Contracts and Procurement

PROJ6004 Contracts and Procurement
Module 5
Performance-based Contracting and
Vendor Management

Module Topic Achieved Week
M1 The Role of a Procurement
Manager
12th of June 2022 W 1 & W 2
M2 Processes, Strategies and Risks 26th June 2022
Assessment 1
W 3 & W 4
M3 Financial Aspects of Procurement 10th July 2022 W 5 & W 6
M4 Global Procurement,
Documentations and Contracts
24th July 2022
Due Assessment 2
W 7 & W 8
M5 Strategies, Risks and Rewards of
Performance based Contracting
and Vendor Management
07th August 2022 W 9 & W 10
M6 Relationships in Procurement 14 of August 2022
Assessment 3.
21th of August 2022
W11 & W12

Summary of week 1 and week 2
4
Summary of week 1 and week 2
Plan Procurements process
Summary of week 3 and week 4
Contract Types
Summary of week 3 and week 4
Procurement Workflow Process

Identify
Needs
Write
Specifications
(TOR/SOW)
Choose a
Procurement
Method
Prepare
Solicitation
Documents
Evaluate
Offers
Seek, Clarity &
Close Offers

Award
the Contract
Negotiate
the Contract
Manage
the Contract
Evaluate the
Procurement
Advisory Committee
on Procurement
Approval
Summary of week 3 and week 4
Summary of week 3 and week 4
Soliciting Procedures
What is solicitation in project procurement
Basically – The process of notifying prospective and/or qualified offerors who
the project procurement team may wish to receive bids or proposals for the
desired resource
So – From the planning procurement process we know
What to procure
When to procure it
Where it will need to be
How much to procure
Now – we begin to decide on WHO we will use or procure from
“We need to
solicit some suppliers”
Summary of week 5 and week 6
Tendering Evaluation Panel
The Tender Evaluation Panel for a large infrastructure project may have
ideally required seven members with backgrounds in
Project management
Construction industry
Procurement policy and procedure,
Finance
Industry law
Technology
Construction engineering
Negotiation
A cross-functional team may include specific stakeholders with high
interest and/or expertise or knowledge on the procurement process
Summary of week 5 and week 6
Criteria to be Evaluated
Price
Quality
Quantity
Delivery
Performance
Availability
Capacity
Communication
Location
Credibility
Reputation
Financial status
Market longevity
Supply chain connections
Relationality
Business processes and systems
Organisational efficiencies
Information systems
Primary factors Supplier factors
Summary of week 5 and week 6
Procurement Documentation, Procurement
Constraints
Summary of week 5 and week 6
Procurement Documentation, Procurement Constraints &
Contract Negotiations
Procurement documentation contains complete supporting records for administration of the procurement processes.
Procurement documentation includes
• The statement of work,
• Payment information,
• Contractor work performance information,
• Plans,
• Drawings,
• And other correspondence.

Documentation
Procurement Documentation, Procurement
Constraints & Contract Negotiations
1. Invitation for the tender
2. Instructions for tenderers
3. Tender form
4. Contracting form
5. General Conditions
6. Special Conditions
7. Supplementary Conditions
8. General Provisions
9. Special Provisions

Contract negotiations
Negotiation is the act of two parties discussing the pros and cons of a
particular contract at hand in an attempt to arrive at an agreement.
Negotiation is a process in which buyer and supplier with conflicting
requirements reach an agreement of mutual interest.
Negotiation is a process of “communication with the objective of
reaching an agreement by means, where appropriate, of
compromise”.

Learning Objectives
5.1 Performance-based Contracting
5.2 Vendor Management
Performance-based Contracting and Vendor Management
When you make a purchase as a consumer, you likely do so under certain
assumptions. Chief among these is the achieving of high performance from your
procurement team. If you purchase a new automobile, you assume it will perform
as advertised, and if you hire someone to make home repairs you assume the
job will be completed satisfactorily. If these basic assumptions are not met, you
expect the seller to make it right by addressing the issue, revising the work
performed, or offering replacements or refunds.
Message From Leadership | Performance Based Contracting
https://www.youtube.com/watch?v=-PATjfeVsn0
Performance-based Contracting (PBC)
UN Procurement Practitioner’s Handbook; 2020
https://www.ungm.org/Shared/KnowledgeCenter/Pages/PPH2
Performance-based Contracting (PBC)
Sources: performancebasedcontracting.com
Performance-based Contracting (PBC)
Performance-based contracting became the preferred acquisition method
when the federal government turned to the private sector for most of its needs.
The House Committee on Government reported $135 billion spent annually on
government services – the largest single category of federal spending
(Skillman, 2004). “To ensure that the American people receive maximum value
for their tax dollars, commercial activities should be subject to the forces of
competition,”

