Contract operation

You should use contract management to resolve problems as they arise. It should be used as a dispute resolution technique before litigation.  

Finance have a standard Contract Management Plan Template. The plan should be finalised, describing all contract management processes and activities agreed to at the contract’s commencement. The plan should be updated throughout the life of the contract as circumstances change.   

For purchases over $5 million (including GST) contract management plans: 

• must be referred to the State Tender Review Committee for endorsement 
• are required for purchases made under Common Use Agreements, unless the relevant Buyers’ Guide states otherwise

Contract management plans are not mandatory for purchases valued at $5 million (including GST) and above if the Accountable Authority decides: 

• the plan would be of no benefit  
• the purchase is a one-off good and/or service that is not the subject of a period contract

You should use contract management plans for lower value contracts that are of a medium or high risk.  

Contract transition includes changeover from: 

• one contract to another 
• one contractor to another 
• the induction of an inaugural contract  

Transition management strategies should be developed where: 

• the contract will result in assets or intellectual property becoming public authority assets  
• security arrangements are required 
• there is ongoing service requirements

Contract transition tasks include: 

• identifying potential transition issues and risks 
• risk management strategies  
• establishing who manages the transition process. This may be an individual or a transition management team 
• establishing a communication strategy  
• implementing the transition management strategy

Supplier performance management measures, analyses and manages supplier performance in goods and services procurement contracts. Using the Supplier Performance Management Framework assists agencies and supports best practice contract management. You can access the framework on the Goods and services procurement practice resources page. 

It assists contract managers to monitor: 

• performance gaps 
• outcomes 
• budgets 
• timeframes 
• risks 
• expectations 
• areas of improvement

It ensures outcomes are: 

• what was agreed to 
• what you asked for 
• timely  
• value for money

Ongoing Conflict of Interest Monitoring

The monitoring and evaluation of contract performance by contract managers is a continuous process. Potential conflicts of interest are possible because contract managers may be involved in the review, evaluation and management of contracts. Periodic independent audits should be conducted for high risk, high value contracts.  

KPI’s must be measurable and clearly defined. The contract should specify actions that may result if there is a downward trend or fall in performance against an agreed benchmark or threshold.

It is important that KPIs and reporting requirements are specified in the Request document. The procurement planning team and the contract manager should work collaboratively to determine these appropriately. It is then the responsibility of the contract manager to proactively manage the contract and ensure that KPIs are monitored and reporting requirements are met.

Contract managers and contractors should monitor the external environment to: 

• identify, define and adjust to changes in stakeholder needs 
• identify process improvements, industry trends and technological advancements that are relevant to the contract

Incentive based contracting arrangements encourage continuous performance improvement. They need to be considered and detailed in the initial Request and then incorporated in the resulting contract. Incentives may be suitable when: 

• contracts are longer-term  
• contracts are for supply of services 
• the benefits of innovation or improvements are shared between the contractor and public authority

Liquidated damages should only be included where the delivery of the product or service is critical, and the loss suffered if the delivery fails is readily quantifiable. 

Liquidated damages are paid when certain contract requirements are not achieved. These requirements, called ‘trigger events’, must be clear and precise. An example is when a contractor delays the delivery of a new system beyond the agreed contract completion date and the agency, as a result, will incur additional costs of maintaining their current system and maintaining the external project manager.  

The amount payable (the liquidated damages) upon the occurrence of a trigger event must be clearly defined in the contract. The liquidated damages must be a genuine accurate pre-estimate of the loss incurred. The purpose is usually to ensure prompt delivery or action rather than provide compensation. 

Financial guarantees may be included:

• to provide access to immediate funds in the event of termination of the Contract due to a material breach 
• where liquidated damages are included in the contract

The decision to include financial guarantees is best made prior to tender, or at the latest before contract award. Reference should be made to the required value of the guarantee. 

There are usually costs associated with these as they are procured through the banks. Such undertakings can also affect the credit rating of the company as the banks may insist that the value of the guarantees be held in trust, thus reducing the company’s borrowing capacity. 

Where liquidated damages are included in the contract, the financial guarantee gives immediate access to the liquidated damages amounts where trigger event(s) occur. The guarantee value should cover the total likely liquidated damages that may be levied prior to any contract termination. 

Unlike financial guarantees, performance guarantees ensure the performance of the contract requirements only – they do not provide any money to the agency in the event of performance failure. 

In the event of a performance failure, a performance guarantee ensures someone steps in to perform the contract. There are two forms of guarantee: 

• Parent Company Guarantee 
• Director Guarantee

A performance guarantee may be included where the financial due diligence of the respondent exposes some risk to the performance of the contract, and where the services or products required are critical. 

Options relating to liquidated damages and guarantees are included in the Request templates