Global Contract Logistics

Best Practice Toolkit for Planning, Negotiating and Managing a Contract

Steven Morgan

• Publisher: Kogan Page
• Year: 2019
• Print ISBN: 9780749475932
• eBook ISBN: 9780749475949
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The role of a contracting professional begins well before the award of a contract and doesn't end until the benefits of the acquisition have been realised, long after the deliverables arrive in a box on a loading dock. Global Contract Logistics tackles the growing complexity of contracting in a technologically accelerating world. The author looks at the common errors and the ten phases of a successful acquisition.

Global Contract Logistics examines what it takes to be an intelligent client, one who employs contracting or procurement professionals to obtain goods and services on their behalf. It debunks many commonly held myths involving contracting, procurement and acquisition and outlines ten vital steps towards success for intelligent clients and their supporting acquisition professionals. The text is supported by case studies of projects that the author Steve Morgan has led, during his time with the Ministry of Defence and BAA. Online supporting resources include contract templates for procurement and acquisition projects.

06

Devising an incentivized contract for alignment

In the acquisition approach phase, the intelligent customer primarily focuses on chunking the total requirement into manageable procurements for a set of contracts which collectively deliver satisfaction of the need. The approach might also feature change initiatives or other in-house work which when integrated together with contractor deliverables can satisfy the whole need.

But another important part of the acquisition approach is to select the type of contract to be used for the chunks that ideally aligns the contractors’ motivations with those of the customers. While the intelligent client may identify early on what the contractual arrangements should be, it falls to the procurement professional to make the final decision about what terms and conditions to actually offer in the ITT.

‘Alignment’ has many definitions but a good one for the purposes of this book is: ‘A statement of agreement or cooperation among persons, groups, nations, etc.’

In procurement terms, misalignment is when a contractor benefits from behaving in a manner that disadvantages the customer. An example would be where the contract type is a time and material contract with profit built into each hour charged and the contractor makes more profit with each hour it consumes. The contractor is actually incentivized to be inefficient, milk the contract, avoid any performance improvements that would reduce costs, or avoid taking any risks at all.

Alignment in a contract is where the contractor’s behaviour is influenced by incentives and terms and conditions that encourage the contractor to do and behave exactly as the customer would want.

In the private sector, contractors believe that satisfying customers and even suffering a bit of loss will be rewarded later by additional business and enhanced reputation in the marketplace. A good reputation, sales and market share all contribute to increased share price which, of course, is the best measure for shareholder wealth enhancement. A company making a good profit can see its share price drop because of a reputation for poor customer service, being a difficult or pugnacious supplier, having a coercive or unfair relationship with its own suppliers, or acting as a bad community citizen. Corporate responsibility is important in the private sector.

As noted earlier, the Japanese approach to supply chain management is based on continuing loyalty of both contractor and customer but only if the supplier meets the customer’s needs. In the auto industry and other markets, a loyal contractor who sometimes suffers for its customer is rewarded over the long haul.

In government procurement, it is not that easy. Procurement is conducted in a goldfish bowl with opposition parties and journalists eager to expose poor performance, waste, fraud and abuse. Project Management Works, an organization that keeps project statistics for industry, reports that the average cost over-run is 59 per cent of the original project cost estimate when the acquisition was initially approved. In the absence of incentives to contain costs, contractors actually have incentives to extend projects, incur extra costs, and absorb fixed corporate costs.

The promise of future work cannot be guaranteed even if a contractor performs very well; each new procurement must be competed for as if it were the first. While past experience may be considered in determining qualification eligibility, it cannot be used as a black ball in the evaluation phase. Personal relationships between contractor employees and government officials have little or no influence on obtaining future work, market share and share price. Indeed, contractors are encouraged to position themselves in monopolistic positions where competition is minimized and investment in government business is disincentivized. Instead, alignment must b...

Table of contents

• About the author
• Foreword by Gerry Walsh
• Introduction
• 01 Professional growth in procurement
• 02 Defining the need
• 03 Specifying the requirement
• 04 Chunking the work (aka acquisition strategy)
• 05 Competitively selecting the ideal source
• 06 Devising an incentivized contract for alignment
• 07 Supporting the contractor
• 08 Enforcing the contract
• 09 Integration
• 10 Commissioning
• 11 Assessing effectiveness
• 12 Conclusions
• Appendix A Sample source selection statement
• Appendix B Procurement plan template
• Appendix C Example of a cure notice
• Appendix D Example of an award fee determination
• Appendix E Examples of justifications for dispensing with competition
• Appendix F Homework for an intelligent client
• Appendix G The contract manager: the most important commercial player on the pitch
• Appendix H Outline for a contract management plan
• Appendix I Summary of intelligent acquisition system
• Appendix J Some dos, don’ts and suggestions in contract formation
• Appendix K Helpful tips for the intelligent client and the procurement professional
• References and further reading
• Index