5, because I said that I believed that the contract was appropriately authorised, I do not want to give the Committee the impression that we are not accepting any of the NAO’s observations, particularly the middle one where it says, “There was no effective handover to the contract management team.” I think that was a weakness that I put my hand up to. It is true that Bob Driver recommended more effective governance of the contract after it had been signed. Obviously, with the benefit of hindsight, that was the wrong call. We should have had a better handover, as the NAO said, and more formal governance of the contract after it had been signed.

Chris Evans

But as chief executive at the time, the buck stopped with you.

Crispin Simon

Yes, I agree.

Chris Evans

Was this a one-off, or is this a systemic failure of UKTI?

Crispin Simon

I believe that we were making significant improvements to the effectiveness of our operations. One of the problems that the NAO observes, for example, is that we introduced the FDI contract on to the top of the contract that we had been negotiating, and it was critical of that. At the time, it seemed like a good idea. With the benefit of hindsight, it was not. But what we were trying to do, for example, was in the FDI contract we had an aerospace specialist in investment and one in trade. In automotive, we had one in investment and one in trade. By putting the two contracts together, it looked like we were improving the efficiency and effectiveness of the process.

Chair

You did that after you started letting the first one.

Crispin Simon

We believed—the NAO have told us that we may have been mistaken—that the transfer of people associated with the FDI was effectively—

Chair

Sorry, just explain FDI.

Crispin Simon

I’m sorry—FDI is foreign direct investment. UKTI, as the name suggests, is divided into T for trade, which is exports, and I for investment, which is inward. So we transferred some of the people associated with the foreign direct investment work to this contract. As I said, we believed that that was done for good commercial reasons.

Chair

One of the interesting things that struck us was that, for what is a relatively simple contract in essence, it was a 596-page contract. Mr Driver, was that really necessary for something that was potentially quite a straightforward trading contract?

Bob Driver

It was not a straightforward contract, actually. It was a—

Chair

It could have been.

Bob Driver

Yes. I only got the requirement to come here two weeks ago, and I had a look at the contract—I managed to get my hands on a copy of it over the weekend—and 92% of it is actually the instructions for the tender, PA’s bid and standard Government terms and conditions. The substantive contract is actually 45 pages in length. That is not that long for a contract of £66 million over four years. Also, on page 542 of the contract it is crystal clear that the contract is subject to changes in volumes and prices.

Chair

That brings us back to the bit where it becomes more complicated.

Philip Boswell

Just to go back to an earlier line on questioning, Mr Simon, when we spoke about point 8 on page 5, that, “There is no evidence that a number of key decisions were approved by any formal UKTI decision-making body”, what document could not be found? Did you approve the original contract or the Version 11 rate card agreed shortly thereafter? Which one was approved, or was it both?

Crispin Simon

The first contract would have been approved. We had been working on it for months, and it involved a huge amount of the organisation. That certainly would have gone to the executive board. Rate card 11 may not have done, although I personally will have authorised it, because Bob Driver would not have made any significant commercial judgment without involving me. Approving that rate card was a mistake, with the benefit of hindsight. I cannot honestly tell the Committee that I know that that would have been approved. It seemed at the time to be—

Chair

Just repeat that last bit for us, to be clear.

Crispin Simon

The original contract was approved—I stick to that, despite the lack of evidence to that effect. The Version 11 rate card, which became the basis for PA charging, was an amendment to the contract. Because it was an amendment that seemed exactly in line with the commercial aspects of the deal, it is possible that that did not go to the executive committee, and again I accept responsibility for that.

Philip Boswell

Mr Driver, fair play to you: you said earlier that you had no formal procurement training and you had a part-time procurement adviser. Did that mean that you were often or occasionally left to make commercial decisions on your own, as it was only part-time cover that you had?

Bob Driver

I wouldn’t say that I was making any commercial decision on my own; it was a collective decision-making process.

Philip Boswell

With part-time support.

Bob Driver

Yes. If you are talking about having expert advice on procurement issues, that was not available all the time.

Philip Boswell

So you would save up the questions for 50% of—

Bob Driver

Yes. I have to say, though, that towards the end of the process, the adviser was pretty full-on, so he was around a lot.

Philip Boswell

He became pretty much full time, latterly during negotiations?

Bob Driver

In the closing stages, yes.

Philip Boswell

Again, these are questions about why there was no proper governance of this procurement. Mr Driver, what were the roles of UK Shared Business Services and BIS during this process?

Bob Driver

UK Shared Business Services provided the procurement adviser that I relied on. BIS, at the time, was not really involved, apart from in one instance. On Christmas Eve, I got a challenge for the framework that we had just published the results for, from one of the bidders that had been unsuccessful in winning some of the lots. That meant we had to extend what was then called the Alcatel period, which is the standstill period. I remember at the time we had to utilise legal advice from BIS. I can’t remember whether it was BIS Legal, internal BIS lawyers, or lawyers that were brought into BIS from the Treasury, but there was legal advice from BIS that looked at the challenge and went through all the documentation and the decision making that we had done as part of the tendering, and I remember being congratulated at the time on the thoroughness of our paperwork, ironically.

Philip Boswell

The same question to Mr Simon—or is there anything you would add to that response from Mr Driver?

Crispin Simon

No. I was aware that SBS were there. I actually felt that Bob Driver did a good job. It seems bizarre to say that now we are here, but I think he did a very good job, particularly on the initial phase of the contract up to the point where we introduced the foreign direct investment element. I felt that the commercial aspects were well managed. I did rely on SBS to ensure that the bit that I wasn’t familiar with, because I had spent most of my career in the private sector, which was Government procurement rules—we were relying on them to make sure that we did not breach Government procurement rules, and obviously we relied on lawyers to draft the final contract.

Philip Boswell

Let’s look at the poor documentation again, Mr Simon. There was poor documentation, a failure to properly record negotiations and the almost complete switch-out of the initial contract management team, including the procurement specialist, shortly after the contract commenced. Why was there all this change?

Crispin Simon

May I provide a little background detail? I know you don’t like digression.

Chair

Very briefly.

