• Novice
  • Aware
  • Competent

Packaging of Contracts

As an organization makes the transition from in-house services to contract services, it must define its provider contracts and package them appropriately.

Contract packaging should take into account:

  • The organization's general economic requirements
  • The ability of the contracts to maintain true competitive pressure over the long term.

During the early stages of this transition, an organization may typically use a simple Schedule of Rates contract where specific items are nominated for planned maintenance for a short period (approximately 1-3 years).

With this type of contract, there may be little or no historic data on asset performance.

Over time these contracts will become more sophisticated.

The various stages of sophistication for asset management contracts, the key elements and some indicative packaging options available are shown below:

 

Stages of Sophistication

Timeframe

Activities to improve contract packages

PRIMARY (Year 1)

List of major assets only

Project managers / internal control

SECONDARY (Years 1-3)

Asset register down to maintenance managed item level

Information technology systems being put in place

Data capture taking place

Project managers defined

TERTIARY (Years 2-6)

Information technology systems fully operational

Performance and cost histories available

Maintenance and life-cycle analysis being completed

ADVANCED (Years 3-8)

Long term life-cycle contracts including rehabilitation and replacement

Performance clearly defined and managed

Contractors able to assess risk

Optimized renewal decisions being made by contractor

As contracts become more sophisticated, the contractor may begin to make the decisions -about maintenance, rather than the owner. The contractor may eventually know more about the asset than the owner does.

Because of this acquired knowledge, the contractor will be in a privileged position when the contract comes due for renewal, which may discourage other suppliers from submitting a tender and reduce or negate the benefits of competitive tendering.

The owner needs to guard against such an undesirable situation by establishing comprehensive asset information systems and specifying the data inputs required from the contractor.

This information must reside with the owner, where it can be made available to all contractors when tenders are called.

This helps to cultivate a competitive contracting environment.

The owner also needs to develop the skills and systems to monitor the contractor's performance and effectively administer the contract.

At the most sophisticated stage, there may be a Performance Based Life-Cycle contract, where the contractor is responsible for asset renewal, as well as maintenance for a long-term period (eg, 10 years or more).

Such a contract will require:

  • Comprehensive detailed information on past asset performance to enable the owner and contractor to assess risks and likely costs
  • Acceptable processes and decision-making evaluation procedures
  • Clear standards of service and intervention levels.

The key issue here is "don't rush it". Get it right the first time by completing a sound strategy that enables both the organization (the owner) and the contractor to evolve and develop the necessary skills and systems required:

  • Asset management skills
  • Information systems
  • Collection and maintenance of the data
  • Contract and administration skills
  • The specifications and cost effective performance monitoring programs
  • The cultivation of a competitive contracting environment.

Managing the Transition from Internal to Contracted Work

The process of managing the transition is a formidable challenge for most organizations.

This process will be one of evolution and change for the organization and the contractual environment in which it operates.

New work practices will need to be established and a corporate culture that embraces change will need to be developed.

The critical ingredient is the rate at which the organization and its potential contractors can develop the skills, information systems, processes and experience necessary.

If the organization tries to accelerate the program beyond its capabilities to control the contractors' activities, it will:

  • Weaken its managerial and operational performance
  • Reduce the success of its contracting out program.

The risks include:

  • Non-competitive costs
  • Inadequate standards of workmanship
  • Greater supervision required
  • An adversarial contract relationship.

Supervisory staff must have the appropriate skills, experience and systems for managing contracted services.

The organization may need to cultivate a competitive market for contractors with the capabilities required, if this does not already exist.


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