IFMA FMPv3-0 F-B Ch4

Chapter 4: Contracts
in the Facility Organization
► Topic 1: Contract Development,

Management and Oversight
► Topic 2: Contract Administration
► Topic 3: Analyzing and Interpreting Financial

Contract Elements
► Topic 4: Resolving Vendor Conflicts

© 2014 IFMA
All rights reserved Chapter 4 Introduction Edition 2014
www.ifma.org/fmp Slide 4-1 v3.0
Contracts and Facility Management
► A primary vehicle to identify and define
opportunities for products or services
procured from external providers.
► A framework for regulatory compliance,
reputational risk management and
effective change control; a source for
added value and innovation.
► Parties know exactly what is involved and
expected of them.
© 2014 IFMA
All rights reserved Chapter 4, Topic 1 Edition 2014
Valid Contract Elements
The meeting of the minds; an express or implied
Mutual agreement
agreement.
Consideration The exchange of something of value; quid pro quo.
Whoever signs must have legal authority and

Competent parties
capacity to understand the terms.
Proper subject matter The contract must have a lawful purpose.
Mutual right to remedy Both parties must have an equal right to remedy a
breach of terms by the other party.
Agreement to enter Parties demonstrate that negotiations have ended
into the contract and an agreement has been reached when the
contract is signed.
© 2014 IFMA
Contract Classifications
Express and Bilateral and Void, Voidable,
Implied Unilateral Unenforceable
• Express • Bilateral • Void

Contract in which all Contract in which both Contract that is considered
elements are specifically parties make a promise. never to have come into
agreed upon; they are existence.
• Unilateral
stated either orally or in
Contract in which one party • Voidable
writing.
makes a promise. Contract in which one of
• Implied the parties has the option
Contract assumed by to terminate.
circumstances; agreement
indicated by conduct or • Unenforceable
performance. Contract in which neither
party may enforce the
other’s obligations.
© 2014 IFMA
Discussion Question
Identify the following statements as true or false.
Answers:
True  An informal verbal agreement can be as
binding and legally valid as a written contract.
False  You cannot bind yourself to a contract through
e-mail.
False  The terminology “without prejudice” implies
that the contract adheres to all applicable laws
and regulations.
© 2014 IFMA
Discussion Question
Match each contract term with its description.
Answers:
Prescriptive 1. Items that relate to a specific procurement
contract
2. Outline the exact specifications expected or
acceptable ranges
Performance-
based contract 3. Pre-established items that provide the legal
framework for the relationship between the
General organization and the
conditions vendor
4. Describe expected results but leave flexibility
Special for the vendor regarding achievement of those
conditions results
© 2014 IFMA
Purchase Orders
One-Time Purchase Order Blanket Purchase Order (BPO)
► Expires with the individual ► Allows a stream of procurements

delivery of a finite good or over a length of time and/or within
service. a dollar ceiling.
► Specifies a variety of terms ► May be called an annual PO when
and details. the duration is a year.
► Contains all of the same
information as a one-time PO.
► Usually includes some form of
maximum periodic commitment for
the year plus each supply period,
above which a variation order is
required.
© 2014 IFMA
Fixed Price Contracts
► Also called fixed sum or lump sum
contracts.
► Require a contractor to successfully
perform the contract and deliver
Fixed supplies or services for a price agreed
to up-front.
price
► Appropriate for supplies and services
that can be described in sufficient
detail to ensure that both parties
completely understand the contract
requirements and the inherent risks.
© 2014 IFMA
Cost-Reimbursement Contracts
► Also called reimbursable or variable
price contracts.
► Allow for payment of all incurred costs
within a predetermined ceiling that can
Cost- be allocated to the contract, that are
reimbursement allowable within cost standards, and
that are reasonable.
► Place the least cost and performance
risk on the contractor.
► Appropriate when uncertainties will
not permit a fixed price to be
estimated with sufficient accuracy.
© 2014 IFMA
Other Contracting Mechanisms
Indefinite Delivery
National Buy
Quantity, Line Item
Contracts
Contracting (IDQLI)
Open Book Labor Hour/

