Ask the Expert - Contract Management Operational

In this webinar and downloads, we explore what Contract Management is, how you define and manage contractual terms, the importance of specifications in contract management, pricing arrangements in commercial agreements and key performance indicators. 

Ask the Expert - Contract Management Operational Q&A

Q1 - Are liquidated damages covered in performance bond?

A – No. Liquidated damages and performance bonds are two different contract management mechanisms.

Liquidated damages are included in a clause in the General Terms and Conditions of your organisation. It is intended to seek compensation from suppliers upon a specific breach e.g. late performance. The amount of the compensation is defined in a liquidated damages clause to calculate the cost of the bad performance from suppliers. For example, late deliveries of drugs by suppliers could be resulting in a financial penalty of 1% of the contract value per day of delay, up to a maximum of 10% of the contract value. The supplier would get paid his invoice, but with a deduction of the financial penalty or liquidated damages.

While liquidated damages are usually the first level of sanction in a contract, performance bonds are linked to the termination of a contract. A performance bond is issued to the health buyer at contract signature as a guarantee against the failure of the supplier. This is to ensure that suppliers meet their obligations specified in the contract. A performance bond is usually provided by a bank or an insurance company to the buyer to make sure a supplier completes the contract/project. If the supplier fails to do so, then the buyer can be compensated for the supplier’s failure to complete the project.

Q2 - Where multiple stakeholders exist in contract management; how do you ensure ethics and integrity throughout?

A – A health procuring entity can ensure ethics and integrity in various ways, such as:

• Procurement Law: any health organisation follows the Procurement Law of its jurisdiction (national, state, international, etc.) which contains laws on ethics and integrity in public procurement.
• The financial rules and regulations (FRR) of the organisation. The FRR clearly identify and define the various ethics and integrity issues in an organisation. This is applicable for internal and external stakeholders to your organisation.
• The Staff Regulations (for internal stakeholders): employees must abide to certain staff rules or civil servants act (e.g. not awarding contracts to family members, impartiality, no nepotism, etc).
• Procurement policies with specifics on ethics and integrity.
• Ethics and integrity policy in the organisation.
• Clauses included in the contract explain what the ethics and integrity situations are, and the consequences if suppliers or staff are in breach.
• Procurement officers are the safeguards of ethics and integrity and must educate stakeholders (e.g. suppliers, technical experts) on the financial rules and regulations, and best practices.
• Training and capacity building: provide ethics and integrity as part of the staff procurement training programs.
• Ethics and integrity boards or committee (or ombudsman and whistle-blower systems): A panel of experts in the organisation is usually providing guidance to stakeholders on ethics and integrity, reporting and escalating issues to senior management and law enforcement.

Q3 - Who are stakeholder to ensure successful contract management and how do you ensure no conflict by the stakeholders when managing contract

A – Stakeholders exist at all levels of the contract management process .They are both internal and external. External stakeholders may not directly affect the contract except where the contract involves a community or social project for instance, the construction of a hospital. In this case, the success of the contract will depend on how the community are involved and managed. In my country, this type of construction would require public participation as required by the public procurement law. Internal stakeholders would include the users affected by the contract. In the example I have given we would have multiple contracts but the main stakeholders would include the financiers, government, community (external) and departmental Heads and/or employees (internal).

To prevent conflict in any of these contracts government and organizational policies on conflict of interest must be very clear to all the stakeholders. Both public procurement laws and organizational policies must be communicated during the development of the contracts and stakeholders sensitized on the consequences. In most procurement processes and tender evaluations any participant with conflict of interest is expected to declare it and withdraw from the processes.

Q4 - How would you approach a situation with a vendor with whom you have a framework agreement with for a specific market. This vendor was selected based on competitive advantage offered as well pricing. However, when offered a supplier purchase order to deliver items from the same market, he came back with reasons why he cannot deliver at the agreed price.

A – This will depend on the reasons and your relationship with the vendor. If the relationship is based on mutual trust and benefit to both of you and the reasons given are genuine the advice is that you renegotiate the pricing and review the agreement. It may be that it was beyond their control due to the dynamics of the business environment. However, if the reasons are not convincing you may have to terminate the agreement amicably and select the next lowest competitive vendor. It is important to note that a framework agreement may not necessarily constitute a contract. Purchase or call-orders from the framework agreement may be the contracts.

Q5 - What areas are important is establishing tender evaluation criteria for drugs

A – Evaluation criteria for drugs may include and not limited to the following:

• Quality - whether the supplier has good quality management systems in place e.g. Quality Labs, appropriate storage, etc. If the supplier is the manufacturer, whether they adhere to Good Manufacturing Practices (GMP)
• Cost - affordability. The drugs must be sold at reasonable or prevailing market prices
• Reliability - must have a history of timely delivery and responsiveness. Use of references will help.
• Registration - the drugs must be registered by the relevant regulatory bodies e.g. WHO, Food and Drug Administration (FDA,USA), Pharmacy and Poisons Board (e.g.in Kenya)
• Qualified Staff - selling of drugs must be done by those with knowledge about medicines ,preferably pharmacists

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