Pre-award activity and contract preparation

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Contract management is “the process of systematically and efficiently managing contract creation, execution and analysis for maximising operational and financial performance and minimising risk”, according to technology research company the Aberdeen Group.

It is an area of growing importance in both the public and private sectors because of pressure to reduce costs and improve financial and operational performance. Increases in contract volumes and complexity have also resulted in a greater recognition of the importance and benefits of effective contract management.

Contract management is successful when:

The arrangements for service delivery continue to be satisfactory to both parties, and the expected business benefits and value for money are realised;
The supplier is co-operative and responsive;
The organisation understands its obligations under the contract;
There are no disputes;
There are no surprises;
An objective debate can be had over issues;
Efficiencies are identified.

1. Building a project team

One of your first considerations will be whether to assemble a project team to deal with pre-award activity and contract preparation. This will depend on the scale, nature, complexity and significance of the project and the necessary skills and experience.

Factors to be considered when assembling the team are:

The nature of the project;
The nature of the work environment and
management style;
Internal and external communication.

In addition to procurement, the project team may be drawn from relevant disciplineswithin the organisation.

These disciplines could include: design, research and development, production, quality control, logistics, marketing and sales, legal, finance and human resources.

The project team may also include representatives of the end users, whether internal or external, and representatives of disciplines within supplier organisations, such as design, production and logistics.

As well as the necessary technical skills, knowledge and experience, team members need to be able to work together effectively.

2. Resources

According to the Office of Government Commerce (OGC), the financial resource required to manage a major contract has been estimated at around 2 per cent of the contract value. This proportion increases for contracts of lesser value.

There will be an overhead of in-house resource to manage the contract, so make sure that you allocate sufficient resources for this.

3. Assessing Needs and Defining Requirements

A new contract can be prompted by a variety of reasons. For example:

Dissatisfaction with an existing supplier;
The need to achieve cost savings;
Identification of key aims, outputs or deliverables.

Before thinking about a contract it is important first to understand what the drivers are for the contract.

For example, if one driver is your organisation’s dissatisfaction with its existing supplier, then you need to identify what is wrong with the current deal. Is the price too high, are response times too slow – or is it something else?

By fully understanding the rationale for a new contract you can ensure that it has all the relevant provisions to achieve your organisation’s goals.

Sometimes personnel involved in negotiating a new contract may not be fully aware of the reasons why this contract is being entered into, how it links with other contracts and how it achieves your organisation’s strategic goals. They need to understand the drivers in order to negotiate effectively.

Choosing a new supplier involves a certain amount of risk for your organisation. This is because you are putting the supply of goods and/or services into the hands of a third party. If the supplier does not meet the required standard, or supplies late, at a higher cost than anticipated or in a way that is not expected, this can have an adverse impact upon your organisation. A proper written contract can help to avoid this.

This contract can be seen as an umbilical cord which links your organisation to the supplier (and vice versa). It is therefore crucial that this contract covers all of the key issues and is drafted properly from a legal point of view.

4. Preparing Initial Requirements

The next step is to outline your key requirements. Typical key requirements will include:

Goods/services required;
Acceptable standards;
Price;
Timescales;
Duration of contract;
Termination clauses;
General contractual terms (relating to your organisational strategy).

You may choose to put such terms in a document called “Heads of Terms” or a Memorandum of Understanding (MOU) although these terms may be subject to the detail of the full contract.

The MOU provides an outline of what your organisation needs. This can help to filter out at an early stage those suppliers that cannot fulfil your criteria.

A potential disadvantage is that the terms can begin to resemble the full contract. Be absolutely clear as to whether they are binding or not. Get this wrong and you will be left with legally binding obligations but without legal protection such as limitation of liability

DOs and DON'Ts

DO make sure all relevant
disciplines are represented
in the project team
DO allocate suffi cient
resources for the project
DO identify drivers for
the contract
DON’T expect staff to
negotiate effectively if they
are unaware of the rationale
behind the deal
DON’T rely on verbal
agreements – put a proper
written contract in place
DO provide an outline of
what your organisation
needs to help fi lter out
unsuitable suppliers