An Overview of Contract Performance Management
Contract performance management is a critical component of the contracting process. It is essential for fulfilling the terms of the contract and for maximizing the value of the contract for the business. The objective of contract performance management is to establish frameworks that enable optimum outcomes in line with corporate objectives for all stages of the contracting process. There are four basic steps in contract performance management: Defining, tracking and measuring contract performance is essential for all types of contracts, including purchasing contracts for goods and services and supply contracts for product manufacture . In addition to core contract performance management activities, strategic contract performance management provides a platform for contract governance and increased value attainment through risk management and enhanced analysis of existing relationships for further optimization. Any organization that deals with contracts, both externally with clients and customers or internally with department co-department suppliers, will see greater return on relationship through improved contract performance management.
Key Components of Contract Performance Management
Establishing and communicating clear objectives and measurable deliverables at the outset can help mitigate potential contract disputes and ensure that a third party’s performance ultimately meets your company’s requirements. To achieve these objectives, it is important that the objective and deliverables are set out clearly and in a manner that the third party understands.
- Clear and easy to understand objectives.
- Measurable deliverables with an open or closed delivery system.
- Regular performance evaluations which includes a prescribed schedule for performance review and rating of performance and for regular or frequent feedback to the third party.
- Remedial plans with specific corrective actions if a performance deficiency is identified.
- The ability to impose meaningful penalties for non-performance.
- Open and clear direction to the third party about your expectations and how they will be measured, including the consequences of falling short of those expectations.
- Complete and understandable contracts which take account of any industry standards applicable to performance.
Tools, Technologies, and Skills for Contract Performance Management
Maintaining optimum contract performance is a science all its own and incorporates many well established practical techniques in the law and management. The law of contracts is still fundamental to managing contract performance. A contract must be clear and unambiguous as to the obligations of the parties, the consequences for failure to meet those obligations, and any rights the parties might have to change the contract terms. Also, the schedules for performance and properly identifying milestones can be critical to performance. However, there are a number of tools and technologies that can streamline the management of contract performance and make it more effective.
The Fail-Safe Checklist. One of the most widely understood and effective tools in business management is the checklist. Almost everyone has seen one or more of the following checklists: (i) the checklist airlines use before taking off; (ii) the pre-ride checklist astronauts use before leaving Earth or returning from outer space; (iii) the safety checklists doctors and nurses use before administering an anesthetic or performing an operation. A checklist is simple, effective, easy-to-follow, and, most importantly, can reduce and mitigate performance risk. Checklists can be used in conjunction with formalized reports on contract performance. In effect, a checklist is a simplified status report. A checklist of tasks that must be completed and deadlines that must be met. Status reports should be customized to the requirements of the reviewers. For example, a status report for senior management will be high-level and summary in nature. A report being provided to the person overseeing a particular task should be detailed and oriented to the tasks required to complete the contract.
Software and the Internet. Technologies also play an important role in managing contract performance. Most businesses now use some form of software to manage documents and process contracts. Document/contract management software allows a business to track the status of its contracts and to improve efficiency. This is possible because a software system helps to automate the contract administration process. Document and contract management systems streamline the processing of contracts by standardizing the process for processing contracts. The systems are usually web-based and can be accessed through an Internet connection which means there is no need for a standalone computer or computer network for each business unit. This makes it easier to provide access to employees, customers, and employees of other organizations. Employees who require training on a web-based software system can attend webinars held over the Internet or they can receive interactive on-line training. Moreover, these businesses can scale back on the number of employees involved in contract processing, thereby reducing administrative costs.
Challenges and Obstacles in Contract Performance Management
Despite the substantial body of research on contract management, relatively few studies have been devoted to examining how contracting affects business outcomes. However, those that have are revealing a disheartening truth: the effective execution and management of contracts is often prized over their creation.
The need for efficient execution and management of contract performance management is underscored with the rise in internal and external compliance and oversight. Increased oversight means more documentation, vendor relationship issues, and other external risks have resulted in the need for an even greater emphasis on managing the entire lifecycle of contracts.
The expected value that can be achieved over the lifespan of a contract through proper management continues to grow. For example, smarter ways to reduce the administrative burden of contracts is expected to be worth $6.4 trillion globally by 2027. The problem is that data indicates the opposite is happening. The cost of non-compliance is estimated to be worth $6.9 trillion, a number expected to continue increasing.
So why is there such a discrepancy between expected and actual outcomes?
For one, delayed performance from contractors and vendors is usually the largest contributor to cost overruns in contract performance management. That is this is because contracts with these issues require additional coordination, oversight, and increased management effort to achieve compliance.
Another source of problems is poor communication between parties. Good communication is always vital for successful business operations, but when it comes to contracts, it may be the most important. The unfortunate problem is that many companies treat contract management like an administrative activity, rather than a way to make money. This produces a communications style that places the responsibility solely on the vendor to communicate with little expectation of any information to be coming from the company in return.
When a company fails to understand and act upon contract information, it creates a cascading effect. Over time, the business begins to lose touch with the contract. Meaning the passive approach to contract performance management created a situation where they no longer know what the contract specifies, therefore are no longer in control of their contracts. Without active communication, misunderstandings and misinterpretations begin to crop up.
Another issue companies face in contract performance management is compliance. Researchers estimate that more than 80% of audits either fail or require a substantial amount of rework. However, they also found that when businesses have an active performance management process, over 80% of compliance risks are resolved before the contracts are reviewed. Contracting compliance is incredibly expensive and a small amount of effort in contract performance management pays off.
