A PRACTICAL GUIDE TO SUCCESSFUL CONTRACT MANAGEMENT

Transcription

1 A PRACTICAL GUIDE TO SUCCESSFUL CONTRACT MANAGEMENT December 2009 Technology and Outsourcing Group

2 CONTENTS 1. PURPOSE OF THIS GUIDE INTRODUCTION MANAGEMENT OF CONTRACT START UP ADMINISTRATION OF THE CONTRACT MANAGEMENT OF CONTRACT PERFORMANCE CONTRACT VARIATIONS SYSTEMS AND PROCEDURES MANAGEMENT OF CONTRACT DISPUTES RECORD KEEPING...26

3 1. PURPOSE OF THIS GUIDE This guide is for anyone who has responsibility for managing contracts. It is from the point of view of a buyer or customer. The guidance is generic that is, its principles are intended to be applicable to all contracts, although it is likely to be of more relevance to major and complex service contracts. The guide provides best practice tips and guidelines so that you can: actively monitor and control all aspects of the relationship between the service provider/contractor and your organisation; and ensure the delivery of a cost effective and reliable service at an agreed price and standard. From our experience and those of our clients, the worst way to manage a contract is simply to leave it to take its course. It will inevitably go wrong and leave an incomplete audit trail. The guidance in this document should provide you with the know-how to: manage the contract "start up" effectively and to provide a checklist to assist with understanding the contract; manage the process relating to unresolved issues; administer the contract effectively; undertake performance management; negotiate contract variations; and manage contract disputes. This guide does not cover the process of creating a commercial arrangement and assumes that: the reader is familiar with procurement procedures and principles; the contractual requirements have been carefully determined and documented; the contract to be managed is well constructed; the service provider has been carefully selected and their tender properly evaluated before contract signature. For contract management to be successful, it is crucial that the above foundations are in place

4 2. INTRODUCTION 2.1 What is 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. It also involves building a good working relationship between the customer and the service provider. It continues throughout the life of a contract and involves managing proactively to anticipate future needs as well as reacting to situations that arise. One of the key aims of contract management is to obtain the services as agreed in the contract and achieve value for money. This means optimising the efficiency, effectiveness and economy of the service or relationship described by the contract, balancing costs against risks and actively managing the customer and service provider relationship. Contract management may also involve aiming for continuous improvement in performance over the life of the contract. 2.2 Getting the contract right This guide concerns customer activities following the signature of a contract, not the procurement process that leads up to the signing of a contract. However, as mentioned previously, the foundations for contract management are laid in the stages before contract signature, including the procurement process. The terms of the contract should include an agreed level of service, pricing mechanisms, service provider incentives, contract timetable, means to measure performance, communication routes, escalation procedures, change control procedures, agreed exit strategy and agreed break options, and all the other formal mechanisms that enable a contract to function. The above mentioned formal contract aspects form the framework around which a good relationship can grow. If the contract was poorly constructed, it will be much more difficult to make the relationship a success. The contract negotiation process must take account of the requirements for contract management. It is vital to build a contract that not only identifies clearly the obligations of the service provider (and indeed the customer), but also enables a productive relationship built on good communication and mutual trust. While the contract must be built on a firm formal and legal foundation, it should not be so restrictive that it precludes flexible, constructive management of the relationship between the customer and the service provider. 2.3 Critical success factors In our experience, the following factors are essential for good contract management: Good preparation: An accurate assessment of needs helps create a clear output-based specification. Effective evaluation procedures and selection will ensure that the contract is awarded to the right service provider. The right contract: The contract is the foundation for the relationship. It should include aspects such as allocation of risk, the quality of service required, and value for money mechanisms, as well as procedures for communication and dispute resolution. Single business focus: Each party needs to understand the objectives and business of the other. The customer must have clear business objectives, coupled with a clear understanding of why the contract will contribute to them; the service provider must also be able to achieve their objectives, including making a reasonable margin. Service delivery management and contract administration: Effective governance will ensure that the customer gets what is agreed, to the level of quality required. The - 2 -

5 performance under the contract must be monitored to ensure that the customer continues to get value for money. Relationship management: Mutual trust and understanding, openness, and excellent communications are as important to the success of an arrangement as the fulfilment of the formal contract terms and conditions. Continuous improvement: Improvements in price, quality or service should be sought and, where possible, built into the contract terms. People, skills and continuity: There must be people with the right interpersonal and management skills to manage these relationships on a peer-to-peer basis and at multiple levels in the organisation. Clear roles and responsibilities should be defined, and continuity of key staff should be ensured as far as possible. A contract manager (or contract management team) should be designated early on in the procurement process. Knowledge: Those involved in managing the contract must understand the business fully and know the contract documentation inside out ("intelligent customer" capability). This is essential if they are to understand the implications of problems (or opportunities) over the life of the contract. Flexibility: Management of contracts usually requires some flexibility on both sides and a willingness to adapt the terms of the contract to reflect a rapidly changing world. Problems are bound to arise that could not be foreseen when the contract was awarded. Change management: Contracts should be capable of change (to terms, requirements and perhaps scope) and the relationship should be strong and flexible enough to facilitate it. Proactivity: Good contract management is not reactive, but aims to anticipate and respond to business needs of the future. 2.4 What can go wrong and why? If contracts are not well managed from the customer side, any or all of the following may happen: the service provider is obliged to take control, resulting in unbalanced decisions that do not serve the customer s interests; decisions are not taken at the right time or not taken at all; new business processes do not integrate with existing processes, and therefore fail; people (in both organisations) fail to understand their obligations and responsibilities; there are misunderstandings, disagreements and underestimations; too many issues are escalated inappropriately; progress is slow or there seems to be an inability to move forward; the intended benefits are not realised; and opportunities to improve value for money and performance are missed

