Chapter 9. Ensuring results: implementing robust post-award contract management in Nuevo León
This chapter discusses the need for stronger management of the performance of public procurement suppliers in the state of Nuevo León. The chapter discusses how Nuevo León can benefit from the implementation of a broad framework for contract management based on delivery management, relationship management and contract administration. It also examines some of the key pillars of an effective performance management system for suppliers, such as information technology infrastructure and adequately trained personnel.
The proper planning and implementation of a public procurement system helps government institutions meet their goals and serve citizens more effectively and efficiently. To achieve these goals, a comprehensive public procurement system needs to accomplish a few tasks. First, it needs to acquire the tools that will allow it to provide agile answers to urgent needs. Second, it needs to be able to respond to both expected and unexpected outcomes. Third, all stakeholders in the public procurement system should abide by clearly established normative rules for good behaviour. The OECD Recommendation on Public Procurement describes these objectives, among others, in further detail (see Box 9.1).
The Council:
VII. RECOMMENDS that Adherents develop processes to drive efficiency throughout the public procurement cycle in satisfying the needs of the government and its citizens. To this end, Adherents should:
i) Streamline the public procurement system and its institutional frameworks. Adherents should evaluate existing processes and institutions to identify functional overlap, inefficient silos and other causes of waste. Where possible, a more service-oriented public procurement system should then be built around efficient and effective procurement processes and workflows to reduce administrative red tape and costs, for example through shared services.
ii) Implement sound technical processes to satisfy customer needs efficiently. Adherents should take steps to ensure that procurement outcomes meet the needs of customers, for instance by developing appropriate technical specifications, identifying appropriate award criteria, ensuring adequate technical expertise among proposal evaluators, and ensuring adequate resources and expertise are available for contract management following the award of a contract.
X. RECOMMENDS that Adherents drive performance improvements through evaluation of the effectiveness of the public procurement system from individual procurements to the system as a whole, at all levels of government where feasible and appropriate. To this end, Adherents should:
i) Assess periodically and consistently the results of the procurement process. Public procurement systems should collect consistent, up-to-date and reliable information and use data on prior procurements, particularly regarding price and overall costs, in structuring new needs assessments, as they provide a valuable source of insight and could guide future procurement decisions.
ii) Develop indicators to measure performance, effectiveness and savings of the public procurement system for benchmarking and to support strategic policy making on public procurement.
Source: (OECD, 2015[1])
To ensure that the purchase of goods and services is carried out according to the aforementioned principles and recommendations, it is necessary to implement mechanisms to manage contracts from beginning to end. By doing this, systems can ensure both compliance with contractual conditions and the best use of resources.
A comprehensive contract management framework should provide certainty that all contractual agreements include instruments that ensure the best results for all involved parties. This is especially important for public organisations, as they often have long-lasting contracts with very specific characteristics. To ensure that the management of contracts is carried out in a timely and efficient manner in all circumstances, it is necessary that regulations and personnel prioritise not only the fulfilment of the contracts, but also monitoring and learning from performance.
In the case of the State Government of Nuevo León (SGNL), the Secretariat of Administration (Secretaría de Administración, SA) carries out various activities to ensure an adequate selection of suppliers for the services or products required by the different central government agencies. While this work is commendable, the SA needs to expand these mechanisms to assess and obtain information on the performance of suppliers once they have been awarded contracts. The implementation of these types of mechanisms will require close collaboration between the SA and each of the agencies that use the contracted goods and services. The reason for this is that these agencies know the suppliers better than the SA, and thus they can maintain a close relationship with them.
Contract management can be understood as a process that requires three broad areas: delivery management, relationship management and contract administration.
Contract management activities can be broadly grouped into three areas: delivery management, relationship management and contract administration.
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Delivery management ensures that whatever is ordered is actually delivered with the required level of quality and performance, as stated in the contract. Delivery management may include checking the nature, quantity and quality of:
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goods supplied on delivery, and, also when appropriate, at the time of manufacture;
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works carried out, including conformity with designs and drawings, quality of workmanship and materials;
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services performed, including checking that required service levels and timescales are met.
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Relationship management seeks to keep the relationship between the economic operator and the contracting authority open and constructive. The aim of this is to resolve or ease tensions, and identify potential problems at an early stage while also identifying opportunities for improvement. Relationships should be professional, and should include a professional approach to managing issues and dispute resolution.
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Contract administration covers the formal governance of the contract and any permitted changes to documentation during the life of the contract. This area of contract management ensures that the everyday aspects of executing the contract effectively and efficiently are taken care of.
Source: (OECD, 2011[2])
By developing a comprehensive contract management framework that covers all the areas mentioned above, the SGNL could not only facilitate full compliance with its contracts, it could also obtain useful information regarding its suppliers and the quality of goods and services that they provide. Having this information could lead to a better evaluation of past purchasing procedures, as well as more strategic planning of future processes.
In addition to these planning advantages, proper contract management can have a positive impact on the quality of the immediate results of purchases. Timely monitoring of suppliers, as well as adequate management of relationships with these suppliers, improve the quality of supplier services and facilitate the fulfilment of user expectations. The following graph shows some of the possible performance contributions that can be obtained from contract management, as opposed to the costs of inefficient management.
