Contract Management

Upstream or Pre-Award Activities
Activities
Importance of Contract Management
Introduction and Scope
Contract Management Principles

Contract Management Principles

The purpose of this document is to identify a set of principles that underpin our approach to contract management.

Ensure that contracts are known and understood by all those who will be involved in their management; make sure that adequate resource is identified and appointed well before award of contracts and that there is an effective handover or transition from sourcing to contract management. It is also important to be aware that when the contract manager for a particular changes, it is important to communicate and agree this change in personnel with the service provider.

Be clear about accountability, roles and responsibilities; ensure contract ownership, management processes and governance mechanisms are clear with defined roles and responsibilities at appropriate levels of seniority. It is also important that the Contract Manager is aware of the Commercial aspects of any such tender and fully conversant with any Contract risks or risk mitigation actions.

Establish and use strong governance arrangements to manage risk and enable strategic oversight; ensure that governance structures are proportionate to size and risk of contracts, are suitably empowered and support the business outcomes and objectives. Understand and use contractual options such as appointment of Remedial Advisor, Rectification Plans. Ensure appropriate business continuity and contingency plans are in place and these are agreed with the service provider and monitored.

Adopt a differentiated approach based on risk; distinguish between tactical and strategic contracts, direct the most/strongest resource to contracts where the risks and rewards are highest. Consider a ‘self-managing’ approach with exception reporting for lower risk contracts.

Manage contracts for business/public service outcomes; the owners of the required outcomes should be accountable for successful contract performance and should work closely with commercial staff to manage contracts. Focus on successful outcomes and take account of public service and accountability obligations and risks.

Accept that change will happen and plan for it; develop flexible approaches to change through joint working with suppliers; accept that change will affect both parties during the contract life, but control costs with robust change control mechanisms. Ensure that senior level assurance and controls are in place to prevent changes from altering the strategic intent of the contract.

Measure and report on performance and use KPIs and data efficiently to incentivise good performance; administer contracts proactively and efficiently, making maximum use of benchmarking and performance measurement data. Use a balanced scorecard to measure ‘hard’ data such as KPI performance alongside ‘soft’ measures e.g. customer satisfaction and relationship management, with a focus on achievement of outcomes. React quickly to issues when they arise. Ensure KPIs and incentives are appropriate and proportionate to the contract. Challenge KPIs and incentives regularly and ensure a mechanism to change and evolve them through the life of the contract.

Drive continuous improvement, value for money and capture innovation; actively use contract tools and provisions to leverage the relationship, continually drive value for money and seek out and implement innovative ideas for improvement.

Accept that successful delivery of major projects is best achieved through a single fully integrated team where the supplier and the client work as a single team with one focus, delivery of the successful outcomes

Introduction and Scope

This guide is intended to cover all those activities associated with contract management from the establishment of the business case and the confirmation of need, through contract administration and relationship management to the review of contract performance. The activities themselves are divided into two distinct but interdependent phases, upstream and downstream of the award of the contract.

The guide is generic in that its principles are intended to be applicable to all contracts from a simple order, through framework contracts to complex construction or service contracts, and it should be seen as equally applicable to contracts in the private as well as the public sector

Importance of Contract Management

Organisations in both the public and private sectors are facing increasing pressure to reduce costs and improve financial and operational performance.

New regulatory requirements, globalisation, increases in contract volumes and complexity have resulted in an increasing recognition of the importance and benefits of effective contract management.

The growing recognition of the need to automate and improve contractual processes and satisfy increasing compliance and analytical needs has also led to an increase in the adoption of more formal and structured contract management procedures and an increase in the availability of software applications designed to address these needs.

It is worthwhile noting that contract management is successful if:

the arrangements for service delivery continue to be satisfactory to both parties, and the expected business benefits and value for money are being realised
the expected business benefits and value for money are being achieved
the supplier is co-operative and responsive
the organisation understands its obligations under the contract
there are no disputes
there are no surprises
a professional and objective debate over changes and issues arising can be had
efficiencies are being realised.

Activities

The foundations for effective and successful post-award contract management rely upon careful, comprehensive and thorough implementation of the upstream or pre award activities. During the pre-award stages, the emphasis should be focused on why the contract is being established and on whether the supplier will be able to deliver in service and technical terms.

However, careful consideration must be given to how the contract will work once it has been awarded. The organisation’s high-level requirements should be carefully researched so that there is clarity of purpose from the outset. This will help to ensure clarity in all aspects of the procurement process.

Management of contracts, particularly partnerships, requires flexibility on both sides and a willingness to adapt the terms of the contract to reflect changing circumstances. It is important to recognise that problems are bound to arise which could not be foreseen when the contract was awarded.

Finally, it may not be necessary to follow every activity for every contract - particularly in the case of small, simple orders - but it is advisable to read the whole guide and to apply the advice provided under each stage as appropriate to the particular contractual circumstances.

Upstream or Pre-Award Activities

Preparing the business case and securing management approval

All contracts are predicated on the need to obtain management commitment and approval at the appropriate level. This involves the formulation of a sound business case aligned to the organisations corporate and functional strategies.

The business case sets out the policy, business and contract objectives and the issues that affect the decision and the investment. It should seek to establish that the proposed contract will meet the need, that it is achievable and affordable, and it should address the following issues:

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 prepared with the involvement of the stakeholders, including where and if possible, the end users.

It should be signed off by the sponsor or patron. The business case is a working document and should form the basis of the post-implementation review and used as a management tool to ensure that the original outcomes and benefits have been achieved.

If the project is large, complex and in particular, innovative in nature, the market should be approached concurrently with the preparation of the business case, firstly to alert them to the potential need and secondly to take soundings on such issues as feasibility, capacity, capability, approach and level of interest.

