Procurement driving better value for money

Guide 7 to Sustainable
Procurement
Manage the contract and disposal
route

A guide for agencies July 2010

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 This guide is part of a series of documents focussed on Integrating Sustainable Procurement into
Practice. This material was developed by Sustainable Procurement Limited for the United
Nations Marrakech Taskforce for Sustainable Procurement of which the New Zealand
government is a member. The series is based around a typical procurement process with a guide
for each relevant stage as identified below:

Identify need
& assess risk

Guide 2

Manage the
contract & Evaluate &
disposal route select suppliers

Guide 7 Guide 3
Identifying
sustainable
procurement
priorities
Audit & Guide 1
Define the
improve Start specification &
supplier invite bids
Guide 6 Guide 4
Evaluate bids
from suppliers
& award
Guide 5

Please see the separate guidance notes referenced for other stages of the procurement process.

First Published July 2010

Government Procurement Development Group | Ministry of Economic Development
PO Box 1473 | Wellington | New Zealand | http://www.med.govt.nz | http://www.procurement.govt.nz

Crown This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 New Zealand License. In
essence you are free to copy, distribute and adapt the work noncommercially, as long as you attribute the work to the
Copyright Crown and abide by the other licence terms.
To view a copy of this license, visit http://www.creativecommons.org.nz Please note that no departmental or
governmental emblem, logo or Coat of Arms may be used in any way that infringes any provision of the Flags, Emblems,
and Names Protection Act 1981. Attribution to the Crown should be in written form and not by reproduction of any such
emblem, logo or Coat of Arms.

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Contents page
Background ....................................................................................................................... 4

Introduction........................................................................................................................ 4

Key contract management principles ................................................................................. 5

Determining the sustainability issues for contract management review.............................. 6

Example performance measures ....................................................................................... 8

Risk and reward mechanisms............................................................................................ 9

Links to supply chain management (back to back contracts) ........................................... 10

Summary......................................................................................................................... 10

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TO WHAT EXTENT DOES YOUR AGENCY
CONTINUE TO MANAGE CONTRACTS
AFTER THEY HAVE BEEN AWARDED?
Background
This guidance document details the key issues involved in contract management and the setting
of supplier performance criteria. In particular, it details the common principles involved in contract
management and how sustainability issues can be integrated into a contract management
approach.

Whilst referencing inter-linked procurement stages, this guide focuses on contract management
to manage sustainability impacts. This is primarily informed through a sustainability risk
assessment and by the specification set for the particular contract need. See Guide 2 Identify
Need and Assess Risk and Guide 4 Define the Specification and Invite Bids. Sustainability risks
that are best managed by on-going supplier performance criteria applied after the contract has
been awarded are illustrated as well as the principles of motivating the supplier to deliver
continuous improvement over the life of the contract.

Why is this Important?

Except for very routine procurements all contracts will need to be managed, mainly to ensure that
the supplier keeps to the commitments they made in their bid. The supplier and procurer have
legal contractual obligations, effective contract management ensures that commitments are met
and that any problems are managed and dealt with quickly. From a sustainability perspective,
contract management ensures suppliers meet their sustainability commitments, but also creates a
mechanism to improve performance through use of performance indicators. If practiced
successfully, procurers will be able to show continuous improvement and demonstrate successful
delivery of sustainable procurement to all stakeholders.

How to use this Guide

The guide is structured by subject, so it can either be read fully in order to obtain a complete
overview of the issues in bid evaluation or the reader can jump to a specific subject area (see
above). However, the guide does follow a logical order so it is recommended to start at the
beginning and work through to avoid any confusion.

Introduction
Having awarded the contract to the successful supplier it is important that the contract is
managed to ensure that the supplier meets the commitments they gave in their bid proposal.
Effective contract management is particularly important for longer-term contracts where the
buying and supplying organisations will be working together for many years. Unfortunately
contract management is an area of procurement that is often neglected and can lead to
frustration for all parties. As with other guidance, the approach to contract management can be
linked again to the category of the contract on the sustainable procurement matrix:

Critical contracts - High Value and High Sustainability Risk

Secure contracts - Low Value, but High Sustainability Risk

Drive contracts - High Value, but Low Sustainability Risk

Acquisition contracts - Low Value and Low Sustainability Risk

Whilst all contracts need to be managed, it is particularly important for high-risk contracts as the
items being supplied have high sustainability impacts and are often essential purchases for the

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buying agency. A key issue is ensuring that suppliers of secure items (low value, but high
sustainability risk) are closely managed as the value of the business is relatively low so the
supplier will need to motivated by other factors to ensure a successful service.