Source: (OECD, 2017[3])
To carry out adequate contract management that covers delivery management, relationship management and contract administration and favours performance monitoring, it is necessary to have sufficient information technology (IT) infrastructure and adequately trained personnel. The following sections detail some of the opportunities the SGNL has in both areas.
9.1. Monitoring the performance of suppliers
Suppliers have the potential to contribute significantly to the fulfilment of the objectives of the SGNL. By monitoring the performance of suppliers, public officials can request corrective actions when the contractual conditions are not being met. Monitoring the performance of suppliers can also provide information that will be beneficial in the future, when officials undertake the selection of suppliers. Disqualified suppliers must be registered so that contracting units do not include them in their tendering processes. This section explores the actions the SGNL needs to take to strengthen the management of suppliers’ performances.
Currently, the SGNL is in the process of modernising its supplier registry. Although the current process is performed in an agile way, it still requires suppliers to deliver documents physically to the SA offices. As a part of the modernisation process, consideration should be given to what happens when the SA requests information from other states about suppliers who are unable to register in Nuevo León. In these cases, out-of-state suppliers can be at a disadvantage, as their documents have to be delivered physically to the SA offices from farther away. The same is true for the renewal of supplier registrations, which requires suppliers to complete an online renewal application and then deliver documents physically.
While Nuevo León should perhaps reconsider the requirement of physical delivery of documents for suppliers of goods and services, it should not ease registration requisites; in fact, it should strengthen them. Delivery of documents as a requirement for registration in the Register of Suppliers is not enough. There must also be a process for validating data, such as physical inspections at supplier headquarters or a requirement for proof of activity or registered turnover. Such data validation will help prevent the SA from contracting suppliers with ghost addresses or suppliers who do not have the capacity to carry out orders. The case is different for public works. Registration of public works suppliers in Nuevo León can already be carried out electronically on a different platform, the State’s Contractors Registry.
Within Nuevo León’s Central Purchasing Body (UCC), the General Directorate for Procurement and General Services’ Head of Process and Control of Suppliers is the unit responsible for managing and keeping up to date the registry of suppliers. It is also in charge of classifying suppliers according to the industry each supplier belongs to, or the services they offer.
As mentioned in Chapter 5, with the creation of the Unique Registry of Suppliers and Contractors, the SGNL is addressing the need for the complete digitalisation of the registration process, as well as the development of a consolidated registry of both suppliers of goods and services and contractors of public works. When this platform is fully operational, it will allow all the steps associated with registration, tendering and contract awarding to be carried out via a single electronic portal. This portal already exists (with limited functionalities), and is called the Electronic System for Public Procurement (Sistema Electrónico de Compras Públicas, SECOP). Once operational, SGNL should use the SECOP to publish its calls for tender. If this is accomplished, more providers will be able to participate in tenders, and more proposals will be received. These improvements will allow for better management of the supplier registry. In addition, centralising registration, tendering and contract awarding into a single portal will simplify the process and encourage the participation of a greater number of suppliers.
9.1.1. Sources of information for supplier management: planning, collection and analysis of information
Despite the technology advances mentioned above, the SGNL should increase the scope of its IT procurement platform so that it extends to all phases of the procurement cycle. Currently, the physical records of each procurement process include information on the whole process, but they are only archived and stored with the intention of being available in the event of an audit. The content of the files, however, is not used strategically for decision-making.
To achieve the objective of generating strategic information about contracting processes, the optimal scheme does not involve the digitalisation of the files once the processes have been completed. Rather, the SGNL should generate an IT platform that will gather information about the process while it is being carried out. According to information provided by the SGNL, at present, none of the state procurement system’s contract management activities are carried out electronically. Thus, the OECD recommends that Nuevo León consider extending the SECOP to include these aspects.
As mentioned in Chapter 5 of this report, the SGNL uses different technology platforms for different parts of the procurement process. The development of a platform that covers all stages of the procurement process would be advantageous to the state. A good example of such a solution is the Korea Online E-Procurement System (KONEPS) used by the South Korean government. Among other things, this platform has facilitated access to information for all agencies involved in procurement, and has facilitated evaluation and procurement planning work.
Source: (OECD, 2016[4])
9.1.2. Functions and responsibilities for supplier assessment
Different institutions of the SGNL are involved in executing and managing procurement contracts. These institutions include the SA, the requesting unit and the Secretariat of Finance and General Treasury. Each of these institutions has different responsibilities with regards to the execution and management of contracts. Based on these responsibilities, each institution should establish different relationships with suppliers. At present, none of these entities has formally established functions relating to evaluation and feedback on supplier performance. The only assessment the SGNL carries out relates to whether a breach of contract has taken place, hidden defects in products or public works have been found and whether guarantees have been fulfilled or not.
While the centralised purchasing system used by the SGNL requires that the SA manage the procurement process, other agencies have vital responsibilities. Even though the administrative process for the purchase or contracting of a service is performed by the SA, the requesting units are responsible for defining the technical specifications of the good or service to be purchased. The requesting units also approve modifications to the technical data sheets as determined by the Boards of Clarifications (Juntas de Aclaraciones). It would be beneficial to Nuevo León’s procurement system if requesting units could participate to a greater degree in the management of contracts. They could do so through the evaluation of suppliers and their goods and services.
