Facilities Management Procurement: Phase 2
Most organisations rely on contracting to perform their mission. Although much has been written about the contracting of construction projects, there is less material available on the contracting of services.
This is the third article in a series intended to support clients and facility managers by outlining practices and principles applicable to the procurement of services by contract.
Phase 2 – Developing the BUSINESS CASE
This second phase in the contracting life cycle covers the development of the business case and the selection of the appropriate contracting strategy.
Objectives at this phase of the contracting process will:
- Identify the key issues to be addressed;
- Establish a process that will form the foundation for the contacting process; and
- Consider potential areas of risk and opportunity throughout the contracting life cycle.
Outputs from this stage will include:
- A process that satisfies the client’s requirements and has been communicated to key stakeholders;
- A clear identification of risks & opportunities and how they are to be allocated and managed; and
- A document that brings together all the relevant issues and clearly sets out the contracting strategy.
In many instances, the decision to contract a specific service, especially for the first time, is one that has many complications. There will be philosophical considerations, logistical queries, commercial uncertainty, quality of asset data, risk allocation, etc. It is therefore essential that a robust business case is developed and presented. As with all decisions made in business, this ‘justification’ should be documented in detail, widely circulated and accepted by all relevant stakeholders, because full commitment to the process will ultimately be essential for its success. A major part of the justification will be an economic business appraisal.
When the financial analysis is compiled, it is essential that ‘before’ and ‘after’ cases are clearly put forward. The justification should contain a detailed comparison between the current situation and the proposed approach. Current costs should be all encompassing, making due allowance for management and administration costs along with the more obvious labour, plant and material aspects of the service delivery.
The business case should not overlook any commercial issues. It should include financial consideration of contingencies that may be required in the event that other issues arise during the process. It is far better to place the worst case scenario on the table at the outset rather than make the wrong decision based on incomplete information.
When developing the business case, it is essential to consider placing a value on all the benefits that may accrue from the proposed arrangement. Often, ascertaining the exact value of an improvement will be complex, but to ignore the improvement’s value is to ignore its existence. If a change will have no commercial benefit, it should not be incorporated into the business case.
2.2 Overview of the Business Case
After the ‘make or buy’ options have been considered and the decision has been made to contract part or all of the services, an in-depth business case should be developed. The analysis forms the foundation for the selection of the contracting strategy and failure to pay proper attention to this stage will affect the success of the contract.
The key is to examine the risks at this stage and maintain maximum flexibility in the contracting strategy to manage the risks and outcomes.
The business case should address all issues related to the delivery of services including requirements, risk allocation and management, current and estimated future costs, service levels, timeframes, human resources issues, relationship and pricing options, communication, composition of the client project team and any delegation responsibilities.
In-house management of the contract also needs to be considered and these costs included in the business case. Selection of the delivery option will determine the level of in-house resources and skills required.
The objectives of developing a robust business case are:
- To establish the management team and any support services required to deliver the best possible value for money given competing priorities. Key benchmarks of value for money occur when client management approves a project at a given cost. Quantifiable tests of management maximising value for money include:
- improving on costs, quality, response & job completion times;
- optimising life cycle costs;
- providing the flexibility to incorporate changes to user needs;
- limiting variations, claims and other difficulties that impose administration and management costs.
- To provide confidence that cost, quality, response & job completion times, statutory compliance and WH&S will be met;
- To afford program flexibility to allow phasing of the services, perhaps during transition, if required;
- To ensure integrity and probity in the delivery process;
- To ensure that the proposed contracting strategy can be explained and understood; and
- To provide a process that will ensure that there is an adequate audit trail.
The key elements of a business case to achieve the objectives listed in part 2.3 include:
- The requirements and objectives to be achieved;
- Scope of the services to be provided;
- Baseline and estimated future costs, payback for any investment and relevant benchmarks;
- Risk analysis that identifies risk related to cost, quality, time and compliance, and how these risks will be allocated and managed;
- The choice of relationship and pricing structures to best manage the risk;
- Processes to maintain competition, encourage innovation and continuous improvement, add value and provide incentive;
- Approach to developing the asset register, scope of work, specifications, conditions of contract and allocation of risk among the parties;
- WH&S issues;
- Effective communications and public relations strategies;
- Key milestones and timing to best fit the decision process and budgets. This includes nominating the stakeholders/personnel responsible for each major activity, and highlighting the review points and consequences of slippage;
- Management arrangements for each phase of the project, and any support and third party services required;
- Knowledge management and how to keep control of corporate knowledge;
- Guidelines for managing contracts and service providers;
- Performance management framework;
- Process to ensure probity, i.e. Fair and equitable treatment for all; and
- Transition – strategy, timeframe and deliverables.
If the Business Case is approved then the next phases are:
Phase 3 – Establishing Service Levels
Phase 4 – Procurement
Phase 5 – Transition-In
Phase 6 – Contract Governance
Phase 7 – Transition-Out
Future MBM newsletters will address each of these phases.