the relationship between contract administration problems and contract type bill davison, cppo...

The Relationship between Contract Administration Problems and Contract Type

BILL DAVISON, [email protected]

Why is Contract Administration Like a Greek Tragedy

• Observations from the field in Year 2000• Procurement staff disconnected from

postaward activities- Contracts are “handed off” to enduser for management

• Endusers dump contract back to procurement when problems occurs

• Problems with award- vendors with poor performance records awarded contracts- Lack of tools to reward performance

Bill Davison, CPPO [email protected]


DISCIPLINE AND PUNISHMENTCause and Effect

• Discipline is the presentation of negative stimulus, withdrawal of positive stimulus, or both for the purpose of encouraging appropriate behavior

• Cause of Discipline:

– The undesired response (known to both parties).

• Effect

– Punishment. The actual negative stimulus (debarment, suspension).


PROBLEMS WHEN USING NEGATIVE CONSEQUENCES

• Generates emotional behavior– All punishment is aggression– Aggression is behavior intended to hurt

another– Aggression leads to further aggression– Problematic when consequences are

severe– Likely to result from “bagging it” and

overreacting

Why is contract administration like a Greek Tragedy?

Tendency is to avoid confrontation

Avoidance of problems is preferable to dealing with problems

Proactive actions are more cost effective and preferable then reactive actions.


Research Focus

Existing Research and Concepts

• Contractual Goal of Procurement, Thai, IPP 2004– Profession is moving away from

order processing to value added services such as strategic planning and contract management

• Establishment of contract goals, Davison & Wright, CA 2004

• Relationship of Contract Administration Problems and Contract Type, Davison-Sebastian 2006



• The Root Causes of Contract Administration Problems Davison –Sebastian 2010

• Transferability of Research on Persistent Risks in Supplier Engagement and Contract Administration, Davison –Sebastian-Public Works and Government Services Canada 2011



• Relationship between contract type and potential contract problems, Davison & Wright, CA 2004– What is typical in the profession?

• Need for Plan• Purchase similar types of contracts over

time• Similar problems occur for similar contracts• Utilize existing preaward and postaward

tools



• THE RELATIONSHIP BETWEEN CONTRACT ADMINISTRATION PROBLEMS AND CONTRACT TYPE (2006)

• The results provided partial support for the conceptual model

• construction contracts were perceived as having the most problems

• delay was perceived as the most common problem.

• Small Sample Size 557 respondents



• The Root Causes of Contract Administration Problems (2010)

• organizational behavior problem solving conceptual framework which consists of a comprehensive exposition of potential personal (e.g., personality) and environmental (e.g., technology) causes of behavior.

• illustrate how the causal factors from the framework can be mapped to the procurement process and its problems.


Findings of Root Cause Paper

• use the framework to identify root causes in post mortem analyses of contracts to mitigate risks.

• management will use the framework to address the organizational behavior root causes of problems, thereby improving the systems and processes it controls or influences and,



• Transferability of Research on Persistent Risks in Supplier Engagement and Contract (2010

• collaborated PWGSC to replicate the previous study to assess the general validity of the original findings and to expand the overall empirical base.

• The study achieved the objective of creating a larger, cross-border pool of results.


CURRENT RESEARCH

• Addressed previous limitation of low turnout by improving survey ease of use.

• Based on the feedback from the PWGSC respondents, the 2006 survey was updated and sent to all of the members of the National Institute of Government Purchasing (NIGP). The results of the current research were compared to the results of the 2006 survey.


CURRENT RESEARCH

• The major findings were that the 2011 results were comparable to 2007 in the that when contract administration problems occurred, problematic consequences were more likely than no consequences for all contract types except leases and that the types of problematic consequences that were most likely depended on the type of contract.