Currently, the final users of goods and services must certify that they were delivered in compliance with the requirements established in the contract. However, users do not perform any other formal evaluation of satisfaction with the performance of the supplier. In the event of an extension of the SECOP to include contract management, the OECD recommends that the SECOP include a section specifically dedicated to evaluation. A customer satisfaction survey or a formal statement could be introduced. When purchasers receive goods or services, they could fill out a survey to assess the compliance, the delivery and to what extent the product meets technical specifications. Introducing these evaluations at this stage would be more efficient than waiting till the end of the warranty period.
9.1.3. Processes, tools and key performance indicators (KPIs) to evaluate suppliers’ performances
Performance indicators are one of the best tools an agency can use to verify that the goods or services it buys are helping meet the need they were intended for. Performance indicators also allow procurers to cultivate a closer relationship with suppliers. Furthermore, performance indicators can help procurers and suppliers understand more about how the performance of the contract can benefit them both.
When robust and well-designed indicators are available, monitoring and evaluation of any contract become much simpler. In addition, these indicators allow procurement staff to obtain useful, standardised and comparable information from various processes. This then allows them to perform analyses for future purchases. The OECD has developed recommendations for the design of key performance indicators (KPIs, see Box 9.3).
KPIs should have certain fundamental qualities that benefit the procurement organisation and suppliers alike. KPIs should be, namely:
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Relevant and linked to the key objectives of the organisation (critical outcomes or risks to be avoided) rather than to the process.
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Clear (i.e. spelled-out in the contractual document as simply as possible to ensure a common understanding between the buying organisation and the supplier).
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Measurable and objective (i.e. expressed in pre-determined measures and formulas, and based on simple data that can be gathered in a cost-effective manner without subjectivity).
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Achievable (i.e. realistic and within the control of the supplier).
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Limited (i.e. as few as required to achieve the objectives while minimising disadvantages, such as costs, efforts and risk of dispute to both entities). To the extent possible, the procurement body should use information and documentation that is already available under the contract management process, rather than collecting additional data or documentation.
Source: (OECD, 2011[2])
According to these recommendations, KPIs should not be considered to be a burden on suppliers. The correct use of these indicators helps align expectations during an acquisition process. KPIs also impose controls that make it easier to achieve the goals of the procurement. Thus, if the SGNL decides to create and use performance indicators in its procurement processes, the OECD recommends that it involve suppliers and other relevant stakeholders in their design.
The SGNL should design indicators that motivate suppliers to offer more competitive and beneficial conditions. If the indicators are not designed properly, instead of having this effect, they could discourage the participation of suppliers. Some of the main indicators used in procurement processes are illustrated in Box 9.4.
Procurement KPIs can be established for any of the organisation’s important objectives. While a wide variety of subjects can be considered, the following subjects may be appropriate in the context of the SGNL (the list is not exhaustive):
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Timing (i.e. an indicator that includes specific timeframes for completion of procurement).
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Delivery (i.e. whether the supplier delivers on time, delivers the correct items and quantities, provides accurate documentation and information, and responds to emergency delivery requirements).
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Pricing, including competitiveness, price stability and volume or other discounts.
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Customer service, including information on the number of product shortages due to the supplier, training provided on equipment and products, warranty services, administrative efficiency (including order acknowledgement and accurate invoicing), accuracy of performance data, and reports provided by suppliers.
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Product, including information on whether the product meets specifications (percentage of rejection or defects), reliability or durability of usage, packaging, quality and availability of documents and technical manuals.
Finally, not all KPIs should be monitored with the same frequency; the majority should be assessed monthly, while some others can be assessed only quarterly or even annually.
Source: (OECD, 2013[5])
9.1.4. Information sharing and knowledge management with regards to the performance of suppliers
One of the activities that can help strengthen the procurement system of the SGNL is promoting the exchange of information between the different units involved in the procurement process. Each unit has different experiences dealing with suppliers, or different opinions about the quality of the goods or services offered (in the case of consolidated purchases, for example). Thus, the organisation as a whole can better co-ordinate its actions if it has access to the diverse information these units can provide.
The exchange of this type of information between different units can facilitate feedback on the procurement process and improve it in the future. At present, the SGNL has not implemented mechanisms to encourage the exchange of information and internal feedback on procurement processes, according to information gathered during the OECD fact-finding mission to Nuevo León. This has led to the contracting of suppliers that do not necessarily meet the needs of requesting agencies. A platform should be designed that can notify contracting authorities of suppliers that have been disqualified in other states.
To avoid such complications, the implementation of strategies for the exchange of information and joint learning is fundamental. The design of a technology platform that covers all the stages of the procurement process would undoubtedly help fulfil these objectives. However, while it is being implemented, there are other simpler mechanisms that can be put in place to encourage the continuous improvement of purchasing processes.
An example of such instruments would be the design of satisfaction surveys. These surveys could be required of shareholders and filled out at the end of contracts. In them, requesting agencies could share more information about supplier performance. Another alternative is the creation of spaces, such as debriefing meetings, in which the agencies involved in purchasing processes can share their experiences and take note of the lessons learned.
