Contract Management Guide

Contract Management Guide

2

Introduction and scope 3Definition 3Importance of contract management 3Activities 4Upstream or pre-award activities 4Downstream or post award activities 26Acknowledgements 36Bibliography 36

Introduction and scopeThis guide is intended to cover all thoseactivities associated with contractmanagement from the establishment ofthe business case and the confirmationof need, through contract administrationand relationship management to thereview of contract performance. Theactivities themselves are divided into twodistinct but interdependent phases,upstream and downstream of the awardof the contract.

The guide is generic in that its principlesare intended to be applicable to allcontracts from a simple order, throughframework contracts to complexconstruction or service contracts, and itshould be seen as equally applicable tocontracts in the private as well as thepublic sector.

DefinitionContract life cycle management “is theprocess of systematically and efficientlymanaging contract creation, executionand analysis for maximising operationaland financial performance andminimising risk”.1

There are a number of other definitionsof contract management, the majority ofwhich refer to post-award activities.Successful contract management,however, is most effective if upstream orpre-award activities are properly carriedout.

Importance of contract managementOrganisations in both the public andprivate sectors are facing increasingpressure to reduce costs and improvefinancial and operational performance.New regulatory requirements,globalisation, increases in contractvolumes and complexity have resulted inan increasing recognition of theimportance and benefits of effectivecontract management.2

The growing recognition of the need toautomate and improve contractualprocesses and satisfy increasingcompliance and analytical needs has alsoled to an increase in the adoption ofmore formal and structured contractmanagement procedures and an increasein the availability of softwareapplications designed to address theseneeds.

It is worthwhile noting that contractmanagement is successful if:• the arrangements for service delivery

continue to be satisfactory to bothparties, and the expected businessbenefits and value for money arebeing realised

• the expected business benefits andvalue for money are being achieved

• the supplier is co-operative andresponsive

• the organisation understands itsobligations under the contract

• there are no disputes• there are no surprises• a professional and objective debate

over changes and issues arising can behad

• efficiencies are being realised.

3

1(Aberdeen Group)2(Aberdeen Group)

ActivitiesThe foundations for effective andsuccessful post-award contractmanagement rely upon careful,comprehensive and thoroughimplementation of the upstream or pre-award activities. During the pre-awardstages, the emphasis should be focusedon why the contract is being establishedand on whether the supplier will be ableto deliver in service and technical terms.However, careful consideration must begiven to how the contract will work onceit has been awarded. The organisation’shigh-level requirements should becarefully researched so that there isclarity of purpose from the outset. Thiswill help to ensure clarity in all aspectsof the procurement process.

Management of contracts, particularlypartnerships, requires flexibility on bothsides and a willingness to adapt theterms of the contract to reflect changingcircumstances. It is important torecognise that problems are bound toarise which could not be foreseen whenthe contract was awarded.

Finally, it may not be necessary to followevery activity for every contract -particularly in the case of small, simpleorders - but it is advisable to read thewhole guide and to apply the adviceprovided under each stage asappropriate to the particular contractualcircumstances.

Upstream or pre-award activitiesa) Preparing the business case andsecuring management approval

All contracts are predicated on the needto obtain management commitment andapproval at the appropriate level. Thisinvolves the formulation of a soundbusiness case aligned to the organisation’scorporate and functional strategies.

The business case sets out the policy,business and contract objectives and theissues that affect the decision and theinvestment. It should seek to establishthat the proposed contract will meet theneed, that it is achievable and affordable,and it should address the followingissues:• the outcome(s) of the contract• critical success factors• the possible alternatives, including

existing contracts• the risks including the extent and

where they may fall• identification of any contingent needs

and ramifications of proceeding• timescale.

The business case should be preparedwith the involvement of thestakeholders, including where and ifpossible, the end users.

It should be signed off by the sponsor orpatron.

The business case is a workingdocument and should form the basis ofthe post-implementation review andused as a management tool to ensurethat the original outcomes and benefitshave been achieved. 3

4

3 (OGC ContractManagement)

If the project is large, complex and inparticular, innovative in nature, themarket should be approachedconcurrently with the preparation of thebusiness case, firstly to alert them to thepotential need and secondly to takesoundings on such issues as feasibility,capacity, capability, approach and levelof interest.4

b) Assembling the project team

The need to assemble a team to managea contractual procurement programmewill be determined not only by the scale,nature, complexity and significance ofthe procurement and the necessary skillsand experience but also by the extent towhich it is considered appropriate,beneficial or a requirement to complywith organisational policy to involvestakeholders in the project.

Factors to be considered whenassembling the team are:• the nature of the project• the nature of the work environment

and the management style of the team• communication internally and

externally.

In addition to procurement, the projectteam may be drawn from any and alldisciplines within the organisation asappropriate and relevant. The followingare examples; design, research anddevelopment, production, quality control,logistics, marketing and sales, legal,finance and human resources. Theproject team may also advantageouslyinclude representatives of the end users,whether internal or external, andrepresentatives of disciplines within

supplier organisations such as design,production, production planners andlogistics.

Clearly, these individuals and groups willnot need to meet all the time but,depending on the size and complexity ofthe project, there may well be a coregroup that meets regularly and this willbe the project team. Others will then becalled on as and when required.

In addition to the need to identify thenecessary technical skills, knowledgeand experience with the appropriatelevel of authority required of themembers of the team, the importance ofthe ability of team members to worktogether effectively and the significanceof the role of the project leader shouldbe recognised.

These aspects are beyond the scope ofthis guide, but it is considered advisableto devote time to studying the manybooks available on the topics ofmotivation, leadership, power, influenceand group working, particularly if thesize, timescale and complexity of theprocurement project are significant.5

c) Developing contract strategy

The strategy relating to a particularcontract should accord with theorganisation’s overall procurementstrategy.

The development of a contract strategy isdesigned to establish the form of theprocurement and provide assistance indetermining the formulation and awardof the contract and the style and type of

5

4 (OGC ContractManagement)5 (For examplesee HandyUnderstandingOrganisations)

management to be adopted for thesubsequent service delivery, relationshipmanagement and contractadministration.

There are many references these days to‘partner’ rather than suppliers – shouldthis be captured here?The latter aims can be characterised bythe need to address understanding,measurement and communication post-contract award. A successful contractmanagement strategy should achievebenefits by:• managing the organisation’s own

responsibilities during the contract• ensuring the supplier meets the

minimum performance criteria, such ascompliance

• allowing the achievement of bothshort and long term supplierperformance improvement throughdeveloping effective supplierrelationships.

In developing the contract strategy, thefollowing issues need to be addressed:• nature, scale and significance of the

need to the organisation• value of need• type of specification - input or output• complexity of the need including

innovation level• attractiveness to the market• market capacity• timescale and phasing• level of understanding of the need by

stakeholders and potential suppliers.

The use of supplier positioning matriceswill also assist in determining thecontract strategy, the nature of anynegotiations that may need to be

conducted and the form of the supplierrelationship following the award ofcontract. Possible supplier relationshiptypes range from the spot buy throughcall-off contracts, fixed contracts andstrategic alliances, to long termpartnerships. Issues of relationship stylesuch as adversarial, partnership, hands-on or pro-active should also beconsidered.6

Concurrently with determining thecontract strategy, consideration shouldbe given to the evaluation strategy whichsets the direction for the overallevaluation of suppliers and theassociated tender process. It covers suchconsiderations as:• business aims• critical success factors• relative priorities of the requirement• communication plans• criteria for determining quantifiable

and non-quantifiable items• overall evaluation procedures

including assessment methodology• personnel involved in the evaluation• supplier selection criteria including

guidance on interpretation andmarking of replies.

Another important consideration inestablishing contract strategy is whetherto utilise Service Level Agreements (SLA).SLAs are negotiated agreementsdesigned to create a commonunderstanding about services, prioritiesand responsibilities and are applicable intwo situations. Firstly, internally usedand provided specialist support servicesand secondly when outsourcing.

6

6 (CIPS studyguide Legal &ProcurementProcesses)

Internal SLAs are not intended to havelegal consequences since the customerand the supplier are part of the samelegal entity which cannot sue itself, andnormally there will be no direct financialcompensation. External SLAs such asthose for bought-in or outsourcedservices may have contractualimplications. They are generally aschedule or part of a schedule to thebuy-in or outsource agreement. It shouldalso be remembered that ECProcurement Directives may apply toorganisations using SLAs.

The purpose of SLAs and setting servicelevels is to enable the customer tomonitor and control the performance ofthe service received from the supplieragainst agreed standards. It should beunderstood that service levels should beagreed and benchmarked for bothcustomers and suppliers and should be:• established at a reasonable level; if

they are set too they will attractadditional charges from the supplier

• prioritised by the customer in order ofimportance and on an agreed scale forexample critical, major, urgent,important, minor, easily monitored,such as objective, tangible andquantifiable

• unambiguous and understandable byall parties

• open to re-negotiation at any time.

