Leading global excellence in procurement and supplyTitleDescriptionContract Management GuideCIPS memberscan recordone CPD hourThis knowledge paper is supportive of Procurement professionalsoperating at Professional level of the CIPS Global StandardContract Management Guide CIPS Knowledge© CIPS 2019 1On the face of it, contract management may not be the most exciting aspect of sourcing and supply chainmanagement, but without doubt it is a vital element that really delivers the value that the business needs.Often an overlooked key skill, contract management is not something that should happen behind the scenes,or be handed over to another department such as legal. Once all the meetings, deals and excitement ofbuilding new relationships and sourcing activities are completed, contract management is the engine thatdrives true value across the supply chain and should stay with dedicated professionals.The reason contracts fail is normally because the supplier fails to deliver and because the contract is not beingmanaged effectively. Contract management is all about building strong relationships with suppliers so theynot only meet the terms of the contract, but move beyond fulfilling the basic needs into exceedingexpectations, making constant improvements along the supply chain. This approach also increases thepossibility of work continuing beyond the terms of the initial contract and can extend into a long, fruitfulrelationship.Skills, focus, constant attention and strong relationships make contracts work, not penalty clauses and hopingthat the terms agreed are the terms delivered.Duncan Brock, FCIPS Chartered Professional, Group Director, CIPSTo hear more from Duncan Brock on Contract Management listen to the podcast here.Contract Management Guide CIPS Knowledge© CIPS 2019 2ContentsIntroduction and scope ..3Definition 3Importance of contract management .3Contract management activities 4CIPS Contract Management CycleUpstream or pre-award activities ..5a) Preparing the business case and securing management approval .5b) Assembling the project team .5c) Developing contract strategy .6d) Risk assessment .8e) Developing contract exit strategy 9f) Developing a contract management plan . 10g) Drafting specifications and requirements 11h) Establishing the form of contract . 13i) Establishing the pre-qualification, qualification & tendering procedures 14j) Appraising suppliers . 16k) Drafting ITT documents . 21l) Evaluating tenders . 22m) Negotiation . 23n) Awarding the contract 25Downstream or post-award activities . 27o) Changes within the contract .. 27p) Service delivery management 28q) Relationship management .. 29r) Contract administration . 30s) Assessment of risk 31t) Purchasing organisations performance and effectiveness review . 32u) Contract closure 33Acknowledgements .. 35Bibliography .. 36Contract Management Guide CIPS Knowledge© CIPS 2019 3Introduction and scopeThis guide is intended to cover all those activities associated with contract management from theestablishment of the business case and the confirmation of need, through contract administration andrelationship management to the review of contract performance. The activities themselves are divided intotwo distinct but interdependent phases, upstream and downstream of the award of the contract.The guide is generic in that its principles are intended to be applicable to all contracts from a simple order,through framework contracts to complex construction or service contracts, and it should be seen as equallyapplicable to contracts in the private as well as the public sector.DefinitionContract life cycle management is the process of systematically and efficiently managing contract creation,execution and analysis for maximising operational and financial performance and minimising risk.1There are a number of other definitions of contract management, the majority of which refer to post-awardactivities. Successful contract management, however, is most effective if upstream or pre-award activities areproperly carried out.Importance of contract managementOrganisations in both the public and private sectors are facing increasing pressure to reduce costs andimprove financial and operational performance. New regulatory requirements, globalisation, increases incontract volumes and complexity have resulted in an increasing recognition of the importance and benefits ofeffective contract management2.The growing recognition of the need to automate and improve contractual processes and satisfy increasingcompliance and analytical needs has also led to an increase in the adoption of more formal and structuredcontract management procedures and an increase in the availability of software applications designed toaddress these needs.It is worthwhile noting that contract management is successful if:? the arrangements for service delivery continue to be satisfactory to both parties, and the expectedbusiness benefits and value for money are being realised? the expected business benefits and value for money are being achieved? the supplier is co-operative and responsive? the organisation understands its obligations under the contract? there are no disputes? there are no surprises? a professional and objective debate over changes and issues arising can be had? efficiencies are being realised.1Aberdeen Group2Aberdeen GroupContract Management Guide CIPS Knowledge© CIPS 2019 4Contract management activitiesThe foundations for effective and successful post-award contract management rely upon careful,comprehensive and thorough implementation of the upstream or pre- award activities. During the pre-awardstages, the emphasis should be focused on why the contract is being established and on whether the supplierwill be able to deliver in service and technical terms. However, careful consideration must be given to how thecontract will work once it has been awarded. The organisations high-level requirements should be carefullyresearched so that there is clarity of purpose from the outset. This will help to ensure clarity in all aspects ofthe procurement process.Management of contracts, particularly partnerships, requires flexibility on both sides and a willingness toadapt the terms of the contract to reflect changing circumstances. It is important to recognise that problemsare bound to