Assembling the project team

The need to assemble a team to manage a contractual procurement programme will be determined not only by the scale, nature, complexity and significance of the procurement and the necessary skills and experience but also by the extent to which it is considered appropriate, beneficial or a requirement to comply with organisational policy to involve stakeholders in the project.

Factors to be considered when assembling 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 project team may be drawn from any and all disciplines within the organisation as appropriate and relevant. The following are examples; design, research and Upstream or Pre-Award Activities development, production, quality control, logistics, marketing and sales, legal, finance and human resources. The project team may also advantageously include representatives of the end users, whether internal or external, and representatives of disciplines within supplier organisations such as design, production, production planners and logistics.

Clearly, these individuals and groups will not need to meet all the time but, depending on the size and complexity of the project, there may well be a core group that meets regularly and this will be the project team. Others will then be called on as and when required.

In addition to the need to identify the necessary technical skills, knowledge and experience with the appropriate level of authority required of the members of the team, the importance of the ability of team members to work together effectively and the significance of the role of the project leader should be recognised.

These aspects are beyond the scope of this guide, but it is considered advisable to devote time to studying topics of motivation, leadership, power, influence and group working, particularly if the size, timescale and complexity of the procurement project are significant.

Developing contract strategy

The strategy relating to a particular contract should accord with the organisation’s overall procurement strategy

The development of a contract strategy is designed to establish the form of the procurement and provide assistance in determining the formulation and award of the contract and the style and type of management to be adopted for the subsequent service delivery, relationship management and contract administration.

There are many references these days to ‘partner’ rather than suppliers – should this be captured here?

The latter aims can be characterised by the need to address understanding, measurement and communication post contract award. A successful contract management strategy should achieve benefits by:

managing the organisation’s own responsibilities during the contract
ensuring the supplier meets the minimum performance criteria, such as compliance
allowing the achievement of both short and long term supplier performance improvement through developing effective supplier relationships.

In developing the contract strategy, the following 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 matrices will also assist in determining the contract strategy, the nature of any negotiations that may need to be conducted and the form of the supplier relationship following the award of contract. Possible supplier relationship types range from the spot buy through call-off contracts, fixed contracts and strategic alliances, to long-term partnerships. Issues of relationship style such as adversarial, partnership, hands on or pro-active should also be considered.

Concurrently with determining the contract strategy, consideration should be given to the evaluation strategy which sets the direction for the overall evaluation of suppliers and the associated tender process. It covers such considerations 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 and marking of replies.

Another important consideration in establishing contract strategy is whether to utilise Service Level Agreements (SLA).

SLAs are negotiated agreements designed to create a common understanding about services, priorities and responsibilities and are applicable in two situations. Firstly, internally used and provided specialist support services and secondly when outsourcing.

Internal SLAs are not intended to have legal consequences since the customer and the supplier are part of the same legal entity which cannot sue itself, and normally there will be no direct financial compensation. External SLAs such as those for bought-in or outsourced services may have contractual implications. They are generally a schedule or part of a schedule to the buy-in or outsource agreement. It should also be remembered that EC Procurement Directives may apply to organisations using SLAs.

The purpose of SLAs and setting service levels is to enable the customer to monitor and control the performance of the service received from the supplier against agreed standards. It should be understood that service levels should be agreed and benchmarked for both customers and suppliers and should be:

established at a reasonable level; if they are set too they will attract additional charges from the supplier
prioritised by the customer in order of importance and on an agreed scale for example critical, major, urgent, important, minor, easily monitored, such as objective, tangible and quantifiable
unambiguous and understandable by all parties
open to re-negotiation at any time. There are advantages and disadvantages in 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 belief about the service
customers have a greater awareness of the services received and the additional services that can be provided
customers’ real needs are identified, and the associated costs are made clear
services and service levels adding value can be more easily identified and distinguished
greater awareness of costs/benefits of services 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, this leads to unrealistic expectations and acrimonious relationships, as well as giving the setting up of SLAs a bad reputation
training needed to overcome resistance to the introduction of SLAs.

Risk Assessment

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

Risk assessment should be viewed in the overall context of risk management and seen as one of the three key activities – risk analysis, risk assessment and risk mitigation - which facilitate the taking of decisions and actions to control risk appropriately. Risk analysis is the process of identifying all the potential issues that can go wrong with an activity and then estimating the probability of each happening. It should form part of any significant contract management process and is a fundamental part of determining the contract strategy. The process can range from a simple listing of risks on an informal, intuitive basis to a formal process involving set procedures and working with other professional disciplines in brainstorming and technically and financially evaluating potential risks. A more formal process may involve the establishment of a risk register for each tenderer and, following contract award, the transfer of the register of the successful tenderer to the contract management team for use in risk assessment; see sections).

In addressing the fundamentally important issue of risk in contract management, the purchasing professional should adopt a continuous “what if” mentality throughout the procurement of products and services.

Risk management requires a professional who possesses knowledge of techniques, an analytical mindset, objectivity and a knowledge and thorough understanding of their organisation’s business and the market. It is advisable to seek to mitigate and remove risk whenever possible before contract award. Risk assessment is the process of assessing the likely impact of a risk on the organisation. Highly predictable risks may have low impact and it is possibly not worth taking action to control or avoid such risks. Conversely, low probability risks may have a significant impact demanding action to be taken to avoid or mitigate the risk.

Other issues for consideration in risk assessment:

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 or magnitude
identifying compensating behaviour practices
the impact of time, external factors and project actions on risk and the need for assessment to be iterative
the impact of product life cycle including disposal and obsolescence. Having assessed the risks and identified those requiring action, responsibility for managing and mitigating them should be allocated. This allocation should be dependent on the assessment of the likelihood and consequence of the risk. mitigation:
identifying the most appropriate body to manage or control the risk in terms of expertise, time and/or resource
establishing a fair and reasonable reimbursement mechanism
insurance
risk transfer to suppliers including issues of appropriate level, “trade off” and supplier contingency.