Contract Time and Materials
© 2014 IFMA
Discussion Question
Identify the following FM contract terms.
Answers:
Roles and responsibilities  Duties and rights of each party
Protocols when on location  Hours of operation and use of physical
property
Novation/contract  Provisions regarding the substitution of a
transfer provisions new contract in place of the original
Force majeure provisions  Unforeseen or planned events that
suspend contract time limits
Indemnification agreement  Documentation of who is liable

for what and to what extent in the liability
clauses
© 2014 IFMA
Contract Fraud
Fraud is generally defined as an intentional deception
made to gain an advantage or damage an individual.
 Variety of illegal acts (deceit, concealment,

violation)
 To obtain money, property or services
 To avoid payment or loss of services
 To secure personal or business advantage
© 2014 IFMA
Types of Contract Fraud
► Collusion
► Price fixing
► Noncompetitive pricing
► Irregularities during execution
► Payments for work not carried
out
► Cartels
© 2014 IFMA
Principles of Contract Fraud Control
Fraud should be deterred; prevention is preferable to
detection; strong preventive controls should be applied.
► Segregation of duties
► Proper authorization
► Competitive bidding/tendering
► Documentation and record keeping
► Change order controls
► Budgetary controls
© 2014 IFMA
Fraud Indicators
Signs that indicate both the inadequacy of controls in place to deter
fraud and the possibility that some perpetrator has already
overcome these weak or absent controls to commit fraud; often
referred to as red flags.
Red flags may appear in:

► Bid patterns.
► Price patterns.
► Suspicious documents, statements
or behavior.
Fraud can occur in almost any contracting situation; some

scenarios are more likely than others.
© 2014 IFMA
Contract Administration
Contract administration is any action from the time a
contract is awarded until its closeout; the process of
ensuring that the intent, requirements, and terms and
conditions of the contract are met.
Primary goals in contract implementation and monitoring

include:
► Assessing contractor performance.
► Evaluating whether the provider is complying with the terms and
conditions of the contract.
► Documenting the outcomes.
► Ensuring the continuing relevance to organizational needs.
© 2014 IFMA
Contract Monitoring
Simple Extensive
acceptance involvement
General factors influencing the degree of contract

administration include:
► The nature of the work, product or service.
► The type of contract.
► The experience and commitment of the contractor personnel
involved.
A facility manager is typically involved in contract performance

monitoring and contract cost monitoring.
© 2014 IFMA
Contract Performance Monitoring
► Actual progress against work schedules
► Fulfillment of time frames and adherence to
milestones
► Fulfillment of quality and quantity objectives
► Conformance to specifications
► Conformance to baseline operational performance
metrics
► Conformance to service/quality levels outlined within
the contract
► Conformance to standards
Inspections Feedback Vendor reports Audits

Observations Call reports Tests Meetings
© 2014 IFMA
Discussion Question
Contract performance monitoring varies, but, done
properly, which of the following are likely benefits?
(Select two.)
I. Simplifies and streamlines reporting
II. Facilitates early resolution of any vendor
performance issues
III. Identifies planned and unplanned modifications
IV. Provides best value for the money
Answers: II and III
© 2014 IFMA
What is a Service Contract?
A service contract is an agreement for the performance of various
labor-oriented services, funded on a periodic basis. All service
contracts should be in writing.
Important terms to include:

► Identity of the parties
► Description of the service to be performed, where and how often
► Performance standards and measurement metrics
► Costs (specifying hourly, weekly, monthly and annual)
► Contract initiation and termination (start and end dates)
► Special provisions
► Termination provisions
► Signatures of authorized parties
© 2014 IFMA
What is a Service Specification?
A service specification is a part of the service contract. Typically, it is
a separate document developed and agreed upon in order to clarify
and give further detail on expected service levels and quality. The level
of detail varies, depending upon the complexity and importance of the
service or asset item.
The service specification:

► Establishes the minimum level of service acceptable to meet customer
requirements.
► Provides a framework for monitoring actual services.
► Often used as benchmarks to assess the standard and quality of service
provided.
► Is a precursor for a service level agreement.
► Includes internal standards, external standards and procedures.
© 2014 IFMA
Prescriptive and Performance Specifications
Prescriptive Performance
► Dictate exactly what will be done, ► Typically set quality-related targets that
how the tasks will be performed and allow the service provider some flexibility
the frequency. in determining the most appropriate
► Restrictive—based on specific response.
inputs. ► Are focused more on outputs (compared
► Usually cannot be modified once to prescriptive specifications).
► Must convey quality expectations in
the contract is running.
terms the contractor understands and
can execute.
It is best practice in procurement to focus on describing required

outputs rather than inputs.
© 2014 IFMA
Service Specification Contents
► Objectives of the service ► Details of any specific
► General description of the exceptions or exclusions
service to the service requirement
► Service outputs required (e.g., geographical or
► Service input items that would normally
requirements (if any) be included but are not in
► Any priorities and the particular
constraints (e.g., delivery specification)
times)
© 2014 IFMA
Discussion Question
True or false? Key performance indicators (KPIs)
that are included in a service specification relate to
the level of the service.
Answer:
False. Service specifications often describe
performance requirements in terms of KPIs—
factors that are critical to the successful
provision of the service—related to the
criticality and importance of the service (not
the level of the service).
© 2014 IFMA
What is a Service Level Agreement (SLA)?
A service level agreement is a part of a service contract where
the level of service is formally defined. SLAs are a negotiated
agreement between the service provider (in-house or
outsourced) and the customer.
In a service level agreement:

► The service provider commits to deliver an agreed-upon level of
service.
► The level of service time may be specified as targets and minimums.
► Once defined, the levels can serve as benchmarks.
► Expectations should be reasonable and realistic.
© 2014 IFMA
What Do SLAs Include?
► Agreement details ► Meetings—customer/service
► Definitions provider communication
► Description of the scope of ► Subcontracting provisions
services to be provided ► Incentives and penalties
► Quality and performance-related ► Procedures for revising the
targets SLA
► Time targets—service priority ► Customer rating and feedback
categories and times mechanisms
► Pricing—fees and payment terms ► Dispute resolution
► Monitoring—performance ► Default
measures and performance ► Transfer of responsibility
reports
SLAs should be signed by both parties.

© 2014 IFMA
Facility Managers’ Roles in
Service Specifications and SLAs
During the development of service specifications and SLAs . . .
► Identify and clarify stakeholder ► Consider other elements, such as:
interests. • Service effectiveness.
► Define critical success factors • Resolution of disagreements.
and KPIs. • Review of/modifications to
specification/agreement.
Once service specifications and SLAs are in place and operational . . .
► Serve as the point of contact for ► Plan and coordinate service reviews.
problems or concerns. ► Regularly assess the working
► Coordinate and implement relationships.
modifications. ► Facilitate or participate in conflict
► Periodically assess effectiveness of resolution processes.
service tracking and reporting.
© 2014 IFMA
Contract Cost Monitoring
 Ensure that there are sufficient funds to pay for all
services rendered as required by contract.
 Ensure that invoices are paid consistent with most
favorable contract payment terms.
 Identify low spending levels and reassignment of funds,
if appropriate.
 Ensure that vendor payments are commensurate with
the level of goods and services received.
 Review vendor invoices and follow the organizational
and departmental standard procedures for processing
vendor payments.
© 2014 IFMA
How Often to Monitor?
Frequently enough (daily, weekly,
monthly, quarterly, annually, or by special
20XX
arrangement):
  