arise which could not be foreseen when the contract was awarded.CIPS Contract Management CycleTo create a smooth end-to-end process, CIPS has developed a highly effective Contract Management Cycle toensure optimum scoping, planning, implementing, management and reviewing. This can help you add value toevery project and understand key roles and responsibilities. View the interactive cycle here.Contract Management Guide CIPS Knowledge© CIPS 2019 5Upstream or pre-award activitiesa) Preparing the business case and securing management approvalAll contracts are predicated on the need to obtain management commitment and approval at the appropriatelevel. This involves the formulation of a sound business case aligned to the organisations corporate andfunctional strategies.The business case sets out the policy, business and contract objectives and the issues that affect the decisionand the investment. It should seek to establish that the proposed contract will meet the need, that it isachievable and affordable, and it should address the following issues:? the outcome(s) of the contract? critical success factors? the possible alternatives, including existing contracts? the risks including the extent and where they may fall? identification of any contingent needs and ramifications of proceeding? timescale.Finally, it may not be necessary to follow every activity for every contract particularly in the case of small,simple orders but it is advisable to read the whole guide and to apply the advice provided under each stageas appropriate to the particular contractual circumstances.The business case should be prepared with the involvement of the stakeholders, including where and ifpossible, the end users. It should be signed off by the sponsor or patron. The business case is a workingdocument and should form the basis of the post-implementation review and used as a management tool toensure that the original outcomes and benefits have been achieved3.If the project is large, complex and in particular, innovative in nature, the market should be approachedconcurrently with the preparation of the business case, firstly to alert them to the potential need andsecondly to take soundings on such issues as feasibility, capacity, capability, approach and level of interest4.b) Assembling the project teamThe need to assemble a team to manage a contractual procurement programme will be determined not onlyby the scale, nature, complexity and significance of the procurement and the necessary skills and experiencebut also by the extent to which it is considered appropriate, beneficial or a requirement to comply withorganisational policy to involve stakeholders in the project.Factors to be considered when assembling the team are:? the nature of the project? the nature of the work environment and the management style of the team? communication internally and externallyIn addition to procurement, the project team may be drawn from any and all disciplines within theorganisation as appropriate and relevant. The following are examples; design, research and development,production, quality control, logistics, marketing and sales, legal, finance and human resources. The project3OGC Contract Management4OGC Contract ManagementContract Management Guide CIPS Knowledge© CIPS 2019 6team may also advantageously include representatives of the end users, whether internal or external, andrepresentatives of disciplines within supplier organisations such as design, production, production plannersand logistics.Clearly, these individuals and groups will not need to meet all the time but, depending on the size andcomplexity of the project, there may well be a core group that meets regularly and this will be the projectteam. Others will then be called on as and when required.In addition to the need to identify the necessary technical skills, knowledge and experience with theappropriate level of authority required of the members of the team, the importance of the ability of teammembers to work together effectively and the significance of the role of the project leader should berecognised.These aspects are beyond the scope of this guide, but it is considered advisable to devote time to studying themany books available on the topics of motivation, leadership, power, influence and group working,particularly if the size, timescale and complexity of the procurement project are significant5.c) Developing a contract strategyThe strategy relating to a particular contract should accord with the organisations overall procurementstrategy.The development of a contract strategy is designed to establish the form of the procurement and provideassistance in determining the formulation and award of the contract and the style and type of management tobe adopted for the conducted and the form of the procurement and provide assistance in determining theformulation and award of the contract and the style and type of management to be adopted for thesubsequent service delivery, relationship management and contract administration.There are many references these days to partner rather than suppliers should this be captured here? Thelatter aims can be characterised by the need to address understanding, measurement and communicationpost-contract award. A successful contract management strategy should achieve benefits by:? managing the organisations own responsibilities during the contract? ensuring the supplier meets the minimum performance criteria, such as compliance? allowing the achievement of both short and long term supplier performance improvement throughdeveloping effective supplier relationships.In developing the contract strategy, the following issues need to be addressed:? nature, scale and significance of the need to the organisation? value of need? type of specification input or output? complexity of the need including innovation level? attractiveness to the market? market capacity? timescale and phasing? level of understanding of the need by stakeholders and potential suppliers.5For example see Handy Understanding Organisations.Contract Management Guide CIPS Knowledge© CIPS 2019 7The use of supplier positioning matrices will also assist in determining the contract strategy, the nature of anynegotiations that may need to be conducted and the form of the supplier relationship