When forming “the deal” considerable focus is often given to “the price”, yet the theory goes: “price” trades off against “certainty” and “timing”; each of “certainty” and “timing” apply pressure to the margins of “price”. Placing pressure on “timing” and “certainty” increases the risk of “non-performance”.
The most critical aspect of contract preparation is to address the risk of “non-performance” and so as a procurement contract unfolds, the “risk of non-performance” relies on the purchaser knowing how well the contractor has been performing and, in turn, help the purchaser predict how well the contractor will continue to perform. These tools are:
- “Performance Indicators”: “what has been done”, typically used to demonstrate that a party has satisfied the criteria to become entitled to a payment; and
- “Lead Indicators”: which provide information on future performance and should demonstrate whether the desired results will be achieved within the agreed timeframe and cost, providing an early warning of any problems in the delivery of the contract.
A core skill in contract preparation is to determine what performance or lead indicators might exist to help manage contract performance. Having a good contract structure will give you options (whether through re-performance, damages or termination rights) to get the goods or services you bargained for; and critical in that is the delivery of the purpose for which the contract exists.
The foreword to the “Better Practice Guide on Developing and Managing Contracts” published by the Australian National Audit Office in 2012 urges: –
“[C]ontract management is not an end in itself, and it is important that all contracting decisions and actions focus on the outcomes that entities are seeking to achieve and cost-effective delivery approaches”
In the event of a contract breach and in the choices and timing of performance and lead indicators, it is paramount that the parties do not lose sight of what it is they committed to do. In order to effectively manage contract performance, the parties must keep that “goal” in mind.
Where the Commonwealth is a party, it is important to note its obligations under with the Public Governance, Performance and Accountability Act 2013 (PGPA Act). Section 15 requires the “accountable authority” of a Commonwealth entity to promote the “proper” use of public resources i.e. uses which are efficient, effective, economical and ethical. All businesses should keep these principles in mind.
Structuring a contract to address non-performance
Performance and lead indicators exist to support the decisions you might wish to make in the course of contract management.
Identifying what the deliverable is, the means by which the deliverable will be delivered (the steps that need to be in place in that pathway) and the matters that put that delivery pathway at risk, can be used to efficiently and effectively manage the contract by delivering information on a contractors performance in meeting existing contractual requirements and, where appropriate, ensuring that future requirements will also be met.
Performance measures should be designed to alert the contract manager to potential problems so that remedial action can be taken if needed. Identifying areas for potential dispute early can help you guide compliance with the contract or effectively resolve the potential dispute (without that dispute ever arising).
Characterising damages and loss from breach
Further, timing your performance and lead indicators to critical stages of contract delivery should coincide with those points when it becomes most convenient to “cut your losses” and run, if you can. There are many considerations in that decision:
- Is the deliverable contractor easily substituted?
- Even if the deliverable can be substituted, what is the consequential cost of delay?
It is important to be cognisant that a given procurement may simply be a building block embedded within a broader purpose or design. In those circumstances, the possible consequence of terminating the contract is that there may be a greater impact on the procuring party as opposed to the losses which flow naturally from the breach of “that contract”.
Rectifiable defaults clauses typically deal with issues such as:
- the deficiency represented by the breach – will you engage a new contractor to rectify the breach? and
- addressing the consequence to the balance of the performance, particularly in terms of delay.
While such clauses should be geared towards repairing the relevant default, when partnered with delay clauses, they are often seen as a procedural step towards “termination”, rather than as a contract management tool to keep the contract alive and address the consequences of loss flowing from the works needed to keep the contract on foot.
Complex procurement must rely on the skill, judgement and expertise of the contract party to identify and deal with issues arising not only from the environment into which a deliverable will be put, but issues arising from the development of the delivery and then the way in which the resulting output (or absence of it) will affect the moving environment into which the outcome will be placed.
While much of the assessment and performance risk can and should be controlled through relationship management and good communication, a good procurement contract should be structured so that there is an action plan for performance, clear milestones and deliverables, along with subsequent action that would result from underperformance.