contract and vendor management

Tuesday, December 20th, 2011

Contract management requires the application of a wide range of knowledge and skills in very specific circumstances. A structured process is absolutely necessary to facilitate establishing facts, forming relationships and reporting salient information to stakeholders. Our recent research into facets of contract management led us to researching a dispute between South West Water Services Ltd (SWW) and International Computers Ltd (ICL). In our commentary that follows it is not intended to provide legal opinion or legal advice but to highlight certain principles relevant to contract and vendor  management.

SWW required a new customer information system and contracted with ICL for its supply. SWW would later terminate the ICL contract due to ICL’s failure to deliver the system. The court judgment runs to 41 pages and is very instructive (as judgments usually are!). There are many facets relevant to contract and vendor management, including:

# ICL represented that they would enter into back to back agreements with a subcontractor but this never happened. ICL confirmed to SWW that “CCSL (the subcontractor) would be ICL’s subcontractor for South West Water’s information project with a fully documented back to back agreement in place between ICL and CSSL.”

– In a well constructed contract there would be a Right of Audit cklause that would permit a contract manager to see the back to back agreement, thereby establishing that the agreement had been entered into.

# Throughout the transaction there was a point at issue in regard to the resources required to complete the project. ICL were on a fixed price contract and initially believed that 2000 man days would be required. This later changed to 3000 – 3500 man days. The resources required were not committed and SWW had no visibility of a deteriorating situation, making the agreed delivery date impossible to meet.

– So what could effective contract management do in these circumstances? At the time of entering into the contract a fully resourced labour programme should be agreed. This should include visibility of resource by grade, time to be expended and days/week when the resource will be used. A weekly report should be provided as part of a Management Information requirement to the buying organisation. Slippage would then be evident if the truth were to be told. It may also be noted that Parametric Modelling could be considered to estimate the time required to develop software.

# It is evident from the detail of the court judgment that relationships between ICL and CCSL were not conducive to close working. In a communication from CCSL to ICL it was said that “the root cause of our collective difficulty is that ICL signed a contract with SWW without having first agreed with our company that our contribution to the total solution was (i) technically feasible and (ii) deliverable in the time frame agreed with SWW.” Three months later, CCSL said to ICL that “substantial additional time was needed if the project was to be completed successfully and that it is vital that the customer is told the truth immediately.” And later, again from CCSL (who had changed their trading name to CI) “somebody has to tell SWW that the project cannot be delivered this year; they must start to plan for next year – I am not willing to participate in another meeting with SWW if we are expected to continue to support the ICL line that the project will be delivered.”

– From a contract management point of view relationships are vital with a prime contractor and the relationships should extend to the supply chain. In this instance there is only one subcontractor. It is a high skill level for a contract manager to detect unease, strained relationships and ‘signs’ that all is not well. We suggest that meetings at the buyer’s premises are unlikely to ascertain reality. Some review meetings should be held at the prime contractor’s site and that of the subcontractor. A true partnering agreement should encourage very early warning of issues.

# Within the case it was alleged and found that there was misrepresentation by ICL in regard to the back to back agreement. His Honour Judge Toulmin Cmg QC found that “I am satisfied that ICL did make the representation that it would enter into a back to back agreement with CI. It did so recklessly without any basis for believing that either, at the time or subsequently, it would be in a position to do so. It was a continuing representation. ICL failed to enter into a back to back agreement with CSSL. SWW relied on such representation as a contractual term. Without such assurances SWW would never have entered into the contracts with ICL.” The judge then went on to explain Section 2.1 of the Misrepresentation Act 1967.

– We urge buyers to study this Act and to ensure they undertake appropriate due diligence at key phases of the procurement process.

Nothing in this newsletter is intended to impy that SWW did not apply appropriate knowldge and skills. We have used extracts from which readers can extrapolate from this set of circumstances to their procurement actions.