9.1.5. Incentives for performance
Ensuring the fulfilment of a procurement contract and full satisfaction with its results requires arduous work. In order to achieve these goals, officials need to monitor the contract and communicate with the user or beneficiary of the procured good or service. There are mechanisms that can be put in place to motivate suppliers to offer quality products and services that satisfy requesting units. Some of these mechanisms are:
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positive incentives associated with the good performance of suppliers in the execution of the contract;
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negative incentives associated with poor performance that does not meet the expectations of the contracting agency.
When these types of provisions are included in contracts, suppliers not only feel obligated to fulfil their obligations, they also seek to do so in the best possible way to ensure that their performance meets their client's expectations. There is a wide range of incentives that can be included in any contract for the purchase of goods or services. The Federal Government of Canada offers a good reference on the instruments available to public officials (see Box 9.5).
When required, the contract may contain various mechanisms for encouraging timely performance, such as:
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Contract financial security: Security deposits, whereby the contractor deposits securities (government guaranteed bonds, bill of exchanges or irrevocable standby letters of credit), which Public Works and Government Services Canada (PWSC) may convert to complete the contractor's obligation; or performance bonds, which are a type of surety bond used to guarantee the performance of the contract.
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Holdbacks: Whereby an amount is withheld to ensure the due performance of the contract.
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Liquidated damages clause: Whereby provision is made for Canada to recover the pre-estimated loss or rate of loss that would result from a delivery default, without being required to prove actual damages. Where the inclusion of a liquidated damages clause is appropriate, the contracting officer must incorporate such provisions by including the Standard Acquisitions Clauses and Conditions (SACC) Manual clause H1003C (Progress Payments) in the contract. Care should be taken to ensure that the rate of assessment of liquidated damages is reasonable.
The probable damages should be established by reference to the individual circumstances of the particular procurement. The contract should specify the ceilings for collection of liquidated damages. Such ceilings or maximums can be stated in either of the following two ways:
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by specifying a fixed amount payable upon delinquency. This method should be used when it is intended that the contract will be terminated immediately when delinquency occurs and the goods or services "reprocured" elsewhere. The cost of "reprocurement" must be included in the overall fixed amount; or
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by specifying a rate of assessment of damages. This rate per calendar day of delay must not exceed a stated percentage of the contract price. This method should be used when, upon default occurring, it is intended to serve as notice of default requiring the contractor to remedy the default within a stated period of time. The cost of "reprocurement" must be excluded in computing liquidated damages, since this item will be claimable separately if the contract is terminated and the goods or services procured elsewhere.
To ensure uniformity of application, the amount or overall ceiling should not exceed 10 % of the contract price. Ceiling prices in excess of 10% may be used when justified by the individual circumstances of the particular acquisition, subject to the approval of the contract approval authority.
Incentive payments, whereby provision is made in the pricing basis for increased value to Canada.
Such incentives (e.g., for early delivery, cost savings, enhanced performance or additional warranty, or other benefits) should be considered only in the case of major procurements with long lead times for delivery, where such payment provisions can act as an incentive to the contractor in putting forth special efforts to achieve earlier than scheduled delivery, and the client department agrees because of substantial realizable cost savings and other benefits.
Source: (Public Works and Government Services Canada, 2017[6])
As with key performance indicators, performance incentives are not meant to put unnecessary pressure on suppliers. Incentives should not encourage suppliers to commit performing in ways that are not achievable. On the contrary, these mechanisms should help suppliers take full advantage of their capabilities to meet the needs of buyers. In this sense, the OECD recommends that the SGNL establish contact with suppliers in order to get to know them better, and to ensure that performance incentives actually have beneficial impacts for all.
9.2. Implementation of a comprehensive contract management framework is necessary to ensure the maximisation of suppliers’ added value
The SGNL should ensure that suppliers comply with contractual conditions. Robust contract management is important to facilitate the contribution suppliers can make to increase the value of state operations. The 2015 OECD Recommendation of the Council on Public Procurement highlights the importance of having adequate resources and contract management expertise to advance efficiency in the post-award stage of the public procurement cycle (OECD, 2015[1]).
9.2.1. Functions and responsibilities for contract management to mitigate risks and ensure adequate execution (beyond mere compliance)
During the execution of contracts there is always the possibility of unforeseen conditions and other obstacles that threaten the achievement of planned objectives. Therefore, the management of contracts should be understood as a strategic task, rather than a purely administrative activity. Vital to this shift in perspective is also the understanding that strategic contract management should allow authorities to anticipate unforeseen situations, and respond to them.
A good start to implementing a comprehensive risk management framework is to have a sound regulatory body that anticipates and establishes consequences for the risks that may arise during the execution of a contract. These provisions are particularly useful when dealing with supplier defaults. The SGNL has a regulatory framework that provides for the inclusion of these types of provisions in each of its contracts. The framework also includes protection against any type of default on the part of the suppliers.
