management includes negotiating the terms and conditions in contracts
and ensuring compliance with the terms and conditions, as well as
documenting and agreeing on any changes or amendments that may arise
during its implementation or execution.
- Supply Chain Management (SCM)
- management/oversight of the flow (and storage) of goods and services
(materials, information, finance) from point of origin to point of
consumption (and between and within companies). the management of
upstream and downstream relationships with suppliers and customers
- Procurement Management (PM -
- Contract management is the process of systematically and efficiently managing contract creation,
execution and analysis to maximize operational and financial
performance at an organization, all while minimizing risk.
contracts as assets
- Downstream vs. upstream
- Inputs vs. outputs
- Supply vs. Demand
- Competency vs. Capacity
- Contract language vetting
- Create supplier selection criteria and follow a structured approach to short-listing and selecting suppliers
Types of Contracts
b) Service Agreements
- Capital lease
- Operating lease
Types of Service Contracts
- Full comprehensive
- Full-Coverage Service Contract
A full-coverage service contract provides 100% coverage of
and materials as well as emergency service. Owners may purchase this
of contract for all of their building equipment or for only the most
equipment, depending on their needs. This type of contract should
include comprehensive preventive maintenance for the covered equipment
If it is not already included in the contract, for an additional fee
can purchase repair and replacement coverage (sometimes called a
insurance policy) for the covered equipment. This makes the contractor
completely responsible for the equipment. When repair and replacement
coverage is part of the agreement, it is to the contractor’s advantage
to perform rigorous preventive maintenance on schedule, since they must
replace the equipment if it fails prematurely.
Full-coverage contracts are usually the most comprehensive and the most
expensive type of agreement in the short term. In the long term,
such a contract may prove to be the most cost-effective, depending on
owner’s overall O&M objectives. Major advantages of full-coverage
are ease of budgeting and the fact that most if not all of the risk is
carried by the contractor. However, if the contractor is not reputable
underestimates the requirements of the equipment to be insured, they
do only enough preventive maintenance to keep the equipment barely
running until the end of the contract period. Also, if a company
the work in order to win the contract, they may attempt to break the
early if they foresee a high probability of one or more catastrophic
failures occurring before the end of the contract.
A full-labor service contract covers 100% of the labor to repair,
maintain most mechanical equipment. The owner is required to purchase
all equipment and parts. Although preventive maintenance and operation
may be part of the agreement, actual installation of major plant
such as a centrifugal chillers, boilers, and large air compressors is
excluded from the contract. Risk and warranty issues usually preclude
but the manufacturer installing these types of equipment. Methods of
dealing with emergency calls may also vary. The cost of emergency calls
may be factored into the original contract, or the contractor may agree
respond to an emergency within a set number of hours with the owner
paying for the emergency labor as a separate item. Some preventive
services are often included in the agreement along with minor
materials such as belts, grease, and filters.
This is the second most expensive contract regarding short-term impact
the maintenance budget. This type of contract is usually advantageous
for owners of very large buildings or multiple properties who can buy
bulk and therefore obtain equipment, parts, and materials at reduced
For owners of small to medium-size buildings, cost control and
becomes more complicated with this type of contract, in which labor is
only constant. Because they are responsible only for providing labor,
contractor’s risk is less with this type of contract than with a
- Preventive-Maintenance Service Contract
The preventive-maintenance (PM) contract is generally purchased for a
fixed fee and includes a number of scheduled and rigorous activities
as changing belts and filters, cleaning indoor and outdoor coils,
motors and bearings, cleaning and maintaining cooling towers, testing
functions and calibration, and painting for corrosion control.
Generally the contractor provides the materials as part of the
contract. This type contract
is popular with owners and is widely sold. The contract may or may
not include arrangements regarding repairs or emergency calls.
The main advantage of this type of contract is that it is initially
than either the full-service or full-labor contract and provides the
with an agreement that focuses on quality preventive maintenance.
budgeting and cost control regarding emergencies, repairs, and
is more difficult because these activities are often done on a
time-and-materials basis. With this type of contract the owner takes on
most of the risk. Without a clear understanding of PM requirements, an
owner could end up with a contract that provides either too much or too
little. For example, if the building is in a particularly dirty
outdoor cooling coils may need to be cleaned two or three times during
cooling season instead of just once at the beginning of the season. It
important to understand how much preventive maintenance is enough to
realize the full benefit of this type of contract.
