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Items from 2011

contract and vendor management
Contract management requires the application of a wide range of knowledge and skills in very specific circumstances. A structured process is absolutely necessary to facilitate establishing facts, forming relationships and reporting salient information to stakeholders. Our recent research into facets of contract management led us to researching a dispute between South West Water Services Ltd (SWW) and International Computers Ltd (ICL). In our commentary that follows it is not intended to provide legal opinion or legal advice but to highlight certain principles relevant to contract and vendor  management.

SWW required a new customer information system and contracted with ICL for its supply. SWW would later terminate the ICL contract due to ICL's failure to deliver the system. The court judgment runs to 41 pages and is very instructive (as judgments usually are!). There are many facets relevant to contract and vendor management, including:

# ICL represented that they would enter into back to back agreements with a subcontractor but this never happened. ICL confirmed to SWW that "CCSL (the subcontractor) would be ICL's subcontractor for South West Water's information project with a fully documented back to back agreement in place between ICL and CSSL."

- In a well constructed contract there would be a Right of Audit cklause that would permit a contract manager to see the back to back agreement, thereby establishing that the agreement had been entered into.

# Throughout the transaction there was a point at issue in regard to the resources required to complete the project. ICL were on a fixed price contract and initially believed that 2000 man days would be required. This later changed to 3000 - 3500 man days. The resources required were not committed and SWW had no visibility of a deteriorating situation, making the agreed delivery date impossible to meet.

- So what could effective contract management do in these circumstances? At the time of entering into the contract a fully resourced labour programme should be agreed. This should include visibility of resource by grade, time to be expended and days/week when the resource will be used. A weekly report should be provided as part of a Management Information requirement to the buying organisation. Slippage would then be evident if the truth were to be told. It may also be noted that Parametric Modelling could be considered to estimate the time required to develop software.

# It is evident from the detail of the court judgment that relationships between ICL and CCSL were not conducive to close working. In a communication from CCSL to ICL it was said that "the root cause of our collective difficulty is that ICL signed a contract with SWW without having first agreed with our company that our contribution to the total solution was (i) technically feasible and (ii) deliverable in the time frame agreed with SWW." Three months later, CCSL said to ICL that "substantial additional time was needed if the project was to be completed successfully and that it is vital that the customer is told the truth immediately." And later, again from CCSL (who had changed their trading name to CI) "somebody has to tell SWW that the project cannot be delivered this year; they must start to plan for next year - I am not willing to participate in another meeting with SWW if we are expected to continue to support the ICL line that the project will be delivered."

- From a contract management point of view relationships are vital with a prime contractor and the relationships should extend to the supply chain. In this instance there is only one subcontractor. It is a high skill level for a contract manager to detect unease, strained relationships and 'signs' that all is not well. We suggest that meetings at the buyer's premises are unlikely to ascertain reality. Some review meetings should be held at the prime contractor's site and that of the subcontractor. A true partnering agreement should encourage very early warning of issues.

# Within the case it was alleged and found that there was misrepresentation by ICL in regard to the back to back agreement. His Honour Judge Toulmin Cmg QC found that "I am satisfied that ICL did make the representation that it would enter into a back to back agreement with CI. It did so recklessly without any basis for believing that either, at the time or subsequently, it would be in a position to do so. It was a continuing representation. ICL failed to enter into a back to back agreement with CSSL. SWW relied on such representation as a contractual term. Without such assurances SWW would never have entered into the contracts with ICL." The judge then went on to explain Section 2.1 of the Misrepresentation Act 1967.

- We urge buyers to study this Act and to ensure they undertake appropriate due diligence at key phases of the procurement process.

Nothing in this newsletter is intended to impy that SWW did not apply appropriate knowldge and skills. We have used extracts from which readers can extrapolate from this set of circumstances to their procurement actions.