Best Practices in Contract Performance Management
Engaging in contract performance management requires a thorough understanding of the specifics of the contract and its implications for your business. Negotiating a contract is only half the battle, as how you comply with it is what enables your business to thrive. To successfully manage contract performance quality, you must have a good line of sight into how you are operating under the contract at all times. Here are a few additional ways to make sure you are in the clear with compliance:
Continuous Monitoring
Always take the opportunity to keep tabs on how your contract performance management efforts are progressing. When you have a designated professional whose job is to keep an eye on all your agreements, this becomes significantly easier , as you can quickly check in with them at any time to get updates. This person can also quickly respond to a change in contract specifications or conditions.
Stakeholder Engagement
Keeping all stakeholders in the loop in regard to contract fulfillment efforts can foster collaboration and ultimately help you maintain compliance. It’s important to establish communication lines at the beginning of the contract, and ensure your stakeholders understand the potential risks of certain actions, and what the rewards are for meeting expectations.
Data-Driven Decision-Making
You can use the data generated by your performance management processes to help you determine what is working and what is not. When you back decisions with hard data, there is less room for miscommunication or misunderstanding. Make sure to analyze all data gathered through your reporting process on a regular basis to ensure you are swiftly responding to issues as they arise.
Managing Contract Performance: Case Studies
DoD recognizes that transitioning to a new paradigm of contract performance management requires an organizational commitment to moving away from the traditional and linear government oversight and contract administration practices to a more collaborative strategy in which DoD works with its contractors as partners toward achieving mission success. In fact, DoD’s Guidebook for Achieving Effective Outcomes from Services Acquisitions recommends that, at the outset of a contract if not earlier, "acquirers and contractors [should] create a culture of open communication, trust, transparency and collaboration. Specifically, the acquisition team and contractors should discuss how they intend to effectively monitor and evaluate contract progress."
Small and large businesses, such as Artel, Booz Allen, Northrop Grumman, Lockheed Martin, Raytheon, Boeing, Bell Helicopter, and Harris Corporation, have successfully utilized effective contract performance management strategies to obtain successful contract outcomes.
For example, DoD’s Guidebook states that "[i]mproving quality means building trust and reducing risk. Building trust is an investment in a long-term relationship. . . . . Achieving a mutual goal requires time and effort on both sides of a contract. It will never happen unless both parties have a mutual commitment to achieving it through trust and collaboration." An example of what this looks like in practice can be found in the partnership between CIO Solutions (CIO) and PODS. CIO provides emergency communications services and IT equipment for PODS and its military clients. The team consists of three PODS employees who work on-site at the CIO location in Destin, Florida, backed up by 20-30 PODS employees working remotely around the U.S. and abroad.
For CIO and PODS to effectively manage this multi-faceted effort, the leadership at each organization sought input from their respective teams and used the results to develop a shared vision. Specifically, each team, working with leadership, developed a short to mid-term measurement system to monitor progress, goals, targets, and outcomes for the project. The result was a shared responsibility for achieving mission success that contributed to the tremendous growth that both companies experienced in the last 10 years.
A good example of a large business using contract performance management is BAE’s Advanced Information Technology Services ("AITS") contract with the U.S. Army. AITS provides engineering support and information technology services to the U.S. Army Communications Electronics Command (CECOM) Command, Control, Communications, Computer, Intelligence, Surveillance, and Reconnaissance (C4ISR) Center in Belvoir, Virginia. The contract has a period of performance of five years with one five-year option period. To monitor performance, BAE employs software to track multiple factors, including backlogs, cycle times, forecasted and actual capacity, and workload. Monthly, quarterly, and annual, both BAE and the Army discuss the results from this data, adjust baselines, modify routines as needed, and most importantly, work collaboratively—and successfully—to improve processes. Since C4ISR Center awarded the AITS contract to BAE in 2007, it has won four subsequent task orders. The U.S. Army’s C4ISR Center is now BAE’s largest Army account. In addition, AITS customers across all services have praised the contract for its performance and are trying to purchase civilian time and materials tasks for work on the AITS contract.
Emerging Trends in Contract Performance Management
As we look to the future, the importance of contract performance management will only increase. With the rise of globalization, companies are more likely to operate across borders, combining international and local supply chains. Furthermore, companies will increasingly rely on complex networks of suppliers and partners to fulfill their contractual terms, obliging them to manage an expanding number of contracts with different stakeholders. As a result, businesses will likely implement innovative approaches to simplify and improve contract performance management.
One of the key trends to watch for is the incorporation of artificial intelligence into contract performance management. With ongoing and extensive access to historical performance data and the ability to learn from past experiences, AI will empower companies to make more informed, data-driven decisions. Improved insight into potential supplier risk will also be a priority for businesses operating in various global markets. Government intervention, economic instability, and fluctuating market conditions are all examples of how supplier risk can interfere with contract performance. The use of AI-based algorithms will enhance the ability to predict these risks, allowing companies to maintain high standards for contract performance , particularly those operating in multiple local jurisdictions. Additional application of AI will be found in the emerging area of predictive analytics. AI-based predictive tools will assess the necessary performance metrics and provide a forward-looking view of how to measure and improve contract performance. Companies equipped with predictive analytics tools will be better equipped to continually improve their contract performance management strategy.
At the same time, companies that operate internationally will require additional compliance capacity. Each jurisdiction has its own requirements. Consequently, companies will need to continue assessing, monitoring, and addressing compliance risks. Future trends may involve further automation of compliance mechanisms or perhaps other innovative approaches to assist with managing compliance.
In addition to these trends, the future of supply chain management holds particular promise for the future of contract performance management. It is likely that we will see the integration of supply chain management with contract lifecycle and performance management. The incorporation of blockchain technology will also play a significant role in supply chain innovation. With blockchain technology and smart contracts, contract management tools will provide up-to-date and accurate information about the contract and its parties.
