Contract management is a fairly simple concept. It ensures that all parties adhere to the terms within the contract agreement. On a deeper level, procurement process management encompasses everything from inception and negotiation to renewal and termination, as well as maximising value, reducing risks, and making business processes more efficient.
When it comes to procurement contracts, management provides contract compliance, relationship management, and software that standardises the purchase contract. This enables buyers to easily add new suppliers or vendors to their supplier pool, which cuts time off the tendering process and speeds up the entire public procurement process.
Public procurement and the different procurement contract types have unique requirements, especially when you drill down into different sectors, like healthcare. We’re going to look at how contract management affects the government procurement process, as well as some of the benefits that make procurement contracts, and their management, indispensable in public sector procurement.
What Is Contract Lifecycle Management In Public Procurement Processes?
Contract management goes through a series of steps or stages that outline the average contract’s lifecycle. Let’s look at the eight stages of contract lifecycle management.
1. Creation
Identification of a need or needs that determines the precise criteria suppliers or vendors must meet to compete for the procurement contract. Most procurement contracts are created using contract management systems or software, which is both time- and cost-efficient and reduces errors related to costs incurred and supply chain management.
2. Preparation
Preparation thoroughly assesses the contract criteria to ensure the specifications are accurate and easy to understand. Drilling down to specific tasks enables buyers to evaluate the suitability of suppliers and award the contract to the supplier or vendor who provides the most value or most economically advantageous tender (MEAT).
3. Negotiation
Negotiation is essential to the public procurement process, as all parties work to achieve mutually favourable contract terms.
A lump sum contract is the simplest and most often used contract in public sector purchasing. It’s a contract where the buyer agrees to pay a fixed price for specific services, for example, maintenance or security services.
4. Execution
All parties must sign the contract before work can commence. Automation accelerates the procurement contract process, while e-signatures give procurement contracts the go-ahead.
5. Build supplier and vendor relationships
Good supplier relationships enable buyers to send Invitations to Tender (ITT) to qualified candidates. They also help procurement buyers find suitable suppliers to add to their supply pools.
Cost plus incentive fee contracts work well for buyers and suppliers because they encourage suppliers to keep costs as low as possible while finishing the contract as quickly as possible.
When suppliers meet or exceed the contract terms, buyers enjoy maximum profit while suppliers earn the maximum incentive fee.
6. Amendments and revisions
Certain events or changes in circumstances might require amendments, like an economic price adjustment, to the procurement contract. There must be a consensus among all parties to ensure it remains a legally binding agreement for both the vendor and buyer.
7. Monitoring/Tracking
Procurement professionals monitor the contract’s progress to ensure contractual obligations and deliverables are met, for example, procurement teams have reached certain milestones demarcated on the procurement contract lifecycle.
8. Renewal or termination
Some contracts are so successful that all parties want to renew the terms upon contract completion. In these instances, automation in contract management software notifies parties of contract renewal dates and can create new procurement contracts according to preset definitions.
In other instances, renewal is neither necessary nor desirable. This results in contract termination.
Types Of Procurement Contracts
There are three primary types of purchasing contracts, two of which have several subsets.
1) Fixed-price contracts
- Firm fixed price (FFP): The contract must be completed within the agreed timeframe at a set price.
- Fixed price incentive fee (FPIF): The only difference between an FFP and an FPIF contract is that suppliers earn an incentive fee if they exceed expectations.
- Fixed price with economic price adjustment (FP-EPA): These apply to long-term contracts over several years. The contract protects suppliers from inflation and instead sets a percentage increase after a set time.
2) Cost reimbursable contracts
- Cost plus fixed fee (CPFF): The buyer pays the supplier for all costs and expenses along with a pre-negotiated fee.
- Cost plus incentive fee (CPIF): The difference between a CPIF and CPFF contract is that the fee is performance-based.
- Cost plus percentage of cost (CPPC): The buyer reimburses the supplier for all costs and expenses as well as a fee that is a percentage of costs.
- Cost plus award fee (CPAF): The buyer pays for all costs as well as an award fee for performance excellence in technical skills, budgeting (low costs), and delivery on or before the deadline.
3) Time and materials contracts
This type of contract is usually used in industries where suppliers provide labour and materials. Construction is a good example. Buyers shoulder the cost of all materials as well as a rate per hour or day.
Why Is Contract Management Important?
Contract management is important because it is the foundation for all procurement tasks. It supports decisions, activities, and processes that directly and indirectly influence the procurement lifecycle.
Optimised contract management provides the most value while maintaining fair practices that comply with government and industry regulations.
However, modern digital contract management wouldn’t be effective without advanced procurement software, which we’ll look at below.
What Is Contract Management Software?
Contract management software provides a central storage platform that serves as a single repository of all procurement contract-related information, which is accessible to all parties.