There are advantages and disadvantagesin using SLAs. Among the advantages are:• the service providers and the

customers are clearly identified• attention is focused on what a service

actually does as opposed to a beliefabout the service

• customers have a greater awareness ofthe services received and theadditional services that can beprovided

• customers’ real needs are identifiedand the associated costs are madeclear

• services and service levels addingvalue can be more easily identifiedand distinguished

• greater awareness of costs/benefits ofservices and levels

• service level monitoring is facilitated• failure reports enable improvements to

be readily introduced• understanding and trust is created

between customer and supplier.

Disadvantages include:• joint drafting of SLAs, negotiation and

measurement processes can be costly• potential increase in bureaucracy• internal providers are seen as

suppliers and not colleagues• time wasted if clear goals and

objectives are not set out initially, thisleads to unrealistic expectations andacrimonious relationships, as well asgiving the setting up of SLAs a badreputation

• training needed to overcomeresistance to the introduction of SLAs.7

d) Risk assessment

Risk can be defined as “the probability ofan unwanted outcome happening”.

Risk assessment should be viewed in theoverall context of risk management andseen as one of the three key activities –risk analysis, risk assessment and riskmitigation - which facilitate the taking of

7

7 (For moreinformation onSLAs and theirsuccessfulimplementationsee Service LevelAgreements inthe CIPS How toseries)

decisions and actions to control riskappropriately.

Risk analysis is the process of identifyingall the potential issues that can go wrongwith an activity and then estimating theprobability of each happening. It shouldform part of any significant contractmanagement process and is afundamental part of determining thecontract strategy. The process can rangefrom a simple listing of risks on aninformal, intuitive basis to a formalprocess involving set procedures andworking with other professionaldisciplines in brainstorming andtechnically and financially evaluatingpotential risks. A more formal processmay involve the establishment of a riskregister for each tenderer and, followingcontract award, the transfer of theregister of the successful tenderer to thecontract management team for use inrisk assessment; see section s).

In addressing the fundamentallyimportant issue of risk in contractmanagement, the purchasingprofessional should adopt a continuous“what if” mentality throughout theprocurement of products and services.Risk management requires a professionalwho possesses knowledge of techniques,an analytical mind set, objectivity and aknowledge and thorough understandingof their organisation’s business and themarket. It is advisable to seek to mitigateand remove risk whenever possiblebefore contract award.

Risk assessment is the process ofassessing the likely impact of a risk onthe organisation. Highly predictable risks

may have low impact and it is possiblynot worth taking action to control oravoid such risks. Conversely, lowprobability risks may have a significantimpact demanding action to be taken toavoid or mitigate the risk.

Other issues for consideration in riskassessment:• the costs of identifying, controlling or

avoiding the risk• the need for insurance for risk not

readily managed or avoided• the need for “sensitivity analysis” on

risks of an unknown level ormagnitude

• identifying compensating behaviourpractices

• the impact of time, external factorsand project actions on risk and theneed for assessment to be iterative

• the impact of product life cycleincluding disposal and obsolescence.

Having assessed the risks and identifiedthose requiring action, responsibility formanaging and mitigating them should beallocated. This allocation should bedependent on the assessment of thelikelihood and consequence of the risk.

Other issues to be considered in riskmitigation:• identifying the most appropriate body

to manage or control the risk in termsof expertise, time and/or resource

• establishing a fair and reasonablereimbursement mechanism

• insurance• risk transfer to suppliers including

issues of appropriate level, “trade off”and supplier contingency.8

8

8 (CIPS POP Riskmanagement inP & SM)

A further issue, usefully classified undera consideration of risk in contractmanagement is fraud. The need toaddress potential areas for fraud inbuyer/supplier relationships andmeasures to mitigate their impact shouldbe considered at this early stage inupstream activities, particularly contractformulation.

The adoption of a continuous “what if”mentality – a similar approach to thatused when assessing risk - is advisablewhen considering areas for potentialfraud. The CIPS Knowledge paper onFraud provides useful guidance on areasof weakness and counter measures andgives answers answers to somefrequently asked questions.

e) Developing contract exit strategy

A contract will conclude when bothparties have satisfactorily fulfilled theirresponsibilities under the terms of thecontract. This, for example, will occurwhen the goods or services have beensupplied and payment made and/or atthe end of a pre-agreed period of time.This situation, however, does not removethe need to develop a contract exitstrategy as part of the process of riskidentification and reduction, andreinforces the importance of establishingthe foundations of sound contractmanagement.

It is important to identify thecircumstances under which earlycontract exit may be required or indeeddesired. The following is merely a list ofexamples and is certainly not anexhaustive list:

• major default by your organisation;this may include contractual breachesor changed circumstances - market,political ,economic, funding resultingin major procurement need changes,financial resulting in non-payment ofsupplier’s invoices

• major default by the supplier; this mayinclude breaches, technical inability,capacity, and so on

• frustration of the contract.

Whilst many of these sets ofcircumstances are generally predictable,and “standard” terms and conditions arewidely included in contracts today, itdoes not detract from the need to carryout this aspect of risk assessment and toensure that clear and comprehensiveterms and conditions are drawn upwhich address the identifiedcircumstances and the rights andresponsibilities of the parties and themeans by which any damages or costsmay be mitigated are set out. This lattershould include the method by which thegoods or services may continue to beprovided and, if possible, seamlesslytransferred to another supplier orcontractor to ensure business continuity.It is also important to clarify any noticeperiod to be given and any timescaleconstraints associated with the exitprocess itself.

f) Developing a contract managementplan

During pre-contract award stages, it isnormal for time to be devoted to thepreparation of the business case, draftingspecifications and tender documentsselecting potential suppliers, and so on.

9

9 (ProjectManagement-Dennis Lock.OGC ContractManagement)

However, time and effort must also bespent on determining how the contractwill work once it has been awarded. Theimportance of contract management hasalready been mentioned and it is vitalthat a contract management plan isdrawn up in advance of contract award.This should set out how the obligationsof all the parties should be carried outeffectively and efficiently.

Contract management success factors,the conditions that should be met if acontract is to be managed successfully,are:• the arrangements for service delivery

continue to be satisfactory to bothcustomer and provider

• expected business benefits and valuefor money are being realised

• the provider is co-operative andresponsive

• the customer knows its obligationsunder the contract

• there are no disputes• there are no surprises• satisfactory delivery progress is

demonstrable.

In addition to these success conditions, itis worthwhile noting the foundations ofsuccessful contract management and theneed for preparing a management plan:• the need for flexibility by the

contracting parties, particularly inpartnership agreements

• a willingness to adapt the terms of thecontract to reflect change andunforeseen problems. Although the riskassessment process mentioned earliermay be carried out thoroughly andprofessionally, problems are still likelyto arise during the contract period

• the need for the buying organisationto have clear business objectives,coupled with a clear understanding ofwhy the contract will contribute tothem

• the need to understand the provider'sbusiness objectives and drivers

• the ability to recognise and obtainsenior management agreement to theneed for the service provider toachieve their objectives and to make areasonable margin

• the need for people with the rightcommercial, interpersonal andmanagement skills to manage theserelationships on a peer-to-peer basisand at multiple levels in theorganisation.

• to recognise that all parties needmanagers who can manage upwardsin their organisation and persuadetheir boards to make decisions for thebenefit of the relationship.

Other issues to be addressed andappropriate processes and proceduresset out in the contract management planinclude:• the processes for managing the

contract which provide the level ofcontrol you need, such as contractgovernance

• the retention of sufficient expertise tounderstand the technical direction inwhich the provider is taking yourorganisation and to retain the ability toenter into effective dialogue with thesupplier

• to ensure as far as is possible that thesupplier is able to provide sufficientskilled resources, given the risk thatanother customer's account might takepriority

10

• the possibility of the supplier teamchanging after award of contract,leading to a lack of continuity

• to set down how the members of anysupplier consortium handle a varietyof different types of issues so as toensure that problems are resolvedquickly and constructively

• to set down how members of asupplier consortium should sharecommon quality management systemsand escalation procedures

• to set down the timescale andmethods by which the provider’s levelof knowledge and understanding ofyour business can be gained andtransferred to the supplier’s successiveteam members

• roles and responsibilities ofindividuals of the parties to thecontract; this includes issues such as:• adopting the principles of good

communication, awareness of newdemands in partnershiparrangements, leadership,appropriateness and capability ofexisting management structures,understanding the responsibilities ofthe various parties, clearunderstanding of what is expectedand effective ways of reportingprogress, having a frameworkdefining responsibilities, reportingarrangements and policies

• establishing the performancemeasures to cover all aspects of theservice such as:• cost and value obtained• performance and customer

satisfaction• delivery improvement and added

value• delivery capability

• benefits realised• relationship strength and

responsiveness• It is important that the performance

measures selected and set out in thecontract offer clear and demonstrableevidence of the success (or otherwise)of the relationship. Once chosen, therequirements underpinning theperformance measures should be theprimary focus for contractmanagement. They should provide theframework around which providerinformation requirements and flows,contract management teams, skills,processes and activities aredeveloped.10

g) Drafting specifications andrequirements

A specification is a statement of needsand its purpose is to present to potentialsuppliers a clear, accurate andcomprehensive statement of theorganisation’s needs in order that theycan propose solutions to those needs. Atthe same time, the specification shouldenable the organisation to readilyevaluate offers, provide the basis forperformance measurement and be arecord of evidence in any dispute.

