Completion of Request documents – Specifications, Performance Requirements and Selection Criteria

Rule D1.2 of the Western Australian Procurement Rules states the minimum form of contract that a State agency must use based on the value of the procurement. The State’s standard form of contract templates can be found under procurement templates, guides and resources.

State agencies may elect to use a form of contract corresponding to a higher value threshold. For example, a State agency can elect to use the Request document and General Conditions of Contract where the Written Quote template and Simple Contract Terms is the minimum requirement.

There are three main types of specifications:

• functional or outcomes-based specifications describe desired results, but do not describe how the contractor should achieve those results
• performance based specifications define what a product must be capable of doing, but not how the product should be designed in order to achieve the customer’s requirements 
• technical, descriptive or design-based specifications define physical characteristics, such as size, capacity and type of materials required.

Western Australian Procurement Rule D2.2 states that State agencies should use functional or performance-based specifications where possible. Functional and performance-based specifications promote innovation, creativity and potential cost savings, by allowing the contractor to decide how it will deliver the customer’s requirements.

Specification in terms of performance and functional requirements may not be appropriate for certain instances of procurement, for example where a construct only procurement model is used.

The most common difficulty when drafting and interpreting contracts or documents is using the correct language. Contract documents should be drafted in plain English, using language that is clear, modern, direct and precise. You should:

• be succinct. Avoid using ‘legalese’ or complicated language, such as ‘herein’, ‘thereafter’ and ‘aforementioned’. Use sentences with fewer words and boil a sentence down to its essential point
• avoid ambiguity. A contract provision is ambiguous if it is capable of having two or more meanings. Use familiar, concrete words with common meanings.
• consistency throughout the whole document is important. Different terms or phrases should not be used interchangeably, and terms should be used consistently throughout the document. In this case, maintaining consistency is more important than avoiding repetition. If a particular term has several meanings within the context of the document, clearly identify which meaning is intended. Grammar and punctuation must also be used consistently
• be familiar with the defined terms and remember that defined terms always start with a capital letter. Defined terms must be used consistently throughout the document
• do not make assumptions about implied meanings or content. If something is important it should be included expressly in the document.
• look for conflicts within the document. Consider ‘what-if’ scenarios to identify potential issues
• do not include unnecessary preambles such as ‘it is important to note’
• be careful with words such as ‘will’, ‘shall’, ‘must’ and ‘may’. ‘Will’, ‘shall’ and ‘must’ are command words whereas ‘may’ is only permissive
• avoid the phrase ‘and/or’ as it can create uncertainty
• use the active voice and not the passive voice. For example: Active: The successful Respondent must deliver the Goods to... Passive: The Goods must be delivered by the successful Respondent to…
• when in doubt, punctuate! Punctuation is important to prevent misreading
• repeat only when repetition is necessary to improve clarity. Saying something more than once can create confusion. This is why it is very important to know what terms are included in the relevant form of contract. Do not add an additional clause if it is already in the standard form of contract
• editing should be done in three phases: 1. Basics 2. Tighten 3. Fine tune.

Just remember:

• clarity
• consistency
• contract drafting is not just about what you say, but how you say it.

Key Performance Indicators – Performance Requirements

The regular monitoring of performance is necessary to help ensure outcomes are achieved and value for money is realised. The use of Key Performance Indicators (KPIs) is one of the more conventional ways of monitoring performance of the contract and suppliers.

What are KPIs?

KPIs are a set of agreed measures or metrics used to define and evaluate the critical success factors in a contract (a measure to determine how well something is being done). The results of these measures can be analysed and compared to identify trends over the life of the contract or examined at certain points in time.

Developing SMART KPIs 

To be a useful mechanism for measuring performance, KPIs should be clearly defined, measurable and meaningful. One of the most common acronyms for developing suitable KPIs is to make sure they are ‘SMART’, meaning that they are:

• specific - clear and concise to avoid any misinterpretation of what is to be achieved
• measurable - can be quantified and results can be compared to other data and able to show trends if measured over time. These measures should also give a consistent result, regardless of who is doing the calculation
• achievable - practical, reasonable and credible given available resources and expected conditions
• relevant - informative and useful to stakeholders, having regard to the context in which the entity operates (i.e. need to measure what is important to the success of the contract)
• timed - specifies a timeframe for achievement and measurement.

