RICS draft code of practice - Procurement of facility management

Procurement of facility management code of practice

4 Procurement

4.1 Technical activities

The following activities should be completed to enable bidders to accurately price for the services being procured.

4.1.1 Detailed scope

DOS should state the scope of services in detail. It can be helpful to think of services in a hierarchy or other framework to understand their relationships and interdependencies.

Traditionally services have been thought of as 'hard' or 'soft' FM. The industry is now moving away from this artificial categorisation to either a specialist service or an integrated approach. 'Hard' and 'soft' FM therefore will not be used in this document and should be avoided in procurement.

Where services are structured in a hierarchy the first level can be thought of as the service line. Examples of service lines are shown in Table 1. There is no standard list of FM services, they will vary by organisation. In regional or global procurements there may be different scopes and service hierarchies between territories or regions. For example, catering may be in scope in Europe but out of scope in North America. The service lines and hierarchies shown here are examples and do not comprehensively cover all FM services.

Different terms may be commonly used for different services, e.g. cleaning can be referred to as janitorial in the USA and repairs and maintenance can be mechanical, electrical and plumbing (MEP) in the Middle East. DOs should use the terms that are either in recognised international standards or commonly used in their markets.

Table 1: First level of hierarchy

The next level in the service hierarchy can be referred to as the service element. Examples of service elements are shown in Table 2. There is no standard list of service elements, they will vary by organisation.

Table 2: Second level of hierarchy

The detailed descriptions of FM services are provided in the service specifications. The key element of scope is the buildings, sites or land (sometimes referred to as the ‘premises’) that are covered by each service line or service element.

Depending on the size and complexity of the property portfolio, and the services being provided, this can be straightforward or more complex.

Typically, not all buildings require every service, for example a building/asset without a staff restaurant may not require any catering or may just require vending. To provide a clear picture of the scope DOs should map the services in scope to the buildings/assets that require them. This can be done simply via a list or by a matrix showing service elements for each building/asset for more complex situations. An example of this is shown in Table 3.

 

Table 3: Matrix showing service elements for each building/asset

Table 4: Alternative matrix

An alternative is to create a requirement to include a cost for each service element that is in scope, greying out service elements that are not in scope as shown in Table 4. If such a matrix is to be used for future contract change, care should be taken to apportion costs accurately and in detail across buildings to reflect actual cost.

 

4.1.2 Service specifications

The service specifications are a key set of documents that the DO will need to produce. The DO may be able to reuse previous service specifications or may need to refresh them. If the DO does not have fit-for-purpose service specifications, producing them and getting them agreed by stakeholders can take some time, so it is advisable to plan their production as early as possible in the project. For regional or global procurements DOs should aim to have consistent specifications as much as possible but recognise that there will be variations in service requirements between locations, territories or regions as industry good practice and other requirements will be different. It is important that variations/differences are clearly set out.

Service specifications can be one of three types: input specification, output specification and outcome specifications. An input specification is where an input is specified, e.g.:

  • The service provider shall provide two static guards at the main entrance during normal opening hours to check the staff ID passes.

An example of the same requirement specified as an output could be stated as:

  • The service provider shall ensure that no persons without valid staff ID passes can enter the facility beyond the main entrance during normal working hours.

An example of the same requirement specified as an outcome specification could be stated as:

  • The service provider shall ensure that the facility is kept safe and secure.

In some cases, an input specification may be required; in the first example, the DO is certain it needs two visible guards at the main entrance. The drawback with an input approach is that it does not allow bidders to use innovation, so the scope to deliver savings or make innovations is limited. In this example, the only way to reduce costs is to pay the staff less, reduce overheads or to accept lower margins, with the consequential loss of service quality that may arise from less motivated staff and a bidder who is receiving a lower reward. In deciding which specification to use DOs should consider the maturity and capability of the market in the territory. In some territories the market may not be mature enough to deliver output specifications and therefore input specifications will be required.

If the requirement is specified as an output, bidders can propose solutions to meet the required output using different inputs. In this example, bidders may propose just one guard or a technological solution such as a barrier with an access card reader. The possibility of alternative inputs to meet the required outputs increases the scope for cost reduction and innovations.

If the requirement is specified as an outcome, bidders have greater freedom as to how to meet the requirement but also take on a higher level of risk. In FM, outcomes can be difficult to define and measure and as such are seldom used.

In some cases, a hybrid approach is required, where the specification is largely output-based but includes some key inputs and outcome measures, e.g.:

  • The Service Provider shall ensure that no persons without valid staff ID passes can enter the facility beyond the main entrance during normal working hours and that all staff are greeted by a guard as they enter the building.

Service specifications can take many forms, however, the following principles should be followed.

