This part of the Guide discusses the issues involved in developing the key elements of a contract.

The contract development phase is critical to achieving the outcomes sought by the acquiring entity. It also facilitates the effective management of the contract.

Contract development can start at various points in the procurement and contracting cycle. In many cases, a draft contract will be part of the request for tender, while in other cases, contract development may only commence later in the cycle, for example, when the actual contractor has been chosen. Most acquiring entities will have a set of standard contracts that can be drawn on in the contract development process. These standard contracts will need to be reviewed and tailored to suit the individual procurement.

Irrespective of when in the procurement cycle that contract development is undertaken, it is better practice to consider risks, resource requirements, the style of the contract and the contract provisions, to ensure the contract meets all legal and policy requirements. It is also important to establish a clear statement of contract deliverables and an effective performance management regime.

Developing the contract will require some level of planning to ensure that all elements of the contract are appropriately considered. This need not be a time consuming task requiring extensive effort. The extent of planning required will depend on the risks involved for the particular contract, its complexity, size, sensitivity and duration. The degree of effort and the costs incurred in developing the contract should be directly commensurate with the benefit that will be obtained through, for example, a reduction in risk and the clearer identification of contract requirements.

Some elements of the contract will be inter-related and these need to be linked when the contract is being developed, for example, payment provisions should be linked to the provisions dealing with contract performance.

The contract development phase is critical to achieving the outcomes sought by the acquiring entity. It also facilitates the effective management of the contract.

The key tasks involved in developing a contract are:

Identify and manage risks.

Obtain senior management commitment and involvement.

Identify resource needs.

Identify and assign responsibilities.

Obtain stakeholder input.

Behave ethically.

Determine the form of the contract, including:

• determining the need for a written contract

• the use of standard form contracts

• determining the contract approach

• define contract deliverables, and

• establish a performance management regime.

Keep records.

Developing the contract will require some level of planning to ensure that all elements of the contract are appropriately considered.

Depending at what stage of the overall procurement cycle contract development is being undertaken, it may be possible to draw on relevant material developed earlier in the cycle. For example, useful information may be contained in policy documents on the decision to outsource the provision of goods or services, in tender documentation or other plans in place in the acquiring entity. Such material should be reviewed to ensure it is applicable to the current circumstances before it is used as a basis for contract development.

The following case study demonstrates the benefits of focusing at an early stage on planning the contract.

It may be possible to draw on relevant material developed earlier in the procurement cycle.

Case Study: Early planning for contract development

A group of agencies all received business critical services from a contractor under a shared service arrangement. One agency had a lead role in managing the contract. The contract was for a period of five years. Eighteen months before the contract was due to expire, all the agencies considered how best to manage the development of a replacement contract. They were aware that although they shared the same basic needs, there were still many variations in their requirements that would need to be factored into the service specification, and perhaps some conflicting requirements to be resolved. All the in-house expertise associated with the original contract process had since left the agencies.

Services being provided under the existing contract were regularly considered by a cross agency steering committee. The agencies decided to have this steering committee also take responsibility for developing a new services contract, as the steering committee members had practical experience in the services and had specific ideas on some short comings in current service arrangements they wanted addressed in the new contract.

Early planning by the steering committee agreed key project steps and the timetable, arrangements for funding the project, and that staff in the lead agency would undertake the work. Initial discussions by the steering committee also highlighted some of the differing priorities, such as differing views on quality and price.

Practical progress was slow in the next few months, partly due to lack of availability of enough in-house staff time. With 12 months to go, the committee decided to engage external professional assistance to develop the request for tender documentation and manage the tender evaluation. They considered the advantages of this approach to include assurance of resourcing of the project, access to specialist knowledge and experience, and the availability of a neutral adviser to assist in resolution of the varying agency requirements.

This more formal approach encouraged the parties to focus on prompt resolution of issues. It also resulted in key issues and decisions being fully documented (since, for example, the adviser presented options as papers to the steering committee, with decisions recorded in steering committee minutes). The remainder of the project proceeded on schedule. The steering committee met regularly, and members were focused on meeting the agreed project milestones. One last minute difficulty was formal signing of the agreement by each agency. In some cases the correct delegate for an agency had not been identified by the relevant steering committee representative, or had not been kept fully informed of the project. This delayed the final signing while the relevant delegates were briefed and issues they raised were resolved.

Comment: By planning early, developing an overall plan, obtaining the right resources and actively involving the key people, the follow-on contractor was selected and engaged on time, with the desired service quality and at a competitive price.