A further issue, usefully classified under a consideration of risk in contract management is fraud. The need to address potential areas for fraud in buyer/supplier relationships and measures to mitigate their impact should be considered at this early stage in upstream activities, particularly contract formulation.

The adoption of a continuous “what if” mentality – a similar approach to that used when assessing risk - is advisable when considering areas for potential fraud. The CIPS Knowledge paper on Fraud provides useful guidance on areas of weakness and counter measures and gives answers to some frequently asked questions.

Developing contract exit strategy

A contract will conclude when both parties have satisfactorily fulfilled their responsibilities under the terms of the contract. This, for example, will occur when the goods or services have been supplied and payment made and/or at the end of a pre-agreed period of time. This situation, however, does not remove the need to develop a contract exit strategy as part of the process of risk identification and reduction, and reinforces the importance of establishing the foundations of sound contract management.

It is important to identify the circumstances under which early contract exit may be required or indeed desired. The following is merely a list of examples and is certainly not an exhaustive list:

major default by your organisation; this may include contractual breaches or changed circumstances - market, political, economic, funding resulting in major procurement need changes, financial resulting in non-payment of supplier’s invoices
major default by the supplier; this may include breaches, technical inability, capacity, and so on
frustration of the contract.

Whilst many of these sets of circumstances are generally predictable, and “standard” terms and conditions are widely included in contracts today, it does not detract from the need to carry out this aspect of risk assessment and to ensure that clear and comprehensive terms and conditions are drawn up which address the identified circumstances and the rights and responsibilities of the parties and the means by which any damages or costs may be mitigated are set out. This latter should include the method by which the goods or services may continue to be provided and, if possible, seamlessly transferred to another supplier or contractor to ensure business continuity.

It is also important to clarify any notice period to be given, and any timescale constraints associated with the exit process itself.

Developing a contract management plan

During pre-contract award stages, it is normal for time to be devoted to the preparation of the business case, drafting specifications and tender documents selecting potential suppliers, and so on.

However, time and effort must also be spent on determining how the contract will work once it has been awarded. The importance of contract management has already been mentioned and it is vital that a contract management plan is drawn up in advance of contract award.

This should set out how the obligations of all the parties should be carried out effectively and efficiently.

Contract management success factors, the conditions that should be met if a contract is to be managed successfully, are:

the arrangements for service delivery continue to be satisfactory to both customer and provider
expected business benefits and value for money are being realised
the provider is co-operative and responsive
the customer knows its obligations under the contract
there are no disputes
there are no surprises
satisfactory delivery progress is demonstrable

In addition to these success conditions, it is worthwhile noting the foundations of successful contract management and the need for preparing a management plan:

the need for flexibility by the contracting parties, particularly in partnership agreements
a willingness to adapt the terms of the contract to reflect change and unforeseen problems. Although the risk assessment process mentioned earlier may be carried out thoroughly and professionally, problems are still likely to arise during the contract period
the need for the buying organisation to have clear business objectives, coupled with a clear understanding of why the contract will contribute to them
the need to understand the provider’s business objectives and drivers
the ability to recognise and obtain senior management agreement to the need for the service provider to achieve their objectives and to make a reasonable margin
the need for people with the right commercial, interpersonal and management skills to manage these relationships on a peer-to-peer basis and at multiple levels in the organisation
to recognise that all parties need managers who can manage upwards in their organisation and persuade their boards to make decisions for the benefit of the relationship.

Other issues to be addressed and appropriate processes and procedures set out in the contract management plan include:

the processes for managing the contract which provide the level of control you need, such as contract governance
the retention of sufficient expertise to understand the technical direction in which the provider is taking your organisation and to retain the ability to enter into effective dialogue with the supplier
to ensure as far as is possible that the supplier is able to provide sufficient skilled resources, given the risk that another customer’s account might take priority
the possibility of the supplier team changing after award of contract, leading to a lack of continuity
to set down how the members of any supplier consortium handle a variety of different types of issues, to ensure that problems are resolved quickly and constructively
to set down how members of a supplier consortium should share common quality management systems and escalation procedures
to set down the timescale and methods by which the provider’s level of knowledge and understanding of your business can be gained and transferred to the supplier’s successive team members
roles and responsibilities of individuals of the parties to the contract; this includes issues such as:
adopting the principles of good communication, awareness of new demands in partnership arrangements, leadership, appropriateness and capability of existing management structures, understanding the responsibilities of the various parties, clear understanding of what is expected and effective ways of reporting progress, having a framework defining responsibilities, reporting arrangements and policies
establishing the performance measures to cover all aspects of the service 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 the contract offer clear and demonstrable evidence of the success (or otherwise) of the relationship. Once chosen, the requirements underpinning the performance measures should be the primary focus for contract management. They should provide the framework around which provider information requirements and flows, contract management teams, skills, processes and activities are developed.

Drafting specifications and requirements

A specification is a statement of needs and its purpose is to present to potential suppliers a clear, accurate and comprehensive statement of the organisation’s needs in order that they can propose solutions to those needs. At the same time, the specification should enable the organisation to readily evaluate offers, provide the basis for performance measurement and be a record of evidence in any dispute.

A specification is also known as an operational requirement or a statement of requirement. It can take the form of a conformance specification – where the organisation sets out how the supplier should meet its needs - or a performance or output-based specification where the supplier is given scope to propose solutions to an expected and known end result?