  • Be clear on meaning. Include definitions of defined terms and acronyms - this is particularly important when procuring services between territories where different terms or languages may be used. It is good practice to capitalise all defined terms.
  • State what the objectives of the service are, e.g. the objectives of a security specification may read, 'to keep the premises secure and employees and visitors safe'.
  • State each requirement in a clearly delineated section, be it a numbered paragraph or a row in a table. Avoid combining requirements as this can cause issues with pricing and scope change. For example: 'The Service Provider shall undertake all routine cleaning and ad-hoc window cleaning.' In this case ad-hoc window cleaning should be a separate requirement as it is likely to be priced differently and could be easily removed from scope if required.
  • State exactly what is required in clear language. If it is an output specification do not state how to do it.
  • State the service levels required separately as these can then be used in the performance mechanism (see section 4.2.8). For example: 'All emergency repairs shall be responded to within one hour' is a service level for responding to emergency repairs.
  • Use precise language to avoid ambiguity. Check for words such as 'relevant', 'regular', 'appropriate', etc. For example, 'regular' should be replaced with daily/weekly/monthly, etc.
  • Be clear about any exclusions. For example: 'Cleaning of computers and IT equipment is excluded'.
  • State any specific requirement for personnel delivering the service. For example, 'The person managing health and safety should be qualified to diploma level'.
  • There are likely to be many drafts of specifications as they are developed. Use tracked changes as the documents get updated and amended and keep track of version control to avoid missing changes.
  • DOs should ensure that translations of specifications are accurate and that changes and additions are translated.

4.2 Legal and commercial activities

4.2.1 Pricing

When bidders submit a proposal to a DO they will need to provide a price. Each service element should have a suitable pricing methodology allocated. Factors such as volume variation, input cost predictability and risk should be considered when selecting the appropriate pricing methodology for services. As such different pricing methodologies may be appropriate for different services.

Typical pricing types are set out in Table 5.

It is important to understand how each of these pricing types works, in which scenarios they are best used, who holds price risk and who has incentives to reduce costs. DOs should consider the risks and benefits of each pricing type and how they might enable or hinder savings.

Table 5: Pricing type summaries

Table 5 provides a summary to assist with determining which pricing type offers the best value. In any contract several different types of pricing may be used depending on the services being priced, available data and the objectives of the DO, e.g. fixed price for services where the volume is predictable and variable price for services where there may be significant variation in volume. Another common method is to use guaranteed maximum price as balance between variable and fixed price.

It can also be beneficial to change the pricing type during the term of the contract. For example, repairs can be charged as a variable price using a schedule of rates for the first year of a contract to establish a baseline cost, which can then be used to determine a fixed price for repairs in subsequent years.

For contracts covering more than one territory, DOs should state which currencies should be used, how exchanges rates will be calculated and where currency risk sits.

It is common for contracts that include reactive repairs to have a comprehensive or semi-comprehensive element, where the supplier takes risk on the cost of repairs up to an agreed threshold with agreed exclusions.

Comprehensive elements can be beneficial as they allow most repairs to be actioned without DO approval, remove administrative burdens and incentivise good behaviour from suppliers.

Where there is poor asset data, the price for a comprehensive element can be poor value as suppliers include a high level of risk into the price.

In addition to defining exclusions, another key consideration is what level the comprehensive repairs threshold should be set at. Typically, this can be anywhere between $500 and $2,000. What limit to set depends on understanding the appropriate level of risk to pass to the supplier and can be heavily dependent on the age and condition of the assets. A good way of assessing this is to model what would have been included from a past year’s repairs data at different levels of threshold and/or ask bidders to bid and justify their preferred threshold. It is important when defining comprehensive repair limits that the DO is clear about the definition and grouping of assets and systems to ensure that the limits may be applied correctly.

The costs of transferring employees can be a major consideration in pricing and full and accurate employee data should be provided to bidders where there is expected to be transfers of existing staff. Where such data is not known, a mechanism to true-up costs once transferring employee costs are known should be agreed. This is a major area of commercial risk to a bidder and if handled poorly will result in excessive risk pricing or lack of interest from the market. Pension costs can be a difficult area and specialist advice should be sought. Employment law and similar legislation is a complex part of any procurement and specialist advice should also be sought in this area.

4.2.2 Subcontractor commercial terms

DOs should consider the payment and commercial terms of any subcontractors. DOs should seek assurance that fair and transparent payment and other commercial terms are being applied to the supplier's subcontractors. Requirements for the terms agreed with the supplier should be mirrored with any subcontractors, and subcontracts should be assignable (transferred to another principal contractor) or novated (transferred to the DO) under certain circumstances, for example, termination of the main contract for non-performance.

4.2.3 Limits of liability

The limit of liability is the level of damages that one party will be obligated to provide to the other party under terms and conditions stated in the contract.

The limits of liability required is a key commercial decision in any contract - too high and the market may not be able to accept it; too low and DOs run the risk of not being able to recover enough costs if the supplier is liable for damages. Limits of liability can be stated at different levels for different risks/events, e.g. one limit for breaching confidentiality and a different limit for loss of earnings. Specialist advice should be sought to determine what levels of liability are required.

Extra caution should be taken with unlimited liability. Other than liabilities that are required to be unlimited by law, it can either be very difficult for bidders to accept unlimited liability or they will include higher prices to reflect the risk and/or reward for accepting a higher level of risk. Many bidders will choose not to bid if there are unlimited liability requirements. In practice there is no ability to meet unlimited liabilities as any supplier will be constrained by its balance sheet. It is better to discuss and agree sensible limits of liability that provide DOs with the cover they need but do not cause excessive risk pricing.

Liability for consequential losses to a DO's main business is sometimes a requirement. DOs should be mindful that this can be difficult for suppliers to accept so may result in less market interest or even prevent bidders from agreeing to these terms.

Many contracts also seek to achieve further guarantees in the form of parent company guarantees or performance bonds. DOs should be clear about any such requirements at the start of a procurement process and ensure that terms are reasonable and not going to unduly impact the price or the appetite of bidders.