6 Ultimately, the contract becomes unworkable. There are several reasons why organisations fail to manage contracts successfully. Some possible reasons include: poorly drafted contracts; inadequate resources are assigned to contract management; the customer team does not match the provider team in terms of either skills or experience (or both); the wrong people are put in place, leading to personality clashes; the context, complexities and dependencies of the contract are not well understood; there is a failure to check service provider assumptions; authorities or responsibilities relating to commercial decisions are not clear; a lack of performance measurement or benchmarking by the customer; a focus on current arrangements rather than what is possible or the potential for improvement; and a failure to monitor and manage retained risks

7 3. MANAGEMENT OF CONTRACT START UP After a contract has been signed there are a number of matters that should be addressed to provide the foundation for successful contract management. An early step is to ensure that sufficient resources and senior management support are available to manage the contract. It is equally important to understand both the contract provisions and contractual relationships at the outset. In the case where the contract manager has been involved in earlier procurement phases, we expect that the contact manager will already have knowledge of issues relevant to implementation. The following checklist should assist the contract management team with providing a better understanding of the contract and can be used as a basis for developing an effective working relationship with the service provider. 3.1 Analyse the contract and agree the service provider's understanding of the contract Identify deliverables and how their achievement will be measured. Ascertain timeframes, particularly any critical deadlines. Understand payment arrangements, including links between payments and performance. Identify the roles and responsibilities of both parties and allocate responsibilities within the customer organisation. Confirm agreement with the service provider, especially in relation to any sensitive matters. We expect that many customers may have certain procedures that must be followed before and during contract negotiation and prior to execution of contracts. The procedures may vary depending on the contract terms, the service provider and project type. 3.2 Gain an understanding of the background to the contract and the relationship that has been developed with the service provider Discuss the relationship that has developed with the service provider over the preceding phases of the contracting cycle. Meet with the service provider as necessary to further develop the relationship and address issues that may impinge on effective contract management. 3.3 Establish any required systems for monitoring and reporting, protocols for communication and recordkeeping arrangements Establish contract management or data collection systems or processes (this is further discussed in section 7. Draw up a monitoring plan or checklist covering key timelines, critical deliverables and performance reporting priorities. Develop any procedures or protocols. Establish recordkeeping arrangements. 3.4 Obtain or confirm licences in relation to intellectual property that have not already been obtained - 5 -

8 Ensure that relevant confirmation has been obtained. Confirm all documentation is up-to-date. Store evidence of these matters appropriately. 3.5 Brief any team members or stakeholders Set out meeting arrangements for the life of the contract. Confirm stakeholder involvement and their requirements for information. Set up and/or brief any committees or working groups. Brief any members of the contract management team regarding their roles and responsibilities. 3.6 Management of unresolved issues In many instances, not all issues are resolved at the time of contract signature. These need to be addressed in a timely way during contract start up. These issues can create problems when managing a contract if not properly dealt with at the correct time. In situations where there are issues that have not been fully resolved at contract signature, the contract manager should: identify and record any agreements or arrangements made by the parties relating to this when the contract was negotiated; identify and record aspects of the contract which have been potentially left for future development; and identify and record aspects of the contract which will be subject to some other process, for example, third party approvals. The detailed review of the contract at contract start up may also identify issues that require clarification or elaboration in the contract. It is important to address any such issues promptly. This may require a contract variation or exchange of correspondence. Contract variations are discussed at section Transition For some contractual arrangements there will be a transition phase. The duration of this phase can range from a few days to several months. The objectives of this phase are to: ensure a smooth transition to the new service provider by minimising the risk of a reduction or loss of services and the impact on end-users and other stakeholders; establish relationships and systems and procedures that will be used during the life of the contract, and complete the transfer of information and/or assets to the new service provider. For straightforward contracts there may be a number of one-off tasks that need to be appropriately planned and resourced. In complex contractual arrangements the transition phase may require a detailed plan or some other formal documentation to ensure all - 6 -

9 relevant matters are considered and addressed. The way the customer manages the transition phase will generally be an indication to the service provider about the way the whole contract will be managed. If, for example, the customer adopts a lenient approach in respect of the non-achievement of transition targets, the service provider may take this as a signal of how the customer will deal with under performance generally. 3.8 Post- transition review At the end of the transition phase it is important that a formal assessment is undertaken of overall contract performance. The extent and method adopted will depend on the complexity of contract deliverables and how important the results of the transition are to the success of the contract over its life. For example, where the transition is being used to finalise details of contract deliverables and performance measures, the outcome of the transition will dictate the final form of the contract and how it will operate in practice. The post-transition review should also be used to review the customer's contract management arrangements, including resource requirements. 3.9 Governance arrangements There is no one prescribed governance structure for managing the contract/relationship. The structure depends largely on the size and scope of the deal and the organisational structure of both the customer and service provider. The names of the groups/committees within the governance structure are also deal or client specific. A common structure is for the establishment of a hierarchy of working groups/committees with representatives from the service provider and the customer, whose roles and remit are clearly spelt out to ensure progress is reviewed through plenty of interaction. There will usually be committees at executive, service management, operational/project management levels. The parties need to understand and comply with the governance arrangements and in particular the following issues should be considered: the time frames for establishing the meetings of the committees; the agenda for each meeting and the timing for the distribution of that agenda prior to the meeting with any reading material; the role of the chairperson; the process for documenting the minutes of the meetings. All actions, responsibilities and accountabilities should be tracked and managed if the contract is to be managed effectively; and notification to the other party of any change in the committee representatives