The drawing up of specifications in the majority of large organisations is not the responsibility solely of the buyer, nevertheless it should be emphasised that the successful drafting of specifications is one of the most important responsibilities of a professional purchasing officer. The starting point for the preparation of the specification, particularly in the case of large and complex projects, is the business case. The drafting process is concerned with breaking down the overall scope set out in the business case into more detail and then, progressively and iteratively, refining into schedules of detailed requirements.

All contracts are different, and the following process is not intended to be prescriptive but to act as a checklist for issues that should usefully be considered when preparing the specification:

define in detail the scope of the need including the essential or core requirement, optional and “desirable” needs
establish sources of information about the need from:
business owner’s 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 be used and then prepare draft. In large, complex contracts to be performed over a long period of time, the document could include the following:
introduction
scope of the requirement
background to the requirement
detailed description of the functional requirements, classified as essential, optional and desirable
description of the performance requirements including input and output details
timescale/timetable
performance measurement requirements, for example volume, accuracy, availability, including damages and incentives/ service credit details
other requirements, for example security, access, standards, training, personnel, disaster recovery, data archiving, data protection
constraints, for example, time, interface with other parties, IT issues
contract management requirements, for example management information, project management and risk management methodology, and processes
contractual requirements, for examples terms and conditions, roles and responsibilities of personnel, opportunities for submitting alternative proposals
procurement procedures including timetable, evaluation and acceptance criteria and process, contact information, format and content of responses. Public sector organisations subject to the EU Procurement Directives must ensure that this information is also included in the notice placed in the OJ
appendices providing background data, statistics, organisational information.

The process of preparing the specification should also include the drafting of the evaluation model and criteria. It is important to ensure that:

all the information needed for evaluation has been requested from potential suppliers
the evaluation covers all the organisation’s needs
the responses are in a format that enables an effective, clear and fair evaluation 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 credible and realistic offers
ensure that all information needed for effective evaluation is requested
permit offers to be evaluated against the 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 be reviewed and signed off by a person with the necessary knowledge, experience and authority. The review should 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 original business case
is capable of being met by the market
complies with EU Procurement Directives (Public sector organisations only).

Establishing the form of contract

Contracts can range from a single, ad hoc agreement for the provision of a product or service of relatively low monetary value, requiring little more than a short term, formal relationship, or an overarching framework agreement, through contracts for long term product or service contracts, to a series of contracts for large, complex construction or leading edge research and development contracts with multi-million pound values requiring the establishment of strategic partnerships and alliances.

Commercial or mercantile law includes agency agreements contracts for the sale of goods and services, insurance, negotiable instruments, carriage by air, sea and land and electronic trading, and there are extensive examples of forms of contract in all these areas.

Clearly, however, a “one size fits all” approach to the form of contract is unsatisfactory and will be ineffective. It is therefore extremely important that the appropriate form of contract is drawn up that not only reflects the size, nature, value and complexity of the need, but also the relationship required with the potential supplier(s).

Post-award management of longer term, high value and complex contracts can be categorised as service delivery management, relationship management and administration. The form and content of the contract document should therefore also be determined by the balance and significance required by each of these aspects of the post-award management. It is worth reiterating that the foundations for successful contract management post-contract award are laid down in these stages and thus the aspects of clarity and comprehensiveness are extremely important in determining the form and content of the contract document.

Drafting ITT documents

As with drafting specifications, great attention should be paid to ensuring that the contract document as a whole sets out clearly, comprehensively and unambiguously, the obligations of the parties to the agreement.

As already mentioned, all contracts are different, both in requirement as well as complexity and supplier relationship needs. The following schedule should therefore be seen as a checklist and not a prescribed list of matters to be considered for inclusion in every contract:

form of agreement or form of tender setting out the contract period and spaces for signatures
specification of requirements including the levels of output to be achieved and the performance measurement methodology, relevant information to enable bids to be submitted
conditions of contract or articles of agreement. These should comprise definitions, general terms including changes, alterations and variations clause, notice clause, commercial terms setting out the rights and obligations of the parties, conditions, warranties, confidentiality, intellectual property, indemnity, exit management, data protection, dispute resolution/escalation and termination clauses and “standard “ clauses which should appear in all contracts covering such matters as liability, severability, waiver, force majeure and jurisdiction
pricing schedules - particular attention should be given to ensuring that potential suppliers are bidding on the same basis of output required
price variation mechanisms applicable to products, services and time-based requirements
invoicing and payment terms and methods, for example BACS, CHAPS cheque, and so on, invoice content requirements
pricing basis including milestone, incentivisation, payment reductions for non-compliance, retention, advance, interim
implementation and transition plans including knowledge transfer
testing methodology
acceptance strategy and procedures
award criteria
dispute resolution procedures including escalation process
sub-contractor information
contract change procedures arising from both internal or external sources and the consequential need for flexibility in contractual terms
contract management arrangements to ensure successful service delivery and the level of control your organisation requires during contract performance
communications including frequency, level, detail, content
exit / termination strategy and procedures
drawings
free issue materials schedule.

This list of matters which are not exhaustive should be categorised and arranged clearly and logically into the tender document. Typically, this may comprise 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

Contract documentation issued by public sector organisations will, in addition, need to comply with the requirements of the Councils Contract Procedure Rules (CPR) and tendering procedures of the Public Contract Regulations 2015, and it will be necessary for purchasing officers to be familiar with those directives.

