Service Contract Monitoring:
Ensuring Sustainability and Value for Money

By David Levintow
Senior Consultant, IP3

About the Author...

David Levintow has over 35 years experience in the design, conduct and evaluation of development assistance projects and programs in Asia, Middle East, Africa, and Eastern European countries. Recently he has been involved in facilitating and helping to governments negotiate arrangements for private sector delivery of public services. He has worked as a Foreign Service officer for USAID, and as a consultant to the World Bank, the Asian Development Bank, and private consulting and training organizations such as the Institute for Public-Private Partnerships (IP3).

Abstract

Once governments have determined the feasibility of engaging private sector firms to deliver services¹ , and - using open and competitive procurement practices - have selected a qualified firm using cost-effective compensation arrangements, the most crucial government responsibility is then initiated: monitoring the on-going performance quality of the service-provider.

This monitoring is necessary to ensure the firm's satisfactory completion of all of the functions and activities it has agreed to perform. Monitors make certain that the contractor performs as expected throughout the entire duration of the performance period. For a successful outcome, governments must include in the terms of the contractual agreement specific elements - e.g. technical, financial, customer relations, legal compliance, etc. - that both parties agree will fairly measure how well the tasks are being done. These measurements are often called key performance indicators (KPI's). There are various sources for obtaining sample contract clauses for inclusion in the contract.

Government must also designate someone or some entity to be responsible for the monitoring, using an agreed upon methodology. This will ensure that the public is getting good value for money, and that terms and conditions being applied and enforced remain acceptable to all parties involved. Performance monitoring is a continuing process required to ensure that service delivery by the private firm will be sustained throughout the entire duration of the contract. Success in monitoring service delivery contracts is an important surrogate for the country's quality of governance.

I. Introduction

Once private sector service delivery contracts come into effect, they should always incorporate a carefully designed procedure, embedded in clear contractual provisions, which identify those contract performance elements that both parties agree will be monitored throughout the duration of the contract. In most cases these would include but may not be limited to:

• Technical performance
  
• Financial aspects
  
• Customer relations
  
• Legal compliance
  
• Quality standards and milestones
  
• Plus any other key performance indicators (KPI's) that are project specific
  

The purpose for having these contract provisions on performance monitoring is to provide a mechanism - acceptable to both parties - to ensure that the contractor is performing satisfactorily, and that he is continuing to meet benchmarked targets on time and in the expected or required amounts.

Monitoring thus provides assurance to the government and the public that the service delivery is being performed in an acceptable manner. It establishes a public record by documenting results of the private contractor's performance so that it can be proven that the private firm has consistently delivered a high quality of service; that it has satisfied the needs and requirements of the public and the government; and that the compensation arrangements (for example fees for service or tariffs charged to users) are within the range of reasonable limits and remain affordable to customers and the government.

II. Methodology

There are various ways in which the monitoring regime can be performed, and depending on the situation and circumstances, some or all of these methods may be used either at the same time or during different periods of contractor service delivery activities:

1. Designated staff of the government contracting authority or agency.
   
   
2. Vesting authority with another government agency such as an audit or regulatory authority (especially for financial performance) with jurisdiction over the service being performed.
   
   
3. The development of a separate monitoring contract unit staffed by skilled consultants/monitors.
   
   

The methodology used will depend on the particular circumstances of the service delivery being contracted out. For example, a complex water utility management contract may require a separate contract monitoring unit outside the utility. For multiple municipal government services that are contracted out, perhaps one government entity could oversee all the monitoring functions.

Key Points in Establishing and Maintaining Monitoring of Service Delivery

There are several key points that need to be addressed to effectively establish and maintain effective contract monitoring programs:

• The intention of the government to include a monitoring regime in conducting the service delivery contract must be identified early, for example, by including this requirement in the bid and tender documents government uses to select the provider.
  
  
• Monitoring requirements should be limited to the "objective function" or specific activities covered by the contract, and should not be used to deal with any matters not covered in the scope of work being done. Monitors should focus on Key Performance Indicators (KPI's).
  
  
• The methodology (including frequency, duration, reporting requirements, and other obligations imposed on the contractor as necessary to enable or assist the government in carrying out the monitoring) should be thoroughly negotiated and subject to complete agreement during contract negotiations. They should include detailed arrangements.
  
  
• Government should ensure that adequate funding has been provided to meet all the costs to government involved in the monitoring. This includes staff, administrative expenses, travel or transport if necessary, and the cost of preparing and publishing periodic reports and findings.
  
  
• The monitoring regime should include early and very clear opportunities for government to informally bring to the contractor's attention, any problems, delays, incomplete activities, or other contract elements that the government may wish to question or have clarified. There should be time limits set for the contractor to respond to such matters.
  
  
• Government monitors must be clear about the limits of their mandate in monitoring contractor performance. The monitoring function should not be used by the government to try to undermine the contractor's authority by interfering with its responsibility for managing its own employees, or conducting its day-to-day operational activities.
  
  
• There should be a clear linkage in the monitoring process to the formal dispute resolution provisions, with the understanding that most problems or issues arising from information learned during performance monitoring are expected to be resolved promptly and informally. Should there be continuing problems or major disagreements, then the formal dispute settlement procedures in the contract would apply.
  
  
• Useful general guidelines for designing the monitoring procedures, and sample contract provisions which of course have to be specifically worded to describe the actual circumstances and conditions in the location where the service delivery is being performed, can be found in several places. One such source is the "Conditions of Contract for Works of Civil Engineering Construction" published by the International Federation of Engineers-Consultants, or "FIDIC" as it is known. FIDIC has published a "Client/Consultant Model Services Agreement" which can be a very useful starting place for help in drafting the contract, which then includes monitoring, and dispute settlement clauses.

III. Conclusions and Summary

The success or failure of any contracting out or private sector service delivery arrangement nearly always depends upon the inclusion and conscientious application of an agreed performance-monitoring regime. Performance monitoring has to be very explicit about what is being measured, what are the criteria required for satisfactory contract compliance, and implementation of the monitoring process must be performed in an even-handed and fair manner.

Governments contracting out for service delivery expect the contractor to assume some risk in undertaking the agreed tasks, for which the contractor expects he will be properly compensated and permitted to manage his own performance. At the end of the day, performance monitoring is a crucial tool for government, and is one of the most important ways for the public to hold government officials accountable to the populace.

For more information, please contact David Levintow at david.levintow@valley.net

¹ These services can include a wide range of government activities: water delivery, urban transportation, solid waste collection, parks & recreation management, cafeteria services, health, energy, and education, to just name a few.

Copyright 2005© Institute for Public-Private Partnerships, Inc. All rights reserved