Performance-based Contracting (PBC)
The “performance-based service contracts” (PBSC) concept came
to life more than a decade ago when the federal government in
304 BUCHANAN & KLINGNER general and DoD(USA –
Department of Defense) in particular were looking for better and
more efficient ways to do source selection and contract award and
administration.
The recent report is critical of the FBI for not using a
performance-based contract and for not performing effective
contractor tracking and oversight (U.S. GAO, 2005)

Performance-based Contracting (PBC)
Performance-based service contracts achieve greater cost
savings and better outcomes.
Necessary to first assess the contract performance standards
and how they are measured.
What is the language of the two SOWs (not performance-based
and performance based)?
Does the new language convey “what” is to be performed rather
than “how” to perform it?

Performance-based Contracting (PBC)
Does the new language ensure that each performance standard
is “necessary, carefully chosen, and not unduly burdensome”
(U.S. GAO, 2002, p. 4)?
Does the new language ensure that standards are not set so
high that they could drive up the cost of service or so low that the
government does not meet its requirements?

Performance-based Contracting (PBC)
The contractor’s performance needs to be evaluated
utilizing a Performance Assessment Plan (aka “Quality Assurance
Surveillance Plan”).
United States General Accounting Office2
(GAO) suggests, “A good quality assurance plan should include a
surveillance schedule and clearly state the surveillance methods to
be used” (U.S. GAO, 2002, p.4).

Performance-based Contracting (PBC)
Positive incentives will be identified and should be used “when they
are objective, measurable, achievable, are of value to both parties,
and ultimately improve performance” (personal communication,
January 14, 2005).
“They should apply to the most important aspects of the work,
rather than every individual task” (U.S. GAO, 2002, p. 4).
In performance-based contracts, the liability shifts to the contractor.
Yet, the USA government is still responsible for the oversight that is
especially crucial in a complex contract such as this one.
How does the government perform risk assessment? Is strong
government involvement still needed to mitigate risks, even for
routine commercial requirements?

Performance-based Contracting (PBC)
Performance-based contract: Contract payments are based on the
achievement of mutually agreed upon performance goals, such as
outcomes, outputs, and performance standards.
Cost-based contract: Contract payments are based on
reimbursement of expenses associated with the labor and
materials necessary to perform the contract obligations.
Performance-based deliverable: The deliverable is the
contract milestone the provider must meet to receive payment
under a performance-based contract.

Create a group and Discuses the importance of Performance-based
Contracting For procurements and provide an example
Group discussion

Performance-based Contracting (PBC)
Five key characteristics of a PBC
1. Requirements focused on the contractual outcome and not how
the work is performed.
2. Set of indicator tied to the Outcome.
3. Achievable performance standard for each indictor.
4. Defined process to collect, analyse and report data for each
selected indicator.
5. Range of monetary and non-monetary consequences, either
rewards or sanctions for the contractor, based on performance.

Performance-based Contracting (PBC)
Supporting a PBC is the performance management
framework(PMF:)
“ the ultimate goal of any PMF is to ensure that the delivery of
the enterprise outcome by creating self regulating agreement
which uses a range of incentives to guide and disable choice.”

Performance-based Contracting (PBC)
Sources: performancebasedcontracting.com
Performance-based Contracting (PBC)
Performance-based Contracting (PBC)
Performance-based Contracting (PBC)
Designing Balance in a PBC

Performance-based Contracting (PBC)
Designing Balance in a PBC

Performance-based Contracting (PBC)
Designing Balance in a PBC
Sources: performancebasedcontracting.com
Performance-based Contracting (PBC)
Designing Balance in a PBC
Sources: performancebasedcontracting.com
Performance-based Contracting (PBC)
Create a group and Discuses when to use the performance based
contract and provide an example
Group discussion

