Although firms often promise to behave well, the NAO believes the only way to make sure “the companies are not paying lip service at the centre with little group-wide control to back it up” is to check up on the businesses.
It carried out the review after a series of outsourcing scandals involving firms like G4S and Serco, who are under investigation by the Serious Fraud Office.
Contracts must be more transparent to make sure the public can trust the firms are making a fair profit, the NAO said.
“Contractors need to make a profit to stay in business and contract for work. It is difficult, however, to assess what constitutes a fair profit,” the report said.
The Confederation of British Industry said the state also has to improve its work with contractors.
“It needs to get better at managing procurement, contract performance and supplier relationships,” said CBI boss John Cridland.