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Contracting best practice

Sureyya Cansoy of Intellect highlights the importance of having standard terms and conditions for the delivery of a successful project

IT solutions are increasingly required to address difficult commercial and technical issues, as well as to provide value for money and continual improvement of the services they support over extended periods of 10 years or more. Consequently, contracts for such services can be complex, time-consuming and expensive to formulate. It is therefore attractive to both customer and supplier to become familiar with using contracting templates such as the OGC Model Contracts wherever possible, so as not to duplicate unnecessary effort in recreating contracts at each transaction.

This model-based approach is recommended and reinforced in the public sector by the OGC in its guidance to customers. Intellect welcomes many of the messages in the OGC guidance - for example, emphasising the benefits of standardisation while at the same time encouraging customers to be flexible in their use of the model contract provisions.

Such an attempt to standardise and provide appropriate associated guidance is encouraging. However, suppliers have also observed that, in practice, some public sector customers are proposing additional contractual conditions, which have the potential to unnecessarily increase risk and cost, and reduce desirable flexibility.

Successful delivery of projects requires that, from the outset, behavioural and relationship issues are recognised as a vital part of effective delivery. The written agreement with its terms, conditions and schedules should reflect and allow for the application of these less quantifiable aspects of the customer-supplier relationship, as well as the basic deal and its legal obligations.

Model contracts
The focus of Intellect’s work over the past four years on the topic of public sector contracting practice has been the development of model contract terms and guidance that most effectively facilitate and support the successful outcome of IT-based programmes. Intellect has also addressed the issues of government and supplier practice in the drafting and negotiation of contracts, again with successful outcomes of programmes as the primary goal.

In both areas - model contract terms and negotiation practice - an inefficient approach can result in protracted negotiation on key topics that arise again and again. Much progress has already been made in this area, but further improvement in contract terms and practice could significantly reduce the negotiating burden on departments and suppliers, and deliver more effective contracts and more successful programmes.

Guidance for suppliers
Contracting Best Practice - Guidance for Suppliers, published by Intellect in 2006, consolidates the ICT industry’s view of current best practice in contracting. It outlines the main contracting principles, drawing on members' experiences from both the public and private sectors, and recommends behavioural approaches that lead to more successful contracts. The aim of the guide is to inform and assist suppliers engaging in public sector contracts. It is hoped that it also contributes to the government’s own view of best practice in contracting and contract negotiation.

The guidance is based on the considerable experience of Intellect’s members and it should promote successful IT procurement in the mutual best interests of the government and its supplier community.

Key objectives
The key objectives for contracting best practice in the guidance include:

* Successful and reliable delivery by the supplier against the customer’s requirements
* Value for money for the customer (including reducing unnecessary costs)
* Due compensation for the customer should the supplier not perform as agreed
* A recognition of the customer’s necessary role in contributing to delivery
* An equitable balance of risk, with responsibilities assigned to those best able to manage them
* Acknowledgement of the importance of appropriate behaviours as a vital part of the delivery process
* A joint commitment to work together for the success of the programme
* A healthy and profitable project delivery for the supplier.

Collaboration with OGC
OGC has recently undertaken a major refresh of the OGC Model Contracts and Guidance and has engaged in a wide-ranging consultation with both the public and private sectors. Intellect played an active part in the review exercise, highlighting industry's concerns in relation to the model contracts document and the commercial principles that they have applied. Version 2.1 of the guidance document, which has addressed some of industry's key concerns, was published in June 2007.

OGC, working closely with Intellect, continues to review the model contracts and accompanying guidance, addressing new requirements and any outstanding issues from the consultations. The next revision of the model contract (version 2.2.) is expected to be published in Spring 2008.

Concerns
At this stage, suppliers remain concerned about a number of issues in the model contract and guidance. In order to plan and cost any responsibilities that will be assumed under the contract, suppliers that are bidding for and negotiating a contract need to understand the state of the existing assets (including current personnel and the quality and scope of existing services). This information is very important for assessing the real costs and timescale of the programme and the customer should be assigned formal responsibility for providing and warranting as much information as can reasonably be made available.

Supply chain rights: The supply chain is in many cases integral to the prime contractor’s solution. The model terms and conditions seek to provide the customer with the right to enforce the supplier’s contract as though it were its own. This approach - where customers can control or step into the supply chain - can threaten the integrity, viability and cost structure of the supplier’s overall proposition. This can result in severe disruption to both programme deliverables and customer services.

Limits of Liability and Indemnities
Liability and indemnities should normally be limited, reasonable and proportionate to the scale and type of the project concerned. The general limit of liability should be based on the contract value for a defined period and not the total contract value, and indemnities should only be used in special cases and not as a substitute for normal contractual commitments. Where a customer insists on excessive levels of liability and broad indemnities, then only the largest suppliers (and sub-contractors) may be in a position to bid, reducing competition and innovation. This is because commercial organisations can only take on defined levels of liability.

Financial distress: Each procurement includes an assessment of the financial standing and legal structure of tenderers. Customers may wish to be assured of the supplier’s ability to continue contract performance and make payment of sub-contractors, in the course of a major project where the supplier’s financial standing changes.

However, the current provisions in the OGC Model Contract are severe in that they effectively stop the flow of payments to the supplier that are properly due under the contract. These provisions worsen the supplier’s trading position and increase the potential for service disruption.

Successful outcomes
Good contracting practice is key to achieving more successful outcomes for the public sector, including better value for money, more timely and effective delivery, and the implementation of improved systems and processes. These in turn should enable the public sector to provide improved, efficient public services delivered in collaboration with a more successful, effective and sustainable supplier community.

Intellect is the trade association for the UK technology industry. It represents 800 members ranging from SMEs to large corporations.

For more information
If you would like to find out more please visit: www.intellectuk.org