10 4. ADMINISTRATION OF THE CONTRACT Contract administration is an integral and important element of contract management and overlaps with monitoring and performance assessment. It encompasses various activities that need to be completed on a day-to-day basis, including: developing and maintaining contact details of key people involved in the contract; understanding the notice provisions; scheduling meetings and other actions required by the contract delivery and acceptance of the goods or services; making payments; maintaining complete records for the contract itself; and establishing and maintaining contract documentation. 4.1 Contact details To assist the overall management of long term contracts, there can be benefits in maintaining up-to-date records of key personnel, stakeholders, end-users and/or experts and their contact details. This can assist in facilitating communications between the parties particularly where there are changes in personnel or where personnel are geographically dispersed. 4.2 Notice provisions Although notice provisions are not the most glamorous or exciting of clauses, it is often important to determine at what time notification is considered to have been given or received. Therefore, the following essentials of a notice provision should be well understood: the place at which notice is to (or may) be served; the method by which it is to (or may) be served; and where and when service is deemed to take place. 4.3 Scheduling meetings For most contracts, meetings and particular actions will need to occur at specific times throughout the life of the contract. It is an important element of contract administration that a schedule of meetings for parties to the contract, end-users and stakeholders is established in advance, giving the time, place and purpose of the meeting. The schedule should also list any planned reviews or other key actions. 4.4 Delivery and acceptance Delivery refers to receipt of the contracted supplies into the customer's possession as specified under the contract. Particular care must be taken with phased delivery. If a service provider fails to deliver supplies by the delivery dates or to the delivery point specified in the contract there may be consequences for the service provider under the contract. The contract manager should ensure that various requirements regarding risk of loss or damage to the goods or services are carried out in accordance with the contract provisions. The contract manager should ensure that, prior to goods or services being - 8 -

11 delivered, appropriate risk management measures are put in place in relation to the security and storage of goods or services. Where appropriate, the contract manager should also ensure that appropriate insurance coverage for the goods or services has been arranged. "Acceptance" is the term used to describe the procedure by which the customer determines whether the goods or services meet contract requirements. In many contracts, acceptance of the contract deliverables will occur periodically throughout the life of the contract. In service contracts, services may be delivered on a continuing basis. On delivery, goods or services need to be inspected or reviewed and, where necessary, tested against the standards specified in the contract, before formal acceptance under the contract is completed. In the case of goods the process of inspecting or testing the contract deliverables is easier to apply than it is for services. In the case of services, performance measures such as service levels and compliance with reporting requirements may be part of the acceptance process. Generally, the contract should set out the process for acceptance. This will usually require the service provider to provide the contract deliverables in the form specified by the contract. This may include providing a formal document to the contract manager and supporting evidence, such as the results of an acceptance testing, that the goods or services meet the contract requirements. The contract will usually set out a period in which the customer is able to decide whether to accept or reject the goods or services. 4.5 Payments Contract payments should only be made in accordance with the provisions of the contract. Before payments are made evidence is required that the appropriate representative of the customer has certified that goods and services have been received and have met the required standard of performance. It is also important that payments for satisfactory performance are made in line with the timeframes set out in the contract. Payments for satisfactory performance should not be delayed because this can undermine the relationship with the service provider. Payments should be made following receipt of a correctly rendered invoice or other statement of expenditure. All necessary authorisations and approvals should have been obtained prior to making payment. 4.6 Contract documentation It is important that the most up-to-date version of the contract incorporating any variations is formally evidenced in writing and appropriately stored. This provides the basis for making payments and the ongoing management of the contract. It is likely by the contract management phase that a system for maintaining documents for the particular contract will already have been established. If this is not the case, a recordkeeping system containing all appropriate documentation should be established in accordance with the customer's recordkeeping policy and practices. If a system already exists it should be reviewed to ensure that it is appropriate to the contractual arrangement. Any additional recordkeeping requirements should be identified and any gaps in documentation addressed. The following case study highlights a situation where good recordkeeping paid off

12 Case Study: The benefits of good recordkeeping An organisation was considering an extension of a major contract (in accordance with an option under the contract). All staff associated with the original tender process and initial operation of the contract had moved to other jobs. An external consultant was engaged to assist in deciding whether the extension option should be exercised and then negotiating the extension. The consultant reported that the meticulous recordkeeping of the original contract manager had resulted in major savings in the updated contract. The records provided evidence of the effectiveness (or otherwise) of previous contract clauses, of successful approaches to managing services that could be included in the updated contract, and evidence of early problems that strengthened the agency s negotiating position in exercising the option to extend the contract