4.2.4 Insurance requirements

The level of insurance required is another key commercial decision. A DO will want to be sure that the supplier can meet any financial obligations that may result if something goes wrong. Specifying minimal levels of insurance cover required can help to provide this assurance. In addition, the DO's insurers may require that suppliers have a certain level of cover to minimise their own exposure. Specialist advice should be sought before deciding what levels of insurance cover are required, for example a lease may include specific lease obligations.

4.2.5 Indexation

Most contracts longer than two or three years will typically have indexation applied to the price. Two key decisions to be made are what index to use and why, and how to apply it. Various inflation projections are published and the government in the DO's territory may have a preferred index that is commonly used. Deflation is typically not covered and would result in no price increases but not in price reductions. In some territories, inflation may be so high or unpredictable that indexation clauses are not possible. In this scenario, agreement should be reached as to when the price can be increased and how the increase can be agreed, e.g. by pegging the cost against another more stable currency, this would allow increased payments in the local currency but in USD terms the cost remains stable.

Some contracts agree to apply a specified index, others will build in a set amount, regardless of what actual inflation turns out to be, and some have a capped figure.

In any contract the year one price would usually not attract indexation, which may kick in from year two onwards.

Sometimes suppliers are asked to price in inflation and it can only be applied after a set number of years or if the specified index breaches a pre-agreed threshold. DOs need to identify which index is most applicable to the cost of the services and how and when to apply it. How much inflation risk DOs are willing to take versus the value for money they would get from having the supplier take inflation risk is a key consideration. The more inflation a DO wants a bidder to take, the higher risk premium they are going to build into their costs. Many older contracts do not have provisions for deflation. In a low inflationary environment this is a real possibility and the contract should cover this eventuality by, for example, stating that only inflation of greater than 0% will be applied.

Indexation is not always the best method of dealing with actual cost variations over time. In some instances, it may be better to have an annual review and negotiation based on real changes to the underlying cost base.

4.2.6 Continuous improvement

Continuous improvement can refer to improvements in the quality of services over time or can refer to future cost reductions that can be built into a price. As a supplier makes ongoing changes, the services should get more efficient and effective over time. Continuous improvement can be used as a mechanism to return some or all of this benefit to the DO in an agreed reduction in price. This could be expressed as a percentage point reduction in price year by year but is often expressed as a reduction in indexation when used to partially offset the effect of inflation. It can also be expressed as a guaranteed reduction in actual price each year.

For example, the supplier may increase the price by the agreed index -1% each year. It is common for continuous improvement to be a higher figure in the early years of a contract when it would be reasonably expected that a supplier will be driving out efficiencies. In the later years of a contract, continuous improvement often tapers off and may end as there should be a floor below which further efficiencies are harder to achieve or may cease to be possible.

In this example the -1% is the continuous improvement. As inflation has reached historic lows in recent years, many contracts did not have provisions for what would happen if inflation was less than continuous improvement. It is advisable for contracts to address this scenario by clearly stating either that:

  • continuous improvement applies even if indexation falls below the level of continuous improvement or goes negative or
  • continuous improvement only applies when indexation is applied to the price.

4.2.7 Gainshare mechanisms and other incentives

In more mature markets, including incentives for suppliers to bring innovation and reduce costs can deliver real value to DOs. Gainshare mechanisms are often seen as a good way to do this. Suppliers will do all they can to reduce costs, but this will be to maintain and grow their own margin. Gainshare mechanisms take it a step further and usually involve more innovative ideas, a change to the specification and often require some investment. Typically, it will involve some initiative that cannot be implemented without the DO's agreement. A typical gainshare mechanism enables the supplier to bring ideas forward that will create a gain, usually expressed as cost savings. This often results in a direct reduction in the supplier's revenue, so allowing the supplier to keep a proportion of this lost revenue and/or applicable margin for a period provides an incentive to bring ideas forward.

Generally, gainshare mechanisms work best when the gain is evenly shared; if too low a percentage of the gain is offered to the supplier, they have less incentive to bring ideas forward or to invest. If suppliers demand too high a percentage of gains, the DO has less incentive to accept whatever changes are required.

In all gainshare mechanisms close attention should be paid to calculating and agreeing the baseline cost against which any gain will be measured. Energy savings are a common area for gainshare initiatives and, due to the variability of energy supply costs, baselines are generally better expressed as energy consumption (kilowatt-hours, etc.) rather than as cost.

Beware of agreeing gainshare proposals where the supplier makes no investment and adds little value. For example, simply stopping a service (e.g. cleaning desks everyday) should be a contract change not a gainshare.

4.2.8 Performance mechanism

A robust performance mechanism should be developed as it will form an important tool for effective contract management. Performance mechanisms need to be discussed with bidders to ensure that measures are workable and targets are realistic. It is important that it is not used to penalise suppliers nor to recoup cost; rather it is an incentive to maintain the standard of service that is required and a method of assessing if objectives are being achieved.

Table 6: Performance mechanism

A performance mechanism can be constructed of three components.

    1. A service level (SL) that should be achieved, e.g. a call to the helpdesk should be answered within 30 seconds.
    2. A key performance indicator (KPI) – a target that the SL should achieve, e.g. 90% of calls to the helpdesk will meet the SL (calls answered within 30 seconds).
    3. A consequence of failure. Typically, a deduction from the price if the KPI is not met. However, DOs can have performance mechanisms with no deductions provided there are other strong contract management provisions.

To be applied, a KPI needs to have a frequency (typically monthly, quarterly or annually) and a method of measurement and reporting, e.g. monthly reports from the CAFM system recording the total number of calls received and the percentage that were answered within the SL.