While these types of rigid mechanisms help ensure compliance with contracts, they do not always ensure the best results, or the best performance by suppliers. To avoid less-than optimal results, Nuevo León could use more flexible compliance mechanisms. These mechanisms would allow the state to not only react to failures when they occur, but to also follow each contract closely. In doing this, the state could prevent failures through the joint work of all the actors involved. Flexible compliance mechanisms define tasks and functions that must be followed to monitor a contract and react to problems. They also identify specific items that could fail during the execution of each contract.
The framework developed by the OECD for risk management in public procurement contains a mixture of these instruments. It is a good example of the type of framework the SGNL could adopt to complement contractual controls with other types of tools, see Box 9.6.
Processes and plans
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Contractual and supplier risk management is in place with clear responsibilities and processes, and procurers identify who is best placed to manage risks, as well as supplier involvement, where appropriate
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Risks are formally identified and monitored regularly, with mitigating actions developed and implemented where possible, and “obsolete” risks removed from consideration where appropriate.
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Escalation and reporting routes are in place for risk governance.
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Contingency plans are developed to handle supplier failure (temporary or long-term failure or default), exit strategies are developed and updated through the life of the contract.
Contractual terms
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Contractual terms around termination are understood and monitored by the contract manager. Contractual terms around warranties, indemnities and insurance are understood and monitored by the contract manager.
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Contractual terms around security and confidentiality are understood and monitored by the contract manager, particularly issues relating to the security and confidentiality of personal data.
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Dispute resolution processes are in place, including agreed-upon award procedures, mediation and arbitration.
Ongoing supplier risk management
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The contract manager monitors the supplier’s financial health and business performance.
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The contract manager monitors supplier compliance.
Source: (OECD, 2011[2])
9.2.2. Monitoring tools (including IT-based tools) and reports on contract execution that provide standardised information and allow for decision-making
The proper management of the risks associated with a contract involves the timely follow-up of contracts to identify and solve problems when they occur. This prevents the occurrence of situations in which failures are identified once products or services have been delivered or completed definitively.
At present, the SGNL does not have systems or monitoring tools in place that allow the state to obtain information beyond the administrative steps established in its contracts. Put simply, the state is only able to obtain information on the delivery and reception of goods and services. As a result, it is difficult for officials in Nuevo León to have accurate information on the risks that can occur during the execution of a contract.
It is imperative that the SGNL consider designing tools that can help it identify potential risks and report these risks or poor practices when they materialise. Some of these risks are described in Box 9.7.
Many of the risks involved in contract management relate to the economic operator being unable to deliver, or suppliers delivering goods and services with a dissatisfactory level of quality. The risk of these issues arising increase when the following failures occur:
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Lack of capacity.
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The economic operator’s key staff is re-deployed elsewhere, which erodes the quality of the works delivered or the service provided.
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The economic operator’s business focus moves to other areas after the award of the contract, reducing the added value for the contracting authority in the arrangement, or impacting the timeliness for delivery of goods or works.
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The economic operator’s financial standing deteriorates after the award of the contract, eventually endangering its ability to maintain agreed-upon quality requirements for goods purchased or levels of service.
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Demand for goods or services is much greater than expected, and the economic operator is unable to cope
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Demand for a service is too low, meaning economies of scale are lost and operational costs are disproportionately high.
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Staff at the contracting authority with knowledge of the contract get transferred or move on, weakening the relationship between the contracting authority and supplier.
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Factors beyond the economic operator’s control disrupt delivery of goods or services. For example, premises cannot be accessed because of a natural disaster
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The contracting authority is unable to meet its obligations under the contract.
Source: (OECD, 2011[2])
The SGNL could adopt different indicators based on previously mentioned categories to enable it to more appropriately monitor the risks associated with its contracts. Examples of these indicators are those developed by the government of Queensland, Australia, for its public procurement guide (see Box 9.8).
Some examples of factors the SGNL may want to address during contract monitoring include the following:
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ensuring that the contractor meets minimum service standards
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tallying the number of customer complaints
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reporting against key criteria as required by the contract
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benchmarking of performance with other suppliers and other comparative performance activities
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quality of regular stakeholder meetings
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financial management aspects
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information technology aspects
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other performance measures specifically applicable to procurement.
Source: (Queensland Government, 2017[7])
9.2.3. Delivery processes, assessment of results, and inspections
Without proper supervision, the contract execution stage can result in corruption. When this happens, involved parties often render fictitious work, inflate work volume, change orders, use lower quality materials than specified in the contract, supply goods of a lower price and quality than quoted and render contracted services in an improper way (Chartered Institute of Purchasing & Supply, 2007[8]).
To avoid the development of any of these situations, the SGNL could benefit from strengthening the mechanisms of control and inspection that it currently carries out in relation to procurement. These types of instruments allow parties to report incidents as they occur, and describe them appropriately. Such actions allow the state to gain useful information for decision-making (see Box 9.9).
Spot checks and inspections may be necessary to ensure that the goods or services delivered by a supplier conform to the contract standard. Spot checks of supplier performance can either be announced or unannounced. Spot checks and inspections are a powerful tool for monitoring supplier performance, but agencies should take great care not to overuse them. Over-reliance on unannounced spot checks is likely to damage relationships between agencies and suppliers, and to make it difficult to build business relationships that are based on trust and mutual commitment to excellence through continuous improvement. In addition, spot checks and inspections must be included in the conditions of contract all parties enter into.