13 5. MANAGEMENT OF CONTRACT PERFORMANCE Performance management involves: performance monitoring collecting data on performance; performance assessment deciding whether performance meets the customer's needs; and taking appropriate action such as understanding and extending features of good performance, correcting areas of under performance; or amending contract requirements to meet changing needs. Performance management must be undertaken throughout the life of the contract and for all contracts, whether straightforward or complex. Along with performance indicators and standards, arrangements for monitoring and assessment should have been set out and agreed in the contract along with action that would result from non performance. Clear links should have been established in the contract between payments for performance and the effect of non-compliance or under performance on those payments and the intent to invoke service credits/rebates contained in the contract if necessary. The performance monitoring and assessment arrangements should also have been reviewed at the contract start-up stage and any necessary plans, tools or systems developed. 5.1 Monitoring Monitoring focuses on collecting and analysing information to provide assurance to the customer that progress is being made in line with agreed timeframes and towards providing the contract deliverables. Information provided by the service provider for monitoring purposes should be reviewed and audited, as necessary, to ensure its accuracy and reliability. It can also often be tested through consulting end-users regarding the goods and services they have received. While the broad arrangements for actual monitoring over the life of the contract should generally have been set out in the contract itself, they may need further or more detailed explanation at contract start-up or during the transition in phase. The level and formality of any approach to monitoring needs to be governed by the complexity of the contract and/or the degree of risk involved. In some cases the approach to monitoring may be set out in a checklist, in others, a plan setting out detailed monitoring arrangements may be needed. It is important to focus monitoring activity on key deliverables - very detailed monitoring can be costly and can unduly shift the focus away from achieving contract outcomes. This may mean establishing priorities for what will be measured at specific time intervals. Collecting too much information is also costly and the customer may not have the resources to analyse it to assess performance adequately. Having a systematic approach to monitoring, which includes the sort of information required and when it is required, can assist in identifying any potential problems and allow early remedial action to be taken. It also allows timely reporting to senior management and other stakeholders. Obtaining relevant information and data may need to be supported by management information systems or data bases. Some information may be able to be provided electronically

14 It is important to collect and analyse all relevant information needed to assess performance. After analysing the information, feedback should be provided to the service provider in a professional and constructive manner (and in line with any communications protocol that exists). This is discussed further in the section below dealing with performance assessment (section 5.2). The following case study discusses a situation involving too many performance indicators. Case Study: Too many performance measures An organisation had specified comprehensive performance information to be provided under the contract. The service provider fully complied with the requirement. Each month the contract manager received by a report of nearly 100 pages of detailed statistics on all aspects of the contract for the previous month. After the first few months, the report was only used as the basis for authorising payments. It was not useful for a higher level assessment of performance or of potential problems, as it contained so much information, with no analysis or indication of whether corrective action had been taken on any service shortfalls. The contract manager negotiated the addition of appropriate management summaries to give an understanding of the overall performance and evidence of effective management by the service provider. Details of areas that need to be monitored could include: specific goods or services provided on time to the required quality; user satisfaction; performance against contract requirements; and invoicing and payments. In addition to data collected for the purpose of measuring performance, assessment of a service provider s performance can also be assisted by other information sources such as records or minutes of meetings and discussions, reports from third parties, stakeholder, end-user and client surveys, site visits and observations, complaints, reported delays and the need for contract variations. 5.2 Performance assessment Performance assessment is undertaken on the basis of information collected during the monitoring process. It is important that during this process feedback is provided in relation to good and poor performance, and that any performance problems are addressed promptly. The basis for performance assessment, that is, indicators with related targets, and standards should have been set out in the contract. Where performance information is difficult to establish at the contract development stage, it may require further development over the life of the contract. The contract provisions should have been framed to allow this. Developing indicators further during contract management can draw on actual results achieved, research and feedback from stakeholders. For performance management to be most effective, responsibility needs to be shared between the service provider and the customer. From the customer's point of view, the primary responsibility for performance rests with the contract management team. It is in their interest to work actively and positively with the service provider to achieve outcomes in a "value for money" way. Performance management should ensure that standards and targets are met on time and within budget. It should also contribute to, not distract from, the service provider delivering contract outcomes

15 Revisions will need to be made if: data being collected is not providing adequate information to assess performance; performance measures have not been fully developed; or performance measures are found not to be suitable for the particular contract. It is important not to change arrangements to mask poor performance by the service provider or a lack of skill by the customer. Judgement will need to be exercised to determine whether changes or reinterpretations are needed. Contract managers need to have assurance that the information used to assess performance, and to make or withhold contract payments, is accurate. This material will also be used to keep senior management and other stakeholders informed regarding progress. Inaccurate information may mean that an actual understanding of performance is not being obtained and/or poor performance is being masked. Once information is collected it should be analysed to allow an assessment of specific or related matters. For example, under performance may trigger the application of service credits or some similar action. Satisfactory performance may trigger payments of regular fees or milestone payments. It is possible at this stage that technical advice may be needed to assess particular aspects of performance, for example, compliance with specified standards for construction work, or whether IT systems deliver the required functionality. Reports provided to senior management and other stakeholders should be a balanced account of performance achieved and any identified shortcomings. If there are identified shortcomings, proposed action and a timeframe to address them should be included in reports to senior management. Honest and balanced feedback should be provided to the service provider. Where performance is satisfactory or above standard, positive feedback to the service provider can be beneficial to maintaining the relationship. It is also at this stage that any bonus or incentive payments linked to performance should be made in line with contract provisions. In cases where performance problems have been identified they should be dealt with promptly. This means discussing the issues with the service provider in a professional manner as soon after they arise as possible. When performance problems are addressed as a normal part of contract management, it should not have an ongoing negative impact on the relationship between the customer and the service provider. In some cases, informal remedial action may need to be undertaken. In other cases, more formal action for under performance may need to be taken and this is discussed in the section below. 5.3 Under performance In many cases contracts are completed without problems but contract managers need to be prepared to address any problems promptly as they arise in accordance with agreed procedures. Many contract performance problems can be avoided by managing the relationship well. Under performance can be minimised by having a performance regime that allows prompt and ongoing feedback, particularly in relation to critical timeframes or deliverables. The contract manager needs to be aware of any signs of potential under performance and be able to address them, to the extent possible, before they become serious. Addressing under performance in this way can avoid the problem worsening and/or the service provider being confronted by a problem that the customer has known

