Estates outsourcing or insourcing in the NHS?

Published 23 February 2018

When a contractor goes into liquidation, a replacement contractor will need to be procured by the relevant NHS organisation, however, in doing so there will be legal issues which need to be considered in order for the NHS organisation to comply with its procurement obligations. Here, DAC Beachcroft examines some options that NHS organisations procuring services could consider, and offers some solutions to the challenges they face.

We recently published an article about the procurement implications of a contractor going into liquidation in the wake of Carillion's collapse. The relevant procurement legislation, the Public Contracts Regulations 2015 ("PCR"), contain a specific provision where a new contractor can replace an existing contractor by effectively stepping into their shoes, so long as they fulfil the selection criteria initially applied during the procurement process and that the terms of the original contract are not changed.

But what if in such a situation the new contractor wants to renegotiate the terms?  Or what if the outgoing contractor had been performing poorly for a period of time, meaning that previous work carried out had to be changed by the new contractor?  In a situation where the contract is changed significantly, then the NHS organisation client would be at risk of a procurement challenge if it amended the contract without a new procurement process.

What are the alternatives?

One option that Foundation Trusts may want to consider, particularly in light of Carillion's collapse, is an insourcing estates and facilities solution, rather than outsourcing services to a private sector provider.

Insourcing is the establishment of a subsidiary company to deliver estates and facilities services to a Trust. The subsidiary company can take any legal form, but is most commonly a limited liability partnership or a company limited by shares in order that it can make a profit which can be reinvested in the parent company Trust.  A procurement process is not necessary if the subsidiary company meets the requirements of the “Teckal exemption” (codified in regulation 12 (1) PCR), so that it is effectively an in-house function which is ultimately controlled by the Trust. Although, this should be balanced with the requirement to ensure that the “insourcing” is an arms-length commercial transaction to ensure the quality of the service being provided, and the subsidiary company has the same expectations on it  that the Trust would have from another third party supplier.

With an estates insourcing, the subsidiary company provides the Trust with a fully managed healthcare facility via a dedicated estates and facilities operation.  Following the Carter review and the 2017 NHS Property & Estates Report by Sir Robert Naylor (whose majority of recommendations have been accepted in principle by the Government), Trusts are being encouraged to make efficiencies and consider more commercial ways of delivering the estate (in line with the new proposed STP footprints).

The insourcing model requires Trusts to assess and review its estate from a commercial perspective and drive efficiencies through the setting of KPIs resulting in a focussed, improved quality and commercially driven estates and facilities service. Trusts can also use the subsidiary company to collaborate across STP areas, which in turn allows them to generate further efficiencies. Ultimately, insourcing is a model which not only generates significant cost savings, motivates staff and encourages the maximising of the potential of the Trust estate, but also allows Trusts to benefit from a more dedicated and more commercially focussed service, in respect of which, unlike the Carillion model, it retains ultimate control.

DAC Beachcroft has collaborated with financial advisers to assist a number of foundation trust clients in setting up subsidiary companies; resulting in efficiencies and allowing the governance model of a separate entity, whilst retaining the benefits of NHS ownership.

If you would like to discuss procurement issues or insourcing options further, please contact one of our experts below.