SLs may be different between different territories or regions depending on local requirements. Consistent performance reporting can still be achieved if the SLs are different provided the KPIs are still the same, although direct comparisons should be treated with caution.

A performance mechanism would typically consist of a table or spreadsheet containing a number of SLs and KPIs. See the example in Table 6.

The sum at risk is typically equal to the supplier’s overhead, risk and profit. It is set at this level as it is an amount that will penalise suppliers for poor performance without damaging operational performance and causing additional issues.

It is important that SLs be set only when something is important and matters to the DO’s business. If answering calls to the helpdesk quickly is not important to the business, there does not need to be an SL attached to it. SLs should be realistic and achievable with given resources. A requirement to answer calls within 30 seconds may be a realistic SL given the number of staff employed and the systems and technology used. If this was ten seconds, the supplier may have to employ additional staff to meet the level. If this is important, that is a valid cost, however, if it is not it has added unnecessary additional cost. Avoid generalisations such as ‘to be clean at all times’; such standards are impossible without permanent 24/7 cleaning. A better SL might read ‘following completion of a cleaning activity, to be free of dirt, smears and marks’.

Example

The DO has an old inefficient gas boiler. FM Co. proposes to replace it with a new energy efficient boiler that will deliver energy savings as well as being cheaper to maintain. FM Co. proposes to provide the necessary investment to fund the replacement. The DO agrees to give 50% of the energy savings for a five-year period to FM Co. and FM Co. can keep 100% of the maintenance savings. The DO has the benefit of a better, more reliable boiler for the rest of its lifecycle and 50% of energy savings. FM Co. has the benefit of revenue from the project to install the boiler, 50% of the energy savings for five years and the maintenance savings. Both sides have a broadly equitable level of net benefit when you remember that FM Co. has to make the investment and the DO does not have to invest up front.

In formulating SLs DOs need to consider if it is within the supplier’s power to achieve them and express the standard in a way that is achievable and measurable. For example, if ‘employ an agreed number of apprentices’ is in the contract, it is within the supplier’s power. However, if it is to ‘reduce youth unemployment in your district’, it is not. SLs should try to measure the output, not the input. In some cases, SLs concerning inputs may be required and they are often easier to measure, but, for example, it is better to measure that the DO’s building is secure rather than how many patrols guards have undertaken. Output measures are typically quite difficult to measure and, although they can be beneficial, are often outside of the performance mechanism.

KPIs can be applied to SLs, but this should only be done for SLs that are critically important. KPI targets need to be realistic and achievable. DOs need to consider the volume of activity in each and what the KPI target means. If, for example:

  • the SL states ‘all planned maintenance tasks to be completed within the scheduled month’
  • there are 5,000 maintenance tasks to be completed in one month
  • the DO’s target is 90% and
  • the DO is happy to accept that 500 maintenance tasks will not be completed each month,

what is the impact on the DO’s business if 500 tasks are not completed on time?

In general, 100% targets should be avoided, especially for high volume activities as there will always be a degree of failure with scale and suppliers may seek to include risk pricing to try and cover the risk of failing the KPI. However, care should be taken with legal and statutory requirements – DOs cannot accept anything less than being statutory compliant and legal. In these cases, 100% KPI targets are valid.

Frequency of measurement

The less frequent the activity the longer the period of measurement should be. If an activity only happens once or twice a year, a monthly measurement is not valid. On the other hand, if it is a high-volume activity that occurs frequently, measuring it quarterly or annually may smooth out failures in a specific month resulting in data that does not support the DO’s view of the service received, nor does it allow for problems to be identified and fixed month by month.

Measurement and calculation

The method of measuring and the calculation of the KPI is a critical consideration. When it comes to making deductions from a supplier that erodes their margin, DOs should be clear on how something is measured and how the performance is calculated to avoid dispute. There is no right answer; an appropriate method of measurement needs to be agreed with suppliers, depending on the service level agreement (SLA). Avoid subjective measures, for example, ‘it is clean’ is subjective; what do we mean by clean? Better to say ‘over 80% of the surface will be free of visible dirt, marks and smears’. It is hard to avoid subjectivity completely but make the measure as objective as possible.

Self-reporting of performance by suppliers is common but it can be beneficial to back this up with joint audit inspections and ad-hoc DO inspections. When formulating a performance calculation, it is recommended to turn the target and performance achieved into a percentage. The example below shows the calculation for tasks completed against a target of the tasks that were planned.

Actual against agreed plan = (Actual completed tasks/Planned task×100)

In this example, if 500 tasks were planned and 480 tasks were completed, the SLA achieved would be 96%.

Some performance mechanisms are overly complex and create an excessive amount of work and distraction. If including deductions that ramp up with greater levels of failure, win-back mechanisms, excusing clauses, etc. care should be taken to keep the mechanism simple. It can be beneficial to take a balanced scorecard approach where all SLAs are considered rather than focusing on individual KPIs.

Avoid allowing performance mechanisms to become unnecessarily complex. As a principle, performance mechanisms should be transparent; only target SLs that are important, make a difference and have enough consequences to deter poor performance and ensure rapid rectification.