16 about for a period of time. Providing the service provider with early warning may mean that it is easier to address the issues at low cost and with minimal disruption. At the early stages of under performance, agreeing informal remedial action will often be the best approach. Such action could include replacing or using additional personnel, reporting back more frequently on progress, modifying processes or systems or clarifying the customer's requirements. Depending on the seriousness of the under performance, the action taken may need to be more formal and could include: withholding payments until performance returns to an acceptable level; involving senior management from both parties in formal discussions or written communications; developing strategies to address the problem and formally documenting them, and tracking whether they are working in practice; and implementing other formal mechanisms included in the contract. The following case study discusses a situation involving "hidden" under performance. Case Study: Hidden under performance An organisation had contracted out a help desk function for services to staff. The contract specified expected resolution times for calls logged with the help desk. The monthly performance indicators showed satisfactory performance, but the annual staff satisfaction survey showed a marked drop in satisfaction with resolution times. The contract manager investigated and found that the service provider was using the contractually specified measure of resolution time, based on when the call was logged in a register by the help desk. However, the service provider had been encouraging staff to log requests to an address. When the help desk was busy, there could then be a long delay before the s were entered into the help desk register. The automated reporting system used the date of entry to the register as the start time not the time the arrived. This meant delays experienced by the help desk clients were not properly reflected in reports on performance. Taking this into account showed significant under performance. The contract manager treated this as two areas of under performance: The service provider was obliged to improve resolution times to those specified, which meant some increase in staffing of the help desk. It appeared there was either deliberate or inadvertent manipulation of the performance measure. This was a breach of a contract provision specifying a high level of professional care and conduct. Given the ambiguities of the cause of the concern and the otherwise satisfactory service, the contract manager handled the problem with a personal discussion with the service provider, expressing the customer's disappointment with the incident. This was followed up with correspondence setting out the key facts and expectations for the future. Comment: Under performance issues sometimes do have ambiguities about underlying causes and intentions. It is still important to act to avoid a continuation of problems. Failing to do so can be seen as de-facto agreement to a situation

17 6. CONTRACT VARIATIONS 6.1 Introduction Provisions to allow and regulate contract variations should be a standard feature of all contracts. The ability to vary the contract should be directed or controlled by the customer and should only occur in defined circumstances. It is accepted practice for the variation mechanism to provide for variations to be agreed between the customer and the service provider in writing through a formal amendment of the contract. (In technology contracts, the variation mechanism is usually called a "change management process", "change control procedure" or something similar). In some circumstances it is possible to inadvertently amend a contract by oral agreement or conduct, even where there is a contract provision expressly requiring a formal process to be followed. It is therefore important that those involved in managing and administering the contract do not agree to informal contract amendments. Variations should be undertaken in line with the change management process (see section 6.2). The reasons for the variation should be clearly documented. Variations should not be used to mask poor performance or serious underlying problems and the effect on original timeframes, deliverables and value for money should be assessed. If the effects are significant, senior management and other stakeholders may need to be consulted and/or advised. Changes to contractual arrangements have the potential to affect the scope and viability of the contract for either or both parties and making substantive variations to a contract may require the same degree of input and effort involved in developing the original contract. They should therefore be planned accordingly. Customers should be alert to the risk that multiple changes made to a contract over a period of time may shift the overall allocation of contract risk or transfer particular risks to the customer. It is important to analyse all consequences of a proposed contract amendment and make sure there are no unintended effects of the change. For public sector projects, contract managers also need to ensure that the contract variations are not of such a level that they significantly change the contract requirement and/or substantial parts of the original transaction. If this is the case, it may be necessary to undertake another procurement process because the revised arrangements are substantially different to those selected through the original procurement. 6.2 Change management process There are a variety of issues that should be considered in any change management process to ensure that it is effective. Three key areas for consideration are: the need for change impact reports; the pricing principles that will apply to the change; and the service provider's obligation to undertake the change

18 6.3 Change impact reports Before any change request can be properly considered, the customer and the service provider must understand the implications of the proposed change. To facilitate this, the change management process may require the service provider (who will normally be in the best position to assess the likely impact of a change) to prepare an impact report. Ideally, the impact report will present a full description of the change, including how the change is to be implemented and, to the extent relevant, detail: the feasibility of the change; the likely effect of the change on the ability of the service provider to meet its obligations under the contract; any cost implications of the change; any consequential material impact of the change; where appropriate, acceptance testing procedures and acceptance criteria for the proposed change; and any other information likely to be of relevance. 6.4 Pricing principles It is often useful for the change management process to specify how any costs associated with the change will be allocated between the customer and the service provider. Ordinarily, the customer should be required to pay for a change only to the extent that the change cannot reasonably be considered as within the scope of the existing agreement. Where a change falls outside the scope of the existing agreement, the change management process may detail the principles that will determine the price to be paid by the customer. For example, the change management process may stipulate that the price for any change should be: reasonable; competitive; and no higher than the price at which a customer would be able to procure similar products or services from another service provider. The change management process may enable the customer to request the service provider to provide an auditor's certificate, confirming that the pricing of any change complies with the pricing principles. 6.5 Service provider's obligation to undertake the change An otherwise detailed change management process will be of little value if, even once the price to be paid by the customer has been determined, the service provider can simply refuse to implement the customer's change request. Accordingly, the change management process may provide that the service provider cannot unreasonably refuse (either directly or indirectly) a change requested by the customer. Unreasonable grounds for refusing a change might include: demanding unreasonable charges for the change;

