Specialist Disability Employability Programme - Consortium Working
Background
The Department for Work and Pensions ( "DWP") announced in [March 2009] the launch of the new Specialist Disability Employment Programme ( "the SDEP Programme"), as part of the Government's modernisation of disability employment services. It is anticipated that contracts for delivery of the SDEP Programme will be awarded to suppliers in April 2010. The Government has indicated that contracts awarded under the SDEP Programme will be of a longer duration and on a larger scale than those that are currently in place with suppliers of disability programmes. Given the size and complexity of the contracts to be awarded under the SDEP Programme, the DWP will be keen to ensure that all short listed bidders are likely to have sufficient financial resources, stability and expertise to manage such contracts; as such, it has been recognised by the DWP [1] that some organisations will want to bid as a consortium. The DWP has indicated that in the case of organisations looking to bid as a consortium, they would have two options: (a) nominate a lead organisation which will act as the lead supplier, with the other organisations as sub-contractors; or (b) set up a new legal entity i.e. a "special purpose vehicle" to bid for the contracts.
Against this backdrop, the Scottish Government has commissioned a suite of guidance publications which are aimed at those organisations seeking to deliver public services; the latest of these guides is "Developing Consortia" which has a specific focus on supporting social enterprises and other third sector organisations within Scotland that want to enter the public service delivery market. The Scottish Government recognises that one way of increasing third sector economic activity is through the development of consortia, thereby enabling the third sector (through a blend of different skills etc) to deliver larger and more varied contracts. This information leaflet highlights some of the key points discussed in the "Developing Consortia" guide; where an organisation decides to explore the issues in greater detail reference can be made to the guide.
advantages/disadvantages of developing a consortium
Given the move towards larger-scale contracts under the SDEP Programme, individual third sector organisations may not have the resources or capability to deliver the full service required under the contract. Entering into a consortium may be the best method to bring together the necessary blend of skills and resources to enable delivery of a larger-scale and more complex contract.
The key advantages can be broken down as follows:
· The consortium will enable partners to share relevant skills, experience and expertise; it can also increase the scale of delivery without overstretching the resources of any one consortium partner.
· An organisation may lack the skills, experience or resources to participate in the tender process, but can still gain access to the contract and can focus on delivery.
· The consortia approach allows for shared development costs, which might represent a significant reduction in overheads in relation to the contract.
· The risk associated with entering into the contract can be spread across the partners (although specialist legal advice will be needed in this regard).
There are, however, also disadvantages of developing a consortium, and some of the key disadvantages can be summarised, as follows:
· Consortia take time to be properly developed; and where hastily thrown together, may not be as effective.
· Consortia quite often require more resource intensive management during the contract delivery period, to ensure that consistency and quality are maintained across the range of organisations involved.
· If one of the consortium partners fails to deliver, then there is a risk that the other consortium partners might be tainted by association in terms of future tendering or, indeed, exposed to legal and/or financial liabilities, depending upon the consortium arrangements in place; the lead partner may, in fact, be responsible for 100% of the liabilities (and would then need to pursue claims against each of the other partners, as appropriate).
· Where a consortium partner is further down the supply chain, there can be cash flow difficulties, especially where the lead partner is experiencing delays in payment.
· There may not be "brand recognition" for an individual organisation within the consortium.
· There can be friction within a consortium arrangement where there are differing views among the partners.
There are also a number of strategic issues which should be considered before getting involved in a consortium:
· What is the impact of an organisation's decision to join a consortium on its community of interest? What degree of alignment is there between the organisation's mission/purpose and the mission/purpose of the consortium?
· What skills/experience is the organisation lacking i.e. what skills/experience is it looking for the other partners to provide? How will sharing the risks and expertise help an organisation to deliver the contract more effectively? What decisions will be made by the consortium as opposed to being made by the individual partners, and how does that impact on the organisation's ability to manage risk?
· What is the duration of the consortium contract? What effect will delivery of the consortium contract have on an organisation's existing operations? What other potential opportunities will it open up?
· What financial systems are in place to deal with the contract? Will one of the partners take responsibility for this? What are the implications for the consortium generally of this approach? What are the potential cash flow implications for the consortium? How will responsibilities/liabilities be managed/allocated?
· What are the risks related to delivering the contract via a consortium? What are the implications of performance failure by the consortium?
· What will happen to the consortium when the contract comes to an end? What is the exit strategy?
A detailed discussion of how to deal with some of these issues can be found in chapter 9 of "Developing Consortia".
consortium model
The issues considered above are all intrinsically linked to the question of which model is adopted in respect of the consortium. Before the partners look at the detailed legal issues associated with a particular model, it is best for the partners to take a step back and decide:
· Whether or not it would be desirable to form a separate legal entity, through which the consortium would be run, as opposed to relying solely on contractual rights/obligations among the members of the consortium; and
· If the decision is taken to establish a separate body as the vehicle for the consortium, what sort of legal entity should be used (which will depend upon whether or not the consortium is to be profit-distributing or non profit-distributing).
There are three key models for consortia within the social enterprise/third sector, as follows:
· A contractual framework, consisting of an agreement among the members of the consortium to work together and setting out their legal rights and obligations (but without any additional legal entity in the shape of a joint body being formed)
· A contractual framework, as above, with the additional feature of a joint steering group
· The establishment of a jointly-controlled company, as a separate legal entity, through which the consortium would be run. [2]
contractual framework: basic features
The most straightforward means of forming a consortium is on a purely contractual basis; under the contractual framework model, the parties will proceed on the basis of an unincorporated structure whereby the consortium rests on contractual rights and obligations among the members of the consortium.