Contract management normally begins with a face-to-face contract commencement meeting with
the supplier. Thereafter, the way in which the supplier is managed (review meetings, progress
reports etc) is influenced by the nature of the contract. Milestones should be established and
reviewed, and performance assessed against pre-agreed performance measures. The
performance criteria used to manage the contract will have been determined at the risk
assessment and contract strategy stage. See Guide 2 Identify Need and Assess Risk.

Additionally, when determining the approach to contract management, it is suggested that

procurers consider:

The launch of the contract within the organisation

Information for contract users
Administration of the contract within any IT system
The management of day to day queries
The frequency of review meetings with internal users
The frequency of review meetings with suppliers
The documentation required for review meetings
The Key Performance Indicators required for the contract
Any risk/ reward mechanisms for the supplier based on performance

Key contract management principles

Keep a file for each contract with the original documents and all correspondence,
plans, charts, calculations and anything else that passes between you and the
supplier, or other involved parties.
Keep a written log of all significant events that occur during the contract, at the time
they occur. Note what happens, who was involved, why and any perceived cost
implications. The importance of this information in time and trouble cannot be
overestimated.
Any instruction to the contractor must be in writing, dated and sequentially
numbered.
Do all that you can to keep changes to the basic contract to a minimum.
You have contractual obligations under law as well as the supplier. Know what they
are and make sure you that you carry them out.
Don't let a situation drift. Problems rarely solve themselves, but usually get worse
and before you know it, particularly if the supplier has a claim for extra cost.
If you have a contractual problem, don't keep things to yourself, seek advice and
support.
Don't let the suppliers problems become your problems.
The law of contract is usually commercial law and carries commercial penalties if
you get it wrong. This usually involves extra costs and perhaps some embarrassing
explanations.
Don't accept less than the contract calls for in the interests of expediency. The
contractor has costed for the whole contract. Your organisation is paying for the
whole contract, make sure you get it.

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Take as much care in finishing a contract as you did in starting it. Contracts are a
legal process that should not be left to chance.
Remember you are spending tax-payers money, spend it wisely, sustainably and
challenge everything.

Determining the sustainability issues for contract management

review
The sustainability issues that need to be examined as part of contract management are a function
of the risks identified in the contract. When a contract is first being planned risks should be
identified and documented. See Guide 2 Identify Need and Assess Risk. Example risks may
include:

High CO2 emissions due to poor energy efficiency/ travel management

Supplier sub-contracts the work to an organisation with poor sustainability
credentials
Suppliers staff are not properly trained in the sustainability issues associated with
this contract
Unsustainable materials in the product
Employees exploited by supplier
Reputation damage to the organisation through poor sustainability practices by
supplier etc
The risks identified then need to be managed, there are five options available:

Option 1: The risk cannot be managed and is therefore not addressed (these risks
need to be closely monitored)

Option 2: The risk is managed by the choice of supplier

Option 3: The risk can be addressed in the specification

Option 4: The supplier needs to provide proposals on their approach, so the

requisitioner can evaluate how they propose to manage the risk

Option 5: The risk is managed either by targets to be delivered once the contract
has been awarded or generally as part of contract management activity

Each contract will typically employ a range of these management options. For risks that can only
be managed by option 5, (targets to be delivered once the contract has been awarded or
generally as part of contract management activity) a set of performance measures and a contract
management approach needs to be determined. The measures used in contract management
should relate directly back to the risk assessment undertaken at the start of the contract, the
clauses/questions asked in the specification supplemented by any additional commitments made
by the supplier in negotiation.

As highlighted in Guide 4 Define the Specification and Invite Bids B10, sustainability criteria can
be applied at all stages of the procurement process. As an example, see below sustainability
criteria to manage carbon-dioxide/particulate emissions from travel in a computer services
contract. Pay particular attention to the way the criteria become more specific and more dificult
between supplier selection and specification. Also note that the bid evaluation criteria highlighted
have a direct link to clauses/questions in the specification. Similarly, contract management criteria
also link back to both specification and bid evaluation criteria and provide the method by which
compliance is monitored and continuous improvement encouraged.