 
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A Time to Reconsider Price Indexation
The economic climate dictates that,

It is time for procurement departments to re-examine their approach to the use of price indexation formulae. Our informal research shows that in the UK there is an extensive use of the Retail Price Index (RPI) and Consumer Price Index (CPI). These are produced by the Office for National Statistics. The main differences between the RPI and CPI relate to:

-        Commodity coverage – the CPI excludes owner occupiers housing costs and hence the RPI has wider commodity coverage than the CPI.

-        Population base – the RPI excludes very high and low income households and hence the CPI has a wider population coverage than the RPI.

-        Formulae used to combine prices at the first stage of aggregation – the CPI uses a combination of geometric means and authentic means whereas the RPI only uses authentic means.

The first official RPI was produced in January 1956 whereas the CPI was launched in 1996 and was first known as the HICP (Harmonised Index of Consumer Prices).

 

There is the RPIX that is the RPI excluding mortgage interest payments and the RPIY that is the RPI excluding mortgage interest payments and indirect taxes.

 

The discerning buyer may consider, why use either RPI or CPI as indexation formulae in an ‘industrial context’. The RPI and CPI both measure the average change in a fixed basket of goods and services over time. They are based on a comprehensive price collection that combines the price movements of around 180, 000 price quotes collected each month, for a range of over 650 representative good and services.

 

The Office for National Statistics promotes the view that RPI and CPI have, among other things, the use of “indexing rates in private contracts??. We challenge the logic of such an approach! The indices are too general, lacking precision when applied to specific cost drivers.

 

The choice of indexation requires careful consideration of what is being purchased. BEAMA (British Electrotechnical and Allied Manufacturers Association) produce a Standard Contract Price Adjustment Clause and Formulae for Electrical Machinery and Mechanical Plant and other product formulae e.g. for Turbo Generating and Allied Plant. Here are nuances to the BEAMA formulae in that they introduce a “Fixed Element?? (5%) and Labour and Materials weighted each at 47.5%. A sample calculation can be found on the BEAMA website www.beama.org.uk/en/services/statistics-cpa/contract-price-adjustment.

 

We were very pleased to see a UK Council take a somewhat unusual stance;

“In line with the Council’s reduced funding provision, the contract is being offered on a fixed price basis for 3 years and then linked to an appropriate basket of indices to reflect the labour and equipment used in its provision rather than RPIX or CPI. This should provide a level of price certainty in the short to medium term and also link future increases to actual cost model in delivery of the service??.

 

A question to be considered is “who checks the implications of contractors being awarded RPI (or other indexation) but who have not given the workers a wage increase for the past two years??? The answer is, we suspect, very few organisations (if any!).

 

Here is a checklist you may wish to consider.

 

Do we include indexation in our contracts?

Why?

Have we reviewed any alternatives?

What impact does indexation have on Value for Money?

Do we have a forward strategy to deal with our approach to indexation?

Can we find an index (or indices) that accurately reflect the cost drivers of a specific purchase?

If we have indexation, who negotiates the fixed and variable elements?

 