Crispin Simon

As I said a moment ago, I believe that the contract was the right one, up to the point where we introduced the foreign direct investment element. I think that was a mistake, as I said. I explained the reasons why we did it, but the reason that that turned out to be a problem was, as the NAO observes, that in the contract there is not a clear enough definition of what are fixed and variable costs. That meant that when we added the extra volume, it opened the door to PA charging more for the overhead, and that had not effectively been negotiated. That was not apparent at the time and it was an oversight. I still think that that could have been corrected with good will on both sides, because there would have been more overhead. I am not qualified to judge whether it would have been as much as PA eventually charged, but there could have been a fair negotiation. But at that point we had lost the contractual leverage, and that would have been a much better place to be.

Chair

Thank you. Mr Middleton, we were talking about the size of the contract earlier. You as a company contract often with the Government and other Governments. Do you think 596 pages was the right sort of length for this, or was it more complicated than other contracts that you had signed?

Alan Middleton

First of all, Government contracts tend to be larger—in many cases, significantly larger—than we see in the private sector.

Chair

Would this have been a standard size? Do you think it was too long for what it had to do?

Alan Middleton

I think it was a very large contract. The key part of the contract, which, as Mr Driver says, was some 50 pages, was probably fine. In the private sector, you would see a contract like this being some 30 pages. That component was fine. In creating a thing of such scale, a degree of confusion was created on both sides. Certainly on our side, there was a misunderstanding of certain terminology.

Chair

Dr James, you are a commercial expert. You are now in charge of this sort of operation. How complex was this contract compared with others that you have seen?

Dr Matt James

I think it was one of the most complex contracts I have seen a Government Department let in 20 years of doing my job. I have been involved in the billion-pound contracts that this Committee deals with and I have seen contracts that are far slimmer and more articulately written than this one. This was overly complex. Actually—to correct a point—there were almost 600 pages to this contract which were the order, but overpinning the order was also a framework contract of nearly 300 pages. So actually, this was 800-and-something pages—in two contractual documents—and looking at it, I would say that is unacceptable.

Chair

If I can ask Alan Middleton this first, this contract contained contradictory information about the price of services. Why?

Alan Middleton

There were a few and, as I said in the letter I sent to you and to the Committee, we apologise, and we got elements wrong in the midst of all this. As you look through it, you can see that many different terms are being used, both within the ITT and in our response. As you look at ways in which things are calculated, it could have been better agreed between both parties how calculations should be performed. If I am honest, we ended up in a 12-week period in February, March and April, as we went through to contract signature, when the teams on both sides were doing their very best to get things sorted out and get things right, but errors crept in.

Chair

Mr Driver, why was this contradictory information about the price of services not picked up on the UKTI side when you were looking at signing or negotiating the contract?

Bob Driver

I really don’t have an answer to that. I looked at the contract over the weekend and it seemed fairly explicable to me. What it included was what PA was offering—the bid—and, clearly, what we were buying—the ITT. On top of that was a price schedule. Often, what happens in the public sector is that there is a lot of churn in personnel as they go through, so having the full account of what was let and what was bid is useful for people taking over the management of a contract.

Chair

Can I go back, Mr Middleton? You mentioned the letter that you sent me on 10 November, and the one on 22 November. In total, there have been nine letters from PA Consulting either to this Committee, via me, or to the National Audit Office, trying to explain the changes post hoc. In the letter of 22 November, you quote—paragraphs are not numbered, but this is several paragraphs in part 3, the third paragraph up from the bottom of page 2, under item 3. It says: ”On the 25th of April, the PA project team introduced an additional cost memo item in the rate card, and described it—unhelpfully—as a ‘subsidy’”, in inverted commas. It seems extraordinary to me that an organisation with PA Consulting’s experience of contracting so often with Government could be so loose in its language as to call something a subsidy and then spend several letters trying to explain—not that; that is one term that I am picking out—other terms. Either you got it very badly wrong in the first place, through incompetence or worse, or you have a team that does not know how to put together a rate card and a charging system. Which is it?

Alan Middleton

I will be honest. As I started to look at this contract, I found this quite difficult myself. I spent quite a lot of time going through this, and there has been a degree of confusion around it. I want to describe the first area of difference of opinion that we had with the NAO, because it might be very helpful. The annual report could be read as saying that PA incrementally charged an additional £34 per specialist day as a result of introducing a subsidy. The confusion comes about because from the point when PA bid, PA bid a certain charge per day per specialist on an outcomes-based contract. In other words, we committed to deliver outcomes for a certain charge per day. The charge per day changed ever so slightly during the contract negotiation, but stayed largely the same. There was never any addition to that charge per day for a specialist of an incremental £34.

Chair

You talk about it being “unhelpfully” described as a subsidy. That is loose wording, at the very least. Earlier in the same section of the letter, you say: “We are setting out below our chronological analysis of our calculation of the subsidy, which has led us to believe that it was never invoiced to UKTI”. I am curious about that form of words: “led us to believe”. Either you think it was invoiced to UKTI, or it was not. If, after nine attempts to explain this, you still cannot tell us what actually happened, how do you work as an operation billing other clients?

Alan Middleton

We are very clear on this. Our language may not be clear enough, but we are very clear. What happened was that we agreed with Mr Driver a charge per day. The charge per day, in the contract and with the letter of comfort alongside, is the charge that was charged to UKTI throughout the contract. At the time of the bid, the charge per day was £547. That was the estimated charge; it has to be, when you are responding to a bid. Once we had signed the contract with the letter of comfort alongside it, the charge per day was £561 per day. That was the charge we were making for the specialist resources. Alongside it, as you have noted, there were a series of fixed costs. What was happening among the team during the contract negotiation period was that they recognised that the management of the contract and the programme management of the contract were going to cost more than the fixed price being charged to UKTI. In the meantime, as most private organisations do, it attempted to look at the costs of the specialists and manage those as tightly as possible. In bringing the two together, although there was overspend on this side for good reason—I can talk about that later, if the Committee is interested—PA was bearing that cost and was managing down the cost on the other side of the equation, on the specialists. Again, I can take you through the details.

