Improving Contract Management
Kevin McGuinness
October, 2013
Subjects Covered
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Preliminary Questions
Core Area Questions
Creating a Contract Management Process
Conclusion
Preliminary Questions
Preliminary, cont’d.
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What constitutes a contract?
What types of contract are there?
Is a verbal contract binding?
When is a contract required?
Core Area Questions
• What is Contract
Management?
– The discipline of
managing the
contracting process
through the entire
contract life cycle.
What is contract management?
• Buy Side: managing
• HR Management:
contracts and
managing HR related
relationships with
contracts and
suppliers and vendors
agreements
• Sell Side: managing
• Project Based Contract
contracts and
Management:
relationships with
managing performance
customers, partners and
and obligations as part
distributors
of project management
What is contract management?
• Contract management
activities may be
classified in various
ways
• Usual to divide in
relation to the
chronological
progression of the
contract—from precontract to closeout.
Why is Contract Management
Important?
• One of the last key business process to be
automated with the use of technology.
• Contracts underpin 80% of business to
business transactions
• Contract management offers new tools to
increase control over and efficiency of the
procurement process
Important, cont’d.
• Contract management is not intended to
increase the extent of bureaucracy to which
procurement is subject.
• Goal is to improve the value for money
derived from contracting.
• Need to move from generalities to specific
measures that can be taken to improve
efficiency
Important, cont’d.
• How many contracts does your college award
each year?
• What percentage of those contracts are
completed, on time, within budget, and
according to the original specifications?
• How much of your day is dedicated to trying
to resolve problems after a contract has been
awarded, responding to protests, contract
controversies, or unhappy customers?
• Contract Management is comprised of the
entire contracting process, from presolicitation activities through contract closeout.
• Contract Administration is comprised of those
activities after the award of a contract.
Contract management vs. Contract
Administration
Aspects of contract management
• Procurement Planning
– Early involvement/partnering with our internal
client departments.
– Thoroughly understanding the needs of our client.
– Creating a process that will address those needs
– Consultation and engagement
Aspects, cont’d.
• Planning
– Know what questions to ask to ensure that all risks are identified
during solicitation preparation
– Know the market – or how to research market conditions
– Know the supplier/contractor availability
Aspects, cont’d.
• Planning
– Know what procurements may be on the horizon to
help identify time frame necessary to procure
– Routine
– Specialized Projects
Aspects, cont’d.
• From Planning to Execution
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–
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–
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Internal Contract Administration Team
Adequate Specifications (non-restrictive)
Contract Goals
Pre-Award Activities
Risk Identification/Potential Problems
Aspects, cont’d.
• From Planning to Execution, cont’d.
– Determine Required Documentation
– Confirm Suitable Process for
• Measuring Performance
• Reporting
• Documenting
• Payment Processing
• Approval of Change Orders – Contract Close-Out
– Confirm who is directly responsible for each of these responsibilities
Areas of concern
• Procurement options
• Specifications
• Identify Milestones for Measurement
Document Payment Terms
Develop Contract Close-Out Check List =
• Confirm that Approach to each is consistent
with applicable policies/directives
• Conduct in accordance with Contract Management Manual
– Standardization of Approach
Evolving a Contract Management
Approach
• Evolution of a Process
– Planned Procurement
– Contract Management Manual
– Standardized Approach to each Class of
Procurement
– Promotes consistency
– Can be refined based on experience
– Incremental improvement
Key challenges
• Meeting milestones in terms of time, cost and quality
• Proactively managing work so variances from the agreed schedules
are identified early enough for remedial action to be taken.
• Identifying, managing and solving the many issues that may need to
be addressed
• Communicating and demonstrating contract compliance without a
lot of extra work.
• Keeping everyone in the team informed in close to real-time, so
everyone remains focused and no time or effort is wasted.
• Documenting work in terms of effort and progress plus key issues
solved.
• Creating an credible audit trail
Key Challenges
Efficient Procurement
• By consistently aligning
your purchasing
processes with your
procurement strategies,
while harmonizing your
operational
procurement activities,
you will be able to make
more efficient use of
the available resources.
Efficiency, cont’d.