 
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appealing contract award
This update is aimed at those in the public sector who summarily dismiss the private sector organisations who have been unsuccessful with their tenders. It is also designed to help private sector organisations who are very unhappy at the manner in which they are brushed off by some public sector buyers.  In the Court of Justice of the European Communities (inlcuding Court of First Instance, the case of Alfastar Benelux v Council [2011] EUECJ T-57/09 (reported 20 October 2011) it can be seen that the public sector is obliged to state the reasons on which a contract award decision has been made. Whilst this may not seem earth shattering, it strengthens the hand of those organisations who have the courage to challenge public sector award decisions. Quite frankly, it should help the public sector to get their house completely in order when advising organisations that they have been unsuccessful. The procurement in the Alfastar case was conducted under the restricted procedure. On the 1 December 2008 the Council of the European Union (the contracting authority) sent the Alfastar-Siemens consortium a decision informing it that the contract had been awarded to another tenderer. On December 3 2008 the consortium requested further information from the Council. The Council sent a table giving the scores of the successful bidder and the scores of the consortium. At paragraph 36 of the judgment it states that "It is, therefore, clear that by acting in this way, the Council did not correctly comply with its obligation to state reasons....since it does not meet the requirements laid down in Article 100(2) of the Financial Regulation and Article 149(3) of the Implementing Rules." At paragraph 39 of the judgment it states "Thus, merely proividing the scores awarded in respect of the various award criteria was too abstract a form of reasoning to enable the applicant to determine the specific reasons which led the contracting authority to decide, in the exercise of its broad discretion, that the bid submitted by the successful tenderer was better from the quality point of view than that submitted by the Alfastar-Siemens consortium." Very notably, at paragraph 40 it states that "In the absence of explanatory comments on the abovementioned bids, the scores awarded by the contracting authority, as set out in the table, represented merely the outcome of the evaluation conducted by the committee evaluating the tenders and not the evluation itself or a brief summary of that evaluation. In the absence  of information concerning the evaluation itself, it must be hald that the applicant was not in a position in the present case to understand the various scores which the contracting authority awarded to the Alfastar-Siemens consortium's tender in respect of the different technical award criteria." The judgement is quite complex but suffice to note that the Court Annuls the Council's decision of 1 December 2008 to reject the tender submitted by the consortium composed of Alfastar Benelux SA and Siemens IT Solutions and Services SA, in response to Call for Tenders UCA/218/07 for the provision of technical maintenance - help desk and on-site intervention services for the PCs, printers and peripherals of the General Secretariat of the Council and to award the contract to another tenderer.  We offer the above detail to bring to your attention  a very recent judgment and its logic. Given the Remedies Directive and public sector accountability the judgment has potential, significant implications.
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battle of the forms
We receive many queries from clients who are asking us 'Whose contract conditions apply?' The starting point is often the Excello case. We suspect that the whole of the procurement profession has studied this case, very diligently. The circumstances of each situation needs to be clearly understood before reaching a conclusion. We monitor legal cases and now draw your attention to a case that was reported on the 4th October 2011 from the High Court of Ireland. It is complex and has the interesting dimensions of the battle of the forms, implied terms and custom and practice in an industrial sector. The plaintiff Noreside Construction Ltd had a contract from Dublin City Council and purchased aggregate from Irish Asphalt Ltd. It was later found that the aggregate had Pyrite present. The judge was asked whose terms and conditions applied. The buyer e-mailed a purchase order. The Purchase Order conditions were printed on the reverse but there was no reference to such conditions on the front side of the Purchase Order. The defendent commenced supplying aggregate. For each delivery there was a delivery docket signed on behalf of the defendant and the plaintiff. Each delivery docket stated on its face, at the bottom, "This material is sold subject to the terms and conditions available on request". The argument over whose conditions applied impacted on liability. Very briefly the Purchase Order conditions held the supplier accountable for all claims, whereas the defendant's liability was limited to the cost of their replacement. The judge found that neither set of terms and conditions applied. The logic is contained in the judgment. So now the logic moved into implied terms of contract. The list of requirements that must be fulfilled before a custom may be implied are set out in the judgment and the Judge concluded that the evidence adduced by the defendant fell short of establishing a custom of a type which would permit the Court to find that where a contractor operating in the construction industry, such as the plaintiff, enters into a contract with a quarry operator for the supply of aggregate for a construction contract, it could be objectively determined that both parties must be taken to have known of it and intended that it should form part of the contract. The Judge found there is an implied condition of merchantable quality pursuant to s.14(2) of the Sale of Goods Act 1893 as inserted by s.10 of the Sale of Goods and Supply of Service Act 1980. Is this the end of it? No. At paragraph 54 of the judgement, it is stated that "I wish to make it clear that all issues relating to questions as to whether or not the aggregate and stone supplied by the defendant to the plaintiff pursuant to the contract of supply between March 2003 and May 2005 for the  development at the Fingas site was or was not of merchantable quality are matters for the full hearing of the plaintiff's claim herein".