Deductions

When a KPI is failed, a deduction can be made. In practice this usually involves the supplier issuing a credit note to be used against the next invoice. The consequences of failing KPIs needs to be meaningful. Typically, profit is at risk against performance – if, for example, the DO has a contract worth $10m pa, the supplier’s profit for a year may be $1m. That sounds like a big financial risk if the KPIs are failed, but it is $83,000 in any one month. If there are 20 equally weighted KPIs, failing one KPI in any month will result in a deduction of $4,000. There should be enough KPIs to cover what is important in the contract, but not so many as to dilute their impact. In some situations it is cheaper for the supplier to keep failing the KPI than it is to fix the problem.

Other remedies

SLs and KPIs are typically the main component of any performance mechanism. However, if they fail to rectify persistent performance issues, there should be a clause that triggers further remedies such as step-in, reduction of scope and termination due to poor performance.

4.2.9 Value testing and benchmarking

During a contract, DOs often want assurance that they are still obtaining value for money. This is particularly the case during contracts with a term over five years. Value testing and benchmarking are methods of checking that the DO is still getting value for money compared to market conditions and the common standards of service at the time of testing.

In addition to cost benchmarking, other factors such as use of space, environmental impact, quality, customer satisfaction and productivity levels can also be benchmarked.

DOs should be cautious when value testing and benchmarking between territories or regions. Cost drivers such as wage levels, employee benefits and taxation may be very different between territories, making direct cost requirements misleading.

Value testing and benchmarking are often used as interchangeable terms. However, value testing should include some assessment of non-financial benefits whereas benchmarking is typically purely a cost assessment. During a procurement process DOs need to decide whether to include a value testing or benchmarking exercise in the contract. If the length of contract is less than five years, the cost and benefit of doing so may not be worthwhile. If the contract has the potential to be extended, a value testing or benchmarking exercise may inform the decision-making process.

Key questions to consider include the following.

  • Is a value testing or benchmarking exercise worthwhile?
    • Should it just consider cost or should the assessment consider other aspects of value such as risk transfer, payment terms, quality of services, etc.?
    • When should the test be undertaken?
    • Which services should be tested? It is often not possible or worthwhile to test all services, the focus should be on the critical and/or the high-value services.
    • How many comparators will be used?
    • Who agrees which comparators to use and that they are comparable? Suppliers will sometimes offer to benchmark against their other clients only, but this should not be accepted as the comparators may be selected to provide a favourable outcome to the supplier.
    • How will the results be presented?
    • Who will undertake the testing?

Another key consideration is what will be done with the results of any testing. This should be stated clearly at the outset.

Potential actions include a price reduction on costs to within the benchmark or market testing. Outside of any contractual consideration benchmarking can also be used to aid decision-making regarding contract extensions, renewals or the addition of new scope.

4.2.10 Variation and change control

It is important to recognise that requirements often change. The DO could occupy new buildings, dispose of buildings and change other FM service requirements in response to changes in customer demand. The longer the contract term the more likely requirements are to change. A change control mechanism should be included in contracts and DOs should agree with bidders how changes will be priced as part of this. This will avoid disputes about price when change control is being applied.

Typically, a price will include a level of tolerance for smaller changes to avoid a lengthy process each time a small change is required. This could be a cap and collar on the cost of change over a set period whereby the parties absorb changes to the agreed levels, or the cost of changes are applied once per year as part of an annual price review.

It is important to remember that not all cost reductions are linear and price reductions may be less than expected. For example, the cost of maintenance for a specific building will include management and overheads that will still have to be borne.

In addition, if a building is closed but the staff are moved into another building, costs in that building may increase due to a higher occupation density, e.g. more people may mean more cleaning is required. Such factors need to be considered in agreeing a change control process that should be detailed as part of the contract.

4.2.11 Forms of contract

There are two main choices when selecting which form of contract to use: a bespoke contract drafted to meet specific requirements or if available an off-the-shelf contract that can be amended to meet requirements.

Bespoke contracts can be tailored to meet exact requirements but can be expensive to produce and are usually drafted by in-house or third-party legal advisers. Off-the-shelf contracts are relatively inexpensive to purchase, although very few are available specifically for the procurement of FM services. Such contracts typically have core clauses, a range of optional clauses and a method of making variations to any terms.

Choice of contract depends on the size and complexity of the requirements. Off-the-shelf contracts can be fine for smaller, less complex contracts but bespoke contracts are better suited to larger, more complex contracts.

Even if using off-the-shelf contracts, legal advice should still be taken especially if variations are being made to terms.

It should be noted that the contracts will contain a number of schedules where most of the information will sit, e.g. a pricing schedule.

Global contracts covering services in more than one territory or jurisdiction are more complex and specialist legal advice should be sought to agree a governance clause, stating which territory's law and legal resolution processes apply to the contract.

4.2.12 Contract duration

Contract length or term of contract is a key decision. Too short and the DO may not get best value from the market; too long and the DO may end up in an agreement that over time no longer meets its requirements. Where there is more than one supplier DOs may also consider contract lengths that make the contracts coterminous, or contracts that terminate at a known time of change, e.g. a move to a new building. Contract change clauses, including termination for convenience, can remove this problem, saving time and money on re-procuring.

FM contracts are expensive for DOs to tender and for suppliers to bid and win. If supplier investment is required, the minimum contract length is typically five to seven years to allow enough time for a supplier to make a return on their investment. Having to go through this process increases costs too frequently. FM contracts typically run for a minimum of three years for single services and a minimum of five years for IFM, however this may be different in some territories. Contracts often include extension clauses and are stated as 3+2 or 5+2 or 8+2, etc. Most DOs are wary of long contracts as it restricts flexibility and there is a fear of being tied in beyond a time when major change may be required. However, many benefits can be delivered by longer-term contracts through being more attractive to the market during a competition and from higher levels of supplier investment.