A specification is also known as anoperational requirement or a statementof requirement. It can take the form of aconformance specification – where theorganisation sets out how the suppliershould meet its needs - or a performanceor output-based specification where thesupplier is given scope to proposesolutions to an expected and known endresult?

11

10 (OGC ContractManagement)

Although the drawing up ofspecifications in the majority of largeorganisations is not the responsibilitysolely of the buyer, nevertheless itshould be emphasised that the successfuldrafting of specifications is one of themost important responsibilities of aprofessional purchasing officer.

The starting point for the preparation ofthe specification, particularly in the caseof large and complex projects, is thebusiness case. The drafting process isconcerned with breaking down theoverall scope set out in the business caseinto more detail and then, progressivelyand iteratively, refining into schedules ofdetailed requirements.

All contracts are different and thefollowing process is not intended to beprescriptive but to act as a checklist forissues that should usefully be consideredwhen preparing the specification:• define in detail the scope of the need

including the essential or corerequirement, optional and “desirable”needs

• establish sources of information aboutthe need from:• business owners• customers and users• other stakeholders• technicians• the supply market

• gather information on:• background to the need• future developments• detailed requirements• metrics required for performance

measurement

• decide the type of specification to beused and then prepare draft. In large,complex contracts to be performedover a long period of time, thedocument could include the following:• introduction• scope of the requirement• background to the requirement• detailed description of the

functional requirements, classifiedas essential, optional and desirable

• description of the performancerequirements including input andoutput details

• timescale/timetable• performance measurement

requirements, for example volume,accuracy, availability, includingdamages and incentives/ servicecredit details

• other requirements, for examplesecurity, access, standards, training,personnel, disaster recovery, dataarchiving, data protection

• constraints, for example, time,interface with other parties, ITissues

• contract management requirements,for example managementinformation, project managementand risk management methodology,and processes

• contractual requirements, forexamples terms and conditions,roles and responsibilities ofpersonnel, opportunities forsubmitting alternative proposals

12

• procurement procedures includingtimetable, evaluation and acceptancecriteria and process, contactinformation, format and content ofresponses. Public sectororganisations subject to the EUProcurement Directives must ensurethat this information is also includedin the notice placed in the OJ

• appendices providing backgrounddata, statistics, organisationalinformation.

The process of preparing thespecification should also include thedrafting of the evaluation model andcriteria. It is important to ensure that:• all the information needed for

evaluation has been requested frompotential suppliers

• the evaluation covers all theorganisation’s needs

• the responses are in a format thatenables an effective, clear and fairevaluation of offers to be carried out.

A successful specification should:• set out the requirement fully, clearly,

logically and unambiguously• focus on the outputs and how they are

to be met• contain sufficient information for

potential suppliers to submit credibleand realistic offers

• ensure that all information needed foreffective evaluation is requested

• permit offers to be evaluated againstthe declared criteria

• set out the acceptance criteria• provide a fair opportunity for all

potential suppliers to submit offers• not discriminate against or be biased

towards any supplier.

The specification document should bereviewed and signed off by a personwith the necessary knowledge,experience and authority. The reviewshould ensure that the specification:• is complete and accurate• meets stakeholders’ needs• addresses future requirements• addresses identified risks• complies with and addresses the

issues identified by the originalbusiness case

• is capable of being met by the market• complies with EU Procurement

Directives (Public sector organisationsonly).11

h)Establishing the form of contract

Contracts can range from a single, adhoc agreement for the provision of aproduct or service of relatively lowmonetary value, requiring little morethan a short term, formal relationship, oran overarching framework agreement,through contracts for long term productor service contracts, to a series ofcontracts for large, complex constructionor leading edge research anddevelopment contracts with multi-millionpound values requiring theestablishment of strategic partnershipsand alliances.

Commercial or mercantile law includesagency agreements contracts for the saleof goods and services, insurance,negotiable instruments, carriage by air,sea and land and electronic trading, andthere are extensive examples of forms ofcontract in all these areas.

13

11 (OGC ContractManagement,CIPS Study guideLegal &ProcurementProcesses, LysonsCIPS EUProcurementDirectiveGuides)

Clearly, however, a “one size fits all”approach to the form of contract isunsatisfactory and will be ineffective. Itis therefore extremely important that theappropriate form of contract is drawn upthat not only reflects the size, nature,value and complexity of the need butalso the relationship required with thepotential supplier(s).

Post-award management of longer term,high value and complex contracts can becategorised as service deliverymanagement, relationship managementand administration. The form andcontent of the contract document shouldtherefore also be determined by thebalance and significance required byeach of these aspects of the post-awardmanagement.

It is worth reiterating that thefoundations for successful contractmanagement post-contract award are laiddown in these stages and thus theaspects of clarity and comprehensivenessare extremely important in determiningthe form and content of the contractdocument.

i) Establishing the pre-qualification,qualification & tendering procedures

Evaluating the suitability of potentialsuppliers to meet the commercialrequirements of the organisation isnormally undertaken via a pre-qualification system. This is the mostefficient method of assessing suitabilityto meet the required criteria and iscarried out prior to inviting them totender. In large, complex contracts oflong duration it is important to

determine firstly, whether or not theorganisation will adopt a pre-qualification system, determine thequalifications or criteria and concurrentlydecide the tendering procedures.

Public sector organisations must comply(if the procurement itself is applicable)with the requirements of the EUProcurement Directives. These cover allaspects of the procurement of works,goods and service requirements andgovern consideration of the tenderingprocedures to be adopted by the buyingorganisation. The Directives also set outthe rules covering the procurementprocedure to be followed and thepermitted criteria for selecting (orexcluding) suppliers invited to tenderunder the restricted and negotiatedprocedures and the contract awardcriteria. The Competitive Dialogueprocess has now been introduced –should this also be referred to here.

“The EU Procurement Directives also setout rules covering particularly complexcontracts in which a CompetitiveDialogue process can be employed. Thusconsideration of the tendering procedureto be followed should also have regard tothe contract’s complexity.”

The regulations limit the scope of theSelection Stage to three key areas ofquestioning relevant to the subject areasof the contract:• eligibility in terms of insolvency, grave

misconduct, and so on.• economic and financial standing• capability and capacity for the project

and track record in providing similarservices.

14

Buying organisations not subject to theEU Procurement Directives should also,however, give full consideration to theprocedures by which they seek potentialsuppliers, evaluate and award contracts.

The pre-qualification or selection ofpotential suppliers is a critical stage inthe overall evaluation and awardprocess. It should be seen as distinctfrom the contract award but as a processwhich informs and assists the contractaward decision.

The pre-qualification requirementsshould accord with the overall evaluationstrategy drawn up concurrently with theprocurement and contract strategyreferred to in section C.

The key to success at the pre-qualification or selection stage is tostrike a balance between the creation ofa shorter list of potential suppliers fromthe list of suppliers indicating an interest,which can be the subject of in-depthevaluation, and a list sufficiently large toensure that suitable suppliers areactually selected and proceed to thetender invitation or ITT stage.

Information on supplier capability andcapacity can be sought through anumber of routes, formally andinformally. In the case of complexrequirements, it is advisable to indicatein any advert (including for Public sectororganisations, any notice placed in theOJ) that a Pre-qualification questionnaire(PQQ) will be issued to those expressinginterest.

The PQQ should seek the followinggeneral information:• organisation, including ultimate parent

details, identity and ownership,background

• principal activities (past and present)• organisational chart• contractor/sub-contracting approach• professional/commercial affiliations• legal• financial• capability• quality management systems• experience and track record.

The PQQ should also make it clear thatreferences may be sought from selectedcurrent customers.

It is important that PQQ questions ‘makesense’ to the supplier, that they deal withtopics, processes and services that theycan readily understand, that the PQQdoes not ask for inappropriateinformation (or the right information inan inappropriate way) and the suppliershave scope to question, suggest andpossibly adapt your needs.