The acronym ‘SMARTER’ is also used, referring to the development of performance measures which are also ethical (fair and transparent) and recorded (documented).

Considerations when Developing KPIs

When developing KPIs it is important to consider the following:

• can the KPIs be objectively assessed and compared. Do they give consistent results? Can they be used to identify issues and/or trends?
• are the KPIs clear, unambiguous and understood by all parties?
• are the KPIs useful? Do they only assess what is necessary to determine contract and contractor performance, rather than what is easy to measure?
• are there the right amount of KPIs in comparison to the value, term, complexity and risks of the contract (i.e. are there too many or not enough)? Is the information collected at the right time or right intervals?
• do the KPIs identify and encourage performance improvement over the life of the contract?
• is there a process to periodically review the KPIs to ensure the ongoing suitability and relevance?
• is there the capability and capacity to collect, understand and interpret the results of any data collected? Should consideration be given to using an independent third party or technical expert to collect and analyse the performance data?
• has the contract manager been involved in developing the KPIs? Do they understand the KPIs which have been developed and how they should be used to manage the contract?

Feedback

Whilst ongoing monitoring of performance is a key component to contract management, to be successful, it should always happen in conjunction with the provision of regular feedback to the contractor. Providing positive and constructive feedback as well as addressing any problems promptly and efficiently will assist in developing and maintaining a good relationship between the parties. Feedback can be formal or informal, however, the development and implementation of a formal communication strategy may be beneficial for complex, high risk, strategic or panel contracts.

Please note that the following example only focuses on identifying and monitoring a couple of KPIs for one part of a much wider service requirement i.e. Courier Services. In developing the Request document, it is important to determine:

• the key deliverables or outcomes to be achieved from the contract
• the measures that will be used to determine and evidence whether those deliverables or outcomes are being achieved to the required standard.

One crucial element for the Courier Services contract is a priority order service for urgent deliveries (Priority Orders). Priority Orders need to be picked up from Head Office within 30 minutes of the order being placed and delivered to the specified destination within an hour of being picked up.

Example of the KPIs

KPI title	Service level	KPI target	Compliance minimum
Timeliness of courier Priority Order pickup Mon - Fri (9am - 4pm)	Pickup from Head Office to be within 30 min of the Priority Order being placed	Collect Priority Order within the timeframe 100% of the time	Min 95%
Timeliness of courier Priority Order delivery Mon - Fri (9am - 4pm)	Delivery to destination to be within 1 hour after the Priority Order being picked up from Head Office	Deliver Priority Order within the timeframe 100% of the time	Min 95%

Example of the Data that will be Required to Analyse Performance

To determine whether the performance levels specified in the contract are being met, data is required. For the above KPIs the necessary data is:

• type of order
• the time the order is placed from Head Office
• the time the order is picked up from Head Office
• the time the order is delivered to the destination
• the reason why an order did not meet a specified timeline (when applicable).

The data needs to be collected and reported on, therefore the Request document will need to specify the data collection, reporting and feedback requirements.

Example of the Reporting Requirements Included in the Request Document

Priority Orders Report – A report detailing all Priority Orders must be provided to the contract manager no later than the 5th day of each month (with the data from the previous month). The report format is outlined on the following page. An issue log report outlining any non-compliant pickups will also need to be provided.

Example of the Meeting Requirements Included in the Request Document

Meetings – As a minimum, a contract management meeting will be held every quarter to discuss and provide feedback on the operation and performance of the contract. In addition, any concerns of non-compliance and/or issues with the operation and performance of the contract will be discussed as and when required.

