Insight

Successful contract management: the fundamental principles

Dec 12, 2013

Many government departments find it difficult to manage their contracts well. At worst, they have poor relationships with their suppliers and no clear picture of how well their contracts are performing. As a result, overruns and spiralling costs are commonplace. What’s more, when the failing is caused by industry, it is rare that government receives any compensation.

The National Audit Office has brought attention to this issue in the past. In ‘Central government's management of service contracts’, it reported that performance failure is frequently caused by departments failing to prioritise contract management sufficiently, having a shortage of skilled people, overlooking weaknesses in KPIs and neglecting to make the most of financial incentives. Since then, the UK downturn has not helped the situation. Contractors bid low to win work with the aim of making up the shortfall after the contract has started.

They use a variety of tactics to achieve this, such as working to their own interpretations of a contract, introducing costly contract changes and making sure the government shoulders liabilities for delays and costs. When department employees challenge underperformance, they are often rebutted. The result? On many contracts, out-turn costs have risen by 10% or more. Claim liabilities of even larger amounts are arising frequently.

To redress the balance and hold suppliers to account, government departments would benefit from following ‘fundamental principles’ that are in common use in the commercial sector.

Fully understanding the contract

Contracts are frequently highly complex documents that few fully understand, particularly once those involved in their initial development have moved on. There is also a mantra among government officials that relying on the contract to direct an ongoing relationship with a supplier is tantamount to the failure of that relationship. The result is that the government department is left with a limited understanding of core entitlements, obligations and remedies. Hard-foughtfor rights are lost while the supplier picks up a ‘get-out-of-jailfree card’.

A clear and well communicated contract management strategy is one way to address this. This sets out how the contract will be managed, including a list of individuals’ roles and responsibilities and a contract guide outlining entitlements, obligations, incentives and management processes.

Proving you have control

To deliver value from a contract and manage performance and contract-change well, control is crucial. We recommend two approaches.

Firstly, monitoring an agreed simple set of KPIs – set at a challenging level and driving the right behaviours – will demonstrate when a contract isn’t performing and enable early discussions with the supplier as to the reasons for underperformance and where responsibility lies.

Secondly, it is worth remembering that control is often lost as a result of the large number of people involved in contract delivery. Project managers and engineers often ask for additional work to be carried out, or authorise changes or delays, with little consideration of the commercial impact and with no audit trail. In these situations, the department can find it difficult to employ remedies. You can mitigate this by implementing an effective contract change process, which ensures teams understand changes and their potential impact, and allows rapid decisions on non-acceptance. You should also be clear on, and document, who is responsible for any technical issues and delays and what damages are to be expected as a result.

Becoming more confident

One reason government departments forego revenue entitlements is through fear they will jeopardise good relations with their supplier. There is no reason why this should happen. The supplier may be resistant to the department taking control at first but, as new boundaries are established, their behaviour will shift, leading to performance improvements. Failure to seek remedies can lead to further underperformance and can have a negative influence on those suppliers that are performing well.

When deductions are employed, they should always be clearly defined and supported by easily accessible supporting evidence of suppliers’ failure to deliver. It is never too late to change approach and reassert rights that have lain dormant.

Using a consistent framework and toolset

Employing a consistent approach across the organisation will help develop contract management skills and capabilities and present a coherent interface to suppliers. Using a common structure and core elements such as contract guides, an obligations database and change control tools can mitigate key risks.

In addition, there is a range of more sophisticated interventions that can be deployed; for example, a rapid contract management review will identify the right tailored approach and the ‘size of the prize’ for complex contracts. In our experience, successful contract management delivers savings of 10% or more. Successful contract management is built on fundamental principles operated well.

“To redress the balance and hold suppliers to account, government departments would benefit from following ‘fundamental principles’ that are in common use in the commercial sector.”

Chris Hooper, Jonathan Evans, PA defence experts

To find out more about our experience and expertise in contract management or to speak to one of our experts, contact us now.

 



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