The dividing line between theinformation needed for selection andthat which is obtained later (atevaluation or during negotiations) is notalways clear-cut. In some areas, it maydiffer in degree of detail rather than innature. Some areas may requireexpansion or clarification later on,possibly through site visits. It isimportant to avoid putting suppliers toextra work that adds no value. Therefore,only ask for information which willactually be used in assessment, avoidscoring systems based on questions

15

requiring only "yes" or "no" answers,consider, where appropriate, usingstandardised formats and word limits tolevel the playing field and reduce bidcosts and evaluation timescales, and seekinformation from participating supplierson likely bid costs and ways to reducethem.

A variety of pre-qualificationquestionnaires are available from CIPSwhich can be tailored to your ownparticular requirements. Constructionline provides a PQQ database coveringmost of the construction industry.Consideration should be given toallowing suppliers to refer to this as theirresponse to the PQQ.

Supplier appraisal starts formally with anassessment of those suppliers who havecompleted the PQQ. The objectives ofthis stage are to establish whether anysuppliers should be excluded fromfurther consideration because they fail tomeet the criteria and reject them, and tocreate the manageable shortlist ofrealistic candidates mentioned abovewho qualify by meeting the criteria andwho will be asked to proceed to the nextstage (tendering, entering intonegotiations, for example) to identify anypoints that need to be clarified withselected suppliers through meetings,supplier visits and/or reference site visitsat a later stage. (See section j) Appraisingsuppliers.)

In the same way that the PQQ shouldpose meaningful, relevant questionsdesigned to inform the selection decisionwithout placing unnecessary and costlyburdens on potential suppliers in

responding, tenderers are entitled toexpect that their offers will receive fairand full consideration and that their bidswill remain confidential. It is importanttherefore that tenderers have confidencein the tendering procedures laid downby the buying organisation to ensureimpartiality and confidentiality. Intendering to the public sector,confidence in impartial treatment issecured by adherence to the stricttendering rules set out in the EUProcurement Directives. The need fortransparency in the public sector,however, limits confidentiality since theDirectives require subsequentpublication of price details.

The underlying principle is that theparties to the tendering process shouldretain confidence by strict andtransparent adherence to a procedurewhich formalises the manner in whichtenders are received, evaluated andawarded. The maxim that the system “isand seen to be” impartial is an importantone. Attention should be given to suchprocedural issues as:• the closing date and time for receipt of

tenders• late tenders are returned unopened• tender documentation is securely held

until the opening process• the tender opening procedure is

independently witnessed and tenderprice details recorded

• electronically submitted tenders arepassword controlled and possiblyencoded

• evaluation and award criteria• the format and content of responses

including the manner in which theyare submitted.

16

12 (OGC ContractManagement.CIPS ethicalcode)

The procedural matters should becommunicated to potential tenderersboth in the tender documentation andany advertisements.

Other issues to be considered whendetermining the tender procedures are:• any post-tender negotiations (PTN)

conducted do not undermineconfidence or trust in the competitivesystem through unethical means, theuse of buying or political power or theadoption of “Dutch auction” or “horsetrading” techniques

• adherence to the buyingorganisation and/or the CIPS ethicalcode12.

j) Appraising suppliers

Supplier appraisal establishes (orotherwise) a potential supplier’scapability and capacity to deliver goodsand services to your organisation nowand in the future. The assessmentprocess should establish the supplier’scapability to control quality, delivery,quantity, price and all the other factorscontained in the contract. Following asuccessful appraisal, the supplier isplaced on an approved list of suppliers.

CIPS produces guidance on SupplierAppraisal in its “How To” series, and it isnot intended to replicate the booklethere but to summarise the issuessurrounding supplier appraisal under theheadings provided in that guidance ofwhy, when, what, who and how.

Why appraise?Supplier appraisal is an essential aspectof strategic sourcing, successful supplier

management and the achievement ofcompetitive advantage in securing goodsor services.

The process should commence when therequirement is known and, because it isnot necessary to carry out the processfor all needs, the requirement should becategorised according to whether it isstandard or non-standard, of strategic ornon-strategic importance and of high orlow value. Assistance in assessing theselatter two categories can be gained fromthe application of Kraljic’s matrix toassess the strategic importance of arequirement and the use of Pareto andABC analysis techniques to assess value.

When to appraise?The process is time consuming andcostly and, as already mentioned,selectively carried out. There are,however, certain situations in which it isstrongly advised to conduct appraisaland the following provides an indicationof these situations but is not exhaustive:• strategic, high profit, high risk, non-

standard requirements• capital requirements, construction and

similar projects• supplier development• JIT arrangements• use of supplier associations• global sourcing• e-procurement arrangements with

long-term strategic suppliers• negotiating TQM and quality in respect

of high profit/risk items• outsourcing contracts• before agreeing sub-contracting by a

main supplier• service level agreements.

17

What should be appraised?There will be a range of factors to beappraised which are directly related tothe particular requirement, but thefollowing should act as a checklist ofaspects to be assessed for the majority ofcontracts; the significance of each andthus the time devoted to the assessmentwill again vary according to theparticular requirement:• finance, including turnover, profit,

assets, ROC, borrowings, debts, creditstatus takeover/merger possibilities,market positioning. The appraisalshould employ the service of creditagencies such as Dunn and Bradstreetto provide supplier evaluation reports

• production capacity, includingavailable productive capacity, scopefor expansion, capacity utilisationpercentage with and without yourorganisation’s requirements

• production facilities related to theparticular requirements includingrange, type, age and sophistication ofplant and machinery, maintenancelevels, housekeeping

• human resources, including staffnumbers and employment, skills andqualifications, training policies,management/worker relationships,worker representation, industrialdispute record, attitudes andmotivation, staff turnover

• quality, including the implementationof quality systems, for example ISO9001:2000, ISO 14000, policies onTQM, inspection and testingprocedures, statistical controls, qualitycontrol procedures for sub-contractors,guarantees

• performance, including information onpast and current projects, features and

innovations introduced, references• Corporate Social Responsibility (CSR)

issues, including determining thepolicies on environment, humanrights, equality and diversity,sustainability, ethics and ethicaltrading, biodiversity, corporategovernance and impact on society13

• information technology, including theextent and the use made of current ITto support and report on businessactivities.

Who should appraiseApart from the procurement of standardor MRO products, appraisal should becarried out on a team basis and includethe following:• buyer• users• technical staff• decision makers• other stakeholders.14

• Third Party AppraisalThis can be carried out by agenciesincluding:• BSI• certification of major companies• supplier consortia• independent management

consultants• UK Accreditation Service• UKSA accredits third party

independent certification bodies,testing and calibration laboratory.

How to appraiseAppraisal methods can be roughlyclassified under three categories desk:field or site visits and third party.• Desk appraisal. This utilises published

and unpublished information and is

18

13 (CIPSCorporate SocialResponsibility)14 (CIPS SupplierAppraisal. Seealso Lysons)

particularly appropriate for productand financial appraisals. Typicalsources of information are catalogues,product data sheets, test reports,websites and trade journals. Deskresearch should precede field researchsince it will indicate what matters needto be investigated and help to assessthe accuracy and veracity of theanswers provided by potentialsuppliers. Questionnaires are the mosteconomical method of obtaininginformation as a basis for supplierappraisals. They can be used eitherprior to visits to suppliers or as basisfor supplier certification. They shouldprovide assurances to the supplier ofconfidentiality, and the questionsthemselves should be as clear andconcise as possible and designed toelicit the information required byavoiding “closed” questions. Assistanceon the design of questionnaires can befound in the “How to” guide.

• Field appraisal. This involves visits topotential suppliers and other sites andshould follow desk research andsupplement the information gainedfrom that process. It is particularlyimportant to carry out this form ofappraisal when evaluating suppliers ofhigh risk/high value products andwhen long-term, collaborativerelationships are under considerationand vital operational services are to besupplied from site. A checklist ofmatters to be investigated should becarefully prepared prior to the visit toensure that no important questions areoverlooked and to provide theevidence for decisions reached. Thechecklist will largely be based on thematters set out under what to appraise

above. It should be borne in mind thatwhile some of the evidence gatheredmay be more subjective, some matterscan be objectively assessed.

• The following are areas which warrantparticular attention by staff involved inthe appraisal visit:• personal attitudes of supplier’s

employees, providing an indicationof likely service quality anddependability

• adequacy and care of plant andmachinery

• technical knowledge of supervisorystaff

• quality control methods• housekeeping• competence of design, research and

laboratory staff includingknowledge of latest materials, toolsand processes and industrydevelopments

• competence of managementincluding commitment.

k)Drafting ITT documents

As with drafting specifications, greatattention should be paid to ensuring thatthe contract document as a whole setsout clearly, comprehensively andunambiguously, the obligations of theparties to the agreement.

