We have moved some of our Procurement & Construction projects from progress based payment to milestone based payments. The major reason was to motivate contractors to expedite milestone achievement, and get paid faster. However, we found that most of the time delay had come from owner, consultant, designer or suppliers (not under contractor). In those cases, contractor resisted to get paid nothing, for not their mistake. We had to amend few contracts to move back to progress payments, or we had to breakdown milestones into smaller units. For few projects, it went smooth and milestone payment were successful. So you may have to see what you can offer and what are your limitations, before introducing this change. A survey feedback from your routine contractors can also be helpful in decision making.
In the US, Texas or New York are largely considered "neutral territory" whereas in Europe, until very recently UK law was considered neutral. I think that may change with the recent political upheaval.
Hi Brian. Liability, indemnity etc are common terms which reflect the inherent deal risk or at least the desire for risk allocation. However, the rubber hits the road when you look at the Statement of Work (SOW) and Service Level Agreements (SLAs). The SOW is where the buyer/supplier either is fully informed about the requirements, roles/ accountabilities, and risks, hence, whether they have to factor in a contingency for risk (which is defined in ISO31000 at 'the effect of uncertainty on outcomes'). The more uncertainty then the more risk and the more contingency the supplier will typically build into the price. Then the SLAs typically attract 10-15% of contract value'service credits' for non-performance (the intent is to reflect the value of the margin). Depending upon how tough or unrealistic these are negotiated will also impact how much contingency the supplier will try to add in to the price. Trust this helps you Brian
Public Works Advisory, NSW Department...
It depends on the intent for which data will be used.
CPI measures inflation as experienced by consumers in their day-to-day living expenses whereas ECI indicates whether employment cost changes are rising or falling
If the 'change in labor rate' data is used for, to adjust compensation so that purchasing power is maintained, then the CPI would be a good source. However, if data will used to compare salaries so that it remain competitive within the labor market, then the ECI could be used.
BlueCross BlueShield of South Carolina
It is a good topic to talk about. I struggle with what metrics to report on. It only takes one bad contract to cost the organization lots of money but it is hard for people to grasp it. How do you report on that? Currently, I report on the number of contracts the organization has and the amount of money expected to spend under a contract. Cost savings and cost avoidance is reported by my department through our category managers. I believe the category managers take the first offer from a vendor and then subtract the final number after negotiations to calculate cost avoidance. Cost savings is calculated if the organization will contractually pay less under this contract than it historically has for that same commodity. These definitions were agreed to by both our CFO and our Director.
• Century 21 Vanguard
Patrick, are you familiar with IACCM's "10 Pitfalls" research? This study looks at the top value erosion areas. Flip the erosion perspective and you'll quickly find key areas where by improving your capabilities you will improve ROI. Please reach out to me if you wish to discuss this in detail.
• BlueCross BlueShield of South Carolina
Thank you for the excellent recommendation. I've reviewed the research in the "10 Pitfalls" and it has provided me with concepts that I will research further internally.
Patrick, in addition to this first part of the "ROI of Contract Management", I'd also recommend to continue reading Tim's part two of that blog: blog.iaccm.com/commitment-matters-tim-cummins-blog/the-roi-of-contract-management-part-2 You may have already read how the article describes how the Contract Management role has evolved. Now, in this new section, you will have the chance to identify the benefits that can be achieved when creating and demonstrating value from such a role.
I think you are confusing two points here, one is transparency in cost base as a fundamental basis to developing the trading relationship, understanding cost drivers and risks (and hence contigencies) for both parties, and one is the commercial basis of pricing.
By agreeing a baseline through open book (as means of auditing that baseline and hence adjustmets from it) you can then start to bring in incentivisation for better performance, for cost improvements etc through gainshare provisions.
Supplier X may have a target margin of Y%, and the pricing may be firm, but there is no reason why the parties cannot agree open book with a stated target margin for the supplier, and have a gainshare provision that rewards and therefore shares any upside.
Conversely, if a Supplier has a genuine issue and can demonstrate an emerging situation through open book, it should produce a more collaborative engagement to address the matter sooner rather than later.
Open Book does not mean "If you get any more above your target margin I want it all" - question the basis of the trading relationship if it is!