Table 1 Example of possible sustainability criteria to manage Carbon-dioxide/ particulate

emissions from travel associated with providing an IT Service

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Procurement Stage Possible Sustainability Criteria/ Actions
Supplier Selection Ensure service provider has a sustainable travel policy and
has experience of sustainable travel planning & control
Specification Set a target number of miles to be travelled to support this
contract with yr on yr reduction targets, say 4,000 (if it is not
feasible supplier will voice concerns in their proposals,
negotiate total figure)
Supplier to produce a sustainable travel plan to minimise
miles travelled by car and plane (should reflect principles
below) and reduce carbon emissions from its vehicles
Require use of telephone conferencing/ VC conferencing
wherever possible, all journeys must have a justification and
be reported quarterly for review etc
Require train/ public transport where feasible, ask supplier
how they will incentivise this with their employees
Ban use of domestic flights for journeys that can be
undertaken in less than 5 hours by train
Proposals to reduce car/plane travel
Any proposals to carbon off set travel, by whom and to what
level
Bid Evaluation Positive response to issues in specification (yes/no)
Robustness of sustainable travel plan
Incentives for low emission vehicles either as lease cars or
through mileage rates or other staff incentivisation
Targets to reduce car/plane mileage beyond those in the
specification
% target for carbon off set, value of fund, robustness of
carbon off set fund/ mechanism proposed. 100% gets a
maximum score.
Contract management Reduction in miles travelled to deliver and support the
contract
Reduction in carbon emissions from transport
Continuous improvement against the sustainable travel plan,
with financial incentives for the supplier
% carbon off set against miles travelled against the target
agreed
Financial penalties for non-essential/ unjustified journeys
when phone conferencing/ video conferencing could have
been used

See Appendix 1 for a detailed sustainability risk assessment document showing sustainability
criteria and specifically the contract management criteria. This appendix shows the range of
sustainability criteria that can be applied and clearly demonstrates how criteria build-up through
the procurement process.

When considering contract management targets it suggested that procurers categorise

performance criteria as follows:

Essential - Mandatory performance criteria which a supplier must meet. These

will usually have serious consequences for the supplier if they fail,
possibly even termination of the contract.

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Preferred - If the supplier fails these, it does not necessarily have major
consequences, but is indicative of a lack of commitment to
sustainability principles.

Leading - Limit these to as few issues as possible. These issues will really
differentiate suppliers performance and separate the exceptional
suppliers from the ordinary. These targets are usually difficult to
achieve and are often linked to some form of bonus payment for a
supplier.

By categorising measures, procurers are in effect setting the boundaries by which the suppliers
overall performance will be judged. This gives a very clear structure and allows decisions to be
made about a suppliers continued use within an organisation depending on their performance.

Example performance measures

A key element of effective contract management is the application of performance measures to
assess the suppliers performance in the contract. This ensures that contract management is
robust, systematic and has measures to show success and failure. The example below details
possible performance measures that could be applied to key sustainability risks in a contract. The
measures below could be applied and adapted for a number of contracts, but were specifically
developed for a computer hardware and support service contract.

Table 2 Example of contract measures

Sustainability Theme Contract management/ performance measure

Carbon dioxide and particulate Reduction in miles travelled to deliver and support
emissions from travel the contract
Reduction in carbon emissions from transport
Continuous improvement against the sustainable
travel plan
% carbon off set against miles travelled
Non-renewable resource use and Continuous improvement in re-use of spares/
associated waste of spare parts / consumables
consumables and packaging waste Reduction in consumable use
Reduced waste to landfill
Energy use Reduction in power consumption
Overall increase in use of renewable energy
Non-renewable resource use to
create electricity and associated
carbon dioxide emissions

Supplier organisational commitment Year on year update of impacts and action

to and management of its planning
sustainability impacts Achievement of sustainability targets
Delivery of sustainable procurement
Management of electronic waste Time from de-installation to waste disposal,
specifically old desk tops, lap tops, reducing target
mfds, servers and other hardware % electronic waste to landfill, reducing target

Use of chemicals Periodic check of any chemicals being used

Maintenance of COSHH sheets
Delivery of agency corporate KPIs linked to delivery against our targets, but
sustainability targets covered elsewhere specifically in this document

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Sustainability Theme Contract management/ performance measure
Sustainability competency of supplier Contract compliance (note there are links to any
staff on environment agency premises Monitoring of compliance with diversity targets,

Suppliers employees are exploited Records maintained that demonstrate compliance

with minimum social standards e.g. wage, hours,
unionisation etc

Sub contractors must equally deliver KPIs on sub-contractor performance
on sustainability
Sub contractors in the developing As above
world are exploited
Supply base diversification Monitoring of compliance with diversity targets, but
do not link to incentives
Compliance with sustainability Records of any legal investigations/ prosecutions
legislation by legal authorities e.g. environment infractions
Eco-label to manage main KPI linked to Eco-label e.g. Cat A purchasing of
environmental impacts of hardware Energy star hardware and % overall against a eco-
selection label
Carbon dioxide emissions from Year on year improvement
hardware logistic distribution See earlier section on mileage targets
Power consumption of hardware both Reduction in power consumption
on and off site (hosted services) Overall increase in use of renewable energy
Non renewable resources used in Continuous improvement in re-use of hardware
hardware Reduction in hardware use
Reduced waste to landfill
DISABLED USER ACCESSIBILITY 100% compliance in provision of equipment to
facilitate use by disable users

