Contract and relationship management

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Contract and relationship management

Transcript Of Contract and relationship management

Procurement – driving better value

Contract and relationship management
Driving results and maximising outcomes

A guide for government agencies

March 2011

Acknowledgement and thanks – development of this guide
This guide is part of a Government initiative, under the Government Procurement Reform Programme, to support good procurement practice and make it easier for New Zealand businesses to engage with government. It has been developed after consultation and discussion. Specific input and guidance were received from the Procurement Development Technical Advisory Group, which is an advisory group comprising senior procurement advisers from government agencies: the Ministry of Foreign Affairs and Trade, the Ministry of Social Development, the Auckland District Health Board, the Ministry of Agriculture and Forestry, the Ministry of Justice, Inland Revenue and Public Trust.
Feedback on this guide
We want to ensure that this guide provides you with comprehensive information on managing contracts. We’re interested in your views on what works well and what we could improve. Please provide any feedback to: [email protected]

First published March 2011
Government Procurement Solutions | Ministry of Economic Development PO Box 1473 | Wellington 6140 | New Zealand | |

Crown Copyright

This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 New Zealand License. In essence you are free to copy, distribute and adapt the work non-commercially, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of this licence, visit­ nc-sa/3.0/nz/. Please note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way that infringes any provision of the Flags, Emblems, and Names Protection Act 1981. Attribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms.


Contents page
Overview of contract management .................................................................................... 4 Contract Management Plan ................................................................................................ 7 Driving results and maximising outcomes........................................................................ 8 Factor 1 – Managing service delivery ................................................................................ 8 Factor 2 – Managing relationships................................................................................... 12 Factor 3 – Managing contract administration.................................................................. 19 Continual improvement .................................................................................................... 21 Roles and responsibilities ................................................................................................ 22
A guide to contract management

“Contract management is the process that enables both parties to a contract to meet their obligations in order to deliver the objectives required from the contract.”
United Kingdom Office of Government Commerce – Contract Management Guidelines

Overview of contract management
The main aim of contract management is to ensure that goods or services are delivered on time, at the agreed cost and to the specified requirements
It means developing effective working relationships with your suppliers, ensuring effective service delivery, maximising value for money and providing consistent quality for stakeholders and end users.
The nature and extent of contract management will vary between contracts. It can be influenced by the nature and value of the purchase and the type of relationship your agency wants with the supplier - both in the short and the long term. Contract management continues throughout the life of the contract – managing delivery proactively, resolving issues that arise and anticipating business needs and potential problems.
For longer-term contracts, contract management also involves initiatives and discussions aimed at continual performance improvement.
The essentials for successful contract management
• Good preparation. Accurately assess your agency’s needs and you’ll have a clear understanding of the results you’re looking for, the quality required and any time or budget constraints.
• Careful supplier selection. By carefully considering the attributes, capacities and capabilities you require for your contract, and designing a process to test potential suppliers against them, you can be more confident that you’ll select the best supplier at a price that represents value for money.
• Appropriate contract selection. The contract mechanism and terms and conditions you choose should reflect the nature and value of the purchase and manage your agency’s exposure to financial, legal and operational risks. Importantly, the contract should cover how you’ll measure the quality of delivery and the supplier’s performance.
• Comprehensive description of the goods or services. All contracts must comprehensively specify your requirements in a concise, easy-to-understand way that provides the supplier with all the information it needs to deliver successfully. You should also offer the supplier the opportunity to ask questions about any aspect of the contract before delivery begins.

A guide to contract management

When describing the goods or services and service levels you require, use the SMARTER approach – that is, make your contract deliverables:
Time bound

• A Contract Management Plan. Contract management tends to receive the least attention – and sometimes only when issues arise. A Contract Management Plan can be a useful tool, particularly for high-value, complex, unique or strategic procurements. It greatly increases your chances of achieving a successful outcome to your procurement.
• Single business focus. Each party needs to understand the other’s business. Both parties’ objectives under the contract must be achievable.
• Service delivery management. Manage service delivery proactively and you’ll ensure that the goods or services you require are delivered as agreed, to the required level of performance and quality, and within budget. Make sure you monitor supplier performance consistently to ensure that your agency continues to get value for money.
• Relationship management. Effective contract management relies on good communication based on mutual respect, trust, understanding, openness and accountability. Keep the relationship between you and your supplier open and constructive, resolving or easing tensions and identifying issues early.
• Contract administration. Make sure your agency keeps full and accurate records of your business transactions, to ensure good governance, transparency and accountability. Your agency must be able to demonstrate that it’s delivering efficient and effective services to its stakeholders.
• Continual improvement. You can ensure continual improvement by taking a flexible approach to the contract, through which your agency and the supplier can negotiate continual improvements in quality and achieve greater ongoing efficiencies and benefits.
• People, skills and continuity. Appoint a contract manager at the outset. If the contract is long term or complex, you might also need a contract-management team comprising a mix of specialists with the right skills to understand the requirements and manage the supplier relationship at all levels.
• Knowledge. Make sure that your contract manager understands the business, the results you’re looking for and the way that they’ll be delivered under the contract. That way they’ll understand the implications of potential issues and opportunities.
• Flexibility. Both parties to the contract need to be flexible and willing to adapt to unanticipated challenges. Your flexibility in finding mutually acceptable solutions can be key to the contract’s success.
• Proactivity. Good contract management anticipates and responds promptly to issues, risks and emerging business needs.