It is common practice for the enquiry inviting Expressions of Interest (EoI) in tender opportunities to consist of:

a covering letter explaining the invitation and re-iterating the date and time by which tenders must be returned
re-iterating the instructions to tenderers about the manner in which the tender should be submitted
the name and contact details of the responsible procurement person
the procedure for raising queries and receiving clarification messages
the tender document (ITT)

Evaluating tenders

All tenders received through the e-Tendering portal used by the Council on the appointed day and time should be opened at a point after the identified date and time have passed. Submitted bids verified by an appropriate Officer and processed to enable the bid documents to be downloaded. This process can range from maintaining a simple clerical record of valid tenders received by the appointed time to the appointment of a tender opening board who record such issues as:

which companies submitted and bid
the price quoted if a lump sum or bill of quantities bid
the organisations which declined to submit
rejected bids and reasons noted why the bid has not been accepted
deviations or qualifications to offers
the integrity of the tender procedure.

The formal opening procedure is followed by the tender evaluation process which, again, may range from a simple straightforward process to one which is complex, involving many professional disciplines formed into an evaluation team and carried out over a period of time. This process should include a representative from the Procurement team, together with the appropriate Officers from the Council.

Tenders should be initially evaluated under the twin considerations of commercial and technical, the latter possibly carried out without price information, to ensure that the bids are brought to a comparable basis for a more thorough evaluation and study, without the influence of commercial considerations.

The criteria for tender evaluation should follow the award criteria set out in the tender documents and communicated to the potential suppliers. Public sector organisations are required under EU Procurement Directives to award tenders using only the criteria set out by the buying organisation in the OJEU advertisement. This will generally be based upon a combination of Price and quality factors, this might include Social, Economic and Sustainability issues linked to the subject matter of the contract, collectively known as contributing to the “most economically advantageous tender”.

The relative weighting of each criterion, or their listing in descending order of importance, must be set out in the contract document and/or in the OJEU contract notice. For OJEU tenders the evaluation criteria must not be varied, modified or changed in any way after the OJEU Contract Notice has been published through Tenders Electronic Daily (TED).

In principle, the evaluation process should include not only the analysis of the potential supplier’s response to the main subject matter of the requirement set out in the ITT, such as price, delivery, quality, methodology, for example but also, most importantly, the quality of the bidder’s offer.

The evaluation process includes a clarification process whereby the buying organisation can seek further information in order to inform the decision making process. Clarification should not be seen as an opportunity to negotiate or change the basis of the decision, as this will only serve in the longer term to undermine the credibility, trustworthiness and standing of the buyer and the buying organisation.

Additionally, public sector organisations must comply with EU Procurement Directive rules governing the clarification process.

Awarding the contract

Following tender evaluation and, where appropriate, negotiation, the project team will satisfy itself that an offer has been made which meets its requirements in all respects, including budgetary, and consider that it is in a position to accept an offer and award the contract to the tenderer who has made the most economically advantageous offer to the organisation. It may then move directly to the award stage or make a recommendation to higher authority levels within the organisation for acceptance.

The contract award stage comprises of a number of important aspects; communicating the award to the successful tenderer, notifying the unsuccessful tenderers, debriefing unsuccessful tenderers and, 22 www.bassetlaw.gov.uk in the case of contracts awarded under OJEU Procurement Directives by public sector organisations, publishing a contract award in the OJEU. As will be seen, it is also useful for the procurement organisation to conduct a debriefing of the successful tenderer.

This stage should also include activities such as:

ensuring that all relevant parties are aware of their roles and responsibilities in the immediate implementation and transition process
checking that the agreed processes for contract management are in place by all the parties
that knowledge transfers from the procurement or project team (which may not have included members of the contracts' management team), to the contracts' management team takes place to ensure successful management of the contract
that, where necessary, the continuity plans for the seamless transition of the service from one contractor to the new contractor will be carried out as agreed.

The method of informing the successful tenderer should follow the method set down in the tender documents.

Whatever method of communication is adopted, it is essential that the notification is clear, unambiguous and sufficiently comprehensive to ensure that there is no possibility of doubt by either party about what has been accepted.

Normally this should take the form of a counter-signed copy of the tender document incorporating all the agreed amendments made during the negotiation and clarifying stages. Notification should be made by the appropriate authority level within the organisation.

Concurrently, the unsuccessful tenderers should be advised of the non-acceptance of their offers and, in the case of contracts awarded under EC Procurement Directives, a contract award notice should be placed in the OJEC within the proscribed timescale and in accordance with the regulations relating to the content of the notice.

Some organisations from time to time make use of Letters of Intent to communicate instructions or requests to the potential supplier. These are used for a variety of reasons, for example to smooth service transition, to speed up the start of a project or to secure more time to finalise contractual terms. A wide range of potentially serious problems can arise from the indiscriminate use of Letters of Intent and consequentially CIPS discourages their use and advocates establishing a separate contractual arrangement for the small amount of work that otherwise would be the subject of the Letter of Intent. If there is no alternative, great care should be given to the wording of the Letter of Intent to minimise the risk to the organisation and to ensure that the Letter is not binding on the organisation for anything other than the specific work set out in it.

Equally, care should also be taken to avoid giving inadvertent instructions to supplier(s) to carry out work or indeed verbal comments which may be interpreted as instructions. As already mentioned, it is beneficial for the buying organisation to debrief the successful tenderer to gain their view of the procurement process recently undertaken, to gain better understanding of that market, to improve communications, to maintain good practice processes and to establish a good working relationship with the new supplier at the earliest opportunity.

It is equally beneficial to debrief unsuccessful tenderers. It assists suppliers to improve their competitive performance, not only with the buying organisation in the future but in markets elsewhere. In addition to the benefits gained from debriefing the successful tenderer, the organisation benefits by developing a potentially wider range of suppliers, thus increasing the potential for improved value for money, by receiving better quality bids in future and gaining useful market intelligence.

Debriefing should be constructive and as open as possible, not defensive and secretive. In general, it should be seen as helping to demonstrate procurement professionalism and establishing the organisation’s reputation as a fair and ethical buyer with whom suppliers would want to do business.