As already mentioned, all contracts aredifferent, both in requirement as well ascomplexity and supplier relationshipneeds. The following schedule shouldtherefore be seen as a checklist and nota prescribed list of matters to beconsidered for inclusion in everycontract:

19

• form of agreement or form of tendersetting out the contract period andspaces for signatures

• specification of requirements includingthe levels of output to be achieved andthe performance measurementmethodology, relevant information toenable bids to be submitted

• conditions of contract or articles ofagreement. These should comprisedefinitions, general terms includingchanges, alterations and variationsclause, notice clause, commercialterms setting out the rights andobligations of the parties, conditions,warranties, confidentiality, intellectualproperty, indemnity, exit management,data protection, disputeresolution/escalation and terminationclauses and “standard “ clauses whichshould appear in all contracts coveringsuch matters as liability, severability,waiver, force majeure and jurisdiction

• pricing schedules - particular attentionshould be given to ensuring thatpotential suppliers are bidding on thesame basis of output required

• price variation mechanisms applicableto products, services and time-basedrequirements

• invoicing and payment terms andmethods, for example BACS, CHAPScheque, and so on,, invoice contentrequirements

• pricing basis including milestone,incentivisation, payment reductions fornon-compliance, retention, advance,interim

• implementation and transition plansincluding knowledge transfer

• testing methodology• acceptance strategy and procedures• award criteria

• dispute resolution proceduresincluding escalation process

• sub-contractor information• contract change procedures arising

from both internal or external sourcesand the consequential need forflexibility in contractual terms

• contract management arrangements toensure successful service delivery andthe level of control your organisationrequires during contract performance

• communications including frequency,level, detail, content

• exit/termination strategy andprocedures

• drawings• free issue materials schedule.

This list of matters which are notexhaustive should be categorised andarranged clearly and logically into thetender document. Typically this maycomprise the following sections:• form of tender• conditions of contract• scope of work or technical

specification• administrative and tender submission

instructions• schedule of prices• drawings• schedule of free issue materials.

An extremely useful model form ofContract for the Provision of Servicestogether with guidance notes is availablefrom CIPS and can be used or adaptedas the basis of part of contractdocumentation.

Contract documentation issued by publicsector organisations will, in addition,need to comply with the tendering

20

procedures of the EU ProcurementDirectives, and it would be necessary forthe purchasing officer to be familiar withthose directives.

It is common practice for the enquiryinviting tenders to consist of:• a covering letter explaining the

invitation and re-iterating the date andtime by which tenders must bereturned

• re-iterating the instructions totenderers about the manner in whichthe tender should be submitted

• the name and contact details of theresponsible procurement person

• the procedure for raising queries andreceiving clarification

• the tender document• pre-printed labels for tender return.15

l) Evaluating tenders

All tenders received by the appointedday and time should be recorded. Thisprocess can range from maintaining asimple clerical record of valid tendersreceived by the appointed time to theappointment of a tender opening boardwho record such issues as:• who tendered• the price quoted if a lump sum or bill

of quantities bid• the organisations which declined to

submit• rejected bids• deviations or qualifications to offers• programmes quoted• the integrity of the tender procedure.

The formal opening procedure isfollowed by the tender evaluationprocess which, again, may range from a

simple straightforward process to onewhich is complex, involving manyprofessional disciplines formed into anevaluation team and carried out over aperiod of time.

Tenders should be initially evaluatedunder the twin considerations ofcommercial and technical, the latterpossibly carried out without priceinformation, to ensure that the bids arebrought to a comparable basis for morea thorough evaluation and study, withoutthe influence of commercialconsiderations.

The criteria for tender evaluation shouldfollow the award criteria set out in thetender documents and communicated tothe potential suppliers. Public sectororganisations are required under EUProcurement Directives to award tendersusing only the criteria set out by thebuying organisation in the OJEUadvertisement. This can be either LowestPrice only or a range of criteria, linked tothe subject matter of the contract,collectively known as contributing to the“most economically advantageoustender”. The relative weighting of eachcriteria, or their listing in descendingorder of importance, must be set out inthe contract document and/or in theOJEU contract notice.

In principle, the evaluation processshould include not only the analysis ofthe potential supplier’s response to themain subject matter of the requirementset out in the ITT, such as price, delivery,quality, methodology, for example butalso, most importantly, the quality of thebidder’s offer.

21

15 (CIPS BuyingGoods andServices)

The evaluation process includes aclarification process whereby the buyingorganisation can seek furtherinformation in order to inform thedecision making process. Clarificationshould not be seen as an opportunity tonegotiate or change the basis of thedecision, as this will only serve in thelonger term to undermine the credibility,trustworthiness and standing of thebuyer and the buying organisation.Additionally, public sector organisationsmust comply with EU ProcurementDirective rules governing the clarificationprocess.

m)Negotiation

It is not the intention of this guide toprovide guidance on negotiationtechniques. Information and furtherassistance can be found in thebibliography section of the guide and onthe CIPS website. Negotiation is coveredhere in the context of the formal stagesof contract management covered by thisguide.

It is the aim of every purchasingprofessional to conclude the best dealfor the organisation he or she represents.This is often achieved by post-tendernegotiation (PTN) and is an activity to beconsidered and planned for in theformulation of the contract strategy.

CIPS defines PTN as “negotiation afterreceipt of formal tenders and before theletting of contracts withsuppliers/contractors submitting thelowest acceptable tender with a view toobtaining an improvement in price,

delivery or content, in circumstanceswhich do not put other tenderers at adisadvantage or affect adversely theirconfidence or trust in the competitivesystem”. PTN does not apply, forexample, where• there is no formal tendering process• there is only one supplier• there are discussions to clarify bids• there is a need to correct problems

arising from poor pre-contractpreparation, or there are normal priceadjustment requests or contractvariations during the life of thecontract by either party.

It is worth reiterating that any PTNshould not undermine confidence ortrust in the competitive system throughunethical means, the use of buying orpolitical power or the adoption of “Dutchauction” or “horse trading” techniquesand should adhere to the buyingorganisation and/or the CIPS ethicalcode, as well as any tendering rulesestablished.

When the buying organisation hasdecided that PTN will be conducted, thefollowing matters should be considered:• the criteria for conducting PTN• contract value• the balance between potential savings,

the cost of carrying out PTN and thelikely benefits

• time• effect on the market• the rules contained in the EU

Procurement Directives for publicsector organisations

• ethical issues.

22

The methodology and conduct inundertaking PTN is, in principle, thesame as that for any negotiations outsidethe context of a formal tenderingprocess, although the activity maypossibly be less complex or drawn out.The following matters, however, shouldbe considered in determining thenegotiation strategy:• the approach, such as adversarial or

partnership (respectively a “win-lose”or “win-win” situation). There is noright or wrong approach - either maybe appropriate. For example, anadversarial tactic may be the rightcourse where no on-going relationshipis contemplated and the purchase is aone-off or a simple resolution of aproblem is sought. A partnershipnegotiation tactic may be appropriatewhere a long-term, stable relationshipis contemplated and/or the approachis the only one likely to succeed inresolving complex, intricate problems

• identification of the implicit andexplicit objectives of both parties

• the fall-back or Best Alternative to aNegotiated Agreement (BATNA)positions of both parties (as far aspossible)

• the negotiation goals. Both thesubstance goals and the relationshipgoals are effectively concluded whenthe former have been resolved andwhen the latter have led to thepreservation or enhancement of theworking relationship

• the results of undertaking “what if”and sensitivity calculations on thetendered prices

• the negotiators – personalities needed,authority levels of the negotiator(s),

roles and responsibilities• identifying the buyer’s and the

supplier’s respective negotiationsituations, strengths and weaknesses

• time and degree of urgency of thepurchase. “Necessity never made agood buyer” – urgency is never a goodnegotiating position and time may infact determine the negotiating tacticsthat have to be adopted.

Consideration must also be given to thenegotiating process itself and issues suchas:Pre-negotiation stage:• deciding upon a team or individual

approach – if the former, allocatingroles and ensuring the appropriatelevel of expertise will be present; thevenue, information gathering includingSWOT analysis and data presentation,determining the objectives, decidingthe strategy and tactics at the actualnegotiation stage including negotiationorder, opening speakers, recesses,issues of concessions to be made, ifany, linked issues, for examples priceand quality, likely reactions to tacticsof both parties, role plays and dummyruns

Actual negotiation stage:• establishing the stages and procedural

rules, agreeing the agenda,determining the issues to be resolved,agreeing common goals, removingbarriers to achieving goals and finalagreement and closure, adopting theappropriate behavioural tacticsnecessary, determining the ploys (ifany) to be used

Post negotiation stage:• drafting agreement statements,

communicating the agreement to

23

stakeholders, implementing theagreement and monitoring theimplementation

This is not intended to form anexhaustive check-list of the issues to beborne in mind when it is proposed toconduct post-tender negotiations, butwill act as a prompt to the type andnature of the matters to be addressed.