Contract Types

• Commodities: Small Purchases, MRO (Maintenance, Repair and Operating supplies), Term Contracts: i.e., Office Supplies; One time orders for durable goods under $5000

• Capital Outlay: Durable goods over $5000• Professional Services, Architects, Consultants• Contracted Services, Custodial Services, Food

Service• Software, Custom developed and shrink wrap• Construction, Any type and any dollar amount – New

construction or remodeling • Leases, Leased space or equipment – lease without

intent to own


Typical Contract Administration Problems

• Wrong Product• Delays• Definition of Acceptance • Change Order • Conflict

• Other Sources • Poor Performance • Risk of Failure/

Termination• Sub contractors • Cost


Mapping of Goals, Risks and Contract Problems

Goal Criteria Risk Contract Problem

Right Item and Right Quantity Proposal Risk Poor Performance; Risk of Failure; Final Acceptance

Right Price Surety and liability risk; Contractual Risk; Price Risk

Cost;Change Order; Personality Conflict

Right Time Schedule Risk; Contractual Risk

Wrong product; Delay; Change Order; Personality Conflict

Right Quality Performance Risk Final Acceptance; Poor Performance; Risk of Failure; Subcontractors

Right Source Surety and liability risk Cost; Subcontractors; Other Sources; Risk of Failure


Method

• National Institute of Governmental Purchasing (NIGP)– A “blast” email with a hot link to

SurveyMonkeysurvey was sent to all 13842 NIGP members on January 5, 2012


Survey Instrument

• Background questions• The 2012 survey also asked if they were

involved in post award activities such as monitoring performance, delay resolution, change orders, dispute resolution, final acceptance and monitoring performance and they were asked if their organization collected data on each of these post award activities. If respondents indicated they were not involved in any of the listed post award activities, the survey was terminated at that point.

Survey Instrument

• The survey provided definitions of the seven major contract purchase types and ten major contract management problems from Davison & Wright

• Using these definitions, the 2012 respondents were then asked to indicate the frequency with which these problems occur for each type of contract by using by selecting from the following responses: Never, Rarely, Sometimes, Often, Most of the Time and Always.


Survey Instrument

• Lastly, for both surveys the respondents were asked to indicate the typical consequences they experienced for each type of problem within each type of contract by selecting from the following responses: No Effect, Contract Delay < 10 days, Contract Delay >10 days, Increased Cost<10%, Increased Cost> 10%, Contract Termination.


Response Rate

• 2012 Total number of respondents = 1661

• 2006 Total number of respondents 557


Possible Reasons for Increase Response Rate

• Changes suggested by from the 2011 research were incorporated

• skip logic was introduced for respondents who had not issued purchase orders or contracts for a particular category of goods and services (capital outlay, professional services, contracted services, software, leases, and construction), greatly reducing the number of applicable questions

• respondents had the option to start, stop, and reopen the survey to finish at a later time


