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TRUE SERVICES CONTRACT PARTNERING AND CLAIMS AVOIDANCE Martin Drake explains the need for the
correct strategic thinking to take place in preparing contract documentation
before commencing the procurement selection process. There must be a common
understanding between the parties as to what partnering means, before the
contract award. Martin recommends the use of Treasury Guidance Note 59 suite of model documents as the basis for a sound contract. Information is given on how to obtain a copy together with suggested updates. |
A great deal has been written and
spoken on the ethos of partnering - the quest for trust, respect and
co-operation replacing traditional confrontation, the delicate balance required
to accommodate flexibility, performance incentives and opportunities for
innovation. All good words. However, in order for partnering to be successful,
it must be based on a sound contract and both parties must fully understand
their responsibilities.
No contract relationship can prosper without mutual respect. This requires that the client displays a high level of professionalism in the procurement and in contract management.
The goodwill often evident when launching the "partnership" can evaporate when problems arise during implementation. The contract will be put to the test by changes in service needs or problems in service delivery. A weak contract will become evident, leaving the client exposed to claims.
Sound contracts do not arrive by accident. They result from strategic planning before the start of the procurement.
The contract must encompass an effective strategy for claims avoidance. Partnering should not mean eliminating the control mechanisms that are necessary in order to have a strong claims avoidance strategy.
Valid claims at the end of the contract should be a thing of the past. In order for this to happen the contract needs to provide for the contractor being able to request a variation. The monthly reporting procedure also needs to provide for the contractor to keep the client informed, on an ongoing basis, of the cost of any contended variations that have not been approved. Following this procedure, valid claims at the end of the contract can only result from the client's refusal to recognise the validity of the contractor's request for a variation at the time of the event. To support this strategy, the contract must establish that a recognised "Variation to Contract Form" is the only means by which the contract can be varied.
The techniques used should not be regarded as being solely preventative measures. Having to address issues at the time of the event should encourage co-operation and thus assist in sustaining a partnering relationship.
Tenderer Selection Procedure
Partnering will only work if due care has been taken in the selection of the partner.
Tenderer selection is the start of the partnering process. It is just as much about the contractor weighing up the prospective client as the client the prospective contractor.
Although this paper has been written on the basis of "restricted procedures" being used, many of the principles suggested are equally applicable to use of the "negotiated procedures".
The selection procedure needs to be a structured, controlled process based on objective criteria. The process should include:-
- Place advertisement;
- Send out questionnaire to respondents;
- Score questionnaires received;
- Send out pre-qualification;
- Hold pre-qualification interviews;
- Score presentation / select tenderers.
References should be followed up, how the prospective contractor performs once given a contract, is a key element in the selection process. Care should be taken to ensure that reported poor performance is not due at least in part to the client. Track record in submitting unfounded variation requests and claim submissions is very important. In many cases it is the attitude of the individual and not the company which colours opinions. It is important to seek references in respect of the company's proposed project manager.
The letter requesting attendance at the pre-qualification interview must provide sufficient information about the project and the proposed contract documentation, to enable a project specific presentation to be made. It should be a working level presentation by their proposed project manager.
One of the client objectives is to ascertain that, if selected, the company being interviewed would submit a tender. This confirmation only has value if the pre-qualification process has made known the proposed specification, method of pricing and conditions of contract. Some companies immediately return 40% of invitations to tender received. This can cause a shortage of tenders. A company is more likely to submit a tender if the client has demonstrated a professional approach to the procurement process and the future administration of the contract.
The invitation to tender should both provide and seek information in a structured format. The proposed contract should be presented to the tenderers so as to provide for the tender and the contract to be one and the same. The tenderer should insert the tendered prices into the proposed pricing schedules and provide administrative information in the Administration Instructions section. The client's use of a standard model framework for its services contracts assists in this process.
The tenderer should be given the option of submitting a non-compliant bid in addition to providing a compliant tender. This could contain alternative suggestions put forward by the tenderer with corresponding alternative pricing.
Standard Conditions
There are of course many important matters to be covered by the conditions, to provide for a sound contract and the avoidance of claims. Only a few of which can be highlighted in the space available in this article.
It is essential that when the contract is signed there can be no misunderstandings between the parties regarding what constitutes the contract.
Many contracts are signed with the in-built potential for claims by incorporating references to letters and minutes of meetings. This can lead to differences of opinion relating to their interpretation and the order of precedence.
Many contracts also have an open-ended definition of "the Contract" which can include all the contractor's tender submission documents, as well as making a general reference to a wide range of documents the exact reference or revision of which is not stated.