Finally, it is worthwhile bearing in minda number of general principles whenconsidering negotiations, particularly inrelation to large, high value contracts:• avoid treating each negotiation as a

separate event. This can becounterproductive when viewed froma strategic level through the agreementof advantageous terms on a particularcontract at the expense of the long-term relationship with the supplier

• avoid negotiating each component of asingle negotiation in isolation - acomposite approach can often securea better overall commercial solution

• broaden the evaluation of negotiator’sperformance beyond price and qualityto measuring innovation and creativealternative solutions

• recognise the difference between dealsand relationships. Concessions grantedduring deals can lead to an adversarialclimate and mistrust and damage long-term relationships

• understand when to “walk away froma negotiation”. Negotiators should beencouraged to make good choices, notmerely to produce agreements whichare mutually unsatisfactory.16

n) Awarding the contract

Following tender evaluation and, whereappropriate, negotiation, the projectteam will satisfy itself that an offer hasbeen made which meets its requirementsin all respects, including budgetary, andconsider that it is in a position to acceptan offer and award the contract to thetenderer who has made the mosteconomically advantageous offer to theorganisation. It may then move directlyto the award stage or make arecommendation to higher authoritylevels within the organisation foracceptance.

The contract award stage comprises of anumber of important aspects;communicating the award to thesuccessful tenderer, notifying theunsuccessful tenderers, debriefingunsuccessful tenderers and, in the caseof contracts awarded under ECProcurement Directives by public sectororganisations, publishing a contractaward in the OJEC. As will be seen, it isalso useful for the procurementorganisation to conduct a debriefing ofthe successful tenderer.

This stage should also include activitiessuch as:• ensuring that all relevant parties are

aware of their roles andresponsibilities in the immediateimplementation and transition process

• checking that the agreed processes forcontract management are in place byall the parties

• that knowledge transfer from theprocurement or project team (which

24

16 (Lysons)

may not have included members ofthe contracts management team) tothe contracts management team takesplace to ensure successfulmanagement of the contract

• that, where necessary, the continuityplans for the seamless transition of theservice from one contractor to the newcontractor will be carried out asagreed.

The method of informing the successfultenderer should follow the method setdown in the tender documents (seesection k). Whatever method ofcommunication is adopted, it is essentialthat the notification is clear,unambiguous and sufficientlycomprehensive to ensure that there is nopossibility of doubt by either party aboutwhat has been accepted. Normally thisshould take the form of a counter-signedcopy of the tender documentincorporating all the agreed amendmentsmade during the negotiation andclarifying stages. Notification should bemade by the appropriate authority levelwithin the organisation.

Concurrently, the unsuccessful tenderersshould be advised of the non-acceptanceof their offers and, in the case ofcontracts awarded under ECProcurement Directives, a contract awardnotice should be placed in the OJECwithin the proscribed timescale and inaccordance with the regulations relatingto the content of the notice.

Some organisations from time to timemake use of Letters of Intent tocommunicate instructions or requests tothe potential supplier. These are used for

a variety of reasons, for example tosmooth service transition, to speed upthe start of a project or to secure moretime to finalise contractual terms. A widerange of potentially serious problemscan arise from the indiscriminate use ofLetters of Intent and consequentiallyCIPS discourages their use and advocatesestablishing a separate contractualarrangement for the small amount ofwork that otherwise would be thesubject of the Letter of Intent. If there isno alternative, great care should be givento the wording of the Letter of Intent tominimise the risk to the organisation andto ensure that the Letter is not bindingon the organisation for anything otherthan the specific work set out in it.Equally, care should also be taken toavoid giving inadvertent instructions tosupplier(s) to carry out work or indeedverbal comments which may beinterpreted as instructions.17

As already mentioned, it is beneficial forthe buying organisation to debrief thesuccessful tenderer to gain their view ofthe procurement process recentlyundertaken, to gain better understandingof that market, to improvecommunications, to maintain goodpractice processes and to establish agood working relationship with the newsupplier at the earliest opportunity.

It is equally beneficial to debriefunsuccessful tenderers. It assistssuppliers to improve their competitiveperformance, not only with the buyingorganisation in the future but in marketselsewhere. In addition to the benefitsgained from debriefing the successfultenderer, the organisation benefits by

25

17 (For moreinformation anda suggested Lettersee CIPS POPLetters of Intent)

developing a potentially wider range ofsuppliers, thus increasing the potentialfor improved value for money, byreceiving better quality bids in futureand gaining useful market intelligence.

Debriefing should be constructive and asopen as possible, not defensive andsecretive. In general, it should be seen ashelping to demonstrate procurementprofessionalism and establishing theorganisation’s reputation as a fair andethical buyer with whom supplierswould want to do business.

Following selection and award, thecommunication advising tenderers oftheir success or otherwise should thankthem for their participation in thetendering exercise and offer them adebriefing opportunity. If unsuccessfultenderers respond, requesting debriefingsessions, these should take place as soonas is conveniently and practicallypossible after award and, in the case ofpublic sector organisations, inaccordance with EU ProcurementDirective regulations.

It is important that the debriefparameters are made clear, ideallyconfined to such topics as tendererselection, tender award and tendererwithdrawal issues (where appropriate); itwill not provide an opportunity tochange any decisions and it will beconfined to their own offer.

Downstream or post-award activities.

Having carried out the pre-awardactivities associated with contractformulation and award, the process now

turns to post-award activities. These canbe grouped into three general areas: themanagement of service delivery, themanagement of the relationship with thesupplier and contract administration. Thefirst is concerned with ensuring that theservice is being delivered in accordancewith the agreed performance and qualitylevels set out in the contract; the secondis concerned with maintaining anddeveloping an open and constructiverelationship with the supplier and thelast with the formal management of thecontract.18

o) Changes within the contract

Changes are almost inevitable during theperiod of a contract, particularly in thecase of large, complex construction andservice contracts. They should notnecessarily be seen as causes for concernbut, effectively managed, asopportunities to improve the contractoutputs.

It is important to understand theimplication of change for both parties.Changes of any significance will affectthe scope and potentially the viability ofthe contract for either party. If a changeresults in a reduction in the value orscope of the contract, the organisationcould be faced with claims for increasesin charges and/or legal claims that therewas, for example, misrepresentation inrelation to the likely volumes requiredover the period of the contract. If thechange results in a substantial increasein the value or scope, it is important thatthe organisation continues to ensure thatvalue for money is secured. Public sectororganisations should be additionally

26

18 (OGC ContractManagement

aware of the requirements of the ECProcurement Directives needingsubstantial changes during the contractperiod.

Change can be driven by a number offactors; amongst the more common areamendments to the strategies andobjectives of the parties, the changingbusiness needs of the organisation,market changes, developments intechnology, economic trends whichaffect the viability of the contract andlegislative change. These in turn can leadto changes in the service required, themetrics needed, service infrastructureand workload.

Changes are easier to manage whenplanned. Even the effects of anunexpected, externally driven changecan often be mitigated through, forexample, on-going effective riskassessment and the phasing-in of anyimplementation. Changes will requirenegotiation with the provider(s) and theintroduction of amendments carefullyscheduled to avoid workload peaks andyear-end activities where possible. Theimplementation of the change should beeffectively managed using changecontrol procedures (see section r).

Particular care should be taken whenmaking changes to construction, buildingand IT contracts. What are apparentlyquite small changes can haveunexpected knock-on effects on othercosts, particularly, for example, if aconstruction sequence is affected.Wherever possible, the outcome shouldbe agreed with the supplier beforeinstructing such a change.

p) Service delivery management

This activity is concerned with thefundamental aspect of contractmanagement, that of ensuring that theactual service provided by the supplier isin accordance with the agreed standardsand prices. The ability to measure theperformance of the supplier - sometimescalled vendor rating - and to providefeedback is critical to successful contractmanagement and supplier development.

Performance measures to cover allaspects of a contract should be designedto suit the requirements of a particularcontract and should be set out in thecontract documentation to ensuresuppliers are fully aware of both themeasures and the measurementmethodology before any contract isawarded. It is important that theperformance measures selected provideclear and demonstrable evidence of thesuccess (or otherwise) of the relationshipand, in principle, issues such as thefollowing should be covered:• cost and value obtained• performance and customer satisfaction• delivery improvement and added value• delivery capability• benefits realised• relationship strength and

responsiveness.

It is important to ensure that the actualmetrics selected are not over-specified,that they are, as far as possible, readilyobtained from the direct performance ofthe contract and that they are focused onissues such as those outlined above whichimpact most heavily on the organisation.It should be remembered that there are

27

costs attached to the production andmaintenance of metrics by the supplierwho will seek to pass them on in theform of higher prices or charges.

Once chosen, the requirementsunderpinning the performance measuresshould be the primary focus for contractmanagement. They should form theframework on which information needsand flows and contract managementteams, skills, processes and activities aredeveloped and improved in conjunctionwith the supplier.

They should not be seen as a method ofcontrol, but as a proactive means ofimproving the performance of a supplier.Suppliers should always be requested toimprove their performance, andincentives, used appropriately, shouldencourage improvement. Performancemeasurement results can be used toinform decisions on the type and extentof incentives.