Respondent CharacteristicsYears in Purchasing 11+ 62%

2 or less 3%

Years in Current Position 6+ 46%

2 or less 20%

% With 4 year degree or more Yes 63%

No 37%

Annual Individual Purchasing Volume 5 million 29%

20 million 23%

Annual Agency Purchasing Volume 100 million 40%

Full time employees in Agency 1000 42%

400 or less 24%

Full time employees in Purchasing 5 or less 33%

10 or more 31%

Involved in some type of post award activity Yes 92%

Some type of Procurement Professional as title of position Yes 95%


Comparison of 2012 v. 2006 Most Frequent Problem by Contract Type

YearContract Type 1 2 3 4 5 6 7 8 9 10

2012

Supplies and Small Purchases

Change Order

Other Sources Delay

Poor Perform High Cost

Risk of Failure

Wrong Product

Defn of Accept Conflict

Subcontract

2006

Supplies and Small Purchases Delays Cost

Poor Perform

Change Order

Wrong Product

Other Sources Conflict

Defn of Accept

Risk of Failure/Termination

Subcontract

2012Capital Outlay

Change Order

Other Sources Delay High Cost

Risk of Failure/Termiantion

Poor Perform

Defn of Accept

Wrong Product Conflict

Subcontract

2006Capital Outlay Delays Cost

Change Order

Poor Perform

Other Sources Conflict

Subcontract

Defn of Accept


Wrong Product

2012Professional Services

Change Order

Other Sources Delay High Cost

Poor Perform

Risk of Failure


Wrong Product

Subcontract

2006Professional Services

Change Order Delays Cost Conflict

Defn of Accept

Poor Perform

Subcontract

Other Sources


Wrong Product


Comparison of 2012 v. 2006 Most Frequent Problem by Contract Type

Year Contract Type 1 2 3 4 5 6 7 8 9 10

2012 SoftwareOther Sources

Change Order

Risk of Failure/Termination High Cost Delay

Poor Perform


Subcontract

Wrong Product

2006 Software CostOther Sources Delays

Defn of Accept

Change Order

Poor Perform Conflict


Wrong Product

Subcontract

2012 LeasesOther Sources

Change Order

Poor Perform High Cost Delay

Risk of Failure Conflict

Defn of Accept

Wrong Product

Subcontract

2006 Leases CostOther Sources Delays

Poor Perform

Defn of Accept

Change Order Conflict


Subcontract

Wrong Product

2012 ConstructionChange Order Delays

Defn of Accept

Poor Perform High Cost Conflict


Subcontract

Wrong Product

Other Sources

2006 ConstructionChange Order Delays Cost

Subcontract Conflict

Defn of Accept

Poor Perform


Wrong Product

Other Sources


Comparison of 2012 and 2006 Reported Occurrence of Contract Problems Over All Types of Contracts

2012 2006Contract problem Rank Contract problem Rank

Change Order 1Change Order

3

Other Sources 2Other Sources

7

Delays 3Delays

1

Poor Performance 4Poor Performance

4

Cost 5Cost

2

Risk of failure 6Risk of Failure

9

Definition of Acceptance 7

Definition of Acceptance 5

Conflict 8Conflict

6

Subcontractors 9Subcontractors

8

Wrong Product 10Wrong Product

10



• Rankings from 2012 and 2006 on which problems are experienced most frequently had a high correlation and show 3 of the top 4 problems were the same.

• Exception- In 2012, Other Sources identified as the 2nd most common problem whereas in 2006 it is the 7th most common problem.


Comparison of 2012 and 2006 Reported Occurrence of Contract Problems by Contract Type

2012 2006

Contract Type Rank Contract Type Rank

Supplies, Small Purchases

1 Supplies, Small Purchases

6

Construction 2 Construction 1

Capital Outlay 3 Capital Outlay 5

Professional Services

4 Professional Services

3

Contracted Services

5 Contracted Services

2

Software 6 Software 4

Leases 7 Leases 7



• The significant findings are that 2012 respondents reported more problems in Supplies and Small Purchases contracts and fewer problems in Contracted Services contracts than the 2006 respondents there was a low correlation between 2006 and 2012 results.


Comparison of Summary of Problematic Consequences in 2012 and 2006

2012 2006 2012 2006

Contract Type

Problematic Consequences Rank

Problematic Consequences Rank

No Consequence

No Consequence

Construction

74.70% 1 68.90% 1 25.30% 31.10%


66.00% 2 62.90% 4 34.00% 37.10%

Capital Outlay

64.20% 3 59.20% 6 35.80% 40.80%


64.00% 4 64.20% 3 36.00% 35.80%

Contracted Services

58.10% 5 64.40% 2 41.90% 35.60%

Software

48.20% 6 60.30% 5 41.80% 39.70%

Lease

41.10% 7 45.50% 7 58.90% 54.50%


Comparison of Summary of Problematic Consequences in 2012 and 2006

• Both surveys show a majority of the contracts experience a greater percentage of problematic consequences than no consequence. In 2012 respondents reported fewer problematic consequences for Contracted Services and Software


Summary and Conclusions

• The major findings were that the 2012 response rate was significantly higher than 2006,

• The overall results were comparable to 2006 in the that when contract administration problems occurred, problematic consequences were more likely than no consequences for all contract types except leases

• and that the types of problematic consequences that were most likely depended on the type of contract.


Summary and Conclusion

• In 2012 Other Sources was listed as the 2nd most frequently occurring problem in 2006 Other Sources was the 7th most frequently occurring problem

• In 2012 Supplies and Small Purchase contracts was listed as the contract having the most problems in 2006 it was 6th most problematic contract


Summary and Conclusion

• This could be attributed to decline in economic conditions, there may be fewer suppliers available for each type of contract.

• Supplies and Small purchase contracts typically had numerous providers. Perhaps the same economic decline that may have led to fewer available vendors, and increased the number of overall problems with the remaining vendors


Managerial Implications• Supports the 2006 premise that procurement

professionals can utilize traditional risk management tools to determine which problems are likely to occur assign a risk factor for likely occurrence

• determine how serious the consequence is, if the problem does occur and then assigning a risk factor for each consequence of the problems.

