Value for money in contracts—February 2014 print edition

Tips for ensuring effective supplier performance

March 7, 2014
by By Larry Berglund

Frequent instances occur within contracts where disputes arise over the quality of the materials or service performance. Invariably, the relationship between the owner and the contractor deteriorates with the result being that the owner will not receive full value for money.

Execution of a contract doesn’t give license to the owner to demand services that were not contracted, or for the supplier to provide inferior product or unsatisfactory service. It’s essential that the RFP include language that facilitates management of the contract, the terms and performance metrics that are usually developed collaboratively between the owner and the successful proponent before the contract’s execution.

The key to maintaining a successful relationship is to meet to review performance, identify deficiencies and seek improvement. This implies that all parties can contribute to ongoing improvements.

One contract management weakness is that the owner lacks a structured process to identify deficiencies. This activity is directly correlated to the responsibilities for contract management and without a formal supplier evaluation process the ability to measure value for money is forgone. In future competitions, the owner may fall victim to the lowest bidder—who may qualify for price-based contracts arrived at through competitive processes that meet minimum or lesser requirements.

Supplier performance evaluations should be a shared responsibility between the end user and the procurement or designated contract staff. Verbal complaints or undocumented perceptions about poorly performing suppliers won’t cut it and aren’t defensible in avoiding an award to a poor performing contractor. Without an evidence-based defense, the poor performer is being treated unfairly and may have a right to recourse if unsuccessful in a competitive bid due to a lack of a record. Conversely, suppliers who are performing well have their performance record lost in anecdotal comments.

The lack of a formal evaluation process and record on file defaults in favour of the poor performer. The situation continues until the service provider hits an unacceptable level and remedial actions are necessary. This adds to administration costs and doesn’t address core problems. Replicating successful contracting processes leads to best practices in contract management.

Supplier evaluations
Supplier evaluations on contracts are related to expected level of services within the RFP or in the contract and the perceived level of services received by the organization. The perceived level of services equates to the assessment of the services after they’re performed. The expected level of services equates to the pre-contract evaluation and any subsequent meetings to clarify those services. The latter is analogous to the hiring of a prospective employee. The employee’s resume and references give the employer an expected competency level. Employers assess the value of that performance through evaluations.

The reason for the discrepancies between the expected and the perceived level of services should be determined as part of the continuous improvement process. Where a perceived service exceeds the expected service level, this too is an important lesson from a supplier evaluation. It’s the relationship between the expected (desired) level of services and the perception of the services received that needs to be assessed in the supplier performance evaluation. Not all evaluations should be conducted in the same manner. Based on contract type, the performance evaluations should address the nature of the goods or service and the inherent risks. Several contract types exist, including:

  • One-time services, i.e. need to having a document translated;
  • Multi-year delivery of services, i.e. need to have painting contractors available to meet ongoing service requests;
  • Multi-year outsourcing of services, i.e. need to have IT support available to manage technology upgrades;
  • Short-term project services, i.e. need to have facilitation of training programs;
  • One-time goods acquisition, i.e. need to buy an electron microscope; and
  • Multi-year goods delivery, i.e. need for office supplies and related equipment on an ongoing basis.Each contract type implies different criteria and outcome measurements and therefore different contract management tools or focus areas. All contracts share the common component of the perceived level of satisfaction to be assessed at the contract’s end.Although there are differences in the types of contracts, there are common best practices for managing them. Nevertheless, this doesn’t presuppose that every evaluation should encompass the same degree of detail. Rather, evaluations differ given the variety of factors impacting procurement, like the circumstances under which the goods or services were acquired. This could include time frame, emergent situation, compatibility risks, project cost, or availability of alternatives in the market.Service contracts may result from a successful competitive process or, where justified, a direct award. One-time, short-term contracts tend to be less problematic from a managerial perspective than multi-year agreements. However, all contracts require management of the terms and conditions specific to the nature of the goods or services, or unique to departmental requirements that the parties must comply with during the contract term. Key responsibilities in successful contract management include:
    • Compliance with the contract terms and conditions by all parties;
    • Satisfactory contractor performance during contract term;
    • Owner received value for money; and
    • A post-contract evaluation summary was conducted and stays in the file.The performance of the contractor during the term of the contract should be monitored for:Identification of problems or deficiencies as per the statement of work;
    • Remedial actions taken where necessary;
    • Interpersonal skills and relationships of contractor resources; and
    • Failure to meet terms and conditions.Contractors should be advised during the contract regarding whether their performance is meeting expectations—not only after the fact. After the contract’s completion, an evaluation should be conducted as to the contractor’s performance in meeting the expected outcomes and their relations with organization staff. Post-contract evaluations and reviews are conducted to:
    • Ensure goods or services were provided as per the contract terms and conditions;
    • Ensure end user needs were met;
    • Identify areas of improvement in procurement; and
    • Assess if the contractor would be re-considered for similar services.The contract manager should follow up directly with end users and/or the RFP team lead to discuss the contract/project file, and speak with the supplier to identify areas for improvement. Post-contract evaluations are a commitment to continuous improvement, which is a best practice. The performance evaluation forms a part of the contract file for future reference.Learning outcomes from the evaluations provide an iterative process contributing to the benefits of the owner and supplier.Supplier performance evaluation and ROI
      As advocates of supplier performance evaluations we share the following advice, comments and recommendations:
    • A formal and comprehensive evaluation requires a wide variety of perspectives from stakeholders to be objective. The cost to conduct supplier evaluations during and post-contract is low compared to the benefits.
    • The results should be shared objectively with the supplier being evaluated. Where areas for improvement are noted, this can complement continuous quality strategies; and where a strong performance is assessed, this too contributes to replicating this ongoing level of performance. Supplier improvements don’t just benefit one customer. They also provide the multiplier effect where the resolutions can be applied to many customers.Early detection and remediation of issues reduces the overall costs to all parties. This leads to improved performance and long-term competitiveness. The parties have a stronger understanding of expectations and commitments to the contract’s spirit and intent. The opportunity for leading suppliers to reference successful contracts with potential clients garners better evaluations. Owners receive value with higher end user satisfaction.Supplier Reward Programs
      Suppliers want information regarding their ranking within the overall score determined from the metric assessments. The scores give a percentage in relation to the overall points. Where a supplier gets a very high ranking, rewarding them with a “preferred” or “exceptional supplier status” certificate provides a stronger motivation to maintain that rank. This contributes to increased competition to vie for this recognition.The big payback to the owner is to be the “customer of choice.” In a recent provincial RFP the successful bidder immediately asked for a debriefing (debriefings are usually associated with unsuccessful bidders) since they knew their proposal’s solutions were likely not ranked the highest in every category in the bid document. Before implementation, the supplier wanted to know where they could focus improvement at the contract’s outset. This led to a strong working relationship between the parties where the perceived services were greater than the expected services.

      These guidelines provide a subjective means of assessing performance. A final score should be reached by consensus and averaged by the number of staff completing an evaluation to mitigate bias. The post-contract evaluation process should include end users, procurement, legal, finance or accounting staff, or other stakeholders to assess perceptions at project completion. This forms a part of the contract record and can be used when evaluating future proposals.