Problems can arise if the client incorporates the contractor's method statement into the contract. The method statement may well be in conflict with the requirements of the specification. Its incorporation may be viewed as acceptance of the tenderer's solution which in the event may not work.
If the potential for misunderstandings and therefore claims is to be avoided the starting point must be that true Entire Agreement contracts are used. Any agreed changes should be word processed into the contract before it is signed.
The contract should provide for the client to direct a variation to the service requirement, subject to it being related in nature to the services being provided.
The standard conditions applicable for the procurement of goods are not the same as those applicable to services contracts. Claims can result from trying to combine the two.
The conditions need to address such issues as TUPE, the right to information at handover and use of the client's equipment and space. As an example, which party benefits financially if the number of staff in the undertaking changes from the time of tender to the point of transfer? There is a potential for disagreement at the outset of the contract if this point has not been addressed.
Specification
Two of the main causes of claims emanate from poorly worded specifications and the incorrect use of defined terms. The specification is often written by someone familiar with the service requirement but not with the defined terms contained within a different section of the contract.
The specification must avoid the use of terms such as "assist", "may be required to" or "shall have responsibility for", all of which can create misunderstandings as to the action required.
Performance specifications can sometimes leave the door open for variations or claims resulting from known essential service requirements being omitted from the specification.
Partnering does not mean that once the contract has been let, it is open for the contractor to perform to a lower specification requirement. This would be unfair to the failed tenderers who might have offered lower bids had they known this would be allowed.
Quite often a difference in tendered prices can be accounted for in differences of understanding regarding the work content. This is one of the reasons why a detailed price breakdown should be requested. The submission of an anticipated resource structure can also provide useful clues in this direction. There is no mileage for either party in letting a contract where the work content has not been fully understood and provided for in the tender.
Schedule of Prices and Rates
The standard conditions and schedule of prices and rates should work in tandem to provide for variations to the scope of the specification during the contract period at tendered rates set out in the contract or rates pro-rata to those rates.
The 'Schedule of Prices and Rates' must be structured in such a way as to ensure that the competitive tendered element remains when the volumes or the scope of the services alter. This is achieved by a combination of volume banding tables and the incorporation of 'Daywork' and 'Premium Time' rates.
Care must be taken in being selective with regard to the services that are measured on a volume basis. The wrong selection, on such things as the number of orders placed can be counter productive in creating an incentive for the contractor to split orders.
Administration Instructions
The use of an Administration Instructions section should be one of the key elements in claims avoidance strategy.
The contract should require that the contractor provide a monthly report that addresses pre-determined issues. These should include: -
· Highlights (the contractor's opportunity to discuss achievements, problems, solutions, future key events, proposed new sub-contractors etc)
· Volumes to date / forecast;
·
Financial (variations priced and agreed, the
estimated value of variations issued but not agreed and crucially the estimated
value of requested variations considered to be outstanding);
· Performance (the basis of reporting to be stated in the contract);
· Resource Information;
· Health and Safety Information.
It is very difficult for the contractor to make a claim at the end of the contract if during the contract no mention has been made in the monthly report of the events that form the basis of the claim. However if concerns are raised and the client is not able to demonstrate having taken the appropriate action, the monthly report will be used in support of the claim.
Project Management
An essential ingredient to successful partnering is the selection, by both client and contractor, of management personnel who have the right attitude of mind to make the contract work. Partnering means that problems should be discussed and the first method of conveying dissatisfaction should not be by the written word.
One of the objectives must be to avoid a paper war developing, either between the client and the contractor or the consultant and the contractor. This is not always possible and depends to some extent on the personalities and polices of the parties concerned. Hence the need for careful selection.
The correct use of the monthly report and monthly meetings together with the prompt issuing of variations goes a long way to reducing the need for endless point scoring correspondence. Discussion should be the first resort, coupled with a professional attitude to contract administration.
Treasury Guidance Note GN59
It is the author's view that the use of the Treasury CUP Guidance Note 59 will go a long way towards addressing some of the issues raised in this article.
The CUP Guidance Note is available on the Internet site: www.hm-treasury.gov.uk or by phone: 020-7270-1712.
ProjecTeam publish their own extensive recommended updates to Guidance Note 59. These are available, free of charge, through the ProjecTeam Internet site.
The author of this article - Martin Drake of
ProjecTeam Ltd., chaired the Inter-departmental Committee that produced the
model suite of documents.
Internet: www.projecteam.co.uk
E.mail: mdrake@projecteam.co.uk
Tel: 0161-766-8709 Fax: 0161-766-6620