Chair

But it’s not really good enough, is it? The way that you are held to account in a contract is that it should be separated into parts, as was attempted in this contracting, yet the appendix to that letter—figure 6 on page 38 of the Report—gives all your explanations and the NAO’s analysis of a number of these questions. I won’t go through every detail at this point, because we could get mired in that, but it is extraordinary that you cannot get the language or the charging in each element right. Is it just normal practice that you amalgamate it so that the bottom line adds up, whether or not the individual elements are actually charged at the right rate?

Alan Middleton

To be clear, the bid, the request, the thing that PA won was on the basis of a charge per specialist day. When we bid, we bid at £547 per day. During the contract negotiation, Mr Driver wanted further confirmation of the cost to underpin that, and we were happy to provide it. Not least he was interested to ensure that the subcontracted specialists and other specialists, should they ever return to UKTI, did not return at cost-inflated prices. As we tried to break that down among the project team, and as I have fully accepted in the letters, the project team was not sufficiently skilled to do that and to ensure that everything added up. The terms used were consistently wrong.

Chair

That doesn’t sound very competent to me, but what did this do to your bottom-line profit? It increased it, didn’t it?

Alan Middleton

No, it did not.

Chair

Didn’t it?

Alan Middleton

No, it did not.

Chair

You didn’t have an extra cost?

Alan Middleton

Again, the contract profit is laid out. We need to draw a distinction between the profit of the specialists and back office and the overall contract profit. In terms of our invoices, we made 5.6%. At the contract level, we had intended to make some 6.2%. In both cases, those are low percentages for work performed in government, but it was less over the life of the contract.

Chair

Joshua Reddaway from the NAO, perhaps you could cast some light on those figures.

Joshua Reddaway

I believe all these numbers flow from figure 1 in our Report. Are there any numbers in figure 1 that you wish to dispute?

Chair

Can you give us a page number, please?

Joshua Reddaway

This is on page 15.

Alan Middleton

We are comfortable. As you know, we have written to the Committee to point out that there is a difference in the average cost per day actually invoiced, but we agree with the figures.

Chair

You keep saying that, Mr Middleton. You talk a lot about letters that you have written to the Committee in the past two weeks. The NAO have been looking at this in detail for some months and have been in discussions with all the relevant parties, so it is odd that only now are you referring to the recent letter that you sent, whereas seemingly you couldn’t provide that information to the National Audit Office—the NAO is not a two-bit investigator—when it came looking for the information. Can we just focus on the Report? That is my point.

Joshua Reddaway

The only number I am aware of on which you can test figure 1 is the one at the bottom right: 25,279. Is that right?

Alan Middleton

There are more days than that. As a result, the average charged cost per day per specialist is less than that in the Report.

Joshua Reddaway

Because you dispute it in your evidence, we won’t use that number. You have just said in your testimony to the Committee that the charge per day was moved, between the bid and the version 11 rate card, from £547 to £561? Is that correct?

Alan Middleton

That is correct.

Joshua Reddaway

In the Report we said that it moved from £561 to £573 between the contract and what was actually invoiced.

Alan Middleton

That is the number that you and I have discussed. There is a point about it being a different number.

Joshua Reddaway

We will put that to one side. You have just said that the profit on the contract at bid was 6.1%. Is that correct?

Alan Middleton

It was intended to be 6.2%.

Joshua Reddaway

Okay; and you have also just said that the profit on the invoice was 5.6%. Is that correct?

Alan Middleton

That is correct.

Joshua Reddaway

Now, 5.6% you can get by dividing row c on our table in figure 1, the last column—that is £1,058,383—by the revenue. Is that how you have got that?

Alan Middleton

Correct.

Joshua Reddaway

Okay, because the point that we make in the Report is that the amount invoiced under the day rate is £14,486,896. That is an audited number. We have looked at the invoices.

Alan Middleton

Correct.

Joshua Reddaway

The £7,751,687 is the amount that you were charged for the subcontractors—yes?

Alan Middleton

Correct.

Joshua Reddaway

So that is the amount we have audited, and we have had a look at that number and seen that you have received that. The £4,817,340—

Chair

Can you just point out which column it is?

Joshua Reddaway

I am still going down the “amount invoiced”, line b, £4,817,340: that is an amount that we have audited, according to your internal system, as the amount that you charged, including overhead, for your employees. Therefore, surely the amount that you have just said is your profit—the £1,058,383, plus this balancing figure of the subsidy, must also be profit.

Alan Middleton

The issue that occurred in the time frame from February through to May was we determined that we were going to put more time and effort and work into the role called e, back office, which was the programme and the management of the contract and the specialists. So our view of the £859,000 is that that was money actually spent on resource, managing this contract.

Chair

So that figure—line d in that final column—was effectively spent on line e, back office.

Alan Middleton

Correct.

Chair

But you bid originally for five elements of this; but you only ended up with three.

Alan Middleton

Correct.

Chair

So you had more resource in the back office anyway; because you didn’t reduce it.

Alan Middleton

No, the amount actually reduced. Our choice was to raise it. That was for a number of reasons—specifically, initially, to ensure that we would do our very best against the stretch objectives. Subsequently it was to make sure that we were able to manage within the UKTI environment, where there was, after EY winning two lots and PA winning two lots, more to do. It was our decision to continue to operate at that higher level of programme management, against an agreed day rate for specialists and against agreed fixed costs, and thereby reduce our profit.

Chair

I will just bring in the Comptroller and Auditor General.

Sir Amyas Morse

I am just going to check something from what you have just said: are you saying that you have priced going into the competition on the assumption you win all the lots? You just said, “We found that because we didn’t win all the lots, because some were won by other people”; I mean you knew this was a competition divided into lots with at least five competitors, so you couldn’t possibly have gone into it assuming—or did you? Why did you think you might win all of them?

Alan Middleton

We didn’t go in assuming we would win all the lots. We went in as any organisation would do, best estimating what was required in each of the buckets of cost. In the area of the programme management and management team area, we decided that there was a very good chance of meeting and exceeding our targets as a result of putting extra energy in there. The other thing is—and Mr Driver has commented on this—

Sir Amyas Morse

Sorry, just to be clear: what target is that? Which target were you meeting and exceeding?

