2 Contract management
10. The Department for Environment, Food and Rural
Affairs contracted out the management of the Scheme to eaga plc
in 2005. Since letting the contract, the Scheme has changed from
a relatively small contract into a major programme. Government
funding has increased significantly and by 2010-11 some £1,811
million will have been invested in the Scheme (Figure 3).
The Department for Environment, Food and Rural Affairs established
a Warm Front Scheme board which includes representatives from
consumer organisations and eaga plc to oversee the contract and
financial performance. Three changes were made to the contract
in 2006, but it did not appoint a manager to oversee day to day
performance until the summer of 2007.[14]
Figure 3: Scheme funding, 2005-06 to 2010-2011
Source: C&AG's Report, Figure 3
11. The absence of day to day professional oversight
of the Scheme has led to difficulties in contract management.
For example:
- The contract between the Department
and eaga plc includes a profit share arrangement, where any profits
over 11% are shared equally between the two parties. In April
2008, incorrect profit calculations in the 2006 and 2007 cost
certificates were identified, which resulted in eaga plc paying
back £652,000 to the Department for Environment, Food and
Rural Affairs.[15]
- eaga plc owned subsidiaries can carry out up
to 30% of installation work under the Scheme. The Department has
recently reviewed the clause because of confusion between the
two parties as to whether the limit related to the value of work
or number of jobs, or whether the percentage is measured each
year or over the lifetime of the contract. It has been determined
that the clause relates to the value of the work undertaken. In
2007-08, work by eaga's subsidiaries accounted for 30% of the
overall value of work and 31% of all jobs completed.[16]
- The profit share arrangement does not include
any profits generated by eaga's seven subsidiaries for other work
undertaken in relation to the Scheme, for which eaga group received
£95 million in income in 2007-08.[17]
- As part of its original tender, eaga plc had
noted that transferring the contracts for the supply of heating
materials from the Department to the contractor would attract
a lower VAT rate of 5%, resulting in annual savings to the Scheme
of over £5 million a year.[18]
12. The cost of works is a common complaint about
the Scheme. Under current Scheme rules, customers are unable to
obtain alternative quotes or use their own contractors. Only contractors
on the eaga panel of contractors are able to undertake work. The
National Audit Office undertook a cost comparison for seven of
the most common installation works undertaken by the Scheme and
found that prices charged by the Scheme were competitive compared
to industry averages (Figure 4). Gas and oil boiler replacements
were at the top end of the range of costs modelled. The boiler
of choice on the Scheme is an Ideal boiler, although the qualified
engineer may determine that another boiler is more appropriate
in some circumstances. The boilers are procured from Wolsley Plc
through Plumb Centre under a five year contract and eaga does
not make any profit on the cost of the actual boiler. In 2009,
the Department and eaga were in mid-contract negotiations, including
about the scope to secure cost savings in the supply of materials.[19]
Figure 4: Cost comparison of Scheme measures
Note: All figures exclude VAT. The Building Research
Establishment (BRE) model is based on four dwelling types chosen
to represent the target group for the Scheme: two-bedroom mid
terrace house, 3-bedroom semi detached house, 3-bedroom detached
bungalow and 2-bedroom low rise top floor flat. The price ranges
reflect estimated costs for work on these types of dwelling, adjusted
to reflect regional differences in the costs of works.
Source: C&AG's Report, Figure 14
14 Q 13; C&AG's Report, paras 1.8, 1.11, 4.2-4.3 Back
15
Q 105; C&AG's Report, paras 4.7-4.8 Back
16
Qq 84-85; C&AG's Report, para 3.8 Back
17
Qq 17, 104; C&AG's Report, para 4.7 Back
18
C&AG's Report, para 4.4 Back
19
Qq 88, 90, 95, 109-117; C&AG's Report, paras 3.1, 3.10 Back
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