Performance-based Contracting (PBC)
Sources: performancebasedcontracting.com
Performance-based Contracting (PBC)
Sources: performancebasedcontracting.com
Vendor Management
Performance-based contracting is one option for managing the procurement
of goods and services.
PBC can also be a foundational component of an overall vendor management
approach.
It is important when working with vendors to have measures in place for
monitoring and managing performance
Basis of Vendor Management
https://www.youtube.com/watch?v=GYjjtDQ9d-s
How to Manage Vendors: Getting the Best Results
https://www.youtube.com/watch?v=JkAjbJAagCY
The company must employ a
system to track vendor details
such as name, addresses, tax
numbers, ID number etc.
Manage Vendor Contact Details
Track Vendor Performance
Track Vendor’s revenue,
stability, employees,
services, performance
scores and contracts value.
Track
Vendor’s
Qualifications
Track vendor licenses,
certificates, training, insurance,
security classifications and
services/products supplied
Analyze Vendor’s Risk
Company must rate risk for
performance, quality,
financials, data exposure,
service and security.
Track policy numbers,
coverage dates and limits
by coverage line.
Track Vendor’s
Insurance Details
Properly Analyze the
Historical Data
Routine evaluations,
assessments, and past
performance reviews must be
carried out by internal and
external surveys.
Create and Study Reports
Create reports for
minority reporting,
audits and vendor
reviews
Establish KPI’s to measure
Vendor’s Performance
Vendor Management
Vendor Management
Sources: performancebasedcontracting.com
Activity of Vendor Management
1 . SCOPING
Policy
Process
Business Requirements
2 . CONTRACT
Liability
Terms and Conditions
Pricing
Penalties or Rewards
3 . RE LAT IONSHI P
Transition Expectations
Common Goals
People Alignment
Cultural Fit

Vendor Management
Vendor Management
1. Improve cash flow
2. Provide excellent service
3. Improve reliability of supply
4. Help reduce reliance on capital assets
5. Provide cutting edge technology trends
6. Alternate sources and manufacturing site

Vendor Management
1. Select the right company
2. Involve appropriate persona
3. Assess the relationship from your perspective
4. Vendor assesses relationship independently
5. Assessments from basis for initial conversation
6. Identify the gaps
7. Evaluate the leakage caused by these gaps schedule periodic assessments
Vendor requirements
Vendor Management
Vendor requirements

Vendor Management
Vendor Handbook
1. Company background
2. Expectations
3. Quality review
4. Escalation process
5. Scope
6. Delivery information
7. Performance rating
8. Purchasing authentication
9. Procurement requirements
10.Financial information
11.Payment term
12.Invoicing

Vendor Management
Performance rating
1. Scope
2. Rating criteria
3. Quality criteria
4. Scorecards / trends
5. Rewards & trends
6. Frequently – timeframes
7. Continues improvement
8. Criteria – speed delivery, quality , service

Vendor Management
Change management
Management responsibility
Purchasing
Quality system
Corrective action
Document control
Inspection and test
Control of the test equipment’s
Control of nonconforming product
Handling storage packing and delivery
Vendor Management Tools
Summary
This session examined the use of performance-based contracts as a tool to help focus
procurement management efforts less on the
manner in which the good or service is
delivered and more on the
purpose of the good or service, with metrics developed to
measure performance and adjust price accordingly. Hence the approach focuses not only
on the purchase of goods and services but also on the purchase of performance.
Such an approach brings the concept of vendor management into play as well. Effective
vendor management can begin with performance metrics and evolve into collaborative
processes. This helps ensure, among other things, that both buyer and seller are engaged
in mutually-beneficial efforts to support the project.

ASSESSMENT 3 Information
ASSESSMENT 3 Information
ASSESSMENT 3 Information
ASSESSMENT CASE STUDY
Essential Resources:
Risk Perception in Performance Based Contracts and the Influence of Experience
This article examines performance-based contracting (PBC) analysing how previous experience with such contracting influences
perceptions of risk. Recall that one of the purposes of a contract in general is to mitigate potential risks to both buyer and
seller. Consider your thoughts on if PBC increases or reduces risk to either (or both) parties.
Glas, A. H., Raithel, C., & Essig, M. (2019). Risk perception in performance based contracts and the influence of experience.
International Journal of Productivity and Performance Management, 68(6), 1078–1101.
https://doi.org/10.1108/IJPPM-03-
2018-0123
https://lesa.on.worldcat.org/oclc/8180356615
Missing Performance Management and Measurement Aspects in Performance-based Contracting
This article focuses on the aspect of performance-based contracts relevant to how performance metrics are determined and
measured. Understanding how performance is measured is important to both buyers and sellers to clarify contract terms and–
more importantly–delivery goals. Glas, A. H., Henne, F. U., & Essig, M. (2018). Missing performance management and
measurement aspects in performance-based contracting. International Journal of Operations & Production Management,
38(11), 2062–2095.
https://doi.org/10.1108/IJOPM-09-2016-0571
https://lesa.on.worldcat.org/oclc/7921608471