• Value for money: amount spent to procure is
justified by the quality of the products or
services received, and the conditions (e.g.
timeliness) under which they were delivered
Efficiency
• Methods to enhance
– Lowering transaction costs of procurement
– Achieving best bulk pricing by pooling orders
– Delivery timed to coincide with need (reduces cost
of warehousing, shrinkage and re-shipment)
– Contract terms which encourage competitive
pricing
– Bidding documents and rules which encourage
prospective suppliers to bid
Efficiency, cont’d.
• Public sector agencies are generally large scale
customers, they always pay (eventually) for
what they get, they rarely sue, and they try to
be fair
• Why are they not getting the best prices in the
market?
• Why do some of the best suppliers give them
a pass?
What’s out there?
• Developing a more
active /aggressive
approach to identifying
available products and
suppliers
• Getting a better
understanding of
normal market pricing
Case Study
• British Airways
– £4 billion of purchasing annually (350,000
contracts)
– Used sourcing technology to close the loop from
sourcing to procurement
– Used contract management technology to link
negotiated agreements with purchases
– Deployed technology to automate purchasing of
£1 billion in indirect expenditure
Case Study, cont’d.
• British Airways
– Annual savings of ¢80 million
– 4X increase in order capacity
– Transaction costs reduced by 40%
– Employee productivity increased 48%
– Reduced suppliers from 14,000 to 2,000
– Reduced inventory by £200 million
Nextance Inc. Study, 2003
• Interviewed 100 customer
– 54% said that simply finding contracts is a concern
– 54% said finding key clauses in their contracts is difficult
– 40% said they could achieve large savings by managing contracts
better
– 75% said contractual allocation of risk was a serious concern
– 61% had no idea of the interdependencies of their contracts
– 60% did not track contingent liabilities
– 50% had no procedure in place to identify correct people of
emerging risk
– 26% were dissatisfied with process governing risk disclosure
Automation
• Automation of the
Process produces
greatest results over
time
• Now numerous OTS
solutions for
implementing a
contract management
approach
Automation, cont’d.
• Centralized record
keeping
– Original contract
documents
– Contract changes
– Other important
communications
• Standard form contracts
for each type of supply
• Standard form terms for
special types of contract
(e.g. IT procurement)
• Electronic document
preparation (by entering
key variable data)
• Tickler system
• Invoice and payment
monitoring
• Reconciliation of invoices
with contract milestones
Contract Management Software
• Novatus Contracts
– Provides contract lifecycle management software
– Contract management, paperless contracting and
eSignature. Increase control, visibility and
management across the enterprise.
– Known for ease of use, fast deployment, attractive
costs and support.
– 13+yrs providing contract management solutions.
Software, cont’d.
• The core features are generally similar from
one program to another
• Agiloft
– provides the fastest time to value
– Implements an initial a trial system that you can
actually use to manage contracts
Software, cont’.d
• Revitas Contract Manager
– comprehensive contract management software
solution for the authoring and administration of
contracts, resulting in shorter sales cycles and
reduced risk.
– Single centralized contract repository
– Automated rule-based workflows
– Integration with Microsoft Word
– Contract milestone management
Software, cont’d.
• Open Source Contract Manager
– Free trial.
– Email alerts, full text search, customizable reports,
easy import of any format, document compare
(Word to PDF), authoring, approval workflow,
configurable, on-demand, contract analysis-makes
documents easier to navigate/restrict access
rights, full audit,
– Can go live in only 24 hours
Software, cont’d.
• Over the course of an afternoon, I was able to
locate 127 different software solutions for
implementing contract management within
any organization, from small to large.
• Fairly competitive market
The Contract Lifecycle
• Contract management
concerns must be
addressed at each of
the stages shown.
Goals of contract management
• Ensure both parties
perform as specified
• Right goods and
services are delivered in
a timely manner
• Financial interests of
the customer are
protected
Goals, cont’d.
• To carry out this mandate, you require
– Clearly written, comprehensive and viable
specifications
– Clearly defined scope of work
– Clearly identified deliverables
– Testable method of assessing performance
Goals, cont’d.
• Timelines and due dates (milestone dates)
– Must be clear
– Must be realistic
– Should be stated in procurement document
• Contract should be managed to confirm
compliance to project work plan
Goals, cont’d.