Example of how this Information is Used to Monitor Performance

As part of this contract management responsibility, the contract manager is to monitor the KPIs and the contractor is to provide the required reports. The process can be stepped out as per the following:

• up to the 5th day of the month the contractor would send to the contract manager the reports for the previous month. The contract manager would follow up with the contractor if the reports were not received on time and any issues would be discussed, resolved and documented
• the contract manager would receive the reports, check that they are complete and in the correct format
• the contract manager would analyse the data and note any trends and/or issues. This includes reviewing the reasons for any non-compliant pickups. If required, identified trends and/or issues may need to be escalated and discussed internally
• if required, the contract manager may contact the contractor to discuss any non-compliance concerns identified in the data, and where necessary, agree on a resolution. The concerns, discussions and solutions would be documented. Any other instances of non-compliance and/or issues that arise and require immediate discussion with the contractor should also be documented
• at the end of each quarter a formal contract management meeting would be scheduled and the agenda for the meeting sent out to the relevant parties (one of the agenda items would be Priority Orders)
• the scheduled meeting would be held discussing all agenda items (including the KPIs for Priority Orders, instances of non-compliance and feedback on performance with reference to the KPI data and contract documents where necessary). Minutes would be taken
• the meeting minutes documenting the discussions and required actions from the meeting would be circulated to attendees. If a meeting was not being held for the quarter then the reason why would be documented for future reference
• it is important that any non-compliance, issue and/or required actions are discussed, resolved and/ or completed in a timely manner. Positive and/or constructive feedback should be provided as/when required
• the report data, documented issues and solutions, meeting minutes and any feedback provided should all be used together to monitor the performance of the contract and the contractor
• the above information would also be used when conducting a formal contract review prior to considering exercising any extension option available under the contract as well as when a final review is conducted prior to the expiry of the contract. The reviews should help in determining the overall performance of the contract and contractor as well as summarising any lessons learnt for consideration in the establishment of a future contract.

Conclusion

The example highlights that the use of KPIs requires more effort than just the development and inclusion in the Request document. Thought needs to be applied to making sure that they are not only clear and useful, but also how and what data will be collected, how the data will be analysed, how the results will be used and how the results will be fed back to the contractor to ensure that the use of KPIs is a meaningful method of monitoring performance.

It is important to think not only about what you’re going to buy, but also the process you will follow to buy it. While most procurement activity will fit the standard evaluation model included in most templates published by the Department of Finance, you need to ensure that this model will meet your needs.

In addition, evaluation criteria should be included in all Requests. While there are standard form evaluation criteria included in all tendering templates, you need to make sure that when answered by the supplier, the evaluation criteria will give you enough information to fairly assess all offers.

Evaluation criteria are usually weighted. This means that not only must you have appropriate selection criteria, but that the weightings assigned to each criterion reflects the importance of that criterion to your organisation.

Case Study: Upholstery Services

You are seeking to award a panel of suppliers to provide upholstery services. You are aware that the textile industry is a high risk for supply chains that include modern slavery. You are also aware that there are many small businesses in this industry and you wish to support the government’s objective of fostering small businesses.
You may wish to ensure your supplier buys its textiles from suppliers who appropriately pay their employees. You may therefore choose to include an evaluation criterion that requests information on the suppliers’ supply chain, and information relating to any business plans, policies, or accreditations the supplier maintains in relation to this topic.
The supplier’s financial and organisation capacity to fulfil the contract is not as important as usual because:

1. you intend to award a panel (therefore you will have several suppliers to call on should one cease trading or be unable to fulfil your requirements)
2. you are not at financial risk since you will pay on receipt of completed item
3. the upholstered goods are not time sensitive or critical
4. you wish to encourage participation from small businesses, who do not have a large number of employees and therefore might not have great ‘organisational capacity’.

Therefore, you choose to weight the ‘modern slavery’ criteria 30% and the ‘organisational and financial capacity’ criteria 10%. The remaining 60% weighting is allocated amongst criteria regarding suitability of services and demonstrated experience.

Once you have defined your evaluation criteria it is important to evaluate in accordance with those criteria and the process included in your Request document. At least since the Federal Court decision in Hughes Aircraft Systems International v Air Services Australia (1997) 146 ALR 1 1997 (Hughes Aircraft) the process outlined in your Request has been seen as a ‘pre-contract contract’ with your suppliers – that is, you are bound to follow it.

The Federal Court decision in Hughes Aircraft significantly altered the traditional approach used to analyse the public procurement process in Australia. Prior to this case, putting out a Request was a reasonably simple matter of inviting parties to submit bids for government contracts. In the Hughes Aircraft case, the Federal Court found that a Request may give rise to a binding agreement governing the way in which procurement processes are conducted. This decision significantly changed the way we think about the procurement process as it formalised the notion of process contracts and created a more legally defined and structured process for all parties involved.

