Contract Management: A Risk-Based Approach for Local Governments

A local government can perform a four-step process to determine the appropriate level of contract monitoring.

BLOG POST | Jan 18, 2018

by Kyle O'Rourke, Baker Tilly Virchow Krause, LLP, and Frank Girgenti, Fairfax, County, Virginia

For local government managers, contract management procedures typically focus on the financial elements of the contract—payment of invoices, monitoring of the budget, timely invoicing by the vendor, and controls surrounding receipt of goods and cash disbursement. As a result, nonfinancial terms and conditions of the contract are often overlooked. These terms and conditions are typically associated with vendor performance and the quality of the good or service being provided to the government. Without this focus, it is challenging to discern whether or not the vendor has achieved the performance goals associated with the contract. 

The contract management function should take a risk-based approach to monitoring nonfinancial elements of contract performance and assign these responsibilities to the appropriate party within the organization. A local government should perform this four-step process when determining the appropriate level of contract monitoring:

1. Identify and analyze pertinent risks.

Organizations typically have controls in place to address such financial elements of contract management as purchasing and reporting. These organizations are less likely to be equipped to manage programmatic risks, including the performance of the vendor and tracking of expected service delivery outcomes. Examples of expected outcomes include:

  • Accuracy and timing of reports.
  • Accuracy and timing of invoices.
  • Adhering to service delivery expectations.
  • Monitoring subcontractors.

The contract manager should analyze whether the appropriate controls are in place to mitigate risks associated with the contract and establish enhanced monitoring procedures when necessary.

The government must also consider its risk appetite, meaning it must decide the level of risk it is willing to take on. This is an important consideration, as it helps the organization right-size the level of effort in its contract monitoring procedures.

2. Develop metrics to measure vendor performance.

The next step is to develop quantitative performance metrics. This is the most critical step in monitoring vendor performance, as it enables the organization to point to specific issues or trends when following up with vendors or making future decisions.

Data can be presented in a number of ways—binary measures (e.g., yes, no), ratios, and absolute figures. It is critical that measures address what is most important to the organization and the highest risk contract performance issues.

It is also important to consider this as an iterative process. You may identify improved metrics or determine that the level of monitoring is insufficient or more than needed. The organization must be willing to adapt.

3. Track and report on vendor performance.

Once contract management criteria have been established, the organization must develop a database to track performance matters. This can be as simple as a spreadsheet used as an issue log, where each row represents an instance of contract noncompliance or other challenges with the vendor. A more sophisticated approach would be to develop an issue log spreadsheet as well as a vendor scorecard. Something of this nature can easily be developed in Excel, where color coding would indicate the vendor’s ‘score.’

On a quarterly basis, at a minimum, the contract manager should report on each vendor’s performance. Not only should this information be presented to the appropriate internal party—finance director, city manager, or another designated person—but it is also important to share with the vendor. This enables the vendor to correct performance issues and become a better partner to the government.

4. Make informed management decisions.

Armed with the vendor and contract performance data, the contract manager and others within the organization will be in a position to make more informed management decisions. Examples include:

  • Termination of a vendor due to performance concerns.
  • Consideration of vendor performance concerns when making future procurement decisions.
  • Improvements to a future contract, including enhancements to performance and service-level expectations.
  • Consideration of service delivery approach (e.g., should the government in-source the service in the future).

By implementing this process, a government entity will ensure quality control throughout the lifecycle of a contract. In many cases, this will improve service delivery to residents and promote accountability for the use of public funds.

For more information, visit bakertilly.com.


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