In the public sector it is important to get the contract length right at the time the DO publishes its requirements as the term stated, along with any potential extensions, may restrict the ability to change the term at a later stage of the procurement process.

In the private sector there is more flexibility and contract length is often negotiated as a commercial lever either during the procurement process or during the contract when additional benefits are being sought.

The DO should assess the strategic importance of FM to the business and decide if the relationship with suppliers should be transactional or strategic. If the latter, a longer contract term is appropriate and is likely to deliver better value.

4.2.13 Dispute resolution

 

Many contracts do not run smoothly and disputes are not uncommon. It is important to recognise this and agree a process for dispute resolution before any disputes occur. Dispute resolution processes typically state escalation routes and may name an independent body to act as an arbiter.

In the event of a dispute, RICS' Dispute Resolution Service (DRS) could assist. The DRS is the world's oldest and largest provider of alternative dispute resolution (ADR) services in the land, property and construction industries. Further information can be found on the DRS website.

4.2.14 Exit and termination provisions

Exit provisions cover what happens at the end of the contract term and termination provisions cover what happens if the DO ends the contract early for reasons of non-performance or convenience, in which case termination fees are often payable.

It is advisable to get legal advice on exit and termination provisions, which typically include matters such as transfer of data, assets and relevant employee transfer regulations as well as work in progress, helpdesk data, maintenance records, stock, final payments and handing over to a new supplier. Putting clear obligations on suppliers will assist with enabling an efficient re-procurement process at the end of the contract or in the event of termination.

4.2.15 Supply chain standards

DOs should seek legal advice on imbedding responsible business standards into the contract itself. Such commitments should ensure that business is conducted with the highest integrity and in compliance with the law, and are likely to cover areas such as:

  • business ethics
  • information and data security
  • labour and anti-slavery requirements
  • health and safety standards
  • social value
  • social factors such as diversity and inclusion and
  • environmental obligations.

The contract should ensure that the products and services in the supply chain are being provided in a responsible manner and where the supplier's proposal provided assurances as to how they are managing their own supply chain to such standards, this should be written into the contract.

4.3 Procurement process

4.3.1 Bidder selection

A difficult decision to make is the number of bidders to invite to the process. In government or public-sector procurement, a standard Selection Questionnaire (SQ) (also known as a Pre-Qualification Questionnaire) is commonly used, whereby applicants provide information about their company and their previous experience. Once evaluated, a smaller number of applicants are then invited to tender (becoming bidders) via the public-sector procurement route being used. It is beyond the scope of this CoP to discuss public-sector procurement processes, but a restricted route is typically used for smaller, less complex procurement processes where the solution is known, and competitive dialogue or competitive negotiated routes where the solution requires development with the market.

If using a public-sector framework, the associated rules of that framework should be adhered to. The DO may be able to select a sole supplier of the framework or may be required to undertake a competition with a minimum number of participants, often known as a mini competition.

In the private sector, subject to a company's financial rules and procedures, DOs can invite as many or as few bidders as they like. Good practice is to follow a robust transparent process like the public-sector SQ processes by inviting a number of bidders to submit responses to RFIs.

However, caution should be taken to ensure that there are enough bidders to drive competition but not so many that it creates an unmanageably high workload evaluating bids that the bidders feel they have little chance of winning.

4.3.2 Procurement stages

Public-sector buyers need to follow the appropriate directives, which will vary depending on the services being procured, the financial value and the degree to which the solution requires development. In the private sector, DOs can design their processes, subject to the organisation's financial rules. Regardless of sector, DOs should assess their requirements and the market capability and design a procurement process that is appropriate for the scale and complexity of their needs. In doing so the following points should be considered.

  • An appropriate number of bidders should be invited to tender. The more bidders invited, the lower each bidder's chances of winning. Invite too many and none may provide the level of attention and resources required. Invite too few and there may not be enough competitive tension or the best value solution provided. There is no right answer; it depends on the DO's requirements, but typically five to ten bidders are invited to participate, sometimes three for smaller single-source procurement processes in the private sector.
  • Tender documentation should be issued in the form of an RFP or an invitation to tender (ITT), including background information, objectives, service specifications, description of the process and stages, tender return forms and templates, evaluation criteria, timetable and key DO contacts.
  • Stages to down select bidders should be built in to the process (public-sector directives permitting). As a procurement process progresses, DOs should filter out the bidders who have the lowest understanding of the requirements and/or whose solutions are unaffordable or unlikely to work. It is advisable to inform bidders when the DO will down select and to how many at the outset. No bidder wants to remain in a process that they have little chance of winning; bidding costs are high and resources are better deployed on other opportunities. Down selection also reduces the workload on the DO's procurement team.
  • Realistic timescales should be set. Bidders need to be allowed enough time to develop their solutions and get the approvals they need before making commitments. It is not reasonable to expect turnarounds in short timeframes. DOs should allow enough time to respond to RFIs and for evaluation.

A typical procurement process could take anywhere from 3-18 months depending on the scale, complexity and the procurement process used.

It is important to understand that bidders have significant costs and competing priorities. DOs should try as far as possible to stick to dates, provide papers or meeting requests with enough notice and be mindful of travelling time, etc. Simple courtesies will go a long way to establishing a professional productive relationship with bidders.