19 imposing unreasonable conditions for undertaking the change; or refusing to include the change under the agreement despite the subject matter being reasonably related to or connected with the services. Impact reports, pricing principles and the service provider's obligation to undertake the change are just some of the matters that need to be considered in any change management process to ensure that it is effective. A carefully drafted change management process can mean the difference between the system/services that a customer wanted on day one, and the system/services that a customer discovered it needed during the term of the contract. 6.6 Contract variations checklist Key issues to consider in managing contract variations include: following the procedures required by the contract; assessing the reasons for the proposed variation and whether these may indicate an emerging or actual performance problem; assessing the impact of the proposed variation on the contract deliverables, particularly whether the variation or the work it represents is actually required and whether it was part of the original contract deliverables; determining the effect the proposed amendment will have on contract price; considering the authority for making the variation; properly documenting details of the variation and its impact; meeting any reporting requirements such as updating the customer's contract register (see next section)

20 7. SYSTEMS AND PROCEDURES 7.1 Introduction The sections above relate to the management of individual contracts. However, when looking at contract management across all contracts a customer may have with its different service providers, the maintenance of a contracts register and the use of electronic systems are initiatives which may assist customers in more effective contract management. 7.2 Contract register In our experience, customers have generally found it beneficial to maintain a contract register that contains details of all its contracts. A contract register can be maintained centrally. Alternatively, details can be input remotely by individual work areas. The contract register could also consist of a number of sub registers maintained by business or geographically-based work areas that collectively represents the customer's contract register. Contract registers should be used to monitor contract end dates so that the customer is made aware of opportunities to exercise contract extensions in a timely manner. Effective contract registers are likely to have the following characteristics: the register will contain all relevant contract details and be configured to be able to produce reports that can be used to meet the customer's management and reporting responsibilities; responsibility for maintaining the register will be clearly assigned to an individual(s) or work area(s); formal procedures will be established for maintaining the accuracy and completeness of the register. These procedures will provide for a reconciliation or cross-check between the register and the customer's financial management information system. The procedures should also provide for a periodic quality assurance review of the register; the automation, to the extent feasible, of the input of data that will limit, or eliminate the multiple input of data into different systems, assist in improving consistency and reducing the incidence of human error; the provision of links to individual contracts, subject to security and confidentiality considerations; system access controls designed to ensure unauthorised staff do not have access to, and cannot amend or alter, contract details; and the periodic review by internal audit or other review mechanism. 7.3 Electronic systems Electronic systems can be used to assist in the development and management of contracts. There are advantages to using electronic contract management systems, for example consistency, efficiency and timeliness. These systems are useful in managing the administrative aspects of contracting and can be particularly useful in organisations that are geographically disparate. These can range from reasonably simple systems holding data about key aspects of contracts entered into including critical dates, to sophisticated

21 proactive electronic contract management systems. These may be off the shelf systems or systems that are specifically designed for the customer. Developing and implementing these systems can be costly so it is important to understand the level of functionality that may be necessary for a particular customer's requirements and the benefits likely to be realised through the use of them. Electronic systems can assist in ensuring that contract managers also have access to the most recent standard contracts and forms, policies, advices and contract management assistance. They can also facilitate awareness of new and emerging issues, potential risks and how to manage them. Electronic systems can also provide a contract management help desk for the provision of information and advice. The easy availability of information encourages better decision-making and improved contract management. It can also provide a forum for communication between contract managers in the customer organisation, enabling them to be aware of other contracts being managed by the customer, to ask questions of other contract managers in the customer organisation and to share tips and lessons learned

22 8. MANAGEMENT OF CONTRACT DISPUTES 8.1 Introduction Whist a sound understanding by both parties of their contractual responsibilities and professional relationship management should reduce the potential for disagreements and disputes to arise over the life of the contract, they can still occur. As a general rule, a disagreement becomes a dispute when it is not possible for the parties to resolve it without resort to a formal resolution mechanism. Generally, what a dispute is and when it is deemed to have occurred is defined in the contract, often in a dispute resolution clause. Many disagreements and disputes arise when the parties cannot agree on issues related to the interpretation of contract provisions, such as the definition of deliverables, how performance standards are met and/or the effect of unexpected events. These disagreements may be of a minor nature which can be and are readily resolved. However, it is important that any possibility of dispute or an actual dispute be recognised at an early stage and addressed as quickly as possible. Avoiding the escalation of disagreements can impact on contract deliverables and reduce the costs to both parties. Most commercial contracts include a dispute resolution mechanism which provides a multi layered process involving a number of dispute resolution mechanisms. An example would be a process involving the following: an attempt is made to resolve the dispute by negotiation perhaps by involving senior management representatives identified within the contract and within a specified timeframe, for example, 20 days; if the dispute cannot be resolved by negotiation, then the parties may agree or the contract may provide for an alternative dispute resolution process to attempt to resolve the dispute. An alternative dispute resolution process is one that does not involve commencement of proceedings that are finally determinative, namely court proceedings or arbitration. Instead a dispute resolution clause could provide for processes such as mediation or expert determination. The requirement for an alternative dispute resolution process can be mandatory or the contract can provide that the parties may agree to such a process; and if the parties do not agree to an alternative dispute resolution process or the alternative resolution process does not achieve a resolution of the dispute, then the contract can provide for the parties to then refer the dispute to court proceedings or arbitration. Before deciding on an appropriate mechanism, it is necessary to understand each of the components that are available to constitute the mechanism. Dispute resolution processes may be negotiation, facilitative or determinative or, in some cases, a combination of these. In facilitative processes the impartial person involved in the dispute (a dispute resolution practitioner) assists the parties to identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement about some issues or the whole dispute. The most common example of a facilitative process is mediation. In determinative processes the dispute practitioner evaluates the dispute and makes a determination. Examples of a determinative processes are arbitration, expert determination and court proceedings

