Appendix D: Contracting Considerations
Contracts are, in essence, an agreement between two parties to undertake something,
delivery of a product or work for a stipulated pricing formulation that is protected
in law. They are comprised of terms and conditions that are based on a prediction
of what will unfold. Predictable scenarios, such as initiatives at the lower levels
of the DBM, enable a greater certainty and with that greater application of traditional
contracting practice. At the higher levels of the DBM, however, the dynamics at
play preclude certainty, and have contract predictability.
Matching the sponsor with the contractor
When purchasing an item, once contracted, the contractor is to provide the
item to the sponsoring party for the price and schedule as stipulated in the contract.
The Level 1 rules orientation provides a basis for the sponsor's authority to
"police" the purchase to ensure the sponsor's full entitlement.
Projects can be substantively contracted to a contractor. Such is the case
generally with public sector contracting, where the sponsor has a need but is,
by mandate, not in the business of doing this type of work, and in the private
sector where companies are exercising comparative advantage. As with the principle
of favored advantage, it makes sense to position the contractual risk with the
party best able to manage that expertise and associated risk.
With project contracting the evolving context introduces some important considerations.
Firstly, the Terms and Conditions in the contract need be reviewed in terms of
the new context to determine whether the intended work remains aligned with, or
is outside of, the scope and contract provisions.
For Level 2 projects, the methods baseline remains stable. As such, the future
circumstance is predictable and the associated terms and conditions of the contract
remain valid. Special consideration can be given to progress payments that shore
up the risk position between the parties as value is achieved. Projects of Level
2 stability tend to be bid in an open tender format where the lowest price wins
the work. Tendering works well by enabling the competitive forces of the market
place to establish what is a fair and reasonable price for the job. The stability
of the roll out and achievement of interim value enables Firm Pricing.
Level 3s entail an evolving methods baseline, the trajectory of which is not
readily predictable until the initiative is underway. Both the sponsor and the
contractor learn throughout the rollout and have the opportunity to adjust the
initial concept as appropriate to fitness-for-purpose, affordability and schedule
At Level 3, this joint sponsor/contractor decision-making obscures the contracting
relationship. To maintain currency, contract change control procedures maintain
alignment of the work with the evolving intentions. In this scenario, stakeholders
need consider how the cost growth associated will be managed, providing fair relief
to the contractor for decision made by the sponsor that impact the contractor's
contractual obligation. The procedure applied is an impact analysis to determine
the attribution of liability and quantum, the amount of relief. This principle
of fairness is a matter of integrity and is also protected in law.
A major consideration in contracting is the uncertainty regarding final price.
A Level 3 matched solution would entail a pricing formulation that motivates cost
restraint while providing flexibility regarding the dynamic complexity, such as
with a Target Inventive, Ceiling arrangement. These can be challenging to administer
and require adjustment to the target and ceiling with each sponsor-induced change.
Also, attention can be given to "off ramp" provisions where the parties can agree
to part-company within a stipulated liability cap.
With Level 4, the objective of the initiative is evolving, as are the underlying
methods within the objective. This is a higher dynamic complexity challenge that
undermines a solid reference for the contracted position. The utility of the originally
contracted position has a half-life that can be measured in weeks and days, not
years. The volatility induced by the joint contractor and sponsor decision making,
through the engagement of the sponsor end users
As failure is not an option, the contracting formulation need be reconsidered
to enable the joint sponsor-contractor learning through the engagement process.
This can be achieved through phased contracting where initial phases would recognize
the sponsor and contractor as partners in learning. This would entail a more open
basis of payment for example, a "cost reimbursable award fee" approach.
The plan should address how the project is to transition from the open learning
to a more concrete implementation, a Level 2 for subsequent phases and, with that,
how the price formulation will transition to firm price. Relational contracting
also enables a more fair apportionment of complexity causation and risk.
At Level 5, the context is firstly addressed as the social contract with the
public. This is a figurative representation, not a contract per se, but social
contracts are supported in law by virtue
of constitutional representations and procedures. The first matter of business
is to identify the advocate that speaks officially on behalf of government for
the facilitation with the public will that will unfold. Understanding their social
obligations and any constraints will position the initiative in an accurate context
for analyses what moving forward.
For the product itself, considerations can be given to public-private partnering,
an opportunity to shift existing boundaries between public and private sectors
on public program delivery.
