The need for regular independent audits of contract documentation and management for outsourced FM contracts cannot be overstated, says Lynda Cox, a project director at the Sweett Group.
19 November 2015 | By Lynda Cox
Organisations are dynamic and subject to change - changes in legislation, working practices, and the development of new technologies all have an impact on day-to-day operations.
Adapting to such change is vital to any business's success, although these changes can often have an impact on the property portfolio which, in turn, has a direct effect on FM services delivered to the portfolio.
Outsourced FM contracts must be responsive to this to make sure not only that the FM services being delivered continue to meet the needs of the client, but also that the service provider is able to adjust service levels to meet those changing needs.
Many FM contracts are outsourced on a long-term basis, typically over periods of between five to 10 years, sometimes even longer under certain financing mechanisms. Effective contract management is essential on these outsourced contracts with the purpose of managing the contract being to maximise the financial and operational performance of the contract and to minimise risk
This should continue throughout the life of the contract, allowing both parties to react to changing needs that could not be anticipated at the time the contract was let. But if, over the period of the contract term, there are multiple FM service changes, it can become increasingly difficult to manage contractual variations - and there can be a subsequent loss of contractual control.
Contract management can thus become an operational 'day-to-day' practice, out of which can come a disconnection between the strategic service delivery and performance management system and its implementation. This can force FM teams into 'micro contract management' whereby they focus on one financial element of the contract while losing sight of the bigger picture.
This can prove to be financially ineffectual, particularly on large and complex contracts where substantial sums of money can be at risk. Auditing the contractual processes and contract management function independently can bring clarity, providing a route to ensure that appropriate control processes, reporting feedback and properly constructed routes are in place - not only to maintain financial compliance, but also to control change.
Made to measure
Outsourced FM contracts are typically awarded on a performance measurement basis whereby the service provider is financially incentivised or penalised on performance. So it is critically important to both the client and service provider that performance is managed and measured appropriately and that the contract supports this. A contract that is reflective of the service currently required - and to be provided in the future - is necessary to ensure service delivery is linked to the prevailing performance management system. Failure to provide for this means that the service provider is neither penalised nor incentivised appropriately or fairly. This can lead to loss of income for either or both parties.
For instance, changes to service requirements can result in the contract schedules and the contract itself being inconsistent. Take the example of the performance management system demanding certain standards that the contract either does not enforce or is silent on. As it is the contract that takes precedence, it is then difficult for the client to apply the performance management system and for the service provider to deliver against it. It then becomes more difficult for either party to ascertain whether value for money and standards of service received are being achieved.
What's more, poor service provider performance and poor client management could occur, which could cause relationship breakdown, 'man marking' and increased costs. Best practice advocates that the organisations should not duplicate skills in-house where FM services are predominately outsourced to maximise the value.
Shifting the risk
Many organisations outsource their FM services to transfer the risk. At the time of service procurement, both parties assess the levels of risk, with the service provider costing the risk profile and taking appropriate measures to manage that risk. The contract, its schedules and performance management system are then developed through use of the risk profile adopted by both parties.
Any changes to this service requirement may alter the risk profile, and when that happens this must be reflected in the contract documentation; if this is not, both the client and the service provider could be exposed to inappropriate and unmanaged levels of risk. Where services have significantly changed, reduced or increased, auditing can assist in identifying whether levels of risk are proportionate and appropriately reflected in the contract documentation and, if not, what measures need to be undertaken - including independent negotiation with both parties on potential changes to the risk held.
Most importantly, when the services being received and the services being delivered do not reflect the contractual position or intention, either party could be in breach of contract and/or not protected adequately in law. This is particularly pertinent if a dispute or breach arises.
It is critical that the contract documentation is amended to reflect any changes so that the contract is not weakened, it continues to fulfil its purpose, and recourse to dispute is not diluted.
The ability to audit is often provided for contractually, but not undertaken by either party. As organisations change so do personnel, and as those who were familiar with the original contract documentation change roles, posts or jobs, often the contractual history and knowledge goes with them. So it is not that organisations are unwilling to audit - more often than not they are unaware that they can do so.
Organisations are endeavouring to deliver major service change while at the same time maintaining good-quality services in a financial climate of shrinking resources. In view of this, organisations are realising that there is a need to review standards of FM services and the commercial environment that both clients and service providers operate in. So organisations need to look beyond the operational delivery of FM and what the strategic direction for their FM services is.
Clients and service providers often recognise that there are contractual issues but are unsure of where to start when seeking to remedy them - particularly on large, complex FM contracts. There is often an unwillingness to 'rock the boat' and although the contract is known by both parties to be financially ineffective it is often easier for organisations to allow the status quo to prevail. In other words, it can be seen as too complicated to unravel with contract management then being undertaken in silos and on an individual operational basis. Consequently there is an ad hoc, piecemeal approach - leading to inconsistency, confusion, duplication and non-adherence to contractual requirements, all of which results in poor risk management, with both parties unaware of the risk they are carrying.
To initiate resolution of these issues - and if the contract allows for it - it is recommended that clients and service providers undertake an independent review of their contract documentation and contractual management. Independent audit could be jointly undertaken by clients and service providers, with the costs shared or undertaken independently by either party. An independent audit by an FM specialist can deliver real benefits to organisations seeking to eke out value, improve performance and manage risk.
In undertaking an audit, value can be achieved through assessing the number of contracts in place and potentially both combining multiple contracts and reducing the number of contracts. This, in turn, can make management more straightforward and reduce management cost. Better contract packaging or bundling may also lead to value being achieved through economies of scale and a reduction in resource and service duplication.
Review to clarify
Reviewing contractual documentation provides for an improved understanding by both parties of how contract management should be undertaken.
This can help to improve relationships as both parties better understand their contractual obligations and the procedures that need to be followed to provide the services appropriately. This also provides for improved control and understanding over FM delivery and cost.
Auditing the contractual documents allows for review of the performance management system. Performance management systems can be overly complicated. Reducing the number of key performance indicators and refocusing them can provide greater service clarity and a more appropriate set of metrics to manage performance, along with revised service levels that are suitable for each site and/or property. Again, this could not only reduce management resource and improve relationships, but also ensure that the service provider is incentivised and/or penalised appropriately. It could also highlight levels of risk - and where risk is being held and by whom.
The review of contract documentation and contract management and, if appropriate, progressing toward the development of repurposed contract documentation could ensure that the contract and supporting documentation are appropriate for the client and service provider's needs and fit for purpose.