following the award ofcontract. Possible supplier relationship types range from the spot buy through call-off contracts, fixedcontracts and strategic alliances, to long term partnerships. Issues of relationship style such as adversarial,partnership, hands-on or pro-active should also be considered6.Concurrently with determining the contract strategy, consideration should be given to the evaluation strategywhich sets the direction for the overall evaluation of suppliers and the associated tender process. It coverssuch considerations as:? business aims? critical success factors? relative priorities of the requirement? communication plans? criteria for determining quantifiable and non-quantifiable items? overall evaluation procedures including assessment methodology? personnel involved in the evaluation? supplier selection criteria including guidance on interpretation and marking of replies.Another important consideration in establishing contract strategy is whether to utilise Service LevelAgreements (SLA). SLAs are negotiated agreements designed to create a common understanding aboutservices, priorities and responsibilities and are applicable in two situations. Firstly, internally used andprovided specialist support services and secondly when outsourcing.Internal SLAs are not intended to have legal consequences since the customer and the supplier are part of thesame legal entity which cannot sue itself, and normally there will be no direct financial compensation.External SLAs such as those for bought-in or outsourced services may have contractual implications. They aregenerally a schedule or part of a schedule to the buy-in or outsource agreement. It should also beremembered that EC Procurement Directives may apply to organisations using SLAs.The purpose of SLAs and setting service levels is to enable the customer to monitor and control theperformance of the service received from the supplier against agreed standards. It should be understood thatservice levels should be agreed and benchmarked for both customers and suppliers and should be:? established at a reasonable
level; if they are set too they will attract additional charges from thesupplier? prioritised by the customer in order of importance and on an agreed scale for example critical, major,urgent, important, minor, easily monitored, such as objective, tangible and quantifiable? unambiguous and understandable by all parties? open to re-negotiation at any time.There are advantages and disadvantages in using SLAs. Among the advantages are:? the service providers and the customers are clearly identified? attention is focused on what a service actually does as opposed to a belief about the service? customers have a greater awareness of the services received and the additional services that can beprovided? customers real needs are identified and the associated costs are made clear? services and service levels adding value can be more easily identified and distinguished6CIPS study guide Legal & Procurement Processes.Contract Management Guide CIPS Knowledge© CIPS 2019 8? greater awareness of costs/benefits of services and levels? service level monitoring is facilitated? failure reports enable improvements to be readily introduced? understanding and trust is created between customer and supplier.Disadvantages include:? joint drafting of SLAs, negotiation and measurement processes can be costly? potential increase in bureaucracy? internal providers are seen as suppliers and not colleagues? time wasted if clear goals and objectives are not set out initially, this leads to unrealistic expectationsand acrimonious relationships, as well as giving the setting up of SLAs a bad reputation? training needed to overcome resistance to the introduction of SLAs7.d) Risk assessmentRisk can be defined as the probability of an unwanted outcome happening.Risk assessment should be viewed in the overall context of risk management and seen as one of the three keyactivities risk analysis, risk assessment and risk mitigation which facilitate the taking of decisions andactions to control risk appropriately.Risk analysis is the process of identifying all the potential issues that can go wrong with an activity and thenestimating the probability of each happening. It should form part of any significant contract managementprocess and is a fundamental part of determining the contract strategy. The process can range from a simplelisting of risks on an informal, intuitive basis to a formal process involving set procedures and working withother professional disciplines in brainstorming and technically and financially evaluating potential risks. Amore formal process may involve the establishment of a risk register for each tenderer and, following contractaward, the transfer of the register of the successful tenderer to the contract management team for use in riskassessment; see section s).In addressing the fundamentally important issue of risk in contract management, the purchasing professionalshould adopt a continuous what if mentality throughout the procurement of products and services. Riskmanagement requires a professional who possesses knowledge of techniques, an analytical mind set,objectivity and a knowledge and thorough understanding of their organisations business and the market. It isadvisable to seek to mitigate and remove risk whenever possible before contract award.Risk assessment is the process of assessing the likely impact of a risk on the organisation. Highly predictablerisks may have low impact and it is possibly not worth taking action to control or avoid such risks. Conversely,low probability risks may have a significant impact demanding action to be taken to avoid or mitigate the risk.Other issues for consideration in risk assessment:? the costs of identifying, controlling or avoiding the risk? the need for insurance for risk not readily managed or avoided? the need for sensitivity analysis on risks of an unknown level or magnitude? identifying compensating behaviour practices7For more information on SLAs and their successful implementation see Service Level Agreements in the CIPS How toseries.Contract Management Guide CIPS Knowledge© CIPS 2019 9? the impact of time, external factors and project actions on risk and the need for assessment to beiterative? the impact of