A guide to contract management


What can go wrong, and why?
Common reasons for poor contract management include:

Cause � The agency fails to plan adequately for the
transition to a new supplier.
� The agency’s requirements are poorly specified.
� The supplier’s assumptions aren’t checked.

� Users or stakeholders aren’t aware of the new supplier or changed requirements, and operational disruptions affect the agency’s ability to deliver.
� The supplier doesn’t understand the nature and quality of the goods or services required.
� The supplier’s delivery is inconsistent with the agency’s requirements, and intended benefits aren’t realised.

� The contract terms and conditions are inappropriate for the type of purchase.
� The wrong people are employed to manage the contract.
� Inadequate resources are assigned to contract management.
� The authorities and responsibilities for making decisions aren’t clear.
� The contract managers appointed by the agency and the supplier have different levels of skills and experience, which makes it difficult to control expectations and achieve results.
� The contract’s context, complexities and dependencies aren’t well understood.
� The agency fails to monitor and measure delivery and the supplier’s performance.
� The agency fails to monitor and manage related risks (e.g. political, commercial).
� Parties focus on current delivery arrangements rather than the potential for improvement.

� The agency and supplier fail to understand their respective obligations and responsibilities.
� The legal terms and conditions fail to provide a suitable framework or remedies to best resolve issues that arise.
� Contract management is poor, issues aren’t resolved and can build up, and the supplier isn’t held to account.
� Understandings differ on how to deliver, monitor and implement the contract.
� Progress is slow – even stalled. � The relationship deteriorates and becomes
unworkable. � The supplier fails to deliver and the agency
fails to notice. � Misunderstandings and disagreements arise.
Too many issues are escalated inappropriately. � Decisions aren’t made at the right time, if at all. Staff who have no authority make decisions. Decision-making is inconsistent. � The supplier is obliged to take control, resulting in unbalanced decisions that are not in the agency’s interests.
� The agency can’t assess whether it’s getting full delivery and value for money, or the quality results it requires.
� New business processes don’t integrate with existing processes, which leads to problems or failure.
� Opportunities are missed to improve efficiencies, value for money and performance.

A guide to contract management

“To achieve good contract performance, public entities should ensure that the terms of the contract are adhered to, and that all parties to the contract understand their respective obligations.”
Office of the AuditorGeneral – Procurement Guidance for Public Entities

Contract Management Plan
Your agency needs to monitor and manage its suppliers’ performance to ensure they deliver value for money
While the written contract with your supplier is a record of your mutual legal obligations, it’s not designed as a contractmanagement tool. That’s where a Contract Management Plan is useful, as it enables both parties to understand and record the contract’s operational implications.
A formal Contract Management Plan is recommended for significant procurements that are high value, high risk, complex, novel or likely to attract specific media attention or come under significant public scrutiny. In developing your Plan, make sure you tailor it to the individual contract; the contents and amount of detail will depend on the nature of the procurement.
A Contract Management Plan should include:
• identification and contact details for each party’s contract manager
• the contract managers’ key responsibilities • a timeline of key actions, deliverables, milestones and
payment dates
• the reporting requirements (frequency, type, content and distribution)
• the meeting requirements (chair, location and standard agenda items)
• the process for achieving and checking key deliverables • the quality / standards and measuring process (e.g. KPIs) • payment procedures • the process for agreeing and controlling variations and
changes to the contract
• a contract management risk plan • a fixed asset plan and register (fixed assets could include
laptops or vehicles that your agency buys and that your supplier uses in delivering services)
• guidance on any agency policies or procedures that apply to the supplier (if appropriate)
• ordering procedures (if appropriate). Remember, a Contract Management Plan is a living document – you should keep it updated throughout the contract.
Your Contract Management Plan must be consistent with the terms of the contract.

Review the Contract Management Plan regularly, and adjust it to address emerging issues, needs and opportunities.

A guide to contract management

Who sets the performance measures?
Ideally you and the supplier should agree on the initial performance measures during the contract negotiation – then record them in the contract.
� Review the measures regularly to ensure they remain relevant and useful.
� As the contract progresses you can modify the performance measures to reflect the benefits achieved through innovation and efficiencies.