Contract reports
In some contracts, it is appropriate to require that the contractor provide written reports. It is critical that the contract manager receives such reports in a timely manner, otherwise the performance management opportunity may be lost.
Non-conformance reports from the field
Sometimes, officials do not address non-conformance with specifications promptly. Reporting of non-conformance from the field allows rapid responses to real or potential problems. Information on non-conformance from the field allows strategic and risk managers in an organisation to adjust plans. When managers have information regarding non-conformance, they are able to advise the supply chain to ensure strategies can be put in place to minimise and manage potential exposure to time or cost overruns. These actions can also mitigate any potential impact on the organisation’s own core activities and clients.
Source: (Queensland Government, 2017[7])
9.2.4. Contract modifications and controls to justify them – handling changes during the execution of a contract
Maintaining strict control over contracts is necessary to facilitate proper execution. If the rules under which the contracted services are to be carried out are not well defined, poor results are likely to be obtained. That is why having a strong regulatory framework that delineates the conditions under which modifications and adjustments to contracts can be made is of paramount importance for any institution.
Regulations in the state of Nuevo León establish that contracts should contain provisions regarding cases in which extensions may be granted for the fulfilment of contractual obligations. However, it is not clear what other types of modifications can be made to procurement contracts in the state. In addition, as mentioned prior, in Nuevo León, civil servants often put compliance first, even though some regulations are excessive in some cases.
A good framework for the modification of contracts should contain rigid controls like the ones mentioned above, but it should also be flexible enough to leave room for unforeseen events. These types of situations can jeopardise the execution of a contract. By imposing a flexible framework, officials can solve unforeseen issues by making modifications to the contract. These modifications need to be in line with the budget allocation of the work, as well as technical specifications. Furthermore, they should not be considered an extension of the contract. Again, for the implementation of this type of mechanism, the SGNL should work with suppliers to ensure that the decisions taken are beneficial to all parties.
Whenever processes are carried out to change a contract, orderly procedures should be followed to provide certainty to all the parties involved, and to enhance the transparency of the process. The following are examples of different processes that should be followed:
Change processes
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Officials should regularly review contracts (with a view to updating where necessary) to ensure they meet evolving business needs.
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Processes should be in place that clearly lay out the governance of contractual change – who needs to approve what and how it will happen – with a focus on effective and prompt change implementation.
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The state should have clear processes for the management of minor changes and contract variations, with a focus on the cost or effort being proportionate to the importance and value of the change.
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The state should have more rigorous processes to handle major contractual changes, including clear approval mechanisms and accountability measures, and controls to demonstrate that changes offer value for money.
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Where appropriate, officials should test existing services for the value for money they provide through benchmarking or other processes.
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The state should have processes to cover the introduction of new services under contracts, including market testing where necessary.
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The state should have processes to handle disputes in place to manage disputes arising from change-related issues.
Processes for different types of change:
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Both parties should have a clear understanding of the arrangements for any extension of the contract (both in terms of scope and time), as well as related issues.
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The state should have processes in place to handle commercial (financial) changes to contracts in a fair and structured manner.
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Officials should manage price changes fairly and effectively with the use of mechanisms such as benchmarking, competitive tendering (e.g. for major additional works), and other techniques like open book pricing as appropriate, to test value for money.
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Officials should consider the rationalisation of specifications and demand management as options to achieve better value for money.
Source: (OECD, 2011[2])
Because the current approach SGNL officials take prioritises compliance with the terms of the contract, any modification is complicated. Even in critical situations, officials may prefer to obtain poor results than to make contractual changes because of their fear of violating a regulation. Currently, a violation of a regulation triggers an Administrative Responsibility Procedure (Procedimiento de Responsabilidad Administrativa) or a Compilation of Remarks (Pliego de Observaciones) due to the diversion of resources allocated to a specific programme.
This situation prevents the government from seeking value for money in the face of contingencies that come up during the execution of contracts. When these situations occur, the SGNL does not have the tools to react strategically and make informed decisions. Therefore, the SGNL should revise its current control scheme to allow for streamlined contract modifications in exceptional circumstances, which should be anticipated. The control plan should be proportional to the risks incurred, with instructions stating the institutional and normative reasons for the modification of a contract in normal and exceptional situations.
9.2.5. Management of finances – invoices and payment issues
A comprehensive system of contract management should allow an agile closing of all agreements, facilitating timely and efficient payment to suppliers. Having a well-coordinated payment processing scheme can help increase the competitiveness of public procurement processes, making them more attractive to businesses, particularly small and medium enterprises (SMEs), which cannot stand long and uncertain payment periods. Nuevo León’s legal framework allows for advanced payments to take place in tenders where SMEs are participating in order to allow them to deliver their goods in a timely manner.
If a system is efficiently integrated, certain actions should work almost automatically. For example, once goods or services have been received and accepted by the requesting unit, the step towards the issuance of a request for payment, the corresponding comparison with the administrative area and the subsequent transfer of funds should occur quickly and without difficultly. However, in Nuevo León, different obstacles impede the process. This results in inefficient and unclear steps that delay payment to suppliers.