There are a number of themes whichcould be used to measure supplierperformance:• product quality - Mean Time Between

Failure (MTBF), Mean Time to Repair(MTTR), percentage of delivery rejects,warranty claims

• service quality using Service LevelAgreements (SLA) – call-out time,customer service response time,performance against agreed delivery,lead times

• relationship Management (see sectionq) – accessibility and responsivenessof supplier management

• commercial – costs are maintained orreduced, service improved.

There are three aspects to performancemeasurement;• gathering of factual, objective

information from the supplier - usuallyobtained from IT systems

• gathering feedback from users aboutthe service received – typicallythrough questionnaires, surveys,telephone or face-to-face enquiry

• understanding the supplier’s ownexperience of dealing with theorganisation.

Performance measurement can be anexpensive and time-consuming activity,and as such should be carried out on aselective and prioritised basis,proportionate to the value andimportance of the contract to theorganisation. This is particularlyimportant when time and resources arevery limited. Suppliers of high value,high risk goods and services should beclosely monitored, possibly involvingfrequent regular meetings at thesupplier’s premises or on site. Security orbottleneck type goods and services oflow value but of significant importanceto the organisation may require lessfrequent but regular monitoring. Highvalue or volume and low risk items mayneed only quarterly meetings to ensuresatisfactory performance monitoring.

q) Relationship management

Contractual arrangements may committhe organisation to its supplier(s) forsome time and to varying degrees ofdependency. It is therefore important tomake the relationship work effectivelyby developing mutual trust andunderstanding, creating an open and

28

constructive environment andcontributing to the joint management ofthe contract delivery.

It is primarily through the developmentof mutual trust and confidence that theother elements for success are created.As the supplier gains greaterunderstanding of the organisation’sbusiness needs and style and develops alevel of confidence and trust, it will bemore willing to be proactive andinnovative in bringing forwardimprovements and savings to mutualbenefit, more willing to share problems,plans and concerns, more willing tonegotiate and more confident ininvesting for the longer term. Theorganisation benefits by gaining agreater understanding of the strengthsand weaknesses of the supplier, enablingit to concentrate its management anddevelopment support in those areas.

Factors that can inhibit the developmentof a successful relationship include:• frequent and rapid recourse to the

formal contract to overcome problems• clashes in cultures which are so

disparate as to prevent the creation ofthe level of trust and confidencerequired

• reluctance by the supplier to co-operate in value for money orbenchmarking tests conducted by theorganisation

• commercial issues, for example lack ofreal competition resulting inuncompetitive, poor value for moneyterms from the supplier, or converselythat the organisation is criticallydependent on one supplier leading toprice rise vulnerability and/or

problems of management capability,resources or financial capitalisation

• too frequent demands for submissionof competitive bids – reduces trust inthe relationship.

It should be remembered, however, thatsuch issues should have been identifiedand resolved at the pre-award appraisalstage.

In addition to the elements mentionedabove, other factors that encourage thedevelopment of a successful relationshipinclude:• securing senior level support in both

organisations• recognising that actions and attitudes

affect the tone of the relationship• ensuring that the governance

arrangements are fair• ensuring that relationships between

the parties are peer-to-peer as far aspossible

• ensuring that roles and responsibilitiesare clearly understood by both partiesand that the necessary authority levelshave been ascribed

• ensuring that escalation routes areclear and understood but thatproblems are resolved as early aspossible and as low down themanagement tree as possible

• separating strategic matters from theday-to-day service delivery issues

• ensuring that appropriate attitudes andbehaviour are practised and displayedto assist the promotion of a positiveand constructive relationship

• communicating and sharinginformation at the appropriate levelbetween the organisation and thesupplier, for example strategic,

29

business and operational levels and asopenly as possible.

Performance monitoring of suppliers wascovered in section p) in relation to themanagement of service delivery. Itshould be re-iterated, however, that it isequally important that the exerciseshould also cover the relationshipbetween the organisation and thesupplier, albeit that the measurementsthemselves may be somewhat moresubjective. Such issues as the quality ofthe supplier’s R & D department, theirproject management performance, thelevel of management responsiveness,flexibility and effort can be assessed aswell as benchmarked.

r) Contract administration

This activity is concerned with thepracticalities of the relationship betweenthe organisation and the supplier andthe operation of the routineadministrative and clerical functions. Theimportance to the smooth running ofpost-award contract management shouldnot be underestimated and it should beresourced appropriately. This is one ofthe primary responsibilities of a contractmanager.

Whilst the level of significance andextent of the activity will vary accordingto the particular contract, one of themain areas critical to successful contractadministration is contract maintenanceand change control.

Changes will almost inevitably occurduring the period of a contract andmanaging these changes is a particularly

important activity. As already mentioned,formal change control procedures shouldbe designed and set out in the originalcontract documentation to avoidmisunderstanding and ambiguity aboutroles, responsibilities and the actions tobe taken in any given situation. Thesechange control procedures should beinitiated at the earliest opportunity, post-contract award. They should includeprocedures to keep all contractdocumentation up to date and consistentso that all parties have a common viewof the agreed changes. For particularlylarge contracts or where there are anumber of Service Level Agreements(SLA) in place, a formal documentmanagement system should be set up.The procedures need to becomprehensive but also flexible andstraightforward and should cover suchissues as:• how to request changes including

additional demands placed on thesupplier

• assessing the impact includingcontractual implications

• prioritisation and authorisation levels• agreement methodology• controlling implementation• documenting changes.

Normal price variations in the contractoften fall outside change controlprocedures and have their own methodof proposal, assessment, evaluation andagreement.

A formal framework, definingresponsibilities and reportingarrangements should have beendesigned and set out clearly in thecontract documentation. The information

30

called for may range from a completesuite of performance measurementreports to exception reporting. Thedesign of reports should reflect the needfor flexibility in the type and detail of theinformation required during the contractperiod and the recipients’ possible needfor access to greater detail. In addition,regular reporting – monthly or quarterly– may also be required.

Under the contract administration activity,and if the nature of the contract concernsthe use of the organisation’s assets, therewill be a responsibility to ensure that theorganisation’s asset register is kept up todate, the use of assets by a third party isrecorded and upgrades and replacementsare planned and budgeted. The contractmanager will be responsible for liaisonwith the provider on administration andmaintenance of assets.

Other areas covered by contractadministration and forming part of theresponsibility of the contract managerare charges and cost monitoring,ordering and payment procedures,budget procedures, resourcemanagement and planning.19

s) Assessment of risk

The importance of risk assessment tosuccessful contract management hasalready been mentioned (see section d)and the likelihood of changes arisingduring long term contracts has also beenhighlighted. It can be seen therefore thatthere is a need to conduct continuousrisk analysis and assessment throughoutthe period of the contract in ordereffectively to manage the risks that arise.

Whilst the issue of change during thecontract should prompt a risk analysisactivity, the need continually to assessrisk in large, complex long-termcontracts cannot be overemphasised. Thetechniques for conducting such analysisand assessment are set out in section d).

Risk management during the contractperiod comprises those activitiesassociated with identifying andcontrolling the risks that may potentiallyaffect the successful fulfilment of thecontract. Risks to the contract includesuch issues as:• lack of capacity of the supplier,

particularly if there are significantincreases in demand

• reduction in demand leading to higherunit costs borne by the supplier

• an event which causes an increase inthe total of the price to the purchaser

• an event which causes a programmedelay

• supplier staff changes• changes to the supplier’s business

objectives• deterioration in the supplier’s financial

standing• demand changes that cannot be met

by the supplier• deterioration of quality• force majeure issues• market fluctuations for commodities.

When a risk is anticipated or perceived,its management involves the partiesworking together to identify where theresponsibility for it lies, methods ofminimising it and how the risk will bemanaged. Issues to consider for effectivemanagement to succeed include:

31

19 (OGC ContractManagement

• establishing a binding process toencourage early warning of issuessuch as those mentioned above, assoon as either a supplier or thepurchaser becomes aware of them

• identifying the party best able tocontrol the situation leading to the riskoccurring

• identifying the party best able tocontrol the risk itself - this mayinclude the organisation

• identifying who should be responsibleif the risk cannot be controlled

• establishing whether, if the risk istransferred to the supplier, the cost tothe organisation will fall, whether newrisks will arise and transfer to theorganisation, and the legal position ofany transfer.

It should be remembered that riskstransferred to the supplier still requiremanaging by the organisation and thatsuppliers will seek to obtain payment forany transferred risk not identified andincorporated into the original contract.Care should also be taken to ensure, inany long-term partnership based onopenness and trust where the supplier isresponsible for risk management, thatthe supplier fulfils its obligationseffectively and comprehensively.Furthermore, the organisation shouldensure that risk is not transferred backto the organisation as a result of a levelof co-operation exceeding the scope ofthe contractual requirements by theorganisation’s own representatives.