Following selection and award, the communication advising tenderers of their success or otherwise should thank them for their participation in the tendering exercise and offer them a debriefing opportunity. If unsuccessful tenderers respond, requesting debriefing sessions, these should take place as soon as is conveniently and practically possible after award and, in the case of public sector organisations, in accordance with EU Procurement Directive regulations.

It is important that the debrief parameters are made clear, ideally confined to such topics as tenderer selection, tender award and tenderer withdrawal issues (where appropriate); it will not provide an opportunity to change any decisions and it will be confined to their own offer.

Downstream or post-award activities.

Having carried out the pre-award activities associated with contract formulation and award, the process now turns to post-award activities. These can be grouped into three general areas: the management of service delivery, the management of the relationship with the supplier and contract administration. The first is concerned with ensuring that the service is being delivered in accordance with the agreed performance and quality levels set out in the contract; the second is concerned with maintaining and developing an open and constructive relationship with the supplier and the last with the formal management of the contract.

Changes within the contract

Changes are almost inevitable during the period of a contract, particularly in the case of large, complex construction and service contracts. They should not necessarily be seen as causes for concern but, effectively managed, as opportunities to improve the contract outputs.

It is important to understand the implication of change for both parties. Changes of any significance will affect the scope and potentially the viability of the contract for either party. If a change results in a reduction in the value or scope of the contract, the organisation could be faced with claims for increases in charges and/or legal claims that there was, for example, misrepresentation in relation to the likely volumes required over the period of the contract. If the change results in a substantial increase in the value or scope, it is important that the organisation continues to ensure that value for money is secured.

Public sector organisations should be additionally

Change can be driven by a number of factors; amongst the more common are amendments to the strategies and objectives of the parties, the changing business needs of the organisation, market changes, developments in technology, economic trends which affect the viability of the contract and legislative change. These in turn can lead to changes in the service required, the metrics needed, service infrastructure and workload.

Changes are easier to manage when planned. Even the effects of an unexpected, externally driven change can often be mitigated through, for example, ongoing effective risk assessment and the phasing-in of any implementation. Changes will require negotiation with the provider(s) and the introduction of amendments carefully scheduled to avoid workload peaks and year-end activities where possible. The implementation of the change should be effectively managed using change control procedures (see section r). Particular care should be taken when making changes to construction, building and IT contracts. What are apparently quite small changes can have unexpected knock-on effects on other costs, particularly, for example, if a construction sequence is affected.

Wherever possible, the outcome should be agreed with the supplier before instructing such a change.

Service delivery management

This activity is concerned with the fundamental aspect of contract management, that of ensuring that the actual service provided by the supplier is in accordance with the agreed standards and prices. The ability to measure the performance of the supplier – sometimes called vendor rating - and to provide feedback is critical to successful contract management and supplier development. Performance measures to cover all aspects of a contract should be designed to suit the requirements of a particular contract and should be set out in the contract documentation to ensure suppliers are fully aware of both the measures and the measurement methodology before any contract is awarded. It is important that the performance measures selected provide clear and demonstrable evidence of the success (or otherwise) of the relationship and, in principle, issues such as the following 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 actual metrics selected are not over-specified, that they are, as far as possible, readily obtained from the direct performance of the contract and that they are focused on issues such as those outlined above which impact most heavily on the organisation.
It should be remembered that there are costs attached to the production and maintenance of metrics by the supplier who will seek to pass them on in the form of higher prices or charges. Once chosen, 24 www.bassetlaw.gov.uk 01909 533 533 25 the requirements underpinning the performance measures should be the primary focus for contract management. They should form the framework on which information needs and flows and contract management teams, skills, processes and activities are developed and improved in conjunction with the supplier.
They should not be seen as a method of control, but as a proactive means of improving the performance of a supplier.
Suppliers should always be requested to improve their performance, and incentives, used appropriately, should encourage improvement. Performance measurement results can be used to inform decisions on the type and extent of incentives.

There are a number of themes which could be used to measure supplier performance:

product quality - Mean Time Between Failure (MTBF), Mean Time to Repair (MTTR), percentage of delivery rejects, warranty claims
service quality using Service Level Agreements (SLA) – call-out time, customer service response time, performance against agreed delivery, lead times
relationship Management (see section q) – accessibility and responsiveness of supplier management
commercial – costs are maintained or reduced, service improved.

There are three aspects to performance measurement;

gathering of factual, objective information from the supplier – usually obtained from IT systems
gathering feedback from users about the service received – typically through questionnaires, surveys, telephone or face-to-face enquiry
understanding the supplier’s own experience of dealing with the organisation.

Performance measurement can be an expensive and time-consuming activity, and as such should be carried out on a selective and prioritised basis, proportionate to the value and importance of the contract to the organisation. This is particularly important when time and resources are very limited. Suppliers of high value, high risk goods and services should be closely monitored, possibly involving frequent regular meetings at the supplier’s premises or on site. Security or bottleneck type goods and services of low value but of significant importance to the organisation m y require less frequent but regular monitoring. High value or volume and low risk items may need only quarterly meetings to ensure satisfactory performance monitoring.

Relationship Management

Contractual arrangements may commit the organisation to its supplier(s) for some time and to varying degrees of dependency. It is therefore important to make the relationship work effectively by developing mutual trust and understanding, creating an open and constructive environment and contributing to the joint management of the contract delivery.

It is primarily through the development of mutual trust and confidence that the other elements for success are created.

