Contract managment

Contract management guidelines

Managing the relationship

Critical success factors

Ongoing VFM

Managing risks

Contingency planning

Handling problems

Management summary

These guidelines cover the issues involved in managing long-term service contracts following contract award.The main areas covered are managing service delivery (formal governance), managing the relationship, contract administration, seeking performance improvements, and managing changes.This guidance does not cover the process of creating a commercial arrangement. These guidelines are aimed at public sector managers responsible for managing longterm commercial arrangements with the private sector. It aims to help them manage the contract and the relationship to give value for money and improve performance. This document is intended as a guide for management rather than practitioner level guidance.

Contract management activities can be broadly grouped into three areas.

• Service delivery management ensures that the service is being delivered as agreed, to the required level of performance and quality.

• Relationship management keeps the relationship between the two parties open and constructive, aiming to resolve or ease tensions and identify problems early.

• Contract administration handles the formal governance of the contract and changes to the contract documentation.

All three areas must be managed successfully if the arrangement is to be a success. In addition, good preparation and the right contract are essential foundations for good contract management.The arrangement must also be flexible enough to accommodate change.

A key factor is intelligent customer capability: the knowledge of both the customer’s and the provider’s business, the service being provided, and the contract itself. This capability, which touches all three areas of contract management, forms the interface between supply and demand; that is, between the business area and the provider.

Managing service delivery means ensuring that what has been agreed is delivered, to appropriate quality standards. The contract should define the service levels and terms under which a service is provided. Service level management is about assessing and managing the performance of the service provider to ensure value for money. Considering service delivery Management summary service quality against cost leads to an assessment of the value for money that a contract is providing.

As well as assessments of whether services are delivered to agreed levels or volumes, the quality of the service must also be assessed. Quality metrics will have to be created that allow the quality of service to be assessed, even in areas where i is hard to quantify.

A key part of assessing the service provided is the baseline, or level from which service levels and improvements are measured.This will need to be agreed before the service commences. Benchmarking, or comparing performance across different organisations and providers, is another useful way to gauge improvements or pricing levels.

Managing risk is another important aspect of managing service delivery. The fulfilment of the contract ay be endangered by several kinds of risk; some within the provider’s control, some outside it. Identifying and controlling (by avoiding or minimising) the risks to a contract is a vital part of managing it.This includes those risks that have been transferred to the provider under the contract. Business continuity plans and contingency plans help prepare the customer organisation for the situation where the provider cannot deliver.They are an important part of managing risk.

As well as the contractual and commercial aspects, the relationship between the parties is vital to making a success of the arrangement.The approach to this will vary depending on the contract, but it is important that the specific responsibilities are not neglected, even though there may not be a nominated individual assigned to the role of relationship manager.

In long term contracts, where interdependency between customer and provider is inevitable, it is in the interests to make the relationship work. The three key factors for success are trust, communication, and recognition of mutual aims.

Management structures for the contract need to be designed to facilitate a good relationship, and staff involved at all levels must show their commitment to it. Information flows and communication levels should be established at the start of a contract, and maintained throughout its life.The three primary levels of commun cation in a contractual arrangement are operational (end users/technical support staff), busi ess (contract manager and relationship manager on both sides) and strategic (senior management/board of directors).

The right attitudes and behaviours, based on trust rather than adversarial models, should be encouraged.

There should be set procedures for raising issues and handling problems, so that they are dealt with as early as possible and at the appropriate level in the organisation.

Contract administration, the formal governance of the contract, includes such tasks as contract maintenance and change control, charges and cost monitoring, ordering and payment procedures, management reporting, and so on.

The importance of contract administration to the success of the contract, and to the relationship between customer and provider, should not be underestimated. Clear administrative procedures ensure that all parties to the contract understand who does what, when, and how.

The contract documentation itself must continue to accurately reflect the arrangement, and changes to it (required by changes to services or procedures) carefully controlled. Responsibility for authorising different types of change will often rest with different people, and documented internal procedures will need to reflect this.

Management reporting procedures control what information is passed to management about the service; this can range from a comprehensive overview of all aspects to solely reporting ‘exceptions’ to normal service. Arrangements for asset management must also be considered.

Service delivery management, relationship management and contract administration should keep both contract and relationship running smoothly, and providing the value for money represented by the contract at its outset.The customer will almost certainly want to aim for improvement over the life of the contract as well; ideally, the requirement for improvement will be built into the contract.

A good working relationship will help make improvement a reality, based on the principle that improvement is good for both parties, not just a means for the customer to drive down costs.

Incentives motivate providers to improve by offering increased profit or some other benefit as a reward for improved performance or added value. Benefits based payments, where payment is dependent on the realisation of specific benefits to the customer, are a more sophisticated form of incentive. Normally built into the contract terms, it is vital that incentives are balanced and encourage appropriate provider behaviour.

It may be appropriate to aim for continuous improvement over the life of a contract, perhaps expressed through a capped price that decreases year on year.A plan could be developed with the provider detailing how improvements will be made.

A successful arrangement requires a mutual commitment to meeting evolving business requirements and adapting to changing circumstances. Properly managed change can be a good opportunity to improve the service.

Drivers (reasons) for change during contracts can come from a range of sources, both internal and external.Whatever the drivers, it is important to realise the implications of change for the contract and all parties involved.There could be implications or concerns in areas such as continuing value for money and the possibility of moving beyond the original scope of the requirement.

Change is easier to deal with when preparations are made. Not every possibility can be foreseen and planned for, but it is desirable that the contract include some flexibility as well as procedures for handling changes.

Areas where change might be necessary include performance metrics, service functionality, service infrastructure and workload.

Construction contracts are fundamentally different from major service contracts. There are various types of construction contract.The choice of contract depends on the basis of pricing and the contract strategy that best meets the project objectives.The various types offer different ways of handling pricing, risk transfer, responsibility for performance, cost certainty, and complexity.

The main customer-side roles involved in handling construction contracts are th project manager and the project sponsor.The project manager manages the contract on behalf of the customer, co-ordinating the design and construction and managing claims and disputes in an impartial manner. On large-scale projects, the project sponsor fulfils a higher level, less hands-on role, overseeing the project manager and monitoring budgets (among other duties).