- Inspection Service Contract
An inspection contract, also known in the industry as a “fly-by” contract, is
purchased by the owner for a fixed annual fee and includes a fixed number
of periodic inspections. Inspection activities are much less rigorous than
preventive maintenance. Simple tasks such as changing a dirty filter or
replacing a broken belt are performed routinely, but for the most part
inspection means looking to see if anything is broken or is about to break
and reporting it to the owner. The contract may or may not require that a
limited number of materials (belts, grease, filters, etc.) be provided by the
contractor, and it may or may not include an agreement regarding other
service or emergency calls.
In the short-term perspective, this is the least expensive type of contract. It
may also be the least effective—it’s not always a moneymaker for the contractor
but is viewed as a way to maintain a relationship with the customer.
A contractor who has this “foot in the door” arrangement is more likely to
be called when a breakdown or emergency arises. They can then bill on a
time-and-materials basis. Low cost is the main advantage to this contract,
which is most appropriate for smaller buildings with simple mechanical
- End-Results Contracting
End-results or end-use contracting is the newest concept in service contracting
and is not yet widely available. The outside contractor takes over
all of the operational risk for a particular end result, such as comfort. In this
case, comfort is the product being bought and sold. The owner and contractor
agree on a definition for comfort and a way to measure the results.
For example, comfort might be defined as maintaining the space temperature
throughout the building from 72o
F for 95% of the annual occupied
hours. The contract payment schedule is based on how well the
contractor achieves the agreed-upon objectives.This type of contract may be appropriate for owners who have sensitive
customers or critical operational needs that depend on maintaining a certain
level of comfort or environmental quality for optimum productivity.
How risk is shared between the owner and contractor depends on the type
or number of end results purchased. If comfort defined by dry-bulb temperature
is the only end result required, then the owner takes on the risk
for ameliorating other problems such as indoor air quality, humidity, and
energy use issues. Maximum contract price is tied to the amount and complexity
of the end results purchased.
- Maintain productive working relationships with suppliers
- Reduce the potential for disputes and legal action
Risk of contract management:
critical spares -
e. Measurement and Review
Contracts - Risks
ISO section ___
which of the following contractor risks do you feel protected against
- non performance
- HSE risks
- regulatory non compliance
- reputation risk- damage to business
- authority limit risk - ill informed buying
Contracts - Objectives
An objective is "a result to be achieved" (ISO 55000)
The outcomes of the contracting policy are as follows:
- To mitigate risk to the organization
- To help the organization balance supply and demand
- To help the organization supplement its competencies and capacities.
- To unlock/create value for the organization
- To ensure quality in the delivery of services for which the organization is not qualified to deliver itself
- To manage productivity
- To ensure compliance with regulatory authorities
- There are no disputes
- There are no surprises
- the expected business benefits and value for money are being achieved
- the organization understands its obligations under the contract
- the supplier is cooperative and responsive
- professional and objective debate over change can be had
- supplier insolvency/bankruptcy
- supplier non performance
- Kraljics procurement positioning model - bottleneck,strategic, routine, leverage
- Procurement - positioning model (supp;ly market complexity vs. expenditure
- supplier positioning model - development, core, nuisance, exploit
- power dependency model - buyer dominance, independence, interdependency, supplier dominance cox 2003 (buyer power relative to suppl;ier power)
- Telgens box 2004 - commodity catagories vs. contract compliance
Risk threat responses
- reduction (treatr)
- Mutual trust
- Mutual respect
- mutual understanding
- open and construcrive environment
- contributing to joint management of contract deliery
KPIs should be
- fit for purpose
- easy to suipport by evidende
- accepted by stakeholders
Contracts - Policy
A policy is the "intentions and direction of an organization as formally expressed by its top management" (ISO 55000)
- All contracts shall be written
- All contracts shall be supported by a business case
- All contracts must/shall be recorded in a schedule of contracts
- Every signing officer who has signed a Contract pursuant to this Policy shall keep an
original of such Contract or, when not available, a true copy thereof, as well as the
necessary supporting documents, in his/her office or a place under his/her control.
- No individual may sign any contract that creates an obligation or undertaking on behalf
of the University unless that individual has signing authority in accordance and in
compliance with this Policy.
- There shall be a contract manager to ensure oversight of all contracts
ISO Section __
which of th following controls/treatments have you used?