Alan Middleton

There were two targets. There was a target of full 100% completion of the contract; and there were also at the time of the bid stretch targets with an incentive payment against them.

Sir Amyas Morse

Not your profit target then.

Alan Middleton

These incentive targets were negotiated away by Mr Driver and his team in the time period February, March, April and into May. Nevertheless, PA took the decision—and this, Madam Chair, is the one area where I am putting my hand up and saying I think we got it absolutely wrong: we decided we were going to continue to aim for the stretch targets; we were going to manage this contract closely and well, the specialists closely and well, and over-deliver, which is what in fact we did.

Sir Amyas Morse

The method of managing it closely and well related to the amount of consultant time spent on the contract relative to delivering the contract, did it? It cannot have been the overheads, because the overheads had gone up, so it must have been managing down the cost of the consultants’ time input against their performance—getting more out of less. Is that right?

Alan Middleton

No, getting more out of what we had.

Sir Amyas Morse

But covering the stretch targets with a fixed amount of resource.

Alan Middleton

Correct. Just to be clear, Sir, what I am saying is that we ran this contract at the price agreed. The revenue price is the revenue price that was agreed all the way back to the bid—give or take a little bit. As you say, we further managed the resource pool that we had, at the cost that was being charged to Government, to deliver 167% of the outcomes—not 100%. The figure of £800,000—I do not want to get into the intricacies, but it is not a like-for-like profit between the two; it is very slightly less—was the amount of extra money we were spending on the programme and management in order to deliver 67% more outcomes against the target we had been set.

Joshua Reddaway

I do want to get these numbers out there. If you were to take the subsidy and the disclosed profit together—it is important for the Committee to see—that would make a margin, on this contract, of 10.2%. As I understand it, your argument is that you were making a loss of approximately £0.9 million on your back office, and therefore it is okay to deduct that amount from the rate card element when calculating your profit. Is that right?

Alan Middleton

Mathematically, that is exactly what happened at the contract level.

Joshua Reddaway

My question is that—mathematically, that is what you are doing—when the loss was your loss under a fixed price contract, or a fixed price element you had bid on the basis of, why is it appropriate to add that to a variable rate?

Alan Middleton

First, Mr Reddaway, you have to remember that the bid was for a fixed price per day, per specialist. If you choose to hold us to a fixed price on one element, and a fixed charge on the other, the mentality, whether right or wrong—I believe it was not wrong—of the project team was to say, “We have committed a certain number of days at a fixed fee rate per day. That is what we are charging.” Indeed, that is what we charged throughout. As you say, that would, as a result of us very carefully managing the cost inputs to specialists, have resulted in more profit, had we left it alone. The decision of the team, in the interests of over-delivering against the performance criteria set, was to choose to use some of that otherwise excess profit on resource to deliver 67% more outcomes.

Sir Amyas Morse

To put that in context, why did you end up paying UKTI a settlement amount as a penalty, if you had actually over-delivered and everything had been done just as you say? What was the reason for agreeing to pay them a penalty? What had you done to deserve a penalty?

Alan Middleton

It is a question I ask myself. Let me be very clear, there are three areas that I am sure we will discuss in the Committee: one is the one that we are covering, another is infrastructure, which we can come to discuss, and the third is overheads. As I looked through each of those, the only one where I—morally, not contractually—could see that there was a delta was infrastructure; I could see no delta anywhere else. I could see a moral argument that could be made by UKTI saying, “You contracted with us. You said you would charge us a fixed fee on infrastructure. In fact, it came in slightly less. Would you like to make a repayment?” I offered, and I would have done—in fact, when Mr James came in later, we had exactly that discussion; I am sure that Mr James will confirm. My view was that this was, at most, a £0.5 million settlement. Why did we settle beyond £0.5 million? We settled because Government is an extremely important client to PA. PA always seeks to, and I believe does, behave ethically. Frankly, the £3 million was the cost of having our other invoices paid and having it settled and moved on. I did not want this to be a slur on PA’s name. That is the reason we ended up like that.

Chair

Mr Driver, when did you first become aware of pricing anomalies in this contract?

Bob Driver

I did not become aware of it. I had stopped, I was not responsible for the management of the contract; I was responsible for the procurement of the contract. I was also responsible for the negotiation just before we signed off on the contract. So, I was not responsible for the management of the contract.

Chair

Had anyone raised any concerns with you in the organisation about PA Consulting’s work here or in any other previous contract, in terms of the way it invoiced?

Bob Driver

Not in a formal way, no.

Chair

When you say not in a formal way, that leaves a question begging.

Bob Driver

I left the civil service in March 2015 and I do remember towards the end of 2014 or early 2015 I was told about an attempt to move towards a cost-plus structure.

Chair

What did you do when you heard that?

Bob Driver

Other people were dealing with it. It wasn’t my direct responsibility.

Chair

You were clear that other people were dealing with that and taking it on?

Bob Driver

Yes, it was other people’s responsibility. I wonder whether the Committee would like to hear about the negotiation and the attempts we made to save public money.

Chair

Not at this point, thank you very much. Dr James, Mr Middleton was just saying that he had some discussions with you. Is that how you recollect it?

Dr Matt James

We certainly had those discussions but I do not agree with what Mr Middleton said. As far as I was concerned, having looked at the Baker Tilly/RSM audit that we had commissioned in UKTI, and subsequently the work that NAO had done, I believe the organisation lost just over £5 million on hidden overcharges in the contract. It was that figure that we tried to recover as much as we possibly could for taxpayers in the settlement agreement that was signed earlier this year. I don’t agree with what Alan said, although I agree that we certainly had that conversation.

Chris Evans

Mr Simon, could you explain your understanding of the restricted procedure model used in this contract?

Crispin Simon

I believe that what was involved was a tender. We invited bids in five lots. PA previously effectively had all this work. To the NAO’s point that it was not clear that there was an agreed-upon commercial strategy, we did want to introduce an element of competition with more suppliers. Therefore, we established five lots and we procured it under the system that you described. If, Mr Evans, you are alluding to the fact that we introduced the foreign direct investment element to that, we were certainly aware that we needed to check. I cannot remember the exact chapter and verse but I know that there was a discussion. I believe it was run past SBS and the BIS lawyers and they did not object. Indeed, in the conclusion on page 10, the NAO, I think, stops short of saying that we breached procurement regulations. As far as we were concerned at that point, we were trying to do something that we believed would be commercially beneficial for UKTI and, therefore, it was justified.

