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Improving Contract Management. Kevin McGuinness October, 2013. Subjects Covered. Preliminary Questions Core Area Questions Creating a Contract Management Process Conclusion. Preliminary Questions. Preliminary, cont’d. What constitutes a contract? What types of contract are there?

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improving contract management

Improving Contract Management

Kevin McGuinness

October, 2013

subjects covered
Subjects Covered
  • Preliminary Questions
  • Core Area Questions
  • Creating a Contract Management Process
  • Conclusion
preliminary cont d
Preliminary, cont’d.
  • What constitutes a contract?
  • What types of contract are there?
  • Is a verbal contract binding?
  • When is a contract required?
core area questions
Core Area Questions
  • What is Contract Management?
    • The discipline of managing the contracting process through the entire contract life cycle.
what is contract management
What is contract management?
  • Buy Side: managing contracts and relationships with suppliers and vendors
  • Sell Side: managing contracts and relationships with customers, partners and distributors
  • HR Management: managing HR related contracts and agreements
  • Project Based Contract Management: managing performance and obligations as part of project management
what is contract management1
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 pre-contract to closeout.
why is contract management important
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
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 d1
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 vs contract administration
Contract management vs. Contract Administration
  • Contract Management is comprised of the entire contracting process, from pre-solicitation activities through contract close-out.
  • Contract Administration is comprised of those activities after the award of a contract.
aspects of contract management
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
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 d1
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 d2
Aspects, cont’d.
  • From Planning to Execution
    • Internal Contract Administration Team
    • Adequate Specifications (non-restrictive)
    • Contract Goals
    • Pre-Award Activities
    • Risk Identification/Potential Problems
aspects cont d3
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
Areas of concern
  • Procurement options
  • Specifications
  • Identify Milestones for MeasurementDocument Payment TermsDevelop 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
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
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
efficient procurement
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
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
  • 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 d1
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
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
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
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
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 of the Process produces greatest results over time
  • Now numerous OTS solutions for implementing a contract management approach
automation cont d
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
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
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 d1
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 d2
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 d3
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
The Contract Lifecycle
  • Contract management concerns must be addressed at each of the stages shown.
goals of contract management
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
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 d1
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 d2
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
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
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
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 d1
Preparing, cont’d.
  • Provisions governing implementation and roll-out
    • Acceptance testing plan clearly defined, with comprehensible test standards
    • Clear methods and timelines for correcting perceived deficiencies in performance
  • 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, 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
  • 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
Dispute Resolution Process
  • Graduated
    • Commencing at lowest level
    • Advancing to higher levels in each organization
evaluation process
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 process1
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
Contract Award
  • 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
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
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 d1
Ongoing, cont’d.
  • Interim payments: ensure matched to supply and quality actually delivered
  • Monitor the value for money being received
ongoing cont d2
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
    • Formal claim and record kept
    • Managing and mitigating
    • Identify best way for service/supply to resume
    • Monitor to determine when it ends
managing risk
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
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.

  • 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)
  • Communications
    • Proper records kept
    • Properly approved?