In essence, the software supports the digital management of all procurement contract lifecycles, including those for fixed-price contracts, cost reimbursement contracts, and lump-sum contracts.
What does contract management software do?
Contract management software provides several benefits, the biggest of which is workflow automation. This includes a library of contract templates and clauses which can be adjusted when it comes to details like region, products, services, and pricing structure.
This kind of ‘self-service’ contract in procurement cuts the contract lifecycle and includes verified e-signatures to save time and production costs, such as legal costs.
Software records entries to the procurement contract system, as well as subsequent actions. As a result, procurement processes have an auditable trail should it be necessary to reference or confirm any step in contract delivery.
Who benefits from contact management software?
Several invested parties, including buyers, suppliers, and stakeholders benefit from contract management elements in software.
Procurement: Software simplifies the entire procurement process for buyers and suppliers. It speeds up contract creation, enhances the seller’s performance monitoring, facilitates communication and collaboration, and enables comprehensive risk management at every point in the procurement lifecycle.
Legal: All procurement contract templates, including cost plus fixed fee and fixed price procurement contracts, are created with regulatory compliance in mind and the repository houses a clause library for easy access, customisation, and use.
Finance: Reporting and analytics features in purchasing contracts keep the finance department on top of things like maverick spending, costs incurred, and the cost-efficiency of supply chain management. It’s not about in-depth financial management, but rather the ability to set realistic figures for an economic price adjustment contract or a cost-reimbursement contract.
Benefits of Procurement Contract Management
There are virtually as many benefits from the procurement contract management process as there are uses, including:
Cost savings
Time saved during the procurement lifecycle has a positive impact on revenue. More efficient processes prevent unnecessary waste, while accuracy reduces human errors and incurred costs.
Risk mitigation
Software makes sense of big data to identify patterns in procurement processes and anticipate risks. The way software is configured also ensures that procurement contracts comply with legal requirements, eliminating the risk of penalties for non-compliance.
Relationship building
Early engagement enables both the buyer and supplier to expand their network, but contract management helps the relationships thrive. This is due to more opportunities for collaboration and increased transparency in purchasing as emphasised by the Procurement Act 2023.
Efficient operations
Automation helps streamline workflows, reduce bottlenecks, and help the project manager improve the efficacy of procurement teams.
Informed decisions
Big data is also used to sort, categorise, interpret, and store data so it’s easily accessible. Procurement software generates reports based on identifying factors. Reports are in real-time to make the most informed decisions at that moment.
Supplier trust
Buyers who manage contract terms ethically and with integrity get a good reputation for fairness in the procurement contract process. This attracts suppliers with high-quality goods, services, or works and generates even more interest as suppliers’ trust increases.
Contract Management Best Practices
Let’s look at how to optimise contract management so that the contract protects sellers and buyers from undue risks.
Assign roles
Successful procurement teams know their roles in the process. There’s a clear distinction with no ambiguity, which helps establish accountability in contract delivery for procurement team members.
Ensure consistency
Consistency across the entire procurement process is essential. All procurement team members are held to the same standards, regardless of their position in the business enterprise. Consistency and standardisation in admin and purchasing ensure regulatory compliance across the board and manage risk by reducing the opportunities for error.
Centralise contract repository
A central repository stores templates and clauses that can be tailored to each contract. The repository keeps templates and contract data organised in a structured, logical, and easily accessible manner. All authorised parties can access the data to analyse procurement contract progress and make insightful decisions based on information contained in various procurement reports.
Review contracts
Set reminders to review active contracts to ensure all parties are pulling their weight, that the procurement cycle is on track, and everyone still complies with regulations. Regular reviews also enable buyers to identify potential risks or challenges so they can take immediate action to mitigate the impact.
Foster collaboration
Collaborating with suppliers or vendors can drive innovation that impacts buyers’ operations and the greater public procurement sector in general. Collaboration identifies opportunities in the cycle that have mutual benefit, for example, a tweaked process that increases revenue for both the buyer and supplier.
Eliminate manual processes
Some government buyers and suppliers still use manual, paper-based contract processes. Switching to digital processes with AI and automation gives procurement team members time to focus on more important purchasing contract management tasks, like analysing a seller’s performance.
Financial management
Contract management enables buyers to keep tabs on expenses, especially maverick spending. Procurement professionals can monitor all active contracts to ensure everyone adheres to the purchase contract terms and no unnecessary expenditure materials don’t go to waste.
Planning
Forecasting is essential to develop purchasing contract plans for the next few months or years, depending on the types of procurement contracts involved, including fixed pricing contracts, cost-reimbursable contracts, and time and materials contracts. Additional factors that go into procurement planning include market fluctuations, supplier pricing structure, and material sourcing.
Now we’re going to look at contract contracts in a specific industry: Healthcare
What Is Contract Management In Healthcare?