• Payment entitlement
– Needs to be clearly stated
– Proper balance of interests of supplier and
customer
– Payment trigger should be objectively verifiable
• Avoid automatic payments (e.g. merely by passage of
time)
• Should be test to satisfy
– Incentives and penalties
Good governance
• Proper budgetary
approval
• Proper process of
consultation with
stakeholders
• Ensuring all requisite
approvals obtained
• Ensuring proper signing
authority
• Licenses or other
permissions to proceed
• E.g. IT or Privacy sign off
• Review of documents by
legal
Preparing to Go to Market
• Clear definition of what is to be provided and
all requirements to be met
• Means to measure performance: how can the
supplier know whether or not it has
performed properly?
• Can amount payable be tied to performance?
– Incentives and also penalties
• Is allocation of price risk realistic?
Preparing, cont’d.
• Does the project team cover all relevant areas
– Affected users
– People with required expertise
• Are they committed to providing timely input
• Do they have the requisite authority
Preparing, cont’d.
• Provisions governing implementation and rollout
– Acceptance testing plan clearly defined, with
comprehensible test standards
– Clear methods and timelines for correcting
perceived deficiencies in performance
Specifications
• Clear and complete description of what is
required
– If an RFP, should clearly identify the need to be
met
– Performance constraints
– Operating conditions
– Usage requirements
– Special needs to be addressed
Specifications, cont’d.
• Specifications should communicate set
expectations that must be satisfied
• They provide the basis for oversight,
management of performance and for
application of sanctions
• Vendor accountability during performance
– Immediate notification where not met
– Remedy immediately identified and implemented
Communications
• A concern from commencement to close-out
• Need to cover each of the following
– Pre-bid
– Post-bid pre-award
– Operational
– Close-out
• Invoicing Arrangements
• Processing of payment claims
Dispute Resolution Process
• Graduated
– Commencing at lowest level
– Advancing to higher levels in each organization
Evaluation Process
• Qualified evaluators
• Consistent and rational approach
• Evaluation tied to specifications and other
requirements set out in RFP/Tender
• Proper documentation
• Conflict of interest: perceptions of unfairness
• Proper understanding of role and responsibility
• One level of evaluation or two?
Evaluation Process
• Bid prices
– Main consideration is usually whether they are
within budget
– An equally important concern is whether they are
above market prices
• In the private sector, it is usual for buyers to have an
idea of the likely price
• Why is this left to chance in the public sector?
– If the best bid price is well above market, why
award a contract?
Contract Award
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Communicated quickly
Do not leave losers hanging on the wire
Concluding the final contract
Securing requisite approvals (for instance,
threat risk assessments, privacy impact
assessments)
• Securing appropriate signatures
• Proof of insurance, licences, etc.
Start-up
• Is consultation between customer and
supplier required during start-up phase
– Need to arrange process for securing
• Is initial testing required before commencing
work
• Settling upon delivery schedule, if not
specified in RFP or Tender
Ongoing Delivery
• Communications: feedback to and from
suppliers as to progress being made and any
perceived deficiencies
• Need someone with authority to effect
necessary changes
Ongoing, cont’d.
• Monitoring of delivery to confirm compliance
with service levels
– Proper metrics should have been specified in the
contract documents
– But, very often they are not.
• Note also whether quality control standards are
being met
• May need some flexibility during early stages.
– Do not let this flexibility amount to a reduction in
expectation.
Ongoing, cont’d.
• Interim payments: ensure matched to supply
and quality actually delivered
• Monitor the value for money being received
Ongoing, cont’d.
• Ensuring continuity
– Are supplies being made regularly: right amount, right
time?
– Are prices being charged consistent with the bid
prices?
• Force majeure
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Formal claim and record kept
Managing and mitigating
Identify best way for service/supply to resume
Monitor to determine when it ends
Managing Risk
• If contract has allocated risks, make sure
demands for payment and payments made
are consistent with that allocation of risk.
• How should risks be allocated
– Risk identification and avoidance
– Best risk manager
– In line with the commercial basis of the project
– Lowest cost insurer
– Sharing of risk
Dispute resolution
• Deal with problems promptly and
professionally
• Is the agreed process being followed
• Form record of agreed solutions
• Monitor performance in accordance with
those agreements
Yours and theirs.
Miscellaneous
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Contract maintenance
Change control
Notice periods
Ordering procedures (e.g. in case of vendor of
record)
• Payment procedures being followed; timely
payments made
• Proper reports being made (internally and
externally)
Miscellaneous
• Communications
– Proper records kept
– Properly approved?