Common mismatches that will be used to demonstrate the point are Level 1
Contracting in a Level 3 or 4 Project, Level 2 Contracting in a Level 3 Project,
Level 2 Contracting in a Level 4 Project
Level 1 contracting in Dynamic Complexity World
The common inclination to look into the contract for an understanding of rights
and wrongs is generally insufficient in cases where dynamic complexity has shifted
the context within which the contract should be read. For Levels 3 through
5, the contract becomes an amalgam of the expressed words on the latest contract
document and the behavioral alignment of the parties in that regard. In other
words, through performance, the parties change the agreement, notwithstanding
expressed terms and conditions. As such, absent the larger perspective, simply
policing terms and conditions undermines effective stewardship and provides an
illusion of entitlement that is not supported in law.
Level 2 contracting in a Level 3 Project
This approach entails creating a logically impractical arrangement and adjusting
it to an arrangement that works. A project team adept at managing gaming scenarios
can maintain the relief position through change control procedures to avoid a
project failure. Where this is applied, cost growth negotiations are generally
a matter of posturing, brinksmanship, adversarial positioning, and potentially
a legal challenge.
There are many behavioral tendencies to consider in the management of cost
growth. Firstly, during the bid phase, the primary objective of bidders is to
win the bid. Forthrightness in bidding would require either that the bidder disclose
the price anticipated for the work or that the bidder accept that any underage
in pricing is a "lost leader" for securing the business. The less forthright approach
is a bid-to-win posture in which the contract relies upon disproportionate future
cost growth for contract changes or contract imperfections.
During the initial stages of the relationship, the tendency is for both to
suppress cost growth as they allow time to kindle "trust" in relationships. When
the honeymoon is over, reality overrides trust and the game of brinksmanship takes
The tendency (obviously) is for the sponsor to suppress interest in cost growth
while the contractor is in favor. In the end, a mounting loss for the contractor
will motivate greater focus on changes particularly those that would be
out of the scope of the baseline as contracted.
Many companies are reluctant to sully relationships with the sponsor out of
concern for diminished "public relations" with any adversarial positioning. This
provides the sponsor greater latitude to push the envelope, an opportunity that
need be managed with great responsibility to avoid an untenable business situation
and perhaps project failure or litigation.
Level 2 Contracting in a Level 4 Project
With the context for dynamic complexity established through the DBM, we can
revisit the Standish Group report on the failure of IT projects. The conjecture
here is projects failed to control the work to conform to the pre-established
objective. In the DBM context, the objective is intended to dynamically evolve,
the opportunity to confront the larger questions in transformation such as the
utility of the organization in the brave new world, the good and proper consideration
of end user needs and the like.
In this context, the term "failure" is perhaps indicative of an under targeted
solution where simply controlling the work to conform to the pre-established objective,
as one would at Level 3, renders the work obsolete. You can do it, but you deny
the learning opportunity that will enable the organization to navigate to its
optimized position and you should anticipate fielding a result that nobody wants.
With an evolving objective, the notion of using change control procedures to
maintain contract currency become impractical the change control loop would
"heat up like a hot wire."
Gaming for Success
Gaming for success refers to an intentional mismatching with the further intent
to maneuver the markers as appropriate to maintain the prospects of success. This
works where the simplicity of the under-targeted response enables a more familiar
and acceptable-to-decision-authorities depiction of reality than the real reality
you are confronting. Where this is practiced, the project reporting regime is
generally bifurcated one message designed to make the light go on with
approval authorities, the other designed for reality.
This "coloring outside the lines" approach can work where the leader for the
initiative has sufficient flexibility to move forward. It, however, leaves a simpler
than possible expectation with stakeholders leaving practitioners with a greater-than-realistic
burden and may leave them personally vulnerable following the next audit.
Complexity is an inconvenient truth. Where expediency in transactional progress
overtakes consideration of complexity, gaming becomes the new normal.
To project manage, or not to project manage that is the question:
Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous frameworks
Or to take arms against them,
And by opposing, end them.
I. R., Whither Contracts? Journal of Legal Education 403, 1969.
5. Paquet, Gilles, Citizenry, governments and the military:
a governance perspective Centre on Governance, University of Ottawa, 1997.
6. Adapted from Hamlet, Act III, Scene I, Shakespeare.