► To confirm that the conditions of the contract
are satisfied and actual costs are tracked.
► Any discrepancies in the quality or timeliness
of the work can be quickly addressed and
resolved.
► Situations where the contractor requires
unanticipated support or access can be
arranged to minimize negative impact.
© 2014 IFMA
Exhibit Sample FM Service Scorecard
4-6
Property XYX Monthly Performance Service Scorecard
Vendor: ABC Elevator Repair Month: March 20XX
Score
Service Criteria Priority Weighting Monthly Rating *
(Weight x Rating)
Preventive maintenance 5 2 10
Response time to breakdowns 5 0 0
Total score 10
Performance rating %
50%
(Actual total/maximum x 100)
* 0 = Below expectation
1 = Meets expectation
2 = Exceeds expectation
© 2014 IFMA
Exhibit Sample FM Cost Control Report
4-7
Property XYX Monthly Cost Control Report *

Vendor: ABC Elevator Repair Month: March 20XX
A B C D
Annual Anticipated Gross
Service Contract Changes Expense Value to Comments
Sum (A + B) Date
Preventive €20,000 €5,000 €25,000 €12,000 PM program
maintenance ahead of
schedule
Reactive €10,000 — €10,000 — No reactive
maintenance repairs to date
Total €30,000 €5,000 €35,000 €12,000
* Amounts given in euros

© 2014 IFMA
Contract Closeout
Contract closeout occurs when the termination

conditions of the contract have been met (and
notice of termination served). It involves the
completion of all administrative actions, settlement
of any disputes and resolution of any residual
liabilities, arrangements made for transfer of any
continuing responsibilities and actions, and
approval for final payment.
© 2014 IFMA
Exhibit Sample FM Contract Closeout Checklist
4-8
Closeout Checklist
Contract: Elevator Maintenance
Recipient: ABC Elevator Repair
Performance period: January 1, 20XX, to December 31, 20XX
Task Description Date Completed
1 Final technical report received/accepted
2 All milestones satisfactorily completed
3 Disposition of classified material
4 Final voucher submitted
5 Method for verifying costs determined
6 Cost verification process completed
7 Final payment completed
8 Other requirements completed (Specify these)
9 Issuance of completion statement
10 Contract funds review completed and excess funds de-
obligated
© 2014 IFMA
Risk Management
Risk as it applies to contracts is the possibility of an
event occurring that will have a negative impact on the
achievement of contract objectives.
Risk management can help an organization:
► Save money.
► Improve decision making.
► Protect or strengthen its reputation.
► Reduce the possibility of personal accidents.
► Reduce the chances of litigation.
► Ensure that business continuity is maintained whenever possible.
© 2014 IFMA
Discussion Question
Match each risk management term with its description.
Answers:
Risk 1. Groups the identified FM contract risks
identification together
2. Answers the question “What are the contract
Risk risks?”
categorization 3. Sometimes called risk analysis, the
identification and measurement of risk and the
Risk process of prioritizing it
assessment
© 2014 IFMA
Exhibit Sample Risk Rating
4-9
Likelihood Rating Impact Rating

Likelihood Score Impact Score
Almost certain 5 Catastrophic 5
Likely 4 Critical 4
Moderate 3 Serious 3
Unlikely 2 Marginal 2
Improbable 1 Negligible 1
© 2014 IFMA
Exhibit Risk Map for Likelihood and Impact
4-10
High
High impact High impact

Low likelihood High likelihood
Impact
Low impact Low impact

Low likelihood High likelihood
Low Likelihood High
© 2014 IFMA
Customary Risk Responses
Accept and absorb the risk by identifying
Acceptance ways to manage it such as establishing
contingency plans.
Reduce the likelihood and potential

Control (or Reduce)
negative impact.
Share or transfer the risk to insurance or to

Transfer other parties.
Identify ways to prevent risk exposure or

Avoidance
exit the activities giving rise to the risk.
© 2014 IFMA
Risks in FM Contracts
Scope of services and nature of work