• combine both of the risk factors (likely occurrence and likely consequence) to determine an overall level of risk factor for each contract problem


Managerial Implications

• Development of Risk Mitigation Plan

–Utilize Existing Procurement Tools in to select the best option that will reduce or eliminate the risk• Specifications• Pricing• Vendor Selection Criteria• Contract Management.

–


Consequences of Change Order (Highest Reported Occurring Problem) by Contract Type No effect Contract

Delay < 10 days

Contract Delay

> 10 days

Increased Cost

< 10%

Increased Cost

> 10%

Termination Row Freq. Total

Type of Contract

% # % # % # % # % # % # #


14.9% 265 17.1% 305 22.1% 393 24.0% 428 19.8% 353 2.1% 37 1781

Capital Outlay

17.6% 211 17.5% 210 21.9% 263 22.0% 264 18.7% 224 2.3% 27 1199


14.2% 168 15.9% 188 23.8% 282 22.5% 267 22.4% 266 1.3% 15 1186

Contracted Services

21.8% 166 18,1% 138 17.2% 131 24.1% 184 15.7% 120 3.1% 24 763

Software 25.6% 17 15.5% 108 20.8% 145 19.1% 133 16.4% 114 2.6% 18 696

Lease 38.7% 145 15.2% 57 14.7% 55 19.2% 72 10.9% 41 1.3% 5 375

Construction 5.7% 51 19.7% 177 25.7% 231 24.8% 223 22.9% 206 1.1% 10 898


Example

• Professional Services Contract• Contract for Consultant to develop Land

use Plan. – 4 month delivery (short timeline)– High cost– Numerous public meetings– High visibility


Risk Management 101

• Assess Internal and external environment.

• Determining which risks to mitigate

• Likelihood of occurrence + severity of occurrence= Overall risk factor

• Develop Risk Mitigation PlanBill Davison, CPPO [email protected]

Determining Risks

• Likelihood of Occurrence–Based on the Data the following problems

are most likely to occur Change Orders, Other Sources and Delays. (Frequency)

• Severity of Occurrence–Based on the data for Professional Services

contracts if one of these problem occurs a problematic consequence happens 64% of the time (Consequence)


Risk Mitigation Plan

• Develop a risk mitigation plan to reduce the likelihood of occurrence of– Change Orders– Other Sources– Delays


Risk MitigationPre Award Strategies

• Specifications• Type of Pricing

– Fixed– Cost

• Delivery• Contract terms


Pre award Strategies Specifications

• Change orders and Delays– Clear concise specifications


Pre Award Strategies Pricing

• Options (sharing risk)– Fixed fee – Fixed Fee with incentive– Cost


Pre Award Strategies Delivery

Performance Based PaymentPayment made based on completion of

milestones.• Require a timeline with list of meetings,

reports (agency needs to know how many meetings and location prior to issuing RFP)


Pre Award StrategiesContract Terms

• Change Orders– Include a change order clause, and

option clauses for items that might change. • Number of public meetings• Location of meetings.• Dates of meetings


Pre Award Strategies Contract Terms

• Delays– Excusable delay clauses– Liquidated Damages– Key Personnel


Pre Award Strategies

• Other Sources– Strong Vendor Qualification

requirements• Previous experience in similar project• Financial ability• Key Personnel• Market Research-Other vendors available?


Post Award Strategies

• Monitoring– Outcomes– Output

• Type of Monitoring– Scheduled– Random


Post Award Strategies

– Measure outcomes, surveys from attendees.

– Monitor timeline and deliverables.– Make sure consultant stays on task.– Make sure agency provides resources as

required by the contract.– Enforce delays and unauthorized

changes immediately.


Other Examples

• Training Suggestions– General Contracts

• If you purchase construction contracts-

– Specific Clauses• Delays• Change orders.


Future Research

• Supplier and Procurement Department Performance Benchmark– as baseline to monitor vendor performance

to see if problems occur or don't, if Construction contracts experience contract delays 45.4% of the time, a performance incentive could be provided if a vendor exceeds that performance.

• Establish validity of Critical Success Factors Concept in Public Procurement.


Contacts

• Bill Davison, CPPO

–[email protected]

• Richard Sebastian, Ph.D.

– [email protected]

mailto:[email protected]

mailto:[email protected]

the relationship between contract administration problems and contract type bill davison, cppo...

Documents

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potential contract problems

davison wright

performance bill davison

respondents bill davison

postaward tools bill

timesimilar problems

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