According to the information provided by the SGNL, the state’s Financial Management Department establishes the terms under which payments must be completed for each procurement contract. To date, a payment term of 45 working days after the delivery of services is usually established in contracts. In practice, however, this term extends for periods that are much longer – double or triple the time.
These delays result in significant disruptions to suppliers. According to information provided by suppliers interviewed by the OECD, delayed payment is one of the most significant reasons new companies do not participate in public bidding processes. Small and medium-sized enterprises do not always have the economic capacity to withstand these terms, which reduces the number of potential suppliers to the SGNL, hindering the potential for competition and lower prices.
Managing payments to suppliers requires the intervention of different divisions and subdivisions of the SGNL (see Table 9.2).
Nuevo León offers delineates the procedures and tasks each actor involved in the procurement process should follow. However, the state has not established response times for these actions. In practice, timing for the delivery of work depends on the workload that each agency has or the pressure exerted by suppliers. Officials also attribute delays to budget constraints, and issues with authorisation and approval of the delivery of products and services.
The above complications increase because the different entities involved in the procurement process do not communicate in a fast and precise manner, and because the different steps they perform are not carried out on a standardised platform. While some steps are carried out via the Electronic Integrated Government Resources System (Sistema Integrador de Recursos Electrónicos Gubernamentables, SIREGOB), others are performed via the SECOP. In addition, some steps are handled through paper files. To resolve these complications, it is of the utmost importance that the SGNL implements IT platforms that cover the entire procurement process.
In addition, one of the most important causes of late payments is the lack of co-ordination between the Secretariat of Finance and General Treasury, the Secretariat of Administration and user agencies in Nuevo León. This lack of communication can result in outdated procurement plans and budgets, which generate incomplete information for all parties. Therefore, as mentioned in an earlier chapter of this report, the SGNL needs to implement a better system for linking procurement planning and budgeting.
9.3. Performance assessment frameworks need to be proportional to the complexity of suppliers and contractor deliverables
A contract management system must be able to complete complex and prolonged tasks requiring robust internal and external communication. Hence, it is necessary to develop a balanced and sustainable framework for Nuevo León’s contract management system. In developing this framework, state officials should consider including supplier segmentation. By incorporating supplier segmentation into its framework, Nuevo León can strategically allocate resources for contract management based on their potential impacts. In Nuevo León priority is generally given to immediate needs and to the list of providers with immediate responsiveness.
9.3.1. Supplier segmentation
At present, the SGNL does not have instruments that allow it to carry out appropriate supplier segmentation. The information available to government agencies only states the industry to which each provider belongs, or the services that they offer. The SGNL does not compile accurate or up-to-date information regarding the degree of added value each supplier contributes, or how these suppliers can help the state achieve its objectives.
Using effective segmentation tools would allow the SGNL to have better knowledge of the market and of suppliers. It would help officials gain better negotiation skills and mechanisms to make more strategic selections of suppliers, according to their utility.
Suppliers can be classified into one of four categories, according to the good or service they provide (see Tables 9.3 and 9.4) (Chartered Institute of Procurement & Supply, 2017[9]).
Considering that an updating of the supplier register is currently taking place, the SGNL would benefit from using these categories to classify each of its suppliers.
9.3.2. Management of relationships, negotiations, and meetings with suppliers – a framework for supplier relationship management
Proper management of the relationship between the SGNL and its suppliers is key to maximising the usefulness of contracts. When relationships are handled well, they can foster collaborative alliances that work to achieve the best possible outcomes for all parties. While the relationship between two parties should be close and flexible to the extent that it allows for better joint work, the relationship should also be subject to proportional controls in order to avoid agreements that contravene contracts – or open opportunities for collusion.
Currently, the SGNL has little space to manage its relationships with suppliers. This is because, according to the information provided during the OECD’s fact-finding mission, once a contract has been started, in most cases there are only two opportunities for exchanges between suppliers and the government. The Law for Acquisitions, Leasing and Services of the Public Sector establishes the first moment of contact between users and suppliers during the issuance of the award and the emission of the corresponding purchase orders. Additionally, the Government Accounting Act establishes that the second moment of contact occurs when the process of delivery and receipt of goods and services is performed. This contact includes the emission of a satisfaction note (devengo).
Because the state has few opportunities to manage its relationships with suppliers, the OECD recommends that the SGNL strengthen its framework for establishing relationships with suppliers. It can do so by including other spaces for exchange and appropriate follow-up of contracts. In general, it is in the contracting authority's own interest to make these relationships work. Doing so allows procurers to avoid the costs of late termination and the consequences of poor performance and unplanned supplier changes. The three factors for success in managing these relationships are mutual trust and understanding, openness and excellence of communication, and a joint approach to managing delivery.
In building a collaborative relationship, it is helpful to have working meetings in which all parties can express their expectations, problems and thoughts on the specifics of the contract. Some of the main objectives that can be pursued at these meetings are described in Box 9.11, as well as the way in which they should be conducted to achieve positive results.
This is an illustrative, but non-exhaustive list. Some processes may not be necessary for all contracts, while others, though important in some situations, may not be covered here, as what is relevant depends on the nature of the contract being managed.