23 The following descriptions of the processes should not be taken as the only descriptions of the processes. Often the names attached to the processes will mean different things to different people. 8.2 Negotiation Negotiation is the most commonly used method of resolving all types of disputes. In its simplest form it is the process of counterparties discussing the issues with each other and seeking a mutually acceptable outcome through discussion, without the assistance of other persons. This is particularly suitable if the customer wishes to maintain an ongoing relationship with the other party to the dispute. A successful negotiated compromise can assisting strengthening the business relationship. Best practice is that parties should negotiate in "good faith", keep an open mind, be willing to consider options for resolution of the dispute put forward by the opposing party and also be willing to put forward options for the resolution of the dispute themselves. Essential or core components of this concept in a business context include some fundamental tenets like creating a climate of trust, respect, flexibility, confidentiality and a willingness to do the right thing by each other. It is imperative that persons conducting the negotiations actually have authority to resolve the dispute, so that approval from the negotiator s superior officer does not have to be sought before an outcome can be achieved. While the contract may not set out specific procedures with respect to how negotiations are to be conducted, consideration should be given as to whether the contract should address the following issues: the party claiming that there is a dispute must give the other party notice of the dispute including full details of the issue in dispute and any other incidental matters such as who is authorised to negotiate with respect to the issues in dispute. The notice should also refer to the negotiation period specified in the contract; and whether any communications arising under the clause should be declared to be expressly "without prejudice". This is to ensure that negotiations can be conducted in full confidence that anything said/written in the course of the negotiations will not be used in court proceedings in the event negotiations fail. Negotiations to resolve a dispute may be conducted at various levels between the customer and the service provider. If a dispute arises, the customer's contract manager may seek to resolve the dispute quickly through discussions with the service provider's representative for the contract. If the dispute cannot be resolved at that level, the dispute may be escalated to persons higher up in their respective organisations. Further escalation may follow to the heads of the respective organisations (for example, CEO of the respective businesses), if considered necessary or appropriate. In our experience, the following factors must normally be present for negotiations to be successful: the parties must be in communication with one another and be willing to continue these communications; participants in the negotiations or their representatives must have authority to settle; the problem must directly concern the parties in question and not involve third parties; and

24 the parties must want to negotiate or at least be willing to do so, and must consider that the particular dispute involves an issue that is in fact negotiable. It may be appropriate to develop a "negotiation directive" prior to commencing negotiations with the contractor which outlines: the issues to be negotiated and the authority of the customer's contract manager; the aims, objectives and constraints of the negotiation; the policy objectives which are to be maintained during the negotiation; the likely objectives and approaches of the service provider with whom the negotiation is taking place; definition and commitment of the resources available including financial and technical advice; clearly defined optimum, acceptable and fall-back positions; and checks to ensure that both negotiating parties have the necessary legal authority to act within the scope of their stated or perceived instructions. 8.3 Mediation Mediation involves an independent and impartial third party who is appointed as the dispute resolution practitioner (the mediator) and who facilitates the resolution of the dispute between the parties. The parties agree on the resolution and there is no decision imposed on the parties by the mediator. This is the reason why mediation can also be used by the customer to preserve and continue existing relationships with the other party to the dispute. Mediation is, at its most basic level, an enhanced method for the parties to negotiate a resolution. It is an appropriate option where: direct negotiations have failed; direct negotiations may be difficult; or there are multiple parties. The main feature of mediation is that it is a voluntary process and a defining characteristic is that the mediator and the parties will agree before they begin that the process is without prejudice and that nothing said or produced during the process will be divulged to the Court in any subsequent proceedings if no settlement is achieved in mediation. This enhances the effectiveness of a process where parties can feel ready to divulge relevant facts or interests, and an organisation is protected from expenditure or resources around challenges to the processes and the outcome. It should be noted that the legal doctrine around the limits of confidentiality has not been fully tested by the courts. In general terms parties must reach an agreement on the level of confidentiality, and sign an agreement to this effect prior to the commencement of the process. The mediator will not disclose any information for any reason unless specifically agreed by all parties. Any records, reports, or other documents received by the mediator while serving in that capacity will be confidential and will be returned to the parties at the conclusion of the process, and mediator notes will be destroyed at the end of the mediation