For a contract to be found to exist, the basic principles of contract law require offer, acceptance and lawful consideration. Consideration may be defined as the price paid by one party for the promise of the other. Prior to the Hughes Aircraft decision if you were drafting a Request document you would have confidently said that the document you issued was “an invitation to treat” – as you were simply inviting parties to submit offers to provide a good or service government requires. The Request document was simply considered to be an invitation to suppliers to make an offer. A contract would only arise once the supplier’s offer was accepted. However, an unsuccessful supplier had no recourse in contract law prior to the award of the Contract. Given the significant volume of contracts the State Government awards per year and that suppliers are required to commit significant resources to the procurement process, this was perhaps seen as unsatisfactory. The only action a supplier may have taken would have been in administrative law through avenues such as natural justice and procedural fairness.

Recognising the inequity of this situation the Courts have progressively developed the concept of a “pre-award” contract arising from the procurement process, now often referred to as a process contract. The process contract was cemented into common law in the Hughes Aircraft case.

This case involved a complex set of facts. However, in summary, two suppliers were requested to submit offers regarding an air system purchased by the Civil Aviation Authority (CAA). The unsuccessful supplier, Hughes, sued for damages. The Court found that:

• the conduct of the procurement process leading to the award of the contract for the purchase of the air system was governed by a legally enforceable “process contract”
• it was an implied term of the contract that the CAA would conduct the evaluation process fairly and in good faith
• the result of the first finding (that is that the procurement process was governed by a legally enforceable contract) is that the Court may presume that each supplier in submitting a bid has: accepted the “offer” (i.e. from the State agency issuing the Request) for the pre-award contract in relation to how the process will be run; and made an offer for the main contract (which may later be accepted if its bid is successful)
• the second finding, that it is an implied term of the contract that the supplier would be evaluated fairly and in good faith, reinforces that government must act with “probity” in the procurement process. This reflects the requirements of the Western Australian Procurement Rules that require agencies to demonstrate to suppliers and the community that the State conducts its procurement activities with high standards of probity and accountability.

These findings were reinforced in the case of Cubic Transportation Systems v New South Wales (2002). In this case a “Call for Revised Offers” (the Document) was issued to two pre-selected proponents for the purchase of a ticketing system for Sydney’s public transport system. The unsuccessful supplier alleged that the selection process did not follow the procedures set out in the Document, was not a fair process and did not provide an equal opportunity to both suppliers. The Court found that “a contract of some kind was intended” based on the language of the provisions in the Document. It also implied a term of reasonableness and good faith into the contract which meant that the powers of the government under the contract could not be exercised unreasonably or dishonestly.

In this case the Court did find in favour of the State agency. It found that in each case the decision-making process was fair and that there was no actual bias or conflicts of interest. Interestingly the Court found that the supplier (the plaintiff) did not come to court with “clean hands” and had themselves shown a lack of good faith and dishonesty. One judge noted that had the plaintiff established a breach of process contract, judgement would still have been entered in NSW’s favour on this basis alone.

It is likely that a Court would find that there was a legally enforceable process contract in any Request the State released. This leads to the question what can we do to manage the risks that arise from the two-contract process?

The risks can be managed by ensuring that:

• the selection process is clearly stipulated in the Request – this is important as the implied term of fair dealing will bind the State agency to comply with the procedures it puts forward. Careful consideration should be given at the time of drafting the Request
• we pay careful attention to any evaluation criteria and terms and conditions that are to be applied and how we describe them – the State agency will be obliged to comply as an implied term with any criteria or terms and conditions it puts forward. In Cubic v NSW, although the Court found in this instance in favour of the State agency it severely criticised the drafting of the Document. It emphasised the need for any documentation to be clear especially about actual undertakings and legal obligations
• communication to all suppliers is equal, particularly regarding any amendments in the evaluation criteria. Suppliers must always be given access to the same information
• no preferential treatment is given to any suppliers.

These cases remind us of the complex issues that can arise in relation to the tender process and the need to carefully consider any risks that are likely to arise both when drafting the Request and when dealing with any process issues that may arise. Consideration of how to mitigate identified risks, such as compliance with the procedures set out in the Request and equitable and fair dealing with suppliers, is an important element of contract planning and development.