Finally, it should be remembered thatbusiness risk cannot be transferred tothe supplier and that the ultimateresponsibility will always remain with

the organisation for any failure infulfilment of the contract.

t) Purchasing organisation’sperformance and effectiveness review

Reference has been made to thenecessity to measure the supplier’sperformance throughout the period ofthe contract. Equally important, andanother downstream activity, is themeasurement of the purchasingorganisation’s performance effectivenessand efficiency.

It is not the intention of this guide tocover the wider issue of performanceappraisal, which should be conducted inan organisation as part of its normalmanagement practice, but to focus onthe review of purchasing in relation tothe upstream and downstream activitiesof a particular procurement. Bothpractices will contribute to thedevelopment and training of professionalpurchasing staff.

Briefly, effectiveness is concerned withthe ability to accomplish a given goal orpurpose, and efficiency is concernedwith the ability to maximise productivitywith the least amount of effort, money orresources. In other words, effectivenessmeans “doing the right thing” whereasefficiency means “doing things right”.

The aims of performance measurementof the purchasing department are to:• ensure consensus between individual,

functional and corporate aims• compare actual results with planned

performance• identify reasons for substandard

32

20 (Lysons)

performance and the basis forimprovement

• improve decision making• identify the contribution purchasing

can make to the organisation• motivate and encourage staff.20

A range of traditional purchasingperformance measurements can begathered from the on-going managementof a contract, including metrics such as:• savings on the purchase price• reduced inventory levels• incoming defects• on-time deliveries• procurement cycle time• cost of change• cost of placing orders.

These can be considered as quantitativequestions which are readily monitoredand measured. They are often consideredto be basic, minimum performancestandards today; nevertheless, they areextremely important.

At a higher level, effective measurementof purchasing will be concerned withestablishing the need, managing internaland external relationships, managingcontracts and performance, managingchange, customer support, infrastructureissues, business continuity and transition.

In relation to a particular contract, theseissues can be addressed by raisingquestions, although more qualitative andsubjective in nature than those set outabove, that are concerned with theupstream and downstream managementprocesses and relationship issues.Mention has already been made inearlier stages of a number of the metrics

that may be gathered but they shouldinclude such broad issues as:• documentation – clarity, understanding

and comprehensiveness• pre-award contract processes,

understanding and timetables• change control procedures – ease,

understanding, comprehensiveness• communication - suppliers, customers

and other stakeholders• risk - identification and management• contractual relationships - smoothness,

conflicts• customer satisfaction• business continuity and transition

issues.

Each topic will suggest a range ofquestions related to the particularprocurement as the measurement drillsdown to obtain data which will make ameaningful contribution to theassessment of performance. Responsesmay be measured in terms of extent, forexample “not at all”, “partially”, “largely”or “fully”.

In addition to conducting an internalreview of the project and documentingthe findings, valuable information on theperformance of the purchasingdepartment can be gathered fromsuppliers during performance reviewmeetings.

It should be recognised that someinformation can only be properly andusefully gathered following completionor closure of the contract, whilst it maybe critical that other information isgathered before closure in order toimplement process improvementchanges for future procurement

33

contracts, including the possible re-letting of the current contract.

u) Contract closure

This stage concerns the activitiesassociated with closing the project down,whether in accordance with the contractor as a result of early termination.Different activities of course areassociated with the different forms thatcontract termination can take.

In the case of more complex, long-termor construction contracts ending inaccordance with the original contractplan, best practice requires the need forevidence that the contract has beencompleted to the satisfaction of allparties. This is normally carried out intwo stages; firstly, to ascertain internallythat there are no outstanding mattersand, secondly, to secure agreement fromsupplier(s) that, apart from agreed on-going liabilities, the contract(s) hasended.

The aim of the closure procedure is toprovide a mechanism for managing theclosure of the contract following the endof any retention or guarantee periodsand the resolution of all otheroutstanding matters. The procedure isdesigned (where and if applicable) to:• ensure completion of all administrative

matters• record that all technical issues have

been completed• determine the extent of any liquidated

damages to be deducted from thecontract price

• record the end of the retention andguarantee periods and the date of the

final inspection carried out• record the date of release of retention

and/or bank guarantees• to agree a statement of specific limits

on continuing contractual obligationsafter completion of work and any on-going obligations following the end ofguarantees or maintenance periods

• record any materials reconciliation• transfer any assets, including data and

intellectual property, and any loanitems

• transfer operational systems to thesuccessful supplier

• record the process of final contractpayments and a summary of thefinancial payments and received

• summarise claims made against orreceived from the supplier

• ensure the retention of recordsrelating to the contract to counter anysubsequent claims that may bebrought. The Limitation Act 1980 setsout the general periods – six years ortwelve years according to the type ofcontract - within which an actionmaybe brought.

On completion of this activity, agreementshould have been reached on alltechnical and commercial aspects of thecontract. The agreement should requirethe signature of the parties to adocument which records the acceptanceof the work or service, the obligationsfulfilled and the price paid or to be paid.

Another issue relating to the “normal”end of a contract, which should havebeen considered during the pre-contractaward stages, but worthwhile repeatinghere, is the renewal or extension of thecontract (if appropriate). The terms and

34

procedures for such eventualities shouldbe incorporated into the original contractdocumentation and should include theperiod for negotiation of terms in orderto ensure business continuity, togetherwith a deadline for agreement. Thisdeadline should allow for risk of failureto agree and a period of time for thecontract to be re-let in order to ensurethe smooth transition of the work orservice from the old contract to the newcontract. This period could be extensiveand organisations in the public sectorare reminded that they are required toadhere to the EC Procurement Directivesand that it is unlikely that an acceleratedcontract award process for a newcontract will be acceptable if thejustification is the failure to agree termsin accordance with the deadline set outin the old contract.

There are many reasons why a contractmay not be satisfactorily fulfilled inaccordance with the contract, and it isnot the intention of this stage to describeall the circumstances that may arise andthe associated activities that may bepursued and remedies sought for breachin each case. The important factor toremember, as already mentioned in staged), is the need to conduct riskassessment pre-contract award. As partof that activity, the possibilities forperformance failure and consequentialearly termination should have beenmade and appropriate counter-measuresconsidered and set out in the contractdocumentation. With complex, high

value contracts, the overridingconsideration is the need to ensurebusiness continuity and the maintenanceof a service.

Remedies for breach will includerecourse to adjudication, mediation,conciliation, and arbitration and if thesemethods fail – litigation. Resolution cantake long periods of time extending toyears in the case of serious disputes.Focus should therefore be on activatingplans for securing the smooth transitionof the work or service from alternativesources.

Another important activity conducted atthis stage, particularly in the case of highvalue, large contracts, is the preparationof a post-contract project report. Thismay follow a formal post-contract review,undertaken to assess the businessbenefits – or losses - from carrying outthe procurement, how those benefitsmay be furthered enhanced and/or costsand risks reduced and how the lossescan be recouped and turned to benefits.The review should also gather thelessons that can be learnt from themanagement processes and proceduresfollowed during the contract andimplemented in the future. The reviewshould include the views of allstakeholders and the report should relateto the costs and benefits set out in theoriginal business case.21

R D Elsey October 2007

35

21 (OGC ContractManagement

Acknowledgements

The author would like to thank theofficers of the Chartered Institute ofPurchasing and Supply, in particularDarren Ford, and the members of theContracts Group, formerly the Legal andContracts Management Committees, fortheir support, encouragement andassistance in the preparation of thisguide.

Bibliography

Best Practices in Contract Management –Strategies for Optimizing BusinessRelationships (2004), Aberdeen GroupBuying Goods and Services - Aprofessional guide to contractingincluding model conditions, A DAllwright & R W Oliver. Revised by E SSingleton & K R Burnett (1997), CIPSContract Management - Positions onPractice, CIPSContract Management. A range ofpractical guides and toolkits – Office ofGovernment CommerceCorporate Social Responsibility – 2005,CIPSEuropean Community SuppliesDirectives - A guide for the Public SectorFraud – 2007, CIPS knowledge paperF Harvey (Revised Edition 1998), CIPSLaw of Contract, Paul Richards (FourthEdition 1999), Pearson EducationLegal and Procurement Processes - StudyGuide, Eoin Lonegan & Bernadette King(Revised edition 2003), CIPSLetters of Intent – Position on Practice,CIPSModel Contract for Provision of Services– 2007 CIPSProject Management Dennis Lock(Eighth Edition 2003), GowerPurchasing & Supply ChainManagement, Kenneth Lysons & MichaelGillingham (Sixth Edition 2003) PearsonEducationService Level Agreements, K Lysons,CIPS “How to” seriesUnderstanding Organisations, CharlesHandy (Fourth Edition 1993), PenguinRisk Management in Purchasing &Supply Management - Positions onPractice, CIPS

36