If you have a contractual issue contact us and we will find you a solution.
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Supplier's financial position
Supplier's financial position

We are always advising clients to monitor a supplier's financial position. Knowing the position at the time we obtain annual reports is no longer enough, given the incidence of financial failures. We advocate that it is a strategic role for procurement to undertake monitoring supplier's finances. It is pertinent to read the judgment of Hackney Empire Limited v Aviva Insurance UK Limited (formerly trading as Norwich Union Insurance Limited) [2011] EWHC 2378 (TCC). It is a complex case regarding the provision of a Bond which secured the due performance of obligations under a contract. The detail is available on the BAILII website. It is relevant to note that HEL paid two installments of £500,000 and £250,000. The contractor went into administration after the payments were made. The judgment includes cross examination that includes the following passage:

Q. Well, you knew, didn't you, at the time that you were making these payments that you were making it to a contractor who was financially in dire straits because they were not able to pay their debts as they arose?

A. That's going a little further than I would, sir. I knew they had financial challenges. I wouldn't have said that they were in dire straits, but certainly we knew they had issues.

Q. If they couldn't pay their sub-contractors, they couldn't pay their debts as they arose, could they?

A. Sir, it could be that they couldn't fail but they were reluctant to pay. We didn't know whether they were simply being dishonest, if you wish, rather than simply unable to pay. We didn't know which was which.

Q. You took no steps to discover what their true financial position was did you?

A. The only steps we could take were looking at their accounts, which we did and we tracked but in terms of published accounts there is such a historic record that they are not very useful on a position that's changing quite frequently.

Q. The published accounts which you looked at were in 2000?

A. Yes, exactly.

Q. You knew when you looked at those that there was a real risk of deterioration since then didn't you?

A. No, sir.

The judgment continues and we strongly recommend it be accessed. There are salutory lessons within it.

 

Supplier's financial position : Next Steps

So, what can we do for you?  We can probably help you achieve your objectives – through our consultancy, training and coaching services – let’s start a conversation.

If you can spend a few minutes on the phone with me, I can assess the potential ROI of working with us.

If this is interesting to you, please email me and I’ll set something up.

Or call me on 01744 20698

Thanks

Steve


 

 

Why people with procurement and proposals issues want to work with the people at Brian Farrington.


There are three themes that clients tell us over and over again.

First, they tell us they believe they are making a smarter investment working with Brian Farrington — bringing a thorough understanding of their procurement and proposals issues and a proven track record of enabling excellent returns on their investment.

Second, our clients are confident that they are working with ‘straight-talkers’ that bring experience, expertise and stay focused on client success; not on our next income target (no army of junior consultants that we need to ‘utilize’).

Finally, people - people, just like you - tell us they actually like working with us. They find us easy to work with and collaborative in solving issues that inevitably arise in procurement and proposals.

 

 


About Brian Farrington Ltd


Brian Farrington Ltd is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading organisations in the UK, North America, southern Africa and Asia.

Established in 1978, we have proven expertise and experience in strategic procurement, sustainability and risk management.

Brian Farrington Ltd solutions and services are formed through consultancy, training & development, coaching, interim resource and recruitment.

Our four core areas of strategic procurement, sustainability and risk management capability are:

  • Strategic review and commercial governance

  • Performance delivery and transition

  • Major project support including managing contractual risk

  • Learning & development in support of organisational aims.


For more information go to www.brianfarrington.com services
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Procurement Fraud - A Mars a day........
We have been researching this topic and have encountered a case that will interest our readers. It is 4Eng Ltd v Harper and others [2009] EWHC 2633 (Ch). This is a highly complex case. It began with the purchase in 2001 by 4Eng of Excel Engineering. Excel was a company which provided engineering services primarily to Mars, the confectioner. Despite due diligence 4Eng failed to discover that a Mr Harper and Mr Simpson had been conducting the business of Excel in a manner which was distinctly contrary to the warranties given. In fact for a period of at least 10 years they had systematically defrauded Mars in a classic procurement fraud. With the collusion of Mars employees they created false works orders which were then signed off as completed and thereafter paid for by Mars. The fraud was discovered soon after the purchase of Excel by 4Eng when the directors were approached by an employee seeking confirmation that his bathroom would still be installed as agreed with the previous owners. At paragraph 19 of the court judgment it states ‘that despite his conviction for conspiracy to defraud, Mr Simpson maintained that he did not think that he had done anything wrong in relation to the conduct of Excel’s business. According to him, he considered that the sort of practices in which he and Mr Harper engaged (providing benefits to Mars employees in return for their commissioning work from Excel) were normal in business and there was nothing untoward about them.

