Changes to a contract are an inescapable fact of life for facilities managers. Here, in the final instalment of a two part series, David Pearson looks at cost and price management and the decision to retender
How managers identify costs and prices before a contract is awarded, and how they build a mechanism into the contract for cost and price management are the key to the management of the cost of change.

Because longer-term contracts for the provision of services carry the certainty of change, they also need to provide for the regular review of costs and price to ensure that they properly and equitably reflect the impact of change.

The range of pricing that can be adopted can be bewildering. It goes from cost-plus to fixed-price with many variations in between. The real key in terms of contracts for services is the time dimension over which a contract commitment is made between purchaser and service provider.

Services agreements need to contain flexibility to respond to change and provision for change management. The purchaser also wants to maintain close control over the cost to it of the service provision.

What is needed, therefore, is a flexible and tightly controlled contract — to many a paradox. The only alternative, however, is to be able accurately to predict the future.

In essence there can be no such thing in services contracting as a fixed price for the contract term, because there is no such thing as a fixed service over the contract term. It is reasonable in most cases to fix rates and component prices annually, but some services are linked to raw material prices, which can be volatile and demand more frequent reviews of cost and price. Fixed prices in the provision of live services are therefore just a special (and applicable at a particular time) form of variable pricing.

In effect we can reduce the long list of pricing methods available to three basic types — fixed price, variable price and incentive price. The important thing to ensure in any variable price arrangement is that as much as possible of it is a fixed price element, so that the variable elements are minimised.

It is impossible for the purchaser to negotiate price movements effectively without a clear understanding of the component parts of price. Neither can the purchaser monitor a service provider's efficiency without such an understanding.

The key to judgements on efficiency of working and the acceptability of charges quoted for change lies not just in what costs are at the time of the change, and not just in what costs are recorded in the books for "open book" auditing of costs. The key is the comparison of those costs with the costs included in the original tender, so that a judgement can be made on what the costs at any particular time ought to be, using the original tender as a base.

Positive cost control
The vital key to controlling service provider prices is information on service provider costs. The monitoring process must start with the Invitation to Tender. No contract should be awarded without a clear understanding of the prices in relationship to the underlying cost base.

Neither should a contract be awarded until the purchaser knows what the cost of getting out of it will be. It might be that the purchaser wants to change service provider just to get better value for money.

But what if the contract cannot be terminated for breach and the service provider is content to continue the contract? The purchaser is then dependent on its knowledge of the exit cost to judge the value for money to be derived from changing — or renegotiating.

The service provider's price and costs are only a part of the picture, however. Really effective cost management recognises the costs of both parties and accepts that benefits to the client from increased service might produce cost savings on the client side to more than offset any increase in the contract price. It is essential therefore that the costs of both parties are clearly established and understood, which will only be achieved if first they have established the requisite level of trust. Effective information systems must then be set up to ensure that all costs are constantly and consistently measured to determine that cost benefits are being secured.

The customer's role
By the same token, the client must have a clearly understood relationship with the users of the service. Users will in many cases be responsible for the budgets against which contract prices and charges are allocated.

They must therefore be made aware of the costs and pricing structure so that they can get the best value for money throughout the contract against their budgets. They need to know just what is and is not provided for a given price so that they can determine whether they can justify changes.

A user's guide
Users also need to understand:

  • their obligations to make facilities available or provide inputs by certain deadlines where these affect service and costs
  • their authority and who can change service levels or renegotiate prices.

A well co-ordinated chain from customer to service provider is vital to achieving optimum value for money throughout the contract term.

Retender or renegotiate?
For many contract managers the decision to retender or renegotiate is determined by the rules, regulations and procedures they are obliged to follow. These generally allow for an initial contract term to be renewed for a limited further period without the need to retender in competition.

Within that initial term, however, the contract managers must be thinking at all times whether the contract should continue in its existing form or whether it should be renegotiated or even retendered.

The contract should have been written in the first place to provide for a structured exit or renewal at whatever point that might be deemed to be the most advantageous course.

During the term of the contract it is essential that the terms and conditions are properly complied with and that both parties keep themselves clearly focused on the business needs that the contract has been designed to meet.

Requirements will need to be redefined from time to time and the purchaser should ensure that it is at all times in touch with the market, so that it knows what alternative contract strategies are available. The relationship between the parties must be maintained and the service kept going and above all both parties must remain objective.

Timescale
The most easily-made mistake in renewing or retendering planning is underestimation of the time factor. Arrangements for this should be put in hand at least a year in advance of the end of the contract term in order that time is available for:

  • fully reviewing the history of the contract and its future direction
  • commencing and developing negotiations with the contractor
  • redefining requirements to reflect the up-to-date needs of the users and future projections for the service
  • all necessary tendering activity, including compliance with EU Directives where applicable.

If you are retendering you have to prepare for the possibility of another contractor winning the work.

That means that you have to plan again for transition to another service provider, for the inevitable learning curve and the teething problems there will be with a new firm taking over and getting to know your culture.

With one contract's experience in the locker, you will find the renewal process with a new contractor less of a problem than the first time, but remember that the new contractor will be working with you for the first time.