product life cycle including disposal and obsolescence.Having assessed the risks and identified those requiring action, responsibility for managing and mitigatingthem should be allocated. This allocation should be dependent on the assessment of the likelihood andconsequence of the risk.Other issues to be considered in risk mitigation:? identifying the most appropriate body to manage or control the risk in terms of expertise, time and/orresource? establishing a fair and reasonable reimbursement mechanism? insurance? risk transfer to suppliers including issues of appropriate level, trade off and supplier contingency8.A further issue, usefully classified under a consideration of risk in contract management is fraud. The need toaddress potential areas for fraud in buyer/supplier relationships and measures to mitigate their impactshould be considered at this early stage in upstream activities, particularly contract formulation.The adoption of a continuous what if mentality a similar approach to that used when assessing risk isadvisable when considering areas for potential fraud. The CIPS Knowledge paper on Fraud provides usefulguidance on areas of weakness and counter measures and gives answers to some frequently asked questions.e) Developing a contract exit strategyA contract will conclude when both parties have satisfactorily fulfilled their responsibilities under the terms ofthe contract. This, for example, will occur when the goods or services have been supplied and payment madeand/or at the end of a pre-agreed period of time. This situation, however, does not remove the need todevelop a contract exit strategy as part of the process of risk identification and reduction, and reinforces theimportance of establishing the foundations of sound contract management.It is important to identify the circumstances under which early contract exit may be required or indeeddesired. The following is merely a list of examples and is certainly not an exhaustive list:? major default by your organisation; this may include contractual breaches or changed circumstances market, political ,economic, funding resulting in major procurement need changes, financial resultingin non-payment of suppliers invoices? major default by the supplier; this may include breaches, technical inability, capacity, and so on? frustration of the contract.Whilst many of these sets of circumstances are generally predictable, and standard terms and conditionsare widely included in contracts today, it does not detract from the need to carry out this aspect of riskassessment and to ensure that clear and comprehensive terms and conditions are drawn up which addressthe identified circumstances and the rights and responsibilities of the parties and the means by which anydamages or costs may be mitigated are set out.8CIPS POP Risk management in P & SM.Contract Management Guide CIPS Knowledge© CIPS 2019 10This latter should include the method by which the goods or services may continue to be provided and, ifpossible, seamlessly transferred to another supplier or contractor to ensure business continuity. It is alsoimportant to clarify any notice period to be given and any timescale constraints associated with the exitprocess itself.f) Developing a contract management planDuring pre-contract award stages, it is normal for time to be devoted to the preparation of the business case,drafting specifications and tender documents selecting potential suppliers, and so on.However, time and effort must also be spent on determining how the contract will work once it has beenawarded. The importance of contract management has already been mentioned and it is vital that a contractmanagement plan is drawn up in advance of contract award. This should set out how the obligations of all theparties should be carried out effectively and efficiently.Contract management success factors, the conditions that should be met if a contract is to be managedsuccessfully, are:? the arrangements for service delivery continue to be satisfactory to both customer and provider? expected business benefits and value for money are being realised? the provider is co-operative and responsive? the customer knows its obligations under the contract? there are no disputes? there are no surprises? satisfactory delivery progress is demonstrable.In addition to these success conditions, it is worthwhile noting the foundations of successful contractmanagement and the need for preparing a management plan:? the need for flexibility by the contracting parties, particularly in partnership agreements? a willingness to adapt the terms of the contract to reflect change and unforeseen problems. Althoughthe risk assessment process mentioned earlier may be carried out thoroughly and professionally,problems are still likely to arise during the contract period? the need for the buying organisation to have clear business objectives, coupled with a clearunderstanding of why the contract will contribute to them? the need to understand the providers business objectives and drivers? the ability to recognise and obtain senior management agreement to the need for the serviceprovider to achieve their objectives and to make a reasonable margin? the need for people with the right commercial, interpersonal and management skills to manage theserelationships on a peer-to-peer basis and at multiple levels in the organisation.? to recognise that all parties need managers who can manage upwards in their organisation andpersuade their boards to make decisions for the benefit of the relationship.Other issues to be addressed and appropriate processes and procedures set out in the contract managementplan include:? the processes for managing the contract which provide the level of control you need, such as contractgovernance? the retention of sufficient expertise to understand the technical direction in which the provider istaking your organisation and to retain the ability to enter into effective dialogue with the supplier? to ensure as far as is possible that the supplier is able to provide sufficient skilled resources, given therisk that another customers account might take priorityContract Management Guide CIPS Knowledge© CIPS 2019 11? the possibility of the supplier team changing after award of contract, leading to a lack of continuity? to