Chris Evans

I think you have given us too much information there. I simply asked what your understanding of the restricted procedure was. The magic words I was looking for from you, Mr Simon, were, “There should be no further negotiation.” The question I’ve got to ask myself—I will go into the foreign direct investment contract, the specialist service contract—is, even though there is no further negotiation, as you understand it, would you believe that that was not a material change?

Crispin Simon

Yes, I do believe that was not a material change.

Chris Evans

I am interested to hear from the other witnesses. Dr Raines, do you believe that was a material change?

Dr Catherine Raines

I certainly think it wasn’t best practice, so I agree. It may well be interpreted as a material change.

Alan Middleton

Our understanding of the contract was that it allowed for additional specialists to be added to it. We saw that happening. I am not a specialist in public sector contracting, so I cannot answer personally, but our view was to take a letter of comfort, to ensure we were doing the right thing.

Dr Matt James

I think it is a material change.

Chris Evans

Do you agree, Mr Driver?

Bob Driver

I certainly believed I was not straying from the scope of the overarching framework that had been agreed—the framework to which all five suppliers who were part of it had agreed. One of the key criteria for that framework—15% of the criteria under which they had won the right to be on the framework—was the ability to flex. That is a really important point. You have to bear in mind that at the time, we were not just talking about procuring new services. We were transitioning services from one contract to another into two different suppliers: PA and EY. The number of specialists and who they were had changed from the time of the bid. So we were also dealing with operational matters at the time.

Chris Evans

How do you feel about that, Mr Simon? It seems to contradict what you said. Paragraph 11 on page 6 of the Report says: “UKTI and PA agreed to transfer resources from another contract, the Foreign Direct Investment Services contract, to the new contract. In substance, this acted to extend that part of the other contract beyond its allowed term. It also changed the terms under which PA was paid for the transferred specialists from a cost-plus basis to a banded day rate.” My interpretation—correct me if I am wrong—is that that is a material change, so why did you not open up the contract to competition? Surely that was unfair to others who may have bid.

Crispin Simon

At the time, it did not seem like a material change.

Chris Evans

Correct me if I am wrong, Mr Middleton, but did PA not seek an assurance from UKTI that it was not considered a material change? Paragraph 12 on page 7 of the Report says: “These actions bring into question compliance with the public procurement regulations, and whether or not these changes were a material change to the bid and contract. PA sought assurances from UKTI that they were not considered a material change, suggesting that PA was concerned they may be viewed as such.” Could you explain why you sought that advice?

Alan Middleton

The FDI contract did not move into the specialist contract. Some 30 out of 150 resources who were performing a specialist role did move, and therefore they were resources that were identical to the contract we were managing. Had EY or any other party won lots 2, 3 and 4, which were the obvious ones for them to align to, it was our expectation that we would have to move our specialist resources from FDI towards them over time. We were concerned to ensure that UKTI was comfortable and that it was the right thing to do for business purposes and for contracting.

Chris Evans

Let us imagine for a moment that you are not the chief executive of PA Consulting but the chief executive of one of the consultants. Would you believe you had been treated unfairly by UKTI if you had discovered that, after the contracts had been bid and signed?

Alan Middleton

The easy answer is no, I would be fine with it. The honest answer is that if I was chief executive of another firm and was looking at a contract of some 150 resources—an FDI—and a set of them were clearly and best aligned to work and be managed under the framework, I would not have been uncomfortable with that. The UKTI did not move the FDI contract into the specialist contract. It moved a set of resources who were performing a like service. In doing so, it negotiated hard to get good value for money across those 30.

Chris Evans

Did that change have any impact on your revenue or profit?

Alan Middleton

Again, there is the ability to infer that it materially changed it from the various data sets. What happened was that we had revenue in FDI and we had revenue in specialists. The revenue and profit moved from here to there. So put simply, yes, one number went up from 15 to about 18 and the other number dropped as a result. The absolute amount of revenue did not materially change; actually, it went down very slightly—Mr Driver may have some of the figures—as a result of moving the resources into the new banded framework that he had negotiated. But substantially the revenues remained the same, and therefore the overall revenues and profit remained the same.

Chris Evans

Having heard that, Dr James, are you comfortable with what you have heard so far about the transfer of one contract on to another without the other one ending first?

Dr Matt James

No, for the reasons you have outlined, Mr Evans: the contract that it transferred from was ending sooner than the one that it was transferring to. I would be concerned about that. The more fundamental point is one for UKTI, I guess. I think it acted pretty commercially naively at that point. With the material change of about 40% to the contract from taking on FDI and the other changes that were made, the better commercial thing to do at that point would have been to go back to the framework, which had five suppliers on it, and re-compete all that work, to see if we could get a better price and a better deal with the other suppliers, including PA. That would have been more sensible and a better thing to do, both commercially and with regard to the regulations on procurement.

Chris Evans

Mr Driver, what was your advice at the time? Did you think it was allowable?

Bob Driver

I thought it was allowable, and it made operational sense too.

Chris Evans

Did you take advice on that or did you act alone?

Bob Driver

I cannot remember taking specific advice on the procurement point at the time.

Chris Evans

And you never spoke to Mr Simon?

Bob Driver

No.

Chris Evans

Mr Simon, can we have your views? Did you believe it was allowable? Did you take advice?

Crispin Simon

I did believe it was allowable—

Chris Evans

Or did Mr Driver act in total isolation from you, even though you were the chief executive?

Crispin Simon

I recall differently. I believe that Bob Driver and I did speak about that, and I accept responsibility for the decision that was made. I don’t know that we would have got a better deal had we done it the other way, but I accept that—given where we are today—it was ill advised.

Chris Evans

I feel like you are a divorced couple; Mr Driver is saying one thing and you are saying another. Did you speak to each other about this? It is quite simple.

Crispin Simon

I recall that we did.