Basic features
· The partners enter into a detailed set of contractual terms with the contract among them representing the key mechanism by which they participate in the success or otherwise of the consortium.
· The consortium agreement outlines (a) the duration of the relationship; (b) the rights and duties of each of the partners; (c) the scope of the arrangement; (d) how the costs will be shared; (e) restrictions on the freedom of the partners so as to prevent them from taking steps which would prejudice the realisation of the agreed outcomes; (f) the rights of the partners to participate in any profits generated and on a return of capital etc; (g) the extent to which assets are shared among the partners (unless and to the extent that the consortium agreement makes specific provision for the sharing of assets used in connection with the consortium, the assets of each party will remain the assets of that party); and (h) the exit provisions.
· This approach avoids the formalities/infrastructure of a corporate body and it allows for independent decision-making for each partner within the framework set by the consortium agreement (although this will be restricted, to some extent, where a joint steering group is established).
· [There will be a need for one of the consortium partners to actually enter into the contract with the DWP]; the effect is that this partner represents the first target in the event of any claim by the DWP and consequently, the consortium agreement will dictate the extent to which liabilities will be shared. The absence of a joint vehicle, therefore, arguably creates greater risk exposure for the partners. The greater degree of risk exposure for the lead partner can distort the dynamic of decision-making.
· The partners could, under this model, potentially be liable for claims and liabilities which are unlimited in amount; these claims may have arisen due to the negligent or reckless behaviour of the party itself or as a result of the negligence/recklessness of the other partners (but this will depend upon whether the consortium agreement contains provisions by which the partners assume responsibility for the acts/omissions of the other partners).
contractual framework with joint steering group: basic features
The joint steering group model would incorporate all of the features of the contractual framework model referred to above; in addition, it would involve the establishment of a joint steering group (typically consisting of representatives of the partners) which would act as the forum for joint decision-making on matters of detailed delivery and would help to maintain the focus on the agreed objectives of the consortium. This model involves a higher degree of integration among the partners, as compared with the previous model. The consortium agreement would include a provision requiring the partners to establish a joint steering group within a certain period of time; the consortium agreement would also formalise the make-up and status of the unincorporated joint steering group and would contain reference to certain key decisions which must be referred to the joint steering group, as a mechanism for guiding detailed delivery of the project.
jointly-controlled corporate body: basic features
This model would involve the establishment of a dedicated corporate body to facilitate delivery of the contract (rather than relying solely upon contractual arrangements among the partners). The use of a corporate entity, in this way, would be appropriate where (a) the contract is relatively large-scale; (b) the contract is not of a short-term duration; and (c) there are a significant number of parties who are keen to integrate closely in relation to delivery of the contract.
Basic features
· There is a separate vehicle for delivery of the contract and it is this entity which is the party to the contract.
· The corporate entity provides the benefit of limited liability - this enables the members of the consortium to limit their liability in respect of the liabilities and losses of the consortium vehicle i.e. the financial exposure of each partner is limited to the sum invested; that said, the benefits of limited liability may not be fully available in that, until such time as the separate entity has developed a good covenant in its own right (i.e. is deemed to be in a sound financial position), the partners will most likely have to provide guarantees etc to certain third parties (e.g. funding bodies, lenders etc) in respect of the liabilities of the consortium vehicle. The PQQ documentation in respect of the SDEP Programme should give an indication at to the DWP's expectations in this regard. [3]
· This model could be said to facilitate the introduction of more robust legal commitments as regards future funding, the contribution of assets etc.
· There is a degree of financial flexibility attached to this model - in the case of a company limited by shares, different categories of shares (for equity investment) can be created, loan capital created and the corporate entity can create a floating charge over the assets.
· The corporate entity provides a mechanism for recycling of financial returns (where the intention is not to distribute profits).
· Use of a corporate vehicle involves a higher degree of integration of the interests of the partners and the structure will involve a higher degree of joint decision-making (in the context of a limited company model, the board of directors is likely to include individuals appointed by each of the partners); this can in turn ensure that there is a higher degree of joint management of risk associated with the activities of the consortium company.
· The corporate entity represents a better mechanism for the sharing and management of risk.
· All of the assets and liabilities relating to the consortium arrangement (other than as relating to delivery by the partners under sub-contract arrangements) will be pooled in a single vehicle i.e. in the consortium company.
· The existence of a separate vehicle may make it more difficult for each partner to disengage from the consortium - as compared with a more informal partnering arrangement.
For more detailed guidance and a detailed analysis of the different models of social enterprise/third sector consortia, reference should be made to the "Developing Consortia" guide which is available for download at www.socialeconomyscotland.info; this guide goes into a higher level of detail on the issues to be considered by the parties to a proposed consortium prior to seeking legal advice.
[1] Department for Work and Pensions, Specialist Disability Employment Programme: Specification, March 2009
[2] The three models are not necessarily mutually exclusive, for example, a jointly-controlled corporate model will also need to carry with it contractual obligations (with a degree of overlap with the types of contractual obligations reflected under the other models).
[3] See, for example, Department for Work and Pensions, Specialist Employability Programme, Pre-Qualification Questionnaire, Instructions to Bidders