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How to manage contracts

Struggling with the contracting process? David Marcer advises GP commissioners on how to manage contracts robustly

The basics

Contractual agreement

The contractual agreement sets out the legal relationship between purchaser and supplier.

If there is a dispute, any documents, promises, undertakings or commitments that are not written into the agreement are worthless.

As purchaser, you have the specialist knowledge of the service – so you will need to design and write some parts of the agreement, especially those having to do with performance measurement.


Measurements will vary according to the service in question, but may include:

• volumes, quantities and timescales

• milestones for achieving various targets

• performance indicators.

Defining measures

The first law of the measurement of contractual performance states that if a measure is capable of being interpreted contrary to the intentions of the purchaser, it will be. Thus, if you state that all attendees at A&E are seen within one hour of registration, you get delayed registration and a ‘hello nurse’.

This is not what you wanted, but it is what you asked for. The basic rule for defining any measure of performance is that it must be objective, unambiguous and preferably quantitative.

Getting started

What makes a good indicator?

Defining volumes, quantities and timescales is relatively straightforward – you know how many hip replacements you require in a year, or by what time you wish the supplier to obtain accreditation.

Performance indicators are more difficult to define because they deal, on the whole, with the quality of the service.

Good performance indicators:

• go to the heart of the service – for a joint replacement service, for example, successful relief of pain is considerably more relevant than the time taken to answer the telephone on the ward

• are appropriate – for example, asking diners to rate a restaurant is fine, but a patient satisfaction survey is hardly a reliable basis for rating surgical skills

• measure outcome, rather than process – for example, if you are measuring the incidence of hospital-acquired infections, then why measure how often the floors and walls are scrubbed?

• are within the domain and control of the service supplier – it is no use measuring satisfaction with access to the service if the supplier doesn’t run the car parks or the bus service

• relate to performance as it happens – annual reporting will tell you nothing of day-to-day performance and gives you very little immediate control

• promote good behaviour and deter undesirable behaviour – the recently introduced PDS Plus dental contract rewards low return rates. This deters conservative treatment – it is safer to extract the tooth than try to save it

• avoid unintended consequences – measuring process is like squeezing a balloon; the parts that can be measured are constrained and the parts that can’t be burst out elsewhere. Measurement of outcomes is safer, but always try to anticipate unintended consequences by a critical review of each indicator

• don’t use too many indicators – complexity of measurement and reporting is increased and the significance of each indicator is diluted by all the others. The fewer the better, and you should have a good reason to go beyond 10.

Who measures?

In general, the supplier is better placed to collate results because it has the raw data in its management systems. You should, of course, reserve the right of audit in the contractual agreement.


Reporting should take place as frequently as possible, especially in the early stages. The easiest way is to provide the contract manager with direct access to real-time reports on the supplier’s management systems.

Getting results

Contract management

It is the contract manager’s responsibility to assess whether the supplier is meeting its delivery targets and achieving its performance indicators. If not, something must be done quickly to prevent under-performance becoming the accepted standard.

‘Speak softly and carry a big stick’ is the motto for contract management. Discussions about poor contractual performance will always work better if you have big sticks in the contractual agreement.

Typically, these might include financial sanctions linked to performance indicators, the option for non-renewal and a realistic mechanism for early termination.


If the supplier is under-performing, ask why. In the early stages it can simply be teething problems – performance indicators may be unreasonably stringent, there may be misunderstanding of the requirements, or you as purchaser may be failing in your responsibilities.

On the other hand, the problems may be more fundamental and serious discussions needed. This is not a task for a junior member of staff to do alongside the day job. The contract manager must be able to speak with the full authority of the purchaser.

Financial sanctions

Performance indicators are often linked to financial sanctions, such as when falling below the required standard by 10% will lose 10% of the contractual payment. The law, however, does not allow punitive fines to be levied under a contract, so financial sanctions must be a reasonable representation of the loss suffered. Failing to meet performance indicators by 10% is not necessarily the same as loss of 10% of the service.

The obverse of sanctions is an incentive payment for achieving a higher level of performance. Either way you are, in effect, paying for a basic service with a bonus for a ‘premium’ service.

If you are going to use financial sanctions, you have to resolve the adequacy dilemma to your own satisfaction. What level of service is adequate? If it is the basic level, why pay extra for the premium service? If it is the premium service, why allow a less than adequate service for a lower payment?


The threat of non-renewal is of limited use since it only works if the agreement has provisions for uncontested renewal and the contract is in the pre-renewal phase – but in the right circumstances it can act as a considerable incentive to performance. Nevertheless, you have to ask yourself whether you are comfortable continuing with a supplier that only performs under duress.

Early termination

As a general rule, a contract can only be terminated before its expiry date if there is a breach of one of its fundamental terms. For minor breaches you are only entitled to damages.

If you wish to make under-performance against indicators a fundamental term, then it is best spelled out in the agreement. Say which failures will be treated as fundamental and define a process of breach notices.

These operate rather like a suspended sentence, so if the failure is corrected within, say, six months, then the breach notice expires – but if not or if there is a further failure, then the purchaser has the right to terminate.

If things go wrong do not discount termination as an option. Far too many under-performing service contracts are allowed to limp along to their expiry date because the purchaser fears the consequences of termination. A properly constructed contractual agreement will set out the responsibilities of the parties should early termination become necessary.


Recently, I was running the procurement of a second-generation IT support contract. The incumbent supplier was one of the short-listed candidates, but I felt that it was only fair to warn the incumbent that its performance to date had compromised its chances of going forward. Poor performance was quite evident from the volume of complaints coming from users.

The incumbent’s response was: ‘We have consistently achieved or even exceeded the performance targets in the contract.’ This was, of course, perfectly true – the contract was measuring the wrong indicators.

So make sure that your agreement gives you scope to review and redefine performance indicators. Listen to users and conduct surveys.

Ensure that what your performance monitoring is telling you reflects the experience of users. If not, don’t be frightened to make changes.

Last of all

Never forget that in this hard commercial world the supplier entered into the contractual agreement voluntarily and with its eyes wide open.

David Marcer is an independent consultant in outsourcing and the procurement of services in the public sector

How to manage contracts