As the supplier gains greater understanding of the organisation’s business needs and style and develops a level of confidence and trust, it will be more willing to be proactive and innovative in bringing forward improvements and savings to mutual benefit, more willing to share problems, plans and concerns, more willing to negotiate and more confident in investing for the longer term. The organisation benefits by gaining a greater understanding of the strengths and weaknesses of the supplier, enabling it to concentrate its management and development support in those areas.

Factors that can inhibit the development of 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 of the level of trust and confidence required
reluctance by the supplier to cooperate in value for money or benchmarking tests conducted by the organisation
commercial issues, for example lack of real competition resulting in uncompetitive, poor value for money terms from the supplier, or conversely that the organisation is critically dependent on one supplier leading to price rise vulnerability and/or problems of management capability, resources or financial capitalisation
too frequent demands for submission of competitive bids – reduces trust in the relationship. It should be remembered, however, that such issues should have been identified and resolved at the pre-award appraisal stage.

In addition to the elements mentioned above, other factors that encourage the development of a successful relationship include:

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 as possible
ensuring that roles and responsibilities are clearly understood by both parties and that the necessary authority levels have been ascribed
ensuring that escalation routes are clear and understood but that problems are resolved as early as possible and as low down the management tree as possible
separating strategic matters from the day-to-day service delivery issues
ensuring that appropriate attitudes and behaviour are practised and displayed to assist the promotion of a positive and constructive relationship
communicating and sharing information at the appropriate level between the organisation and the supplier, for example strategic, business and operational levels and as openly as possible. Performance monitoring of suppliers was covered in section p) in relation to the management of service delivery. It should be re-iterated, however, that it is equally important that the exercise should also cover the relationship between the organisation and the supplier, albeit that the measurements themselves may be somewhat more subjective. Such issues as the quality of the supplier’s R & D department, their project management performance, the level of management responsiveness, flexibility and effort can be assessed as well as benchmarked.

Contract Administration

This activity is concerned with the practicalities of the relationship between the organisation and the supplier and the operation of the routine administrative and clerical functions. The importance to the smooth running of post-award contract management should not be underestimated and it should be resourced appropriately. This is one of the primary responsibilities of a contract manager. Whilst the level of significance and extent of the activity will vary according to the particular contract, one of the main areas critical to successful contract administration is contract maintenance and change control.

Changes will almost inevitably occur during the period of a contract and managing these changes is a particularly important activity. As already mentioned, formal change control procedures should be designed and set out in the original contract documentation to avoid misunderstanding and ambiguity about roles, responsibilities and the actions to be taken in any given situation. These change control procedures should be initiated at the earliest opportunity, post contract award. They should include procedures to keep all contract documentation up to date and consistent so that all parties have a common view of the agreed changes. For particularly large contracts or where there are a number of Service Level Agreements (SLA) in place, a formal document management system should be set up.

The procedures need to be comprehensive but also flexible and straightforward and should cover such issues as:

how to request changes including additional demands placed on the supplier
assessing the impact including contractual implications
prioritisation and authorisation levels
agreement methodology
controlling implementation
documenting changes.

Normal price variations in the contract often fall outside change control procedures and have their own method of proposal, assessment, evaluation and agreement.

A formal framework, defining responsibilities and reporting arrangements should have been designed and set out clearly in the contract documentation. The information called for may range from a complete suite of performance measurement reports to exception reporting. The design of reports should reflect the need for flexibility in the type and detail of the information required during the contract period and 28 www.bassetlaw.gov.uk the recipients’ possible need for 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 concerns the use of the organisation’s assets, there will be a responsibility to ensure that the organisation’s asset register is kept up to date, the use of assets by a third party is recorded and upgrades and replacements are planned and budgeted. The contract manager will be responsible for liaison with the provider on administration and maintenance of assets.

Other areas covered by contract administration and forming part of the responsibility of the contract manager are charges and cost monitoring, ordering and payment procedures, budget procedures, resource management and planning.

Assessment of risk

The importance of risk assessment to successful contract management has already been mentioned and the likelihood of changes arising during long term contracts has also been highlighted. It can be seen therefore that there is a need to conduct continuous risk analysis and assessment throughout the period of the contract in order effectively to manage the risks that arise.

Whilst the issue of change during the contract should prompt a risk analysis activity, the need continually to assess risk in large, complex long-term contracts cannot be overemphasised.

Risk management during the contract period comprises those activities associated with identifying and controlling the risks that may potentially affect the successful fulfilment of the contract. Risks to the contract include such issues as:

lack of capacity of the supplier, particularly if there are significant increases in demand
reduction in demand leading to higher unit costs borne by the supplier
an event which causes an increase in the total of the price to the purchaser
an event which causes a programme delay
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 parties working together to identify where the responsibility for it lies, methods of minimising it and how the risk will be managed. Issues to consider for effective management to succeed include:

establishing a binding process to encourage early warning of issues such as those mentioned above, 28 www.bassetlaw.gov.uk 01909 533 533 29 as soon as either a supplier or the purchaser becomes aware of them
identifying the party best able to control the situation leading to the risk Occurring
identifying the party best able to control the risk itself - this may include the organisation
identifying who should be responsible if the risk cannot be controlled
establishing whether, if the risk is transferred to the supplier, the cost to the organisation will fall, whether new risks will arise and transfer to the organisation, and the legal position of any transfer.

It should be remembered that risks transferred to the supplier still require managing by the organisation and that suppliers will seek to obtain payment for any transferred risk not identified and incorporated into the original contract.

Care should also be taken to ensure, in any long-term partnership based on openness and trust where the supplier is responsible for risk management, that the supplier fulfils its obligations effectively and comprehensively.

Furthermore, the organisation should ensure that risk is not transferred back to the organisation as a result of a level of co-operation exceeding the scope of the contractual requirements by the organisation’s own representatives.

