Open book accounting is a method of pricing contract work. It is widely used in the UK construction industry for public contracts. The aim of the system is to encourage the contracting company to reduce costs through the efficient use of materials and the appropriate allocation of resources. Alternative systems encourage contractors to pad projects with superfluous staff and organise kick-backs from suppliers to boost profits.
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Contract pricing difficulties
Pricing a large public project accurately at the bid stage can be difficult. The commissioning authority may accept a fixed price quote only to find the contractor is unable to complete the project. The commissioner could force the contractor to complete the project with no further pay, but that could just bankrupt the contractor and require further payments to other companies to get the project finished.
An alternative strategy is to award the contractor an agreement where all costs will be met, plus an agreed margin. This arrangement gives cost control to the contractor. The danger with this system is that the contractor can find other ways to increase its profits and the client has no rights of disclosure. Each purchase can lead to disputes over costs on presentation of the bill. The client should not expect to maintain a staff specialised in estimating costs and purchasing. However, such a strategy becomes inevitable if the contractor cannot be relied upon to give an honest account of the expenses of the contract. This situation leads to an inefficient doubling of project control staff with the client forced to hire its own experts to shadow and second guess the management of the contracting company.
An open book agreement improves on the cost plus method of charging because it allows the client's project managers access to all financial information for the contractor’s activities on the project. The two sides agree a generally expected cost level, called the target cost, and then attempt to find cheaper supplies and more efficient project methods to lower those costs. The contractor keeps part of the savings as extra profit; this removes the incentive to cheat the client though falsely inflating costs.
Open book agreements remove price competition between competing bidders for a contract. This may encourage contractors to enter into private partnerships with public employees to gain an advantage in winning bids. Public bodies engaged in open book contract awards need third-party scrutiny that examines the motivation behind contract awards and to ensure that the public servants responsible for the project do not encourage bidders to offer personal incentives and bribes to gain the work. The governing body of the client organisation should set parameters for the award of the contract that cover non-financial aspects of work, such as quality of previous work, or environmental impact history of the winning bidder.
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