- Schedule of types of contracts
- Stages of award
- Risk controls
- indemnification/hiold harmless
- limitation of liability
- waiver of subrogation
Control - Stages of contract/Flow Charts
A. Pre-award (upstream)
B. Post award (downstream)
- Identify need
- Prepare the business case
- Secure management approval
- Assemble the team
- Define the procurement apporach
- Establish the form of contract
- Develop contract management plan
- Develop contract exit strategy
- Drafting specifications and requirements
- Establish pre-qualification, qualification and tendering procedures
- Appraise suppliers
- evaluate tenders
- Approve, execute
- Obligation management
- Assessment of risk
- Revisions and amendments
- Contract administration
- Relationship management
- Auditing and reporting
- Contract closure
Preparing the business case
- the outcomes of the contract
- critical success factors
- the possible alternatives
- the risks, including the extent and where they may fall
- identification of any contingent needs and ramifiations of proceeding
Controls - Schedule of Contracts
Types of contracts
Contracting - Roles
Some of the key responsibilities of a "contract manager" include the following:
- Contracts (various: including formal, short form, and annual contracts)—Drafting, Evaluation, Negotiation and Execution:
Disclosure Agreements, Sales / Purchasing Agreements, Sub-contracts,
Consulting Agreements, Licensing Agreements, Master Agreements, review
of customer proposed terms and conditions
- Distribution Agreements (resellers, agents, joint marketing etc.)
- Commercial and Public (Federal, State and Local Municipalities) Contracting
as the point of contact for customers on contractual matters. Act as
contractual “middleman” between company employees and customers,
ensuring timely review and approval / reconciliation of variations.
all standard and nonstandard contracts, provide redlined
recommendations and often negotiate directly with customer attorneys or
purchasing staff until consensus has been reached
contractual records and documentation such as receipt and control of
all contract correspondence, customer contact information sheets,
contractual changes, status reports and other documents for all
- As needed, provide guidance on
contract matters to project managers or other operational staff,
including training to new project managers and other employees in
contracting practices and procedures.
and implement procedures for contract management and administration in
compliance with company policy. As appropriate, contribute to or
influence company policies.
- Monitor compliance by company employees with established procedures. Identify areas of recurrent pressure.
- Work with Risk Management Department / Finance to coordinate contractual insurance requirements.
with Finance to ensure adherence to broader finance and risk
requirements such as revenue recognition, pricing and discounting
policies,, export controls etc. May include ‘financial engineering’ and
understanding / evaluating economic impact of terms and term options.
Product Management / Marketing to ensure company products and services
are offered with appropriate, competitive terms and conditions
competitive terms. Monitor customer satisfaction with our terms and
conditions and contracting practices. Recommend changes.
that signed contracts are communicated to all relevant parties to
provide contract visibility and awareness, interpretation to support
- Handle on-going issue and change management
- Monitor transaction compliance (milestones, deliverables, invoicing etc.)
- Oversee Service Level Agreement Compliance
- Ensure contract close-out, extension or renewal.
Contracts - Measurement
3.3.3 Performance measures can be either generic or bespoke in nature. Typical KPI categories include:
Best Practice & Continuous Improvement;
Asset/ Service Availability
Environmental factors (e.g reduction in energy consumption)
Ethical and Social Issues (e.g checking the supply chain)
regarding equalities, considering the inclusiveness and accessibility
of the service and catering for the needs of all customers).
3.4 Binary Assessment
Some aspects of a service can be assessed in a binary way. These
aspects are either adequate or inadequate, with nothing to be gained by
improving them beyond the level of adequacy.
3.4.2 An example
would be compliance with standards - if the service complies with the
relevant standards, then it is satisfactory in that respect: no
additional work need be done in that area. Similarly, many IT
applications are either "off" or "on".
3.5 Numerical Assessment
Some service aspects are measurable numerically; they can be counted
and measured in a simple, mathematical way. Examples would be capacity,
throughput, transaction volumes and accuracy.
3.5.2 It is
relatively simple to create KPIs for numerical aspects; quality is
expressed numerically, and there is a set numerical value, or
proportion, that is deemed acceptable. The KPI scoring section provides
3.5.3 It may be desirable to stipulate a desired
rate of change in a metric - for example, to process 100 licences a
week for the first month and to seek a 2% increase on that figure in
each following month. This would be a requirement for continuous
3.6 Subjective Assessment
3.6.1 Some aspects of a
service will be hard to measure because they involve subjectivity -
usability and flexibility, for example. However, it is still important
to agree what is to be measured and how the information will be
acquired - through user surveys, perhaps.