Subcontracting
Geography and vendor delivery capability
Pricing and costing options
Contract duration and renewal options
Service and resource flexibility
Vendor company failure
Service failure
Reputational risk
Change and transition
© 2014 IFMA
Discussion Question
Identify the contract types described below.
Answers:
Incentive  Based on the contractor’s responsibility for the
contracts performance costs; tailored to the uncertainties involved
in contract performance.
Cost plus fixed  Contractor has minimal responsibility for the
fee contracts performance costs and the negotiated fee (profit) is
fixed.
Firm fixed price  The contractor has full responsibility for
contracts the performance costs and the resulting profit (or loss).
© 2014 IFMA
Importance of Examining
Financial Contract Elements
Allows:
► The terms of the agreements to be clearly understood in reference to their
financial, risk and security implications.
► An understanding of the controllable and variable items in the contract to aid cost
and resource flexibility.
► Identification and prevention of situations or requests that violate the terms of the
agreement
► Identification and improved control over (or avoidance of) situations or requests
that may impact the budget through increased costs due to unplanned time, usage
or additional services.
► Appropriate review of situations or requests that may reduce costs to determine
that all contracted services have been met satisfactorily and that a reduction in
billed services is appropriate.
© 2014 IFMA
Systematic Risk Management
Possibilities include:
► Reduced contract risks
► Increased revenues
► Reduced costs and fewer cost
Mutual overruns
benefits
► Improved contract performance
► Improved compliance
► Strong communication and trust
between all parties
© 2014 IFMA
Vendor Conflicts
Constructive
conflict
Dysfunctional
conflict
© 2014 IFMA
Common Alternative Dispute Resolution
(ADR) Techniques
Management Escalation Mediation Arbitration
• A provision for • Method in which the • Submission of a dispute

escalation to senior parties reach a to one or more qualified
management in both voluntary settlement and impartial persons
parties. with the help of a skilled for a final and binding
• Often the first action to facilitator. decision.
deal with issues as they • Proceedings are • Parties control the
arise. confidential and private. range of issues, the
• May be binding or not. scope of the relief to be
awarded, and many
procedural aspects.
© 2014 IFMA
End of Chapter 4
© 2014 IFMA
All rights reserved Chapter 4 Edition 2014
Activity
Directions:
This activity has two parts.
Part 1
You work independently and then participate in a large-
group discussion.
Part 2
Your instructor will assign you to work in small groups.
Then you participate in a large-group
debriefing discussion.
© 2014 IFMA
All rights reserved Chapter 4 Edition 2014

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Chapter 4: Contracts

in the Facility Organization

► Topic 1: Contract Development,

► Topic 2: Contract Administration

► Topic 3: Analyzing and Interpreting Financial

► Topic 4: Resolving Vendor Conflicts

Consideration The exchange of something of value; quid pro quo.

Whoever signs must have legal authority and

Proper subject matter The contract must have a lawful purpose.

• Express • Bilateral • Void

► Expires with the individual ► Allows a stream of procurements

Open Book Labor Hour/

Indemnification agreement  Documentation of who is liable

 Variety of illegal acts (deceit, concealment,

Red flags may appear in:

Fraud can occur in almost any contracting situation; some

Primary goals in contract implementation and monitoring

General factors influencing the degree of contract

A facility manager is typically involved in contract performance

Inspections Feedback Vendor reports Audits

Answers: II and III

Important terms to include:

The service specification:

It is best practice in procurement to focus on describing required

In a service level agreement:

SLAs should be signed by both parties.

Property XYX Monthly Performance Service Scorecard

Vendor: ABC Elevator Repair Month: March 20XX

Response time to breakdowns 5 0 0

Property XYX Monthly Cost Control Report *

Total €30,000 €5,000 €35,000 €12,000

* Amounts given in euros

Contract closeout occurs when the termination

Likelihood Rating Impact Rating

High impact High impact

Low impact Low impact

Low Likelihood High

Reduce the likelihood and potential

Share or transfer the risk to insurance or to

Identify ways to prevent risk exposure or

Scope of services and nature of work

• A provision for • Method in which the • Submission of a dispute

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