4.3.3 Bidder questions

During the procurement process, bidders are likely to request data and information. The most efficient way of managing this is to set up a system for clarification questions.

  • Design a template for bidders to complete.
    • Provide a single point for receipt of questions.
    • Share answers to all questions with all bidders but ensure that the bidder asking the question is not identified. If a bidder has requested to keep the question and answer confidential because it would disclose something unique about their solution, this should only be accepted after obtaining the consent of legal and procurement advisers.
    • Develop a log to keep track of questions that have been received and those that have been answered. This is critical as DOs can easily be overwhelmed by a lot of questions, often from different bidders asking the same question.

4.3.4 Site visits

During a procurement process it is common practice to visit one or more sites where bidders are delivering similar services. Before doing this DOs should think about what they hope to achieve from such visits. Suppliers are unlikely to take DOs to visit sites where services are not working well or where their DO is unhappy.

It is not recommended to evaluate or score site visits, they are too subjective for that. Instead they should be used for information, as a way of aiding the DO's understanding of the supplier's solution. If a DO does not have clear objectives for site visits it is better not to undertake them, as they use up a lot of time and effort and could provide false comfort.

4.3.5 Final presentations

Before DOs evaluate final solutions or proposals it is common in the private sector to invite bidders to a final presentation or pitch. Final presentations should not be evaluated, but rather used as information to confirm the written solutions that will be evaluated, to see the solution presented as a whole and as an opportunity to clarify elements of the solution. Government or public sector regulations should be followed as regards final presentations, which are often prohibited.

4.3.6 Evaluation

Evaluation of bids is a critical activity in any procurement process. DOs should have clear evaluation criteria that reflect the objectives of the project and these should be shared with bidders to inform their proposals.

A typical evaluation process starts with selecting appropriate individuals to evaluate different sections of the submission and circulating the submissions to these individuals. Good practice is to have a small number of people independently evaluating each section and producing notes and a score, before coming together to discuss the submissions and moderate a score. There are two methods for moderating a score. The group can discuss the strengths, weaknesses and risks of the submissions and agree a score by consensus, or an average score can be calculated from the evaluator's individual scores. The danger with average scoring is that all bidders can end up with average scores, as higher and lower scores cancel each other out, especially when there is a larger number of evaluators.

Clarification questions should be sought when evaluators are not sure about the information they are evaluating. This is about confirming information already provided, not an opportunity for the bidder to add or change information. In the public sector allowing new or changed information could leave the DO open to challenge. In the private sector, a DO could allow additional or changed information to be submitted but should take care to treat all bidders fairly and ethically.

4.3.7 Dialogue and negotiation

Depending on the procurement process, there may be multiple rounds of dialogue or negotiation with bidders. The difference between the two is important as the public sector competitive dialogue route permits dialogue but not negotiation. The public-sector procurement directives should be consulted to ensure that dialogue does not become negotiation.

If the DO is holding dialogue or negotiation meetings, it should set an agenda and allow bidders time to prepare. While DOs may wish to limit the number of bidder attendees, they should allow them to bring the right people for the topic under discussion. DOs should be careful not to disclose other bidders' commercial positions or intellectual property.

4.3.8 Contract award

At the end of evaluation, DOs are able to award a contract to the successful bidder. Before signing the contract, all outstanding issues should be agreed and all terms and conditions in place. If there is to be a period of due diligence, it should be clear when it will start, when it will end and how any discrepancies will be dealt with. In the government or public sector, DOs are required to follow the relevant procurement directives that are in force.

In FM contracts it is common for assets to be discovered that were not included in the price or for assets to be discovered to be in a worse condition than was priced for. Typically, the bidder takes the risk for a proportion of cost change resulting from a due diligence process undertaken during an agreed timeframe and can only seek to increase the price when a value or volume threshold has been crossed. DOs should have a clear mechanism for this and agree how any increase in price will be costed. Legal advice should be sought before signing a contract.

In some cases, DOs will provisionally award the contract pending final negotiations. This can be beneficial in that it allows mobilisation activity to start while final details are still being agreed. In such instances DOs should ensure that legal advice is sought to ensure that cost and liabilities are agreed in case final negotiations break down.

The actual signing process should form part of the project planning. The contract will need to be engrossed. The DO's senior managers and senior managers from the bidder's organisation may need to be in the same place at the same time, along with both sets of procurement and legal advisers. It is not necessary to have a signing ceremony or even to be in the same location for signing, however doing so can be a good way to cement a new relationship. The signing process can take longer than anticipated so DOs should ensure that they understand the governance and legal process of both organisations and allow enough time.

The award and signing of a contract should follow the legal requirements in the territory in which the contract is being entered into.

4.3.9 Feedback to unsuccessful bidders

Provision of feedback to unsuccessful bidders is something to be treated with caution. DOs should balance the desire to be helpful with the risk of creating or adding to the risk of challenge, or cause damage to the relationship.

The safest option is to provide written feedback that addresses the key points in the bidder's proposal or price, stressing both the strengths and the weaknesses. In the public sector DOs should follow the procurement directives regarding the level of information that should be disclosed. It is sometimes advisable to seek legal advice before providing feedback, particularly if some of the points may be contentious.

Extra care needs to be taken with face-to-face feedback meetings or conference calls. There is a risk that DOs may say or disclose information that could open them to risk. To minimise risk, it is advisable to only provide objective facts and stick to a pre-prepared agenda.