Driving results and maximising outcomes
Effective contract management relies on three separate, but interrelated factors:
• Managing service delivery ensures that a contract is being delivered as agreed, to the required levels of performance and quality.
• Managing relationships keeps the relationship between the two parties open and constructive, aiming to resolve problems early and focus on continual improvement.
• Managing contract administration provides governance and accountability through tracking and recording delivery.
All three factors must be managed effectively and consistently if the contract is to succeed.
Factor 1 – Managing service delivery
Service-delivery management is about managing a supplier’s performance against the performance indicators in the contract
To meet your agency’s business requirements, your supplier must achieve the best possible balance between time, cost and quality to deliver the goods or services you seek. Service-delivery management can help to balance these factors, providing your agency with the best possible value for money.
Well structured service-delivery management helps both parties to:
• quantify the costs and benefits of the contract • ensure that responsibilities are clearly defined and assigned • clearly define standards for delivery • ensure that payment is only made for goods or services that
meet the required (and verified) standard • ensure that deliverables comply with the agreed business
It will also help your agency to develop your current and future requirements.

A guide to contract management

What are ‘metrics’?
Metrics are statistics developed to measure or quantify something.
In contract management, metrics are aspects of delivery that can be tracked, measured and verified.
What measures should we use?
Measuring service quality means creating and using quality measures. Aspects of service quality that can be measured include: � customer service � availability � capacity � efficiency � reliability � flexibility � timeliness � responsiveness � problem-solving � proactivity � innovation.

Measuring service delivery
There are many ways to measure delivery. In some contracts it’s as simple as assessing whether the measure has been either ‘met’ or ‘not met’. This can happen for aspects of delivery where there is nothing to be gained, or no value added, beyond whether or not delivery happened.
Additional statistics (metrics) can be developed when it’s important not only to establish whether delivery has happened, but to measure its quantity or quality. Some service aspects (such as throughput, cost and accuracy) can be counted and measured in a simple, mathematical way. For example, quality can be expressed on a scale of 1 to 10, with parties predetermining the criterion each number value represents as well as setting the minimal acceptable level of quality.
In the early stages of contract rollout it’s a good idea to allow some flexibility in how delivery will be assessed – such as giving your supplier a reasonable timeframe to get ready for full delivery. During this initial phase it might not be productive to point out a minor transgression on standards, especially if the supplier has worked hard to bring the service ‘on stream’ quickly.
During contract start-up, reliability, accuracy and other aspects might fluctuate, so it’s important to stipulate an appropriate timeframe for services to be bedded down and in which you won’t strictly enforce the service levels. In doing so, remember that too short a timeframe might give an unfair picture, and too long a timeframe might be similarly misleading.
Measuring service quality
Managing service delivery involves more than simply gauging whether services are being delivered to volumes, timeframes or costs. You also need to assess the quality of the services being delivered.
Make sure that you clearly describe the standards you expect in the contract documents – and that both parties understand and agree on the performance metrics before delivery begins. You can always adjust the metrics by agreement as the contract progresses.
Contract management is ultimately about ensuring value for money
Quality measures and metrics provide information on how well a supplier is performing – but it’s no use providing a perfect service if the costs are prohibitive.
Ensuring value for money is about the trade-off between service quality and cost. Your contract management should focus on ensuring that you continue to achieve value for money over time.

A guide to contract management

What if the supplier is an in-house business unit or another government agency?
In this case, you can use a service-level agreement instead of a formal contract.
“You don’t want to be trying to establish a relationship in the middle of a crisis. You want the relationship to be in place already. It’s what you work at building every day.”
Chris Renaud, Chief Information Officer, Health Services I & IT Cluster, Canada

Effectiveness, efficiency and economy
Value for money comes from using resources effectively, efficiently and economically.
• Effectiveness is the extent to which objectives are achieved. In contrast to efficiency, effectiveness is determined without reference to costs.
• Efficiency is a comparison of what can be achieved with what has been achieved using the same resources e.g. time, labour, materials. It’s an important part of determining productivity.
• Economy is concerned with the benefit obtained from the procurement. As well as being based on value for money, it’s about the maximum effectiveness and efficiency of the purchase. It involves conserving resources and eliminating waste.
Every contract should contain mechanisms for measuring the supplier’s performance and determining the overall benefits achieved. Developing a benefits statement enables both parties to see the extent to which the overall results can be achieved against what has been achieved.
In contract management, the term ‘risk management’ incorporates all the activities required to identify, control and manage risks that might have a negative impact on the contract being performed effectively – and ultimately to ensure value for money.
Check your agency’s policies and processes on risk management and incorporate relevant processes into your contract-management practice.
Check out the Procurement Process Risk Register template at:
Types of risk
Many contract-management risks relate to the supplier being unable to deliver to the required level, quality, time or cost. Other risks can relate to the nature of the goods or services themselves and how they impact on the ultimate end users. For government agencies, risk can be categorised as:
• operational • legal • financial • reputational (for the agency) • political (for the Minister and Government).

A guide to contract management
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