Chris Evans

And you do not have any recollection at all, Mr Driver?

Bob Driver

I reported all the time on what we were doing, widely. We copied in huge amounts of correspondence all the time. This move of—I think—15 to 30 individuals from the foreign direct investment services contract saved over £100,000.

Crispin Simon

I also will have drawn some comfort from the fact that this will all have had to go into the documentation that went through the BIS lawyers. If we were acting inappropriately, we felt they would have told us.

Philip Boswell

I want to pick up on a couple of points and tie up a few loose ends. Thank you for some of these answers. Mr Driver, you mentioned a clause on page 542 that permits changes in volume and personnel. I have not seen the contract, but I presume that that is the variation clause that would be implemented after the contract that was awarded. It does not justify renegotiating a core term of the contract when the contract is in the negotiation phase. It is quite separate. I think Dr James has the right of it: this was a material change. It was a change in the condition of the contract. A key section of any contract is the remuneration section; why all the bidders were not re-engaged on a revised remuneration section I do not understand. I cannot see why that was not picked up. It is a serious failure on behalf of the administration of this contract. I have another question to UKTI—Mr Driver and Mr Simon. When PA was selected as the preferred bidder, before the contract negotiations were completed—you must have attained an apples v. apples analysis of all bidders to be able to select a preferred one—what was understood as being the remuneration terms of PA’s bid relative to what was requested in the ITT? Were the other bidders compliant with the ITT? If PA was different, why and how could you possibly have a preferred bidder, if it was not apples v. apples? Mr Simon first.

Crispin Simon

I presume that it was apples v. apples. That would be the right way to do it.

Bob Driver

Yes, all bidders had been analysed exhaustively. The bids were analysed against varying baskets of specialists.

Philip Boswell

So that’s the original contract.

Bob Driver

The deal had been struck. The structure of the deal that had been agreed was firm. We were talking about the individual volumes of specialists going through that contract. With the benefit of hindsight, there were clearly issues around procurement regulations. I was not aware of that.

Philip Boswell

So with the original contract that was signed, the mechanism and the remuneration section requested in the ITT and submitted by all bidders were completely compatible.

Bob Driver

Yes.

Philip Boswell

And it was only later that there was an introduction of a revised remuneration section. How did they change in the second submission—version 11?

Bob Driver

The only thing that changed was the quantity and remuneration of individual specialists. We were negotiating on quite a complex area of the transfer of a large number of people. We were arguing about what prices they should be within bands and we were negotiating to get the best deal for the taxpayer at the time—sorry, we were not negotiating, we were having contract discussions. The move of the foreign direct investment specialists over to the framework contract—lot 2, 3 and 4—did change the overhead. But in total, the transfer of those people moving over saved us money on the other contract.

Philip Boswell

And that was the £100,000.

Bob Driver

About £100,000. At the time, we were adjusting specialist remuneration to fit with strategic requirements. I remember having arguments about quite large amounts of money at the time. We negotiated on banding structures and removed the liability for IT costs. We removed, as Mr Middleton said, the planned inflation rate allowance and the incentivisation arrangement. That reduced an upside of, I think, £2 million down to £825,000. We also reduced the planned inflation rate adjustment. In total, all that came to quite a considerable amount of money saved for the public purse.

Philip Boswell

So you saved £100,000 a year, but against—was it an extra £1 million that was charged?

Bob Driver

The extra amount on the overhead that was charged on the new contract—

Philip Boswell

As a result of the negotiation—

Bob Driver

There was a material change, which has been correctly identified by the NAO. The overhead rate on the other contract—the foreign direct investment services contract—was higher.

Joshua Reddaway

Were you expecting the price of the specialists who were already in the bid to change as a result of bringing FDI people in? There were some specialists in this bid, and then you brought extra specialists from the FDI contract into this contract. Were you expecting the price of the people who were in the bid to change as a result of this negotiation?

Bob Driver

Yes. The specialists themselves were individually remunerated. We were going to a banding structure, as has been described in the NAO documentation. The issue that I was interested in pursuing during this period of contract discussions was precisely how each individual specialist was going to be remunerated, and which band they were effectively being placed in. I took that as a requirement to make sure that we were looking after the public purse, but it was also a convenient method of seeing whether we could save the Government money.

Joshua Reddaway

If I can refer you to paragraph 3.12 on page 25, are you therefore comfortable that the average day rate for the 52 individual specialists who were named in both the contractors—that is, the bid—and in version 11 rose from £498 to £640? Are you comfortable with that?

Bob Driver

I was not looking at average day rates; I was looking at individual specialists compared to what we were paying now, and compared to what we had paid in previous contracts. The deal had been done; the overall framework had been agreed. I was looking at individual prices for specialists. Obviously, as the specialist mix changes, then the average price might go up or down.

Sir Amyas Morse

Let me make sure we have understood that properly. If the average day rate for the number of specialists who were in the original contract has gone up by that much, even if you were not looking at it, it must mean—it is the same group of specialists that we are talking about, in the previous version of the contract and the final one—that the aggregate amount being paid for that same group of people has gone up materially. That must be true, mustn’t it?

Bob Driver

Yes, that’s true.

Sir Amyas Morse

Are you saying that was the result of a banding exercise?

Bob Driver

No, it is to do with a lot of changes.

Sir Amyas Morse

But doesn’t it add up to being taken for a bit of a ride?

Chair

Didn’t you question the overall increase? That’s what we are trying to understand.

Bob Driver

Yes, we questioned every single price against every single specialist, and saved quite a lot of money as a result, but the change—the move of specialists from the other contract, the foreign direct investment contract—changed the overall overhead rate.

Chair

Dr James, do you have anything to say on this from your perspective as a specialist? I will ask Mr Evans afterwards.

Dr Matt James

I was slightly confused by the answer, Chair, if I’m honest.

Chair

Yes, I think we were all a little confused by the answer, and we may well come back to it.

Chris Evans

I have two quick, short questions. One is to Mr Driver and then Mr Middleton. You signed the contract on 30 April 2014. It was signed before staff, volume and price had been negotiated. It was signed based on the staff, volume and price in the previous bid rather than what was currently under discussion. Why was that date picked out? Why so soon? Why didn’t you wait for even more negotiation before the contract was signed?

