How do your contractors measure up?

Every government organisation has contractual relationships. Conventional wisdom and common sense suggest that these relationships need to be managed to ensure parties comply with agreed terms and conditions.

In the public sector, contracting is a foundation activity for most programmes. As a result of this contract management should be a fundamental part of programme administration. In reality, however, many agencies struggle to allocate resources to managing contractor relationships.

Performance management is not a new concept. The early days of staff performance management demonstrated how hard it is to develop an effective regime. There is a lot we can learn about performance management from HR practitioners and there is an opportunity to benchmark the effectiveness of managing contractor performance against similar HR systems.

Managing the performance of a contractor is essentially about managing risk. We all know that standard public sector line: ‘The government’s approach to risk management is that the party best able to manage risk takes responsibility for that risk’. Logic suggests that the party best able to manage risk associated with a contractor not meeting requirements is the government; ipso facto, the government have an obligation to establish a regime to monitor contractor performance. The failure to establish such a regime may leave the government in a position of not achieving value for money, that is:

• not getting what it wanted
• having an unacceptable level of risk, and/or
• having unacceptable costs.

Performance Management Systems

A common framework applied to HR performance management systems, as follows:

• Definition
• Evaluation, and
• Feedback.

These three elements exist in most systems to ensure clarity, transparency and accountability in the process.

The Australian Public Service Commission (APSC) in its publication Performance management in the APS: A strategic framework notes the importance of being able to measure performance at both the organisational and individual level. The APSC guides agencies to linking and aligning individual, team and organisational objectives and results.

Although there are differences, the objective is the same for contractors. That is, the organisation wants to ensure that an individual contractor’s performance is meeting requirements and effectively contributing to organisational outcomes.

Standard Resources

Most HR sections have a comprehensive staff performance management resource kit. A good kit will include information on:

• performance planning
• preparing for reviews
• how to conduct reviews
• timing reviews
• how reviews link to remuneration and benefits, and
• forms to be completed.

Resource kits typically provide clear definitions. There might also be a staff self-assessment form and possibly an upward feedback form which contributes to a manager’s assessment.

Additional information may relate to standard Key Performance Indicators (KPIs), such as:

The objective is to have a consistent approach to performance management. Having a resource kit is a mitigation strategy aimed at treating the risks associated with having an overly complex system.

The procurement profession should take note. The threat of protracted staff disputes and the possibility of legal action has driven HR into a position of having well-developed performance management systems supported by comprehensive resource-kits. These systems and kits can be easily applied to contractor relationships.

Drivers for change in contracting

Procurement groups haven't come under the same intense pressure as HR; hence, performance management for low value contracts in most organisations is quite poor.

There is a well-trodden path through the judicial system to resolve employer/employee conflicts. This has resulted in HR practices being taken more seriously by senior executive, with time and effort being invested to ensure that employment law requirements are complied with (eg. Work Choices, and more recently, Forward with Fairness).

In the procurement world, it is very different. Most senior executive still view procurement policy and practices as an administrative hurdle instead of a strategic business tool.

While HR systems take care of staff performance, it is risky to not have a performance management system for external suppliers. Having a contract does not absolve management from what contractors do within government programmes.

Most government agencies are compelled to measure value for money during contract delivery. The Commonwealth Procurement Guidelines state the core principle underpinning Australian Government procurement is value for money. Given the definition of procurement in those guidelines, agencies should assess whether value for money is being achieved during contract delivery in order to report on compliance with this procurement principle. However, it’s surprising how many agencies have no measurement framework established for contracts. Certainly, at a whole of government level, there is no structured reporting on this.

Establishing a performance management framework for contracting is a critical ingredient to assess whether value for money is being achieved.

Measuring Contractor Performance

Definition

The market approach documentation (eg. Request for Tender) and the contract are two places where definitions need to be clear. Defining performance management elements in the market approach documentation allows an agency to assess the degree of compliance against stated requirements. Typically, a comprehensive description of measures would cover:

• what will be measured
• why it will be measured
• when it will be measured
• who will measure it, and
• how it will be measured and reported.

In terms of ‘what will be measured’, there are two distinct areas to cover:

1. Quality, and
2. Performance.

To illustrate the difference between the two, consider the task of building a bridge across a river. A performance measure may be the date of completion. The quality measures would relate how well engineered the bridge is (eg. the bridge must not fall down if a car drives across it) and how correct the bridge is (eg. the bridge must reach both sides of the river).

Well engineered

Well engineered means the construction is sound and reliable. It does not necessarily mean it is correct.

Correct

Correct means the final results are an accurate reflection of the requirements. It does not necessarily mean it is well engineered.

Far too often there are loose contracted performance measures like ‘Timeliness of Report’. This may result in a report being submitted on-time (to meet the performance measure); however, if the report is of poor quality, it may be useless. In a case such as this, the contract may have been fulfilled and the payment made… even though the report was not well engineered.

For low to moderate value procurements, developing performance measures is a lot easier if you have a Work Breakdown Structure defining milestones, deliverables and tasks. Measures simply flow from this structure (ie. for each element in the structure, define performance and quality measures).

The use of standards may also help. If the deliverable should meet a standard, then a quality measure should focus on compliance with the standard. But be warned, compliance to standards doesn’t necessarily mean the deliverable will meet objectives. There are many risk management systems complying with AS/NZS 4360 that are difficult to use.

So what do we collectively call these measures? KPIs?, KPOs?, SLAs?, SLIs?, SLGs?
It really doesn’t matter what you call them, just ensure the right content is there.

Evaluation

The government seek transparency and accountability when assessing contractor performance. It is helpful in feedback sessions if both parties have undertaken an assessment. The contractor should undertake a self-assessment and have the agency undertake a contractor assessment.

If evaluation ratings are used to assess performance, ensure comments support the assessment (ie. a score of 1 should be supported with detailed commentary to explain why the performance was unsatisfactory).

Similarly, some seek to quantify the effectiveness of delivery by assigning weight to measures. When the ratings are applied to the weight, the resulting effectiveness is expressed as a percentage. If used, this approach should be clearly documented in the contract (with weights and rating definitions).

Feedback

Communication is critical in managing performance. Once the agency has completed its assessment of the contractor, and the contractor has completed a self-assessment, the feedback process should be an open and objective review of both assessments. Having developed a clear set of measures and collected the evidence to support the assessment, the process should be straightforward.

Difficulties only arise when evaluation is based on subjective assessment, or measures are poorly defined, or the supporting evidence is perceived by one party to be flawed. The key message here is: establishing a well-defined foundation provides the basis for a confident performance management review.

Conclusion

Governments rely heavily on contractor relationships with the private sector. Managing contractor performance is a fundamental part of risk management in the public sector.  Robust performance management systems must be established to ensure contractors are contributing positively to outcomes.

Regardless of the specific performance management approach used, the key takeaways are as follows:

• Performance management requirements must be clearly identified in the market approach and contract documentation.
• Performance and quality should be measured.
• Ensure that there is an effective evaluation and feedback loop.

In their publication Guidance on Ethics and Probity in Government Procurement, the Department of Finance and Deregulation state: “A good outcome is achieved when probity is applied with common sense”.

A performance management system underpins probity and ethics in contracting; however, there is a need to apply common sense.