set down how the members of any supplier consortium handle a variety of different types of issuesso as to ensure that problems are resolved quickly and constructively? to set down how members of a supplier consortium should share common quality managementsystems and escalation procedures? to set down the timescale and methods by which the providers level of knowledge andunderstanding of your business can be gained and transferred to the suppliers successive teammembers? roles and responsibilities of individuals of the parties to the contract; this includes issues such as:o adopting the principles of good communication, awareness of new demands in partnershiparrangements, leadership, appropriateness and capability of existing management structures,understanding the responsibilities of the various parties, clear understanding of what isexpected and effective ways of reporting progress, having a framework definingresponsibilities, reporting arrangements and policieso establishing the performance measures to cover all aspects of the service such as:? cost and value obtained? performance and customer satisfaction? delivery improvement and added value? delivery capability? benefits realised? relationship strength and responsiveness? It is important that the performance measures selected and set out in the contract offer clear anddemonstrable evidence of the success (or otherwise) of the relationship. Once chosen, therequirements underpinning the performance measures should be the primary focus for contractmanagement. They should provide the framework around which provider information requirementsand flows, contract management teams, skills, processes and activities are developed9.g) Drafting specifications and requirementsA specification is a statement of needs and its purpose is to present to potential suppliers a clear, accurateand comprehensive statement of the organisations needs in order that they can propose solutions to thoseneeds. At the same time, the specification should enable the organisation to readily evaluate offers, providethe basis for performance measurement and be a record of evidence in any dispute.A specification is also known as an operational requirement or a statement of requirement. It can take theform of a conformance specification where the organisation sets out how the supplier should meet its needs or a performance or output-based specification where the supplier is given scope to propose solutions to anexpected and known end result?Although the drawing up of specifications in the majority of large organisations is not the responsibility solelyof the buyer, nevertheless it should be emphasised that the successful drafting of specifications is one of themost important responsibilities of a professional purchasing officer.9OGC Contract Management.Contract Management Guide CIPS Knowledge© CIPS 2019 12The starting point for the preparation of the specification, particularly in the case of large and complexprojects, is the business case. The drafting process is concerned with breaking down the overall scope set outin the business case into more detail and then, progressively and iteratively, refining into schedules ofdetailed requirements.All contracts are different and the following process is not intended to be prescriptive but to act as a checklistfor issues that should usefully be considered when preparing the specification:? define in detail the scope of the need including the essential or core requirement, optional anddesirable needs? establish sources of information about the need from:? business owners? customers and users? other stakeholders? technicians? the supply market? gather information on:? background to the need? future developments? detailed requirements? metrics required for performance measurement? decide the type of specification to be used and then prepare draft. In large, complex contracts to beperformed over a long period of time, the document could include the following:? introduction? scope of the requirement? background to the requirement? detailed description of the functional requirements, classified as essential, optional and desirable? description of the performance requirements including input and output details? timescale/timetable? performance measurement requirements, for example volume, accuracy, availability, includingdamages and incentives/ service credit details? other requirements, for example security, access, standards, training, personnel, disaster recovery,data archiving, data protection? constraints, for example, time, interface with other parties, IT issues? contract management requirements, for example management information, project managementand risk management methodology, and processes? contractual requirements, for examples terms and conditions, roles and responsibilities of personnel,opportunities for submitting alternative proposals? procurement procedures including timetable, evaluation and acceptance criteria and process, contactinformation, format and content of responses. Public sector organisations subject to the EUProcurement Directives must ensure that this information is also included in the notice placed in theOJ? appendices providing background data, statistics, organisational information.Contract Management Guide CIPS Knowledge© CIPS 2019 13The process of preparing the specification should also include the drafting of the evaluation model andcriteria. It is important to ensure that:? all the information needed for evaluation has been requested from potential suppliers? the evaluation covers all the organisations needs? the responses are in a format that enables an effective, clear and fair evaluation of offers to becarried out.A successful specification should:? set out the requirement fully, clearly, logically and unambiguously? focus on the outputs and how they are to be met? contain sufficient information for potential suppliers to submit credible and realistic offers? ensure that all information needed for effective evaluation is requested? permit offers to be evaluated against the declared criteria? set out the acceptance criteria? provide a fair opportunity for all potential suppliers to submit offers? not discriminate against or be biased towards any supplier.The specification document should be reviewed and s