Bob Driver

At the time, the current contract, under which the specialists were deployed, was running out on 1 May. We had already extended the previous contract three times. There had been delays because of the complexity of the framework bid, and also because the challenge from the other supplier had extended the process. A large number of specialists, all of whom were subcontracted through PA, repeatedly got notices that their contracts were being extended. I was concerned that the overall operations of UKTI, which were my primary job, should continue. I didn’t want to extend the contract any further. It had already been extended a number of times, so that was the prime reason.

Chris Evans

So you jumped into a contract because you didn’t want to extend the other contract. Is that absolutely right? Yes or no? You jumped into a contract you knew very little about.

Bob Driver

I did know about the contract that we were signing. It had been thoroughly tested.

Chair

Mr Evans, do you want to repeat the bits that were missing?

Chris Evans

The staff, volume and price had not been negotiated at the point that you signed the contract.

Bob Driver

Yes, they had been negotiated.

Chris Evans

So are you contradicting the Report then?

Bob Driver

They had been negotiated, yes. We signed off the contract on 1 May.

Chris Evans

But it was signed on 30 April 2014.

Bob Driver

On 1 May the actual signature came back from PA, if I remember rightly.

Chris Evans

What is your opinion on that, Mr Middleton? Why the rush?

Alan Middleton

UKTI wished to sign. We had been in negotiation for quite some time. As Mr Driver said, over that period we had reduced annual price rises. We had sorted out bands and mix. We had come up with a complex spreadsheet showing the individual costs for each person—each specialist. We had waived the vast majority of our incentive payment and in fact, further waived it after it was signed. From 15 April, we had a version 6 rate card, which spoke to 27,274 days and £15.3 million. That did not change through the various rate cards thereafter, through to version 11. Version 11 has the same number of days and the same number of fees. As we came into the end of the month, at the end of April we asked for a letter of comfort indicating that there was the FDI element and different days and different fees.

Chris Evans

So if everything was so fantastic, Mr Driver, why did PA Consulting want a letter of comfort? Is that common practice?

Bob Driver

I did not know whether it was common practice or not at the time.

Chris Evans

Did you take any advice for your procurement adviser?

Bob Driver

He actually agreed the terms of the letter of comfort.

Chair

I am going to bring Dr James in here because of his expertise.

Dr Matt James

On Mr Evans’ question, there are times when continuity of service is clearly important, but in this situation, we have the same supplier delivering the old contract as on the new contact. The specialists were not going anywhere. They were in our offices working on UKTI work supporting businesses on trade and investment. So the continuity of supply would not have been my foremost issue. What I think should have been on everyone’s mind is, “Have we got the deal right? And when it’s right, we’ll move forward with it.”

Philip Boswell

I want to tidy something up. Dr James, can you confirm that typically, in any contract negotiation, the key and core terms and conditions—the most difficult terms and conditions—are always the last ones that are completed? All the liabilities are typically in the remuneration section and this should not be any different. On page 11 there is the “Timeline of key events”. It says that on 30 April,”UKTI sends signed call-off contract to PA. The contract does not reflect the increased volume of provision and UKTI issues a letter of comfort”—something we have all spoken about. It then says that 16 days later, on 16 May, “PA sends new rate card to UKTI, which UKTI accepts by email.” How can you sign on a contract when the most onerous and significant terms and conditions—staff, volume and price—are still in flux and negotiation, not to be closed 16 days later? Surely any competent individual or reasonable professional ought to have known that that would at least create a battle of forms scenario further down the line or, at the very least, seriously weaken the negotiation position of UKTI—or was this award to PA a foregone conclusion?

Bob Driver

The award under the framework contract had been agreed, yes. We were negotiating on the volume within the contract.

Philip Boswell

With absolutely no leverage at all in your negotiating position because the contract had already been awarded, yet core issues, such as staff, volume and prices, were not agreed or finalised until 16 days after the award.

Bob Driver

At the time, I felt I was having pretty tough contract negotiations.

Philip Boswell

With what leverage? With what could you counter PA’s position? The contract was awarded on these core terms and conditions, which run to the heart of the contract. These are conditions of contract. They are not innominate terms; they are conditions of contract. What leverage could you possibly have when the contract had been awarded and these conditions had yet to be finalised? How can you be hard or tough on any contractor? There is no alternative. All the other contractors had gone, and the core conditions were still up in the air. What leverage could you bring? How could you be tough?

Bob Driver

My opinion at the time was that the core conditions had been established and we were negotiating volume.

Philip Boswell

It said “staff, volume and price.”

Bob Driver

The prices had been agreed, but the volume had not.

Chair

Dr James, do you want to come in? We are a bit puzzled, as you can gather.

Dr Matt James

As I read the procurement story—obviously, I was not integral to it at the time—the intention to award the contract to PA came before Christmas in late 2013, because it was in December that the organisation issued what is called a standstill or Alcatel period, telling all the suppliers in the competition who has won it. PA could therefore have expected that, if it got through the standstill period of 10 working days, it would be awarded the contract—that would be the natural course of things. The contract was intended to be awarded at the back end of 2013, so the leverage had been lost at that point, as I read it. Obviously, I wasn’t there at the time.

Chair

I think you read it in much the way that we read it.

Philip Boswell

Moving on, Mr Middleton, would you have made a profit on this contract if it had been based purely on your original bid?

Alan Middleton

This goes back to the heart of the question on programme management and the management of the contract. Had we operated that aspect only to the cost that we charged UKTI, we would not have made a profit had we taken no further action. In that case, we either would have had to reduce the amount of management that we chose to put in and deliver nearer the 100% of outcomes, and not 167%—we could have made a profit in that case—or we could have made a profit in the way we did, which was to very carefully manage the cost base on the specialist side.

Philip Boswell

We will come on to that, Mr Middleton. So the answer is that there would have been no profit under the original bid. Do you accept that the negotiation after the bid allowed you to increase both your revenue and your profit margin?

Alan Middleton

Yes. Again, as Dr James said, we had won the right to negotiate around the contract.

