It is legally not possible for an entity that is part of the Commonwealth of Australia to enter into a contract with another entity that is not a separate legal entity19 In recognition of this, it is now a common practice for many entities to enter into Memoranda of Understanding (MOUs) as a useful mechanism to:

• set out the services to be provided by both parties and the responsibilities of each entity for the delivery/receipt of the specified services

• set performance indicators or standards for the specified delivery of services

• formalise arrangements for the custody (as distinct from ownership) of information and materials generated as a result of services provided, and

• formalise arrangements and processes to resolve any disputes between the parties.

Even though MOUs do not have the same legal status as contracts, entities should manage MOUs with the same degree of rigour as they manage contracts. As MOUs between agencies are administrative and distinct from legal instruments, they should not include provisions such as indemnities, liabilities and warranties that purport to have legal effect.

MOUs can also be a useful mechanism for formalising preliminary agreements between two parties prior to entering into a full contractual relationship. Where the parties are separate legal entities, MOUs are a form of contract. To avoid doubt the MOU should specify which of the provisions of the MOUs are binding or non-binding.

Entities should manage mous with the same degree of rigour as they manage contracts.

Good Practice Tip: Don't re-invent the wheel

The Australian Government as a whole has a vast amount of experience in all aspects of contracting and it is very likely that a contract for a similar requirement has already been developed elsewhere in the APS. So ask around, and use existing networks to obtain a copy of another contract and speak to the people involved as a useful source of information for developing a new contract. In doing this, care needs to be exercised to avoid the inappropriate disclosure of commercial-in-confidence information and an agreement should be reached with the 'giving' entity of the basis on which any material can be re-used or adapted.

It can also be useful to obtain relevant contracts from several entities so that similarities and differences can be assessed.

Case Study: Small value consultancy - fixed price or time and materials

An entity decided to prepare user documentation for their financial and human resource management IT systems. All staff were required to use these systems, but many did so infrequently and had difficulty in recalling the steps to follow. The documentation provided when the system was installed was considered to be too generic, and staff found it hard to locate the transactions they required in the full set of documentation.

A specification of the documentation desired and a set of acceptance criteria was developed. Quotes for the work were sought from four possible providers, identified by a review of the market. A tender was not required as the value of the contract was expected to be less than $30 000.

There was a very wide variation in the quotes given. Feedback from the potential providers indicated this variation arose from different weightings given to the difficulty and risks involved in preparing the documentation to a relatively subjective quality standard.

Given the relatively small size of the contract, the agency decided the cost of developing and using more objective quality standards was not justified. Instead, the agency sought quotes again, this time for rates on a time and materials basis of work. The lower risks to be carried by the potential providers reduced the unit costs quoted, and made comparisons between providers more consistent. The provider was then chosen based on judgement of costs and references on the total cost and quality of similar projects undertaken by the providers.

An entity standard consultancy contract was used, specifying the general nature of the project, arrangements for agreeing nominated specific tasks, and hourly rates. Once the project was under way and various approaches tested with staff, it turned out that a set of quick reference cards would be sufficient to meet the business objectives of the project.

Comment: Using a time and materials contract made it easier to reduce the overall scope of work than if a fixed price contract had been used. On the other hand, this meant the entity carried the risk of poor performance by the contractor. In other cases it may be preferable to allocate more effort to clarifying the scope, and then use a fixed price contract.

Case Study: Evolving client requirements - collaborative style contract

An entity was entering into a contract for the construction of a new national office, which it planned to occupy in three years time. It was aware that some of its needs were likely to change in that time. Factors with reasonable uncertainty included overall staff numbers, and the inclusion or not in the building of functions with special requirements for air conditioning and security. In addition, the agency was interested in the building having a low environmental impact during construction and operation. It was aware that design options of interest for reduced environmental impact were not yet fully tested, and hence the entity preferred to defer some design decisions if practical.

The entity decided that an effective way to meet these circumstances was to have the opportunity to change the design as the project was under way. The contract specified a base design (which had been used as an important element of the tender selection decision). The contract also specified a collaborative approach to the project between the client, the building designer, the project manager and the building contractors. At a series of check points during the project, the project goals and requirements, and technical options were reassessed. Workshops were held between the parties to ensure the designers and builders were aware of the underlying requirements of the client, and that the client was aware of the technical options and the possible trade-offs. For example, some air conditioning/heating options with lower operating costs would have higher initial capital costs.

By adopting a collaborative approach, the project coped with evolving client requirements and with minimal unproductive debate due to misunderstandings of roles or technical options. There was a shared commitment to cost reduction wherever possible, while still meeting the underlying business needs of the client.

[Note: the contract did not need to deal with issues such as benefit sharing, as the savings flowed directly to the client through, for example, lower cost equipment and materials, or in long term operating costs. In fact, some of the professional fees were slightly higher than otherwise to allow for the collaborative approach. However these fees were only a small part of the total project cost].

Comment: The use of a collaborative approach, with a well defined framework for revising the design, gave the entity useful flexibility in their detailed requirements, without adding to project risks.

One of the most critical aspects of any contract is the definition of contract deliverables.