By Steve Kelman

Blog archive

Contract management vs. contract lawyering

handshake

I was recently reading a Kennedy School case from last year about a drawn-out effort by a manager at Transport for London, which runs that city's public transportation system, to improve the performance of a consortium managing the system's smartcard payment technology system. (Surely not fully coincidentally, the manager was a Kennedy School graduate from the United Kingdom.) The contract was a 15-year, so-called "private finance initiative" effort that involved the contractors building and running a new smartcard system.

Such long contracts have advantages, especially when a contractor needs to make large upfront investments that will be paid back over a long period of time. But they also invariably create problems as the world changes or as the parties learn more about how their business relationship is working.

When both parties want to change the specs in the original contract, the way is paved for that mainstay of government contracting, the change order. However, in the smartcard contract, some of the problems the government perceived were of a different nature.

One, for example, involved the nature of the performance requirements to which the contractor would be held: The original contract established minimum system-wide performance standards, but nothing that penalized extremely bad performance at a small number of subway stations, as long as it didn't bring system-wide performance below the contracted level. In this case, there were some stations with ongoing bad problems, and the contract (unless it was renegotiated, which the vendor was not anxious to do) provided no redress.

What did the manager do?

According to the case, although "the design of the performance regime precluded [the manager] from assessing [the contractor] financial penalties for many of the equipment problems that bedeviled the Underground and buses," the manager noted that "there's nothing that stops me from picking up the phone and calling them."

"I could call them four times a day if there were four failures in the system," the manager said. "They needed to know that I cared about the system."

I am guessing that good federal managers who just read this anecdote are nodding their heads and thinking, "of course, that's what any good manager should do!"

But I am also guessing there are federal managers who, faced with a similar situation, simply would say their hands are tied by limitations in their contracts' provisions. Our contracting system is so legalized that it can easily send the signal to feds that if they have no legal protection in contract language -- that their hands are completely tied.

A contract sets limits in what the government can legally force an uncooperative contractor to do. But in the real world of business dealings -- that is, business relationships outside a government context between private customers and suppliers -- customers also expect that those doing business with them will informally adapt the letter of a contract to the realities of changed or one-time unusual circumstances. (In a good business relationship, the customer will show similar flexibility to the supplier.)

Actually, even our overly bureaucratized past performance system allows a rating that gives credit for a contractor's performance that goes beyond the letter of what the contract requires. (If I may be permitted to give myself credit here, I fought hard when I was in the government to get this "above and beyond" grade included in the past performance report card system -- though I'm not sure how often the government uses this to create contract management that goes beyond just enforcing legal provisions.)

So I like the way the British manager in this case actually tried to actually manage this contract, not just enforce its legal provisions. I am sure there are many U.S. government managers who behave similarly. And I would love to hear you share with other blog readers examples of situations where you have behaved as a manager, not just a legal cop.

Posted by Steve Kelman on Oct 17, 2014 at 12:49 PM


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