Finally, it should be remembered that business risk cannot be transferred to the supplier and that the ultimate responsibility will always remain with the organisation for any failure in fulfilment of the contract.

Purchasing organisation’s performance and effectiveness review

Reference has been made to the necessity to measure the supplier’s performance throughout the period of the contract. Equally important, and another downstream activity, is the measurement of the purchasing organisation’s performance effectiveness and efficiency. It is not the intention of this guide to cover the wider issue of performance appraisal, which should be conducted in an organisation as part of its normal management practice, but to focus on the review of purchasing in relation to the upstream and downstream activities of a particular procurement. Both practices will contribute to the development and training of professional purchasing staff.

Briefly, effectiveness is concerned with the ability to accomplish a given goal or purpose, and efficiency is concerned with the ability to maximise productivity with the least amount of effort, money or resources. In other words, effectiveness means “doing the right thing” whereas efficiency means “doing things right”.

The aims of performance measurement of the purchasing department are to:

ensure consensus between individual, functional and corporate aims
compare actual results with planned performance
identify reasons for substandard
performance and the basis for improvement
improve decision making
identify the contribution purchasing can make to the organisation
motivate and encourage staff. A range of traditional purchasing performance measurements can be gathered from the ongoing management of 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 quantitative questions which are readily monitored and measured. They are often considered to be basic, minimum performance standards today; nevertheless, they are extremely important.

At a higher level, effective measurement of purchasing will be concerned with establishing the need, managing internal and external relationships, managing contracts and performance, managing change, customer support, infrastructure issues, business continuity and transition.

In relation to a particular contract, these issues can be addressed by raising questions, although more qualitative and subjective in nature than those set out above, that are concerned with the upstream and downstream management processes and relationship issues.

Mention has already been made in earlier stages of a number of the metrics that may be gathered but they should include 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 of questions related to the particular procurement as the measurement drills down to obtain data which will make a meaningful contribution to the assessment of performance. 30 www.bassetlaw.gov.uk 01909 533 533 31 Responses may be measured in terms of extent, for example “not at all”, “partially”, “largely” or “fully”.

In addition to conducting an internal review of the project and documenting the findings, valuable information on the performance of the purchasing department can be gathered from suppliers during performance review meetings.

It should be recognised that some information can only be properly and usefully gathered following completion or closure of the contract, whilst it may be critical that other information is gathered before closure in order to implement process improvement changes for future procurement contracts, including the possible reletting of the current contract.

Contract closure

This stage concerns the activities associated with closing the project down, whether in accordance with the contract or as a result of early termination.

Different activities of course are associated with the different forms that contract termination can take. It is of vital importance that the organisation should be aware of what and how these circumstances can occur.

In the case of more complex, long-term or construction contracts ending in accordance with the original contract plan, best practice requires the need for evidence that the contract has been completed to the satisfaction of all parties. This is normally carried out in two stages; firstly, to ascertain internally that there are no outstanding matters and, secondly, to secure agreement from supplier(s) that, apart from agreed ongoing liabilities, the contract(s) has ended.

The aim of the closure procedure is to provide a mechanism for managing the closure of the contract following the end of any retention or guarantee periods and the resolution of all other outstanding matters. The procedure is designed (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 the contract price
record the end of the retention and guarantee 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 obligations after completion of work and any ongoing obligations following the end of guarantees or maintenance periods
record any materials reconciliation
transfer any assets, including data and intellectual property, and any loan items
transfer operational systems to the successful supplier
record the process of final contract payments and a summary of the financial payments and received
summarise claims made against or received from the supplier
ensure the retention of records relating to the contract to counter any subsequent claims that may be brought. The Limitation Act 1980 sets out the general periods – six years or twelve years according to 32 www.bassetlaw.gov.uk the type of contract - within which an action maybe brought.
It is always good practice to carry out a post tender review to ensure that lessons are learned to that mistakes are understood, and corrective action are taken and recorded to try and ensure that similar mistakes do not happen on later similar projects.

On completion of this activity, agreement should have been reached on all technical and commercial aspects of the contract. The agreement should require the signature of the parties to a document which records the acceptance of the work or service, the obligations fulfilled, and the price paid or to be paid.

Another issue relating to the “normal” end of a contract, which should have been considered during the pre-contract award stages, but worthwhile repeating here, is the renewal or extension of the contract (if appropriate). The terms and procedures for such eventualities should be incorporated into the original contract documentation and should include the period for negotiation of terms in order to ensure business continuity, together with a deadline for agreement. This deadline should allow for risk of failure to agree and a period of time for the contract to be re-let in order to ensure the smooth transition of the work or service from the old contract to the new contract.

This period could be extensive and organisations in the public sector are reminded that they are required to adhere to the OJEU Procurement Directives and that it is unlikely that an accelerated contract award process for a new contract will be acceptable if the justification is the failure to agree terms in accordance with the deadline set out in the old contract.

Remedies for breach will include recourse to adjudication, mediation, conciliation, and arbitration and if these methods fail – litigation. Resolution can take long periods of time extending to years in the case of serious disputes. Focus should therefore be on activating plans for securing the smooth transition of the work or service from alternative sources.

Another important activity conducted at this stage, particularly in the case of high value, large contracts, is the preparation of a post-contract project report. This may follow a formal post-contract review, undertaken to assess the business benefits – or losses - from carrying out the procurement, how those benefits may be furthered enhanced and/or costs and risks reduced and how the losses can be recouped and turned to benefits.

The review should also gather the lessons that can be learnt from the management processes and procedures followed during the contract and implemented in the future. The review should include the views of all stakeholders and the report should relate to the costs and benefits set out in the original business case.

Last Updated on Wednesday, May 8, 2024

Procurement in Bassetlaw - Contract Management

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