The choice of which contract model to adopt is just as important as the actual choice of contractor themselves.
The key issue here is that there is no one model which is right for all. There are a host of different variable factors which can influence the decision and the model selected needs to reflect this.
In tendering for services and selecting the appropriate commercial model, it is firstly importantly to understand what the model is aiming to achieve. In my experience there are four key drivers which are:
- Organisations and Finance Directors in particular want accurate budgetary forecasting in their FM spend and no ‘hidden’/unexpected major expenditures appearing.
- If possible, a full or part transfer of both the risk of such unexpected costs and in accountability for reducing cost to a contractor is a key driver.
- A cost model which reduces administration and the frequency of queries and/or disputes is also desirable.
- A collaborative partnership between customer and contractor needs to be able to evidence continuous improvement and value for money and the commercial model can be a useful tool to do this.
In my FM sector; namely ‘Hard’ Facilities Management (apologies to those of you who hate the term), there are several different commercial models which are prevalent in the market. The most common are:
- What I call the Standard Model: whereby a contractor quotes a price for annual planned maintenance and hourly rates for reactive repairs.
- Semi Comprehensive Models are where there are the beginnings of risk transference and contractors are asked to quote an annual price for the maintenance of equipment, including repairs, up to a set financial value. Such thresholds can be say £250 or £500 per repair. Any repairs above this amount can be chargeable; those below must be absorbed within this tendered ‘pot of money.’
- Fully Comprehensive – in these models customers ask contractors to absorb the full cost of the repairs, sometimes without a financial ceiling. Invariably most will have clauses setting out exceptions, such as end of life or obsolete equipment. This is full risk transference.
- Finally, some models incorporate an AOV (average order value) for reactive repairs. This AOV is usually calculated based on historical data and is charged on each repair, regardless of cost. The advantage of this model is the reduction in the need to scrutinise/authorise each invoice received.
As mentioned previously, which commercial model is best for an organisation to select can depend upon:
- How accurate is their asset data?
- Does it detail the life-cycle profile of the equipment?
- How well has the equipment been maintained to date?
- Can accurate and detailed historical reactive data be published to the tendering companies?
- Is the contractor prepared to work in an open book manner?
- Is the customer prepared to offer a long term contract?
- Is there scope to incorporate some element of shared risk and reward with the contractor into the contract to incentivise performance/results obtained?
The extent of the answer to these questions can then drive an organisation to decide which commercial model is best for them.
My own point of view is that it is really useful for organisations to start these discussions with potential contractor(s) prior to the tender scoping and market invitation, to gauge their opinions. They can then make informed decisions as to which commercial model is best for them, depending on the maturity and accuracy of some of the data mentioned above and their specific business needs.
It can also depend on the cultures of both the customer and contractor and if there a genuine appetite to work collaboratively during the contract term, mutual trust to work completely open book and to drive change and improvement.
I will leave the final word to the great John Ruskin on the quality of decision making, that it
“is never an accident; it is always the result of high intention, sincere effort and skilful execution; it represents the wise choice of many alternatives”
This article is written by Mark Whittaker, Business Development Manager for Integral UK Limited, Hard Facilities Management Specialists.
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