3.6.2 Subjective aspects
should not be neglected simply because mathematical techniques cannot
be applied to them; it is a question of gathering information and
analysing it with as much objectivity as possible.
may be that something that is quantifiable can provide a 'handle' on a
much less tangible aspect. Such a measure is known as a proxy measure,
since it acts as a substitute for a measure that cannot easily be
created. For example, an indication of "staff morale" may be provided
by a measure of staff turnover rate.
Contracting Cycle Length
is crucial to improving profit margins. Unfortunately, the contracting
process is often anything but efficient. Negotiations frequently stall,
drafting can become a seemingly never ending back and forth, and things
often break down during the performance phase, which creates a whole
bunch of other problems and delays. As a result, companies should pay
close attention to the length of its contracting cycles to determine
where improvements can be made, as well as which contracting partners
may need to be cut out altogether.
If a company notices
that it runs into similar problems with one particular vendor or at a
certain step in the process, it has to figure out how to adjust to
avoid repeating the same mistakes over and over again. As a company's
contracting volume increases, it should get easier and easier for each
contracting cycle to be completed in a timely fashion, as experience
that add value are those that involve parties who perform in a timely
manner and do so exactly as stipulated by the contract. It doesn't
matter if the contracting relationship relates to the provision of
different types of goods or services, there must be consistent quality
every time. Companies should not have to scramble to make changes or
push back its deadlines to accommodate for any inconsistencies.
a company cannot rely on a particular contracting partner's ability to
perform properly, this will obviously cause problems in the short-term,
likely delaying any anticipated output. However, it will also interfere
with a company's long-term objectives since problems at any point in
the contracting process will end up diverting resources. Thus,
companies must make its expectations with respect to quality clear and
ensure that these are met every single time.
addition to receiving quality goods and services from every contractual
relationship, timeframes must be established for deliverables, and
timeliness should be monitored. Full performance is irrelevant if it
occurs months after the fact. Consistent and timely performance over
the course of a contracting relationship will make it easier to assess
whether long-term goals will be met, and if issues are anticipated far
enough in advance, the appropriate adjustments can be made.
is probably the most important piece to monitor. And, cost
effectiveness is obviously about a lot more than just a contract's
price terms. Every phase of the contracting process has to make sense
financially. The length of the contracting cycle impacts costs,
performance or a lack thereof impacts costs, and the quality of the
good or service delivered impacts costs.
relationship that ends up requiring the investment of time and
resources that were not planned for ahead of time is not cost
effective. Therefore, companies must pay attention to the amount of
time and money it is spending for each contract to ensure it is getting
During contract (inventory)
- Blend of work force management (WFM) vs. supply chain management (SCM)?
- How do you identify/approve supplier sources?
- Do you have a model of all the inputs and outputs for your supply chain?
- How do you tender?
- Do you ever consider the "point of origin" when choosing supplies/services?
- Who writes your contract specifications (eg. roof renewal)?
- How do you synchronize supply with demand?
- How many active contracts do you have?
are all the different types of agreements that you have - consulting,
contracting, suppliers, employer/employee, leases, etc?
- How many active capital leases and operating leases do you have?
- Do you have a schedule of contracts?
- Who supplies parts for maintenance?
- Who owns the equipment (owner or contractor)?
- What types of ownership (cap lease or op lease)?
- How many of your contracts are full coverage, full labour and PM
- Do you coordinate suppliers with other airport stakeholders to secure volume based pricing?
- How do you determine appropriate spares/inventory holdings? Do you know your critical spares?
- Who holds spares/inventory - contractors or owner?
- How do you improve trust and collaboration between supply chain partners?
- How do you assess the productivity of your supply chain?
- Do you know all the risks associated with contract management?
- Which of the risks have you identified and the mitigation measures?
- How do you identify supplier contract milestones. Do you record these in a master calendar?
- How do you review supplier performance against contracts
- How do you resolve supplier performance issues?
Fig. Supply chains are a key upstream factor in organizational success and must therefore be carefully managed. Failure to do so will result in procurement delays, downtime and business interruption.