Asset management / replacement % Reduction in equipment consumption
strategy that minimises consumption % Amount of equipment re-deployed for re-use

For each contract it is necessary to determine the sustainability risks, identify how the risks are
best managed and for those that need on-going management develop specific performance
management criteria. Supplier performance against these specific criteria are then reviewed as
part of the contract management process. Giving a much more meaningful approach to contract
management than just a general discussion about performance. Sustainability measures such as
those highlighted above are also useful in demonstrating the sustainable procurement
improvement being delivered.

Risk and reward mechanisms

An option to increase a suppliers motivation to improve sustainability performance during a
contract is to use a risk/ reward mechanism. Effectively, agreeing a financial penalty and/or
financial bonus payment based on the suppliers performance. A good way to start this is to ask
the supplier in their proposals for the measures they would like to be measured against and the
amount of their fee they are willing to put at risk based on their performance. It is then a case of
the procurer negotiating the measures to ensure they are robust and the level of fee at risk.

Procurers may seek to add additional measurement criteria or give tougher targets for which the
supplier receives a bonus payment. This can be self-funding in areas such as energy efficiency
etc where there is a reduced cost to the client. Another option is to link contract extensions to

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performance, suppliers usually want to retain a clients business so linking performance against
measures is another method of increasing a suppliers motivation.

Procurers need to ensure that suppliers targeted for this approach, actually value their business,
otherwise it will be difficult to improve performance. To check this an assessment of the suppliers
view of you as a client should have been undertaken. See Guide 2 Identify Need and Assess
Risk.

Links to supply chain management (back to back contracts)

Many of the sustainability impacts present in a contract will actually be further down the supply
chain1, with the suppliers suppliers and so forth. Of key importance is how the supplier you are
contracting with actually deals with their suppliers and so on. This also has implications for
contract management as it will be necessary to ensure that your supplier is applying similar
criteria to their suppliers down the supply chain. Procurers therefore need to ensure that back-to-
back contracts are in place between the main supplier and any sub-contractors/ suppliers they
may have involved in delivering your contract. This is simply achieved by requiring suppliers to
adopt back-to-back contracts, using the precise terms and measures agreed with you as the
same contract with their subcontractors and suppliers. This approach should ensure that
sustainability commitments made in the contract are applied down the supply chain.

It must however be recognised that back-to-back contracts are only usually used for higher risk/
value contracts as they are often not popular with suppliers. So there use should be considered
carefully and only applied in higher risk/ value contracts where there are concerns about
sustainability beyond the main supplier down the supply chain. If this approach is taken it will be
necessary to add additional performance measures into the contract so that the supplier reports
on their suppliers performance also.

Summary
Effective contract management and the setting of sustainability criteria will support sustainability
improvement. Performance management criteria are essential to this as they provide the
measures by which the suppliers progress will be judged. It can however, be quite challenging to
determine these criteria, but the risk assessment undertaken at the start of the contract will inform
this. Suppliers may be resistant to these targets, so early engagement is essential. Suppliers
should be asked for their measurement proposals and these can then be used as part of bid
evaluation as a indication of their commitment to improved sustainability. These initial proposals
can then also form the basis of negotiation to agree specific targets.

Procurers also need to consider the consequences of suppliers performance, will rewards be
given for improved performance and/or a contract extension and will penalties be payable if the
supplier fails. If risk and reward mechanisms are being used procurers will need to ensure that
the criteria are measurable and fair, but also tough enough that suppliers are only rewarded for
improved/exceptional performance.

Contract management requires long-term commitment and time to build the working relationship
between the procurer and supplier and is often neglected by many organisations. If an
organisation is to truly deliver sustainable procurement it must ensure that its suppliers deliver the
sustainability commitments made, improve performance and that results are measurable. This will
ensure that the procuring organisation can show sustainability improvement and demonstrate its
true commitment to sustainable procurement.

1
A supply chain, logistics network, or supply network is a coordinated system of organisations, people, activities, information
and resources involved in moving a product or service in physical or virtual manner from supplier to customer. Supply chain
activities (aka value chains or life cycle processes) transform raw materials and components into a finished product that is
delivered to the end customer. Referenced - Wikipedia 2007.
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