UK: Contract Management - How To Get Comfort That Your Contracting Processes Are Efficient And Effective?

Last Updated: 15 October 2015
Article by Ruth Ireland

With sound contracts playing such an important to successful businesses, how can you get comfort that your contracting processes are efficient and effective?

Many leading Directors and Board members are able to articulate their most critical functions. These tend to be manufacturing, sales, marketing, and IT amongst others, but contract management rarely features. However, it doesn't matter whether you are a large, medium or small enterprise, or what sector you are involved in (i.e. manufacturing, services, construction etc. ) you will always have and need customers and suppliers who will want  'watertight' contracts that make it clear to all parties their obligations to each other, and all of these contracts need to be planned, awarded and managed thereafter.

Taking supplier contracts as a case in point, organisations often use internal procurement functions to support with their sourcing strategy, supplier selection and award, and negotiation and contract development.  Nevertheless , too often 'Procurement' will see their task as complete once they have 'procured' the provider and the contract is signed, moving quickly onto the next procurement assignment. If you're lucky the budget-holder will have been involved during the procurement process and will take over at this point; although, most often the contract is put away in a draw, filling cabinet or random electronic storage location,  never to be looked at again.....until something goes wrong! 

Recently, we have seen dramatic stories about poor contracting in the press. What about the collapse of phones4u or the ghost Formula 1 contract between Daimler and Henkel, or the HP and Oracle contract dispute over £billions, or even Starbucks being sued by a small snack company over breach of contract. Even the bigger players such as Kraft and Coke, have fallen foul of poor contracting.

As internal audit professionals we often see excellent procurement processes undone by poor contract management, resulting in the quality and value initially negotiated at the award stage not being delivered by the supplier, and which often results in costly legal disputes or the need to re-tender. Conversely, for those organisations without a dedicated procurement function, procurement may not be robust, but this can be recovered through effective contract management arrangements. Good contracting means getting everything you asked and paid for.

How are you using internal audit to provide assurance over your contract management arrangements?

There are two important areas where internal audit can give assurance over contracting arrangements.  Firstly, internal audit are used year on year across all industries to carry out contract audits to the value of billions of pounds. These are normally in-depth audits of an individual contract for strategically important suppliers; the main focus being whether or not suppliers are performing to their obligations and expected service standards. There are many benefits to carrying out detailed contract audits, but most importantly it will give an early indication of key risks that need to be proactively managed, such as under performance or non-compliance with contractual requirements, delays ,; cost overruns,  poor value for money, and poor quality products or services.

Secondly, internal audit are often used to review the overriding contract management framework, which typically involves a number of key departments and individuals including procurement and/or contracts team, budget holders, regional or area management, senior management and the Board. Assurance is sought over the design of the contracting framework and to test whether it is operating effectively to minimise any contracting risks. So what should you watch out for? There are a number of fundamental control principles that we see fail regularly and so need to be considered as part of your contracting arrangements:

  • Define what matters to you from the start - An effective contract management process should start right at the beginning of the procurement activity.
  • Ensure you have a signed version of the contract or service level agreement - One of the most common failings relates to a lack of version control and retaining a final copy of the signed; ultimately, much of the time this does not have an impact on the business, unless there is a contract dispute.
  • Ensure your 'contract managers' have the skills to succeed – More often than not, contract managers end up with the responsibility by default - i.e. they are either the budget holder or their background is in that particular area. Rarely do businesses consider the need of detailed skills, knowledge and experience of contracting The most successful contract managers follow project management frameworks and adopt project methodology disciplines.
  • Take a proportionate and risk based approach to monitoring contract performance – Suppliers will regularly promise the world but quickly fall into the same old performance they adopt with all their customers. This often results in poor quality or value for money not being achieved. However, most contract managers do not have the time or resources to robustly monitor every supplier's performance. Where you have limited resources, it is important to remember that not all suppliers are as important as one another i.e. just because a contract may be large in value, it does not mean it needs more focus.
  • Not all contracts are created equal - you need to consider the strategic importance, value, complexity of the service and the subsequent risk profile a supplier poses to the business.  You need to think about what could go wrong with each contract and adopt a proportional approach to alleviating that risk. The most successful contract managers will risk rate their suppliers and will adopt a more rigorous approach to high risk suppliers including:
    • frequent contract management meetings;
    • site and audit visits;
    • monitoring of validated key performance indicators;
    • supplier payment reconciliations to agreed contract terms;
  • We strongly believe that Internal Audit can, and should, be a key player in assessing an organisation's contract management arrangements. This will help boards to establish whether the way in which their company contracts is suitable for ensuring high quality goods and services that offers real value for money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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