Healthcare contract management is tricky because the data involved is more sensitive than many other industries. An effective procurement contract in healthcare must be managed with the industry’s unique challenges and strict regulations in mind. Three primary benefits contribute to the effectiveness of procurement management in healthcare.
1) Optimise financial outcomes
This includes things like negotiating favourable contract terms, maximising reimbursing rates and payment terms, and minimising financial risks, like rogue spending and non-compliance penalties.
2) Enhance patient care
Effective contract management leads to enhanced patient care. This is mostly obtained via monitoring service level agreements, tracking performance metrics and KPIs, and being flexible enough to address challenges and optimise opportunities as they arise.
3) Maintain regulatory compliance
Modern procurement contract templates typically ensure regulatory compliance. There’s no risk that human error will inadvertently lead to non-compliance and perhaps even expensive and time-consuming legal issues.
Three Elements of Healthcare Contract Management
The elements of contract management in healthcare are very similar to those in other industries, but there are some differences.
1) Contract creation
It’s about creating a legally binding agreement that clearly describes the rights and responsibilities of all parties. However, healthcare procurement contracts must also be created with comprehensive knowledge and understanding of specific regulations, legal frameworks, and industry standards.
2) Contract compliance and monitoring
Contract managers must ensure that the contract terms and conditions are strictly followed by tracking KPIs and keeping a vigilant eye on details, like a guaranteed minimum order quantity and other contractual obligations. They must see if everyone is performing as described in the procurement agreements and determine the course of action if they are not.
3) Contract renewal and termination
Contract renewal depends on more than just performance. It includes feedback from key stakeholders on things like cost overruns, as well as market fluctuations, and regulatory changes. If the buyer agrees, successful suppliers can be considered for renewal. Unsuccessful suppliers face contract termination.
Other healthcare contract elements include:
- Digital and automated contract management systems.
- Secure contract repository with standardised templates.
- Optimised security measures to keep the contents of procurement contracts private.
- Track rebates and fixed-price contract guarantees.
- Identify opportunities for growth in procurement and the project management team.
- Financial tracking for fixed price contracts and economic price adjustment contracts.
- Electronic or e-signatures to finalise procurement contracts.
Three Types of Procurement Contracts in Healthcare
Healthcare procurement contracts can be divided into three categories.
1) Service contracts
These are between healthcare providers and stakeholders, like hospitals, clinics, and managed care services. Procurement contracts include payment terms for specific services such as medical treatment for family clinics and administrative support at busy hospitals.
2) Insurance contracts
These describe procurement contracts between medical insurance companies and healthcare providers. The payment terms must not compromise healthcare standards, but they must also ensure that neither party is exposed to undue financial risks.
3) Securing resources
These contracts govern procurement and supply and ensure healthcare facilities have the products and services they need to continue uninterrupted operations. For example, the procurement of medical equipment and maintenance services.
It’s possible to create your own contract management system using Microsoft SharePoint. Let’s look.
How To Create A Contract Management System In SharePoint
SharePoint is another business management tool from Microsoft. Its features include custom procurement contacts management systems.
SharePoint meets all the standard procurement contract requirements:
- Real-time procurement contract tracking and monitoring
- Procurement contract storage in a centralised location
- Collaboration and sharing between buyers and stakeholders
- Data analytics for performance measurement
- Compliance with regulations that govern procurement contracts
- Accountability throughout the procurement contract management process
- Real-time reports to drive informed decision-making
It’s pretty easy to use. With a little planning and organisation, procurement teams can set up processes that track performance, beef up security, and conduct regular reviews of workflow processes and uninterrupted business operations.
SharePoint also enables buyers to optimise the purchasing management system so that all parties have equal access to documents, reports, and audits. It’s compatible with other Microsoft systems and non-Microsoft systems, like cloud-based accounting software.
Setting up SharePoint contract management systems includes the following steps:
1) Create a site where you can keep all of your contracts and contract-related information.
2) Create folders in the document library for all types of procurement contracts, including the fixed price contract and time and materials contract.
3) Create sub-folders for details like contract numbers, invested parties, and contract termination or renewal dates.
4) Use automation features to set alerts for important dates, like audits or contract negotiations.
5) Use security settings to block unauthorised access to sensitive procurement contracts.
Delta eSourcing Is Always There To Lend A Helping Hand
Contract management isn’t the easiest role in the public procurement sector. Sometimes, you need some help with the trickier bits. Delta eSourcing has a Contract Manager module that guides you through the contract management process, including supplier performance monitoring and value tracking.
Contract Register is the central repository for all things procurement contract-related, such as contract terms and agreements, re-tendering, auditability, storage, and management for the entire procurement process.
Contract Performance is where you weigh supplier performance against KPIs and other metrics. It’s a performance monitoring plan for each contract, supplier, or vendor.
Find out more about Delta’s contract management system. Simply book a free demo and one of our experts will show you how much Contract Manager will benefit you.
