The NAO described the agency’s governance of the procurement as ‘weak’ and said PA should have been more transparent about its costs, in its report on its investigation into the contractual arrangements that UKTI had in place since 2013-14 with PA.

The investigation looked at a contract with PA to provide specialists in a number of industry sectors (such as nuclear, chemicals, food or healthcare) who worked to attract overseas investors to the UK or to facilitate UK companies exporting to overseas markets. PA received £18.8m in the first year of the contract (11 months to the end of March 2015) and the contract was due to last three years.

In 2015 UKTI brought in auditors from RSM to investigate the contract, having detected inaccuracies in a spreadsheet provided by PA as part of negotiating a contract change that brought into question the basis for charging on the whole contract.

RSM reviewed the allocation of overheads on the contract and concluded that PA had “consistently made incorrect and misleading representations relating to £3.9m of the overheads charged’. This led UKTI to suspend payment of PA’s invoices and to terminate the contract, which came to an end in January 2016. UKTI agreed a commercial settlement with PA in May 2016.

The audit watchdog found the contract was ‘overly long and complex for a relatively simple requirement’. Despite this, UKTI did not maintain the minimum documentation necessary to support a procurement.

This meant the agency did not understand what it had agreed to, since it was ‘not clear how the contract was, or was meant to be, priced.’

‘As a result, UKTI was unable to understand the commercial deal it had struck, the allocation of risk between UKTI and PA, how changes would affect the economic balance of the contract or, therefore, the value for money of the contract,’ the NAO noted.

UKTI and PA agreed to negotiate a significant change to the contract after the bids were submitted and before the contract was awarded. The NAO described this move as ‘extraordinary’ as it amounted to ‘restricting competitive tension,’ and therefore exposed UKTI ‘to a risk of significantly reduced value for money from the deal’.

In the event, this renegotiation resulted in UKTI spending an extra £4.7m on the contract in the first year, with PA making an extra £1.4m of profit.

After announcing PA as preferred bidder, UKTI agreed a new staff mix and volume of activity that increased PA’s revenue on this contract from £14.1m to £18.8m in the first year. The change in staff mix significantly increased the proportion of PA employees with a corresponding decrease in the proportion of subcontractors, compared to PA’s original bid.

The NAO says it is not clear that UKTI understood that the pricing model gave a 55% mark-up for overheads on PA’s directly employed staff but not on the subcontractors, which increased PA’s gross profit on the specialist contract by £1.4m.

PA’s new proposed rate card added £900,000 of cost in the first year to the variable day rates. PA called this a ‘subsidy’ and the NAO claims that the consultancy’s explanations of this, which have varied over time, imply this was to make up for its loss having underbid for the fixed-price elements of the contract. NAO says its reading of the contract is that PA should have borne this cost. UKTI does not appear to have understood the implication that this ‘subsidy’ was a direct increase in PA’s net profit, according to the NAO, which also found that PA charged £340,000 more than stated in the contract for the fixed-price elements in the first year.

PA’s bid, rate card and explanations did not make clear the amount of corporate overheads built into its price, the watchdog said.

The NAO reported: ‘We can find no evidence in the bid, contract or negotiations that PA ever made clear that its rate card included at least £2.5m of variable corporate overheads in the day rates of its directly employed specialists, in addition to the £1.3m fixed infrastructure charge, which, PA has since stated, related to overheads for subcontractors.’

The NAO found that ‘PA should have been more transparent in how it reported its forecast profit to UKTI,’ while UKTI ‘was unfair to other suppliers and was commercially naïve.’

The watchdog also pointed out that the problems with this contract only emerged ‘due to the tenacity of the UKTI contract managers brought in after the contract had started’. They found it impossible to properly reconcile invoices with the contract because the documentation was poor and the agreement between UKTI and PA unclear.

Amyas Morse, NAO head, said: ‘It is clear that, on this contract, both UKTI and PA have fallen well below the standards expected in managing public money. UKTI should have been in control of the procurement and understood the pricing; PA should have been more transparent in its dealings with UKTI. There are serious lessons to be learned on both sides.’

In a statement PA said: ‘There were misunderstandings on both sides during this process and PA recognises that it could have explained better the pricing of the amended contract. PA accepts its share of responsibility for the misunderstandings.

‘UKTI agrees that PA did a good job in delivering the services required under the contract and the NAO report confirms this.’

UKTI said it has taken steps to ensure this cannot happen again. In a statement the agency said: ‘This was an isolated incident which took place over two years ago and UKTI has made significant improvements to its commercial practice since then.

The report on the NAO’s investigation into the UKTI specialist services contract with PA Consulting is here.