Philip Boswell

Yes is fine. Thank you very much for that. Is bidding low and then negotiating to increase your revenue and profit on this contract part of a wider strategy to land and expand, as some would call it? You land a deal and then renegotiate.

Alan Middleton

No, that is not a PA strategy, and I don’t believe it is what we did in this case.

Philip Boswell

Last one. Did you buy this contract in terms of price and deliberately include a remuneration mechanism, in contradiction to the ITT, in the knowledge that preferred bidder status would allow you to renegotiate previously existing terms, in complete contradiction to those explicitly set out in the ITT?

Alan Middleton

No.

Philip Boswell

Thank you.

Chair

Mr Middleton, we have talked a bit about the incentive payment and we will probably come back to the claim of the 167% performance. Because you keep repeating that and we need to bottom that out. We will leave that for now. You claim in the letter you wrote to me on 22 November that you had given up the incentive payment at the time that your rate card increased, so that there was a quid pro quo balancing out, I suppose. If you look at the Report, page 13, paragraph 1.9, that highlights that that did not happen until the after the rate card had increased. Is that true?

Alan Middleton

Page 13, paragraph?

Chair

Paragraph 1.9. I will quote it: “However, the contract left the incentivisation scheme on the trade side still to be determined.” So, that had not actually gone at the point at which you were increasing the rate card.

Alan Middleton

So, there were two sides to the contract and this one rightly speaks to the trade side. An element had been negotiated away during the period up until 1 May when the contract was signed. The remaining element did carry on beyond that. Beyond that date, UKTI pointed out that they had budget constraints and PA decided at that stage not to pursue incentivisation on that side either.

Chair

At the point that the rate card went up you did not know that you would have lost the incentivisation payment.

Alan Middleton

On one part of the contract but, yes on the other, correct.

Chair

Perhaps Joshua Reddaway could explain that briefly.

Joshua Reddaway

What element was negotiated away during the period between the bid and the version 11 rate card?

Alan Middleton

At that point we were not clear on absolute incentivisation targets and we were not seeking to write it formally into the contract at that time. It was left outstanding.

Joshua Reddaway

“It was left outstanding.” That is very different, isn’t it? I believe, from the documentation I’ve seen, it was left outstanding subject to further negotiation, which both parties agreed they would do and agree by 1 August 2014. Is that right?

Alan Middleton

I don’t know, I will need to come back to you on that.

Joshua Reddaway

That is what both the contract and letter of comfort say. Would you agree that, if it says that, you had not actually formally withdrawn it from the table?

Alan Middleton

It is certainly the view of the team that they had, but let me check.

Chair

If you could write to us on that.

Joshua Reddaway

Finally, Dr James, this came up as part of your negotiation and settlement, did it not? Was this an issue?

Dr Matt James

Yes, it was.

Joshua Reddaway

So, it was still outstanding at the end in 2016.

Dr Matt James

It was, correct.

Philip Boswell

I would like to look back on calculation of profits, please, Mr Middleton. Why did the way your company calculate profit on the contract change as negotiations proceeded? In a nutshell, please.

Alan Middleton

Because it was never actually clearly laid out at the beginning. As we pursued the period through to May there were various requests for various elements of cost and profit. As I say, originally it was a fixed price per day per specialist, and it was not something that we had determined correctly at that time.

Philip Boswell

Do you have a standard way of calculating profit on contracts?

Alan Middleton

We do. This was an unusual contract for PA. I am sure later we will talk about what we changed. We have made significant changes as a result. It is more common; 80% of our Government work is under more standard frameworks. This was more like a managed service. We were new to it and we were calculating it in the way that we always calculate.

Philip Boswell

What would you expect to see UKTI do to understand the economic balance of a contract and changes to that contract? Do you think the level of understanding was clear or that you saw problems in the understanding of this contract earlier than perhaps you owned up to?

Alan Middleton

No, I don’t think so. I think we made a single error which, as I say, was to over-resource relative to what we had planned. The programme office, I think, UKTI was clear on the infrastructure charge. The FDI contract included PA’s overheads, which was another question. There was precedent there and it was understood. Therefore, as a result, the only question was this difference between losing money on the programme office side, making a bit more on the specialist side and the two coming out at 5.6% overall.

Philip Boswell

I may come on to something about that later. Mr Driver, what led you to believe that you had negotiated PA into reducing their profit?

Bob Driver

Is that the email?

Philip Boswell

Just to reiterate—just to cover it—I know that your team sent an email to PA thanking them for taking a hit on profit during the negotiations for the contract.

Bob Driver

Yes, the email said, “These all seem entirely reasonable to me, and thank you for taking the hit on your profit margin.” It was from me and it was in direct response to an email in which PA said, “While there is no impact on UKTI, the impact on PA is that PA’s profit is further reduced from 7.38 to 7.03%.” This was in an email exchange where we were discussing the remuneration of six individual specialists—their direct remuneration—and where they would sit within a band. Effectively, the discussion was about how those specialists should be receiving a slight increase in their direct remuneration; the band itself was not changing. So it was an entirely accurate statement, and it is taken out of context in the Report.

Philip Boswell

Did the statements from PA about a perceived reduction in profit—that is, taking the hit—induce you or your team to determine to accept the revised terms of contract and enter—

Bob Driver

Yes. PA had already reported a reduction of 7.49 to 7.38%. This was a further reduction to 7.03%. I had no reason to believe that these profit figures were misleading.

Philip Boswell

Thank you. Mr Middleton, do you accept that the introduction of the subsidy acted to deflate your stated profit?

Alan Middleton

Our contract profit was unaffected by the introduction of the subsidy. It was an attempt to show the profit at each line of each specialist, so for every specialist it was an attempt to show the profit per specialist at the contract level. With the benefit of hindsight, I wish we had been clearer. I wish we had simply stated that that was what it was, rather than using the term “subsidy”, but nevertheless it neither inflated the fees charged nor changed the overall profit; it simply moved it, as the Report says, from the middle section of figure 1 to the top.

Philip Boswell

Okay. Do you accept that your profit on the contract rose during the negotiations, while you reported to UKTI that it stayed broadly the same?