The inaugural or initial meeting: For any major contract, it is a good practice to have a formal inaugural or initial meeting soon after the contract is officially awarded. At this meeting, representatives from both the economic operator and the contracting authority meet for the first time within the context of the contract. These individuals might have met before, but any prior meetings would have taken place while the parties were going through the procurement process. At the inaugural meeting, it is critical that both sides move from a competitive to a co-operative viewpoint. The reason for this is they will be working together for the life of the contract, and they both want a successful outcome. The objectives of the meeting include:
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understanding the roles and responsibilities of everyone present;
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discussing the project plan and its implementation;
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discussing issues that impact the operation of the contract;
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discussing control mechanisms.
Although this meeting is important for managing the relationship between the supplier and contracting authority, it should not be used as an opportunity to make changes to the specifications, requirements or conditions of the contract. Where necessary, such changes can be dealt with according to previously agreed upon procedures (that are delineated in the contract precisely for this purpose).
Review meetings: Review meetings between contract parties are another practical means of managing a contract, particularly when the contract is complex or has a duration of several years. The frequency and coverage of the review meetings, if any, will depend on the nature of the contract. Review meetings are a useful means of communication between parties during a contract’s execution. Not having them can have negative consequences. These meetings must be well prepared, focused and not too time consuming. Review meetings are intended to be a forum for the parties that are subject to the contract – not for other beneficiaries or stakeholders. In some cases, such as major infrastructure projects, other beneficiaries or stakeholders may need to be consulted or informed about the ongoing delivery of the project. This process is a separate one from the review meetings.
Source: (OECD, 2011[2])
9.4. Proposals for action
The SGNL would benefit from the implementation of a broad framework for contract management based on: delivery management, relationship management and contract administration. Such a comprehensive scheme should address the following:
Delivery
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The SGNL would benefit from developing a series of KPIs that would allow it to obtain and compare useful information about the performance of its suppliers.
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To ensure optimal results for each contract, the SGNL should review its monitoring and control mechanisms. This will allow for more timely decision-making when modifications are required.
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The SGNL must generate a comprehensive contractual incentives system that does not only focus on punishing non-compliance, but also rewards and recognises suppliers who exceed their expectations.
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The SGNL should allow requesting units and the departments responsible for procurement processes to have a closer relationship. This will allow both parties to develop deeper knowledge of the performance of concluded contracts. To achieve this, end users should report on the quality and timeliness of the goods or services received, as well as the relationship they had with each supplier.
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The SGNL should invest in information materials and training for public officials in charge of procurement. These trainings should include a strategic vision of performance-based purchasing processes.
Relationship management
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The SGNL should build better collaborative relationships with its suppliers. For this reason, it is important to formalise spaces for exchanges. During these exchanges, contracting authorities and suppliers should discuss their expectations, the progress they have made and their experiences. These meetings can take place via contract kick-off meetings, follow-up meetings and debriefings or evaluations.
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To foster a better understanding of suppliers and the market in which they participate, the SGNL should make use of better segmentation tools. These tools should adequately indicate the capacity of each of the providers, as well as how critical the goods or services they provide are.
Contract administration
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The SGNL must take advantage of IT tools that would allow it to manage contracts more efficiently. The OECD recommends that the SGNL develop an IT platform that covers all the stages of the procurement cycle, including contract management.
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The SGNL should implement a more detailed framework for handling contract modifications. This would allow the state to react to unforeseen circumstances without compromising contract results.
References
Chartered Institute of Procurement & Supply (2017), Supplier Segmentation, https://www.cips.org/en/knowledge/procurement-topics-and-skills/srm-and-sc-management/supplier-positioning1/supplier-segmentation/ (accessed on 25 June 2017).
Chartered Institute of Purchasing & Supply (2007), Contract Management Guide, The Chartered Institute of Purchasing & Supply, https://www.cips.org/documents/CIPS_KI_Contract%20Management%20Guidev2.pdf.
OECD (2011), “Contract Management”, Sigma Policy Briefs, No. Brief 22, http://www.oecd-ilibrary.org/governance/contract-management_5js4vmns819v-en.
OECD (2013), Public Procurement Review of the Mexican Institute of Social Security: Enhancing Efficiency and Integrity for Better Health Care, OECD Publishing, Paris, https://doi.org/10.1787/9789264197480-en.
OECD (2015), OECD Recommendation of the Council on Public Procurement, http://www.oecd.org/gov/ethics/OECD-Recommendation-on-Public-Procurement.pdf.
OECD (2016), The Korean Public Procurement Service: Innovating for Effectiveness., OECD Publishing, Paris, https://doi.org/10.1787/9789264249431-en.
OECD (2017), Public Procurement Review of Mexico's PEMEX: Adapting to Change in the Oil Industry, OECD Publishing, Paris, https://doi.org/10.1787/9789264268555-en.
Public Works and Government Services Canada (2017), Contract Performance Incentives, https://buyandsell.gc.ca/policy-and-guidelines/supply-manual/section/4/70/25 (accessed on 20 June 2017).
Queensland Government (2017), Procurement guidance: Managing and monitoring suppliers’ performance, Office of the Chief Advisor – Procurement, http://www.hpw.qld.gov.au/SiteCollectionDocuments/ProcurementGuideSuppliersPerformance.pdf.