25 Information disclosed or documents produced or brought into existence by the parties in the course of the mediation are not disclosed by the parties for any reason unless specifically agreed by all parties or required by law. Mediation can be more difficult where there are issues of legal precedent or where there are significant disputes of fact. In both instances, there is less scope for negotiation unless both parties are willing to compromise. Mediation may be appropriate in the following circumstances: the parties wish to engage in free and open discussion and are willing to disclose positions and interests and seek an expeditious solution at an early stage; the parties would like to maintain their commercial relationship; there are economic and financial factors which make mediation desirable. This would include the cost of proceeding to litigation and also the amount of the claim which is disputed; and the nature of the dispute and the availability of an appropriate mediator make it appropriate for mediation. 8.4 Expert determination The expert determination process involves: use by parties of the services of an independent and impartial third party expert, who is chosen on the basis of their specialist qualification or experience in the subject matter of the dispute, to give an opinion on some disputed issue of fact or law; the third party expert having an investigative and decision making role; and the parties agreeing whether or not the expert s opinion shall be final and binding or whether it would be an advisory or recommendatory opinion. Expert determination is a flexible process as parties negotiate matters such as the structure of the process, the issues to be submitted to the expert, choice of the expert, procedures for the expert to receive information and submissions and the use to be made of the expert s opinion. Expert determination may be appropriate if the dispute could be assisted by a reliable unbiased opinion on a technical issue under the contract, or where the parties have made an agreement in principle in relation to the issue in dispute but require a precise valuation of certain supplies or work. It is commonly used for international contracts or contracts of a technical nature, such as large commercial or construction contracts and is more suited to disputes where there is only a single issue to be determined. An expert is chosen to give an opinion after considering and investigating the differences between the parties. Unlike a mediator, an expert is expected to provide an answer to a particular matter submitted by the parties and it is generally expected that an expert will reach a decision on the basis of his or her personal opinion and expertise rather than upon the parties submissions or on the law. The parties agree to accept the opinion as binding. It is up to the parties to agree whether the expert s decision is final. However, the opinion may relate to only one factor in the overall dispute and so a negotiated outcome may still result. The expert plays an investigatory, inquisitor role in eliciting further information and makes a determination as an expert and not as an arbitrator

26 If the parties do not expressly provide otherwise, the expert s decision can only be challenged on limited grounds and cannot generally be appealed. These grounds include failure to follow instructions, fraud and partiality. In order to widen the scope for a challenge based on mistake, a clause may provide that an expert's decision is final and binding "in the absence of manifest error". In the absence of such wording, an obviously wrong decision is usually not susceptible to challenge unless the expert has materially departed from his instructions or exceeded his jurisdiction. Manifest error has been held to mean a "plain and obvious error". Unless the parties have agreed otherwise, an expert is not required to state the reasons for his decision. 8.5 Arbitration The essential feature of most arbitrations is that they are consensual, with the parties electing arbitration as the manner in which to resolve a dispute. Under arbitration, an "arbitrator" makes decisions which are binding on the parties and it is generally a "win/lose" solution similar to that of a court outcome. Arbitration, therefore, is the dispute resolution technique which most closely resembles litigation. Thus, arbitration may be more appropriate when the customer is not concerned with maintaining an ongoing relationship with the other party to the dispute. It should be noted that these days the distinction between litigation and arbitration is less clear than previously, particularly in terms of the costs. Generally any dispute, whether of law or fact, that can be decided by a court, may be referred to arbitration. The key features in arbitration include that: the process is voluntary but adversarial; the parties agree to an arbitrator who is a neutral third party, and who may have specialty expertise or experience; the process leads to a binding decision by the arbitrator; the process is private, and not open to the general public, or the media, like a court hearing; the process will be confidential if the dispute resolution clause in the contract states that the arbitration proceedings and any information disclosed are confidential and can only be used for the purposes of the arbitration; the arbitration can be formal, like a trial in court with evidence being given on oath and procedures similar to that involved by the court, or it can be informal (for example, when a decision is given based on agreed facts and papers); an arbitral award is widely recognised by the courts and internationally (through the New York Convention, to which the UK is a signatory); and the awards are only subject to narrow grounds of appeal. Although parties have considerable freedom in determining the scope and nature of an arbitration, commercial arbitration in England is subject to legislation and court review. Parties have limited rights of appeal to the courts

27 The limitation of arbitration is that it can take as long as standard court proceedings, and in some circumstances can cost more because the parties must pay the costs of the arbitrator and the physical venue of the arbitration. The area where arbitration is most frequently encountered today is in international contracts. This is because where parties are from different countries they often agree to have the dispute determined in a neutral country rather than submit to the courts of the country of one of the parties. 8.6 Litigation Litigation is the act or process of contesting a lawsuit or seeking redress through the courts. It can be an expensive and time consuming procedure and is generally taken when other avenues of dispute resolution have not been successful or are not available. Other approaches to resolving disputes or contractor defaults should therefore be considered prior to litigation. Appropriate legal and other professional advice should be obtained prior to considering and commencing litigation

28 9. RECORD KEEPING The following is a list of documents that may need to be created and retained during the contract management phase: Risk assessments Contract management plan or checklists Analysis of contract conditions All substantive communications with the contractor Evidence of insurances, indemnities, deeds and/or licences required under the contract Records of briefings of stakeholders and/or management team members Transition plans Record of minutes, meetings, discussions relating to the contract Contract lists, schedules of tasks and meetings Records of payments Records of performance reports, analysis, discussions, performance assessments, feedback and of any non-compliance or under or non performance Variations to the contract Records of any disputes and related discussions or negotiations Assistance or expert advice received

29 Contact Us If you wish to discuss the content of this guide or any legal matters relating to commercial contracts, technology contracts or outsourcing, please contact any of the following members of the Taylor Walton Technology and Outsourcing Group. Dr Sam De Silva Partner Mike Pettit Partner For any dispute related issues please contact: James Carpenter Partner The information in this guide is not intended to constitute professional legal advice and should not be relied upon as such. Specialist legal advice should always be sought for your particular circumstances