We urge a reading of this case. It is an eye opener.
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In-house Contract Management Training Course
“Contract Management requires the attention of a range of knowledge and skills to ensure contractors and suppliers deliver their obligations under a contract. The role of Con­tract Management is undertaken by a range of staff including Purchasing , Heads of Service and external provid­ers and administrative staff??

The Risks


The risks attached to non-delivery of contractual obligations currently in­clude:




  • Supplier’s subcontracting

  • The financial failure of suppli­ers

  • Inadequate provision of trained resources

  • Lack of adequate contract re­views


We offer in-house training programmes at an introductory and advanced level. These are suitable for 12 participants. We agree the scope of training with our client, having recently provided a 3 day course for a utility organisation and agreed 1 day events with a Count Council.

Brian Farrington Ltd delivers in-house training with lasting effect



  • In a recent audit it was found that of a sample:

  •  30% of contracts examined had irregularities

  •  15% of contracts had the basis of payment breached

  • There was a risk of employer/employee relationships developing with the contractors

  •  No progress reports were requested on a high value contract

  •  A 7% mark-up on administration costs was applied to all costs leading to a significant overpayment

  •  Performance bond required at contract award never put in place


Our Courses are designed with practicality in mind. When the delegates return to their workplace they will be able to apply the knowledge gained. We use real life examples to illustrate  the learning points. Our operational experience of contract management through consulting and research provides a background that offers clients an immediate payback on the training investment.


If you wish to learn more about how Brian Farrington Ltd can help you please call me,  Ray Gambell on 01744 20698 or email me at r.gambell@brianfarrington.com.


The subject matter of an in-house Contract Management Course would typically include


 

  • Knowledge and skills requirements


 

  • Understanding key contract clauses


 

  • Conducting effective contract review meetings


 

  • Maintaining vigilance over supplier’s performance


 

  • Risk profiling


 

  • Contract payment regimes


 

  • Contract change management


 

  • Relationship Management


 

….Unless of course you want something different

 

Call me, Ray Gambell on 01744 20698  for more information or email me at r.gambell@brianfarrington.com

 

Brian Farrington Ltd

Rainford Hall

Crank

St Helens

WA11 7RP

 

 

 

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Contract Management - On the buses!
We have recently completed a large contract for training in Contract Management and have also won a contract with a large County Council to provide Contract Management training services. We are continually researching the subject. In July 2011 a report was published by the Comptroller & Auditor General – Jersey “Management of the Bus Contracts??. We provide some extracts that raise points that are relevant to most organisations. As you read it wait for the punch line!

“There are respects in which the operation of the bus contracts has not been satisfactory.??

“An initial failure to identify the benefits to be obtained from the contract and the later inability to align the terms of the contract with more recent corporate aims have influenced the whole contract period.??

“The initial agreement of a contract should include agreement of the means by which a contractor’s compliance with performance standards is to be monitored so that the performance and penalty provisions can be applied in practice.??

“Whilst it is clear that the penalty regime provided in the bus contract was not implemented, in view of the uncertainty of the data available it is difficult to be precise about the consequences of this failure.??

“The official contract for the schools and leisure service was not signed until January 2010 although the service commenced in January 2007 owing to legal delays.??

“The initial contract was agreed on the basis of professional advice.?? (Our emphasis).

So there we are. There is valuable information for our readers to consider in this report.
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