It may seem harsh not to provide wider and more subjective feedback as bidders have typically invested a lot of time working with the DO. The best approach is to inform bidders at the start of the procurement process the level of feedback that will be provided and how it will be provided.

In some instances, DOs may return to the bidder who came second if final negotiations are not successful. Formalising this as a 'reserve bidder' status can be beneficial both as a mitigation action against the risk of not concluding negotiations with the preferred bidder and as a tool to keep pressure on the preferred bidder.

4.3.10 Communications

Once the procurement process has begun DOs should control communications with bidders. It is advisable that all written communications go through one channel only and should be filed. For any verbal conversations, for example phone calls, it is advisable to record when the call occurred, who was on the call and what was discussed. Web-based systems are available to manage communications during a procurement process.

DOs are required to comply with relevant data protection rules. DOs should have processes to guard against potential risks, such as sending written communications to the wrong bidder.

4.4 Mobilisation and transition

The period between contract award, or in some cases contract signature and contract commencement, is known as the mobilisation period. It is typically three to four months in length. The period after contract commencement, when the supplier makes changes to implement its delivery model, is known as the transition period.

Poor mobilisation is often cited as a factor when outsourced services contracts fail. DOs should be sure that bidders have robust mobilisation plans.

4.4.1 Mobilisation planning

Planning for mobilisation should start during the bid stage. Mobilisation methods, mobilisation team structures, project plans, dependencies on the DO and risk assessments should form part of the submission requirements. A DO may select the bidder who best meets its requirements but if they cannot mobilise the contract successfully they will never get the opportunity to meet the requirements.

There are costs associated with mobilisation and transition and how to treat these costs is a key commercial consideration.

Mobilisation costs typically include the costs of additional resources to undertake staff meetings, implementation of IT systems, the purchase of equipment and uniforms, etc. Methods of dealing with mobilisation costs include:

  • the buyer pays mobilisation costs upon contract commencement following a successful mobilisation
  • the buyer pays mobilisation costs incrementally on completion of specified milestones during the mobilisation period
  • mobilisation costs are amortised over a set period, which may be the length of the contract and
  • mobilisation costs are included in the contract price.

Amortising mobilisation costs or including them in the contract price will avoid having to pay mobilisation costs up front, which can be beneficial if the DO has short-term budgetary pressures. However, these methods will usually attract interest or a funding charge, so the overall costs may be higher.

DOs will decide which method is best for them and agree with their successful bidder which method will provide the best value for money. For example, if a bidder has to fund high costs for a long mobilisation, better value may be achieved by incremental payments on the achievement of milestones.

In the case of a re-procurement, an incumbent may have low or no mobilisation costs, which places them at a cost advantage over other bidders. It may be appropriate in such cases to not score mobilisation costs or to give them a low weighting in evaluation so as not to give an advantage to one bidder. On the other hand, a DO will have to pay mobilisation costs to change supplier so the cost of doing so should still be considered as part of assessments.

Transition costs can be treated the same as mobilisation costs, but are more commonly included in the contract price.

DOs should have visibility of mobilisation costs. Mobilisation costs cannot be set at $0.00 or even a negative figure unless there is a clear rationale as to why there are no costs. The aim is to prevent hidden costs that do not allow scrutiny and to highlight any attempts by bidders to buy the contract.

Suppliers will sometimes seek to start mobilisation activities once they know the contract has been awarded to them but before contract signature. While this may be helpful in completing mobilisation on time, it does erode buying power from the DO during any final negotiations before contract signature and should only occur at the supplier's risk.

4.4.2 Mobilisation activities

Mobilisation broadly falls into five categories.

  1. The transfer of staff to the new employer, either from previous suppliers or from the DO itself, is the most important part of mobilisation. Suppliers should have detailed plans for this, including staff briefings, consultation meetings, one-to-one meetings, trade union meetings and plans for ensuring staff get paid. Training plans, uniforms, HR support, etc. should also be included in mobilisation plans. In some territories such transfers are not permitted, in particular where migrant labour is involved. Local legal advice should be sought. In instances where there is no transfer of existing staff, recruitment and on-boarding of new staff becomes the most important part of mobilisation.
  2. Due diligence - each side will want to validate the data provided during the bid process. This can include asset lists, operational constraints, equipment provision, back-office procedures and communications, senior staff appointments, etc.
  3. Equipment - the purchase and installation of new equipment such as cleaning equipment, vehicles, engineering tools and IT equipment is an important activity with potential to cause delays if not well planned. Vehicles in particular may have a long lead time.
  4. Systems - operating systems and IT systems such as CAFM systems will need to be installed, configured and tested before going live. Increasingly, mobile technologies will also be deployed and will need to be tested. Access to DO systems and IT architecture is also something that requires careful planning and should be considered at an early stage.
  5. Procedures - the completion of operational procedure documentation, measurement and reporting systems to ensure that services are implemented and monitored effectively from day one

4.4.3 Mobilisation reporting

During the mobilisation period most of the workload falls on the supplier. However, the DO will also have activities that will be delivered to the supplier, internally and potentially to outgoing incumbents. It is very helpful during mobilisation to employ a project management approach, involving staff from both the DO and service provider as a single integrated project team.

There are a variety of ways this can be done, including short daily conference calls, weekly meetings, weekly dashboard reports and more formal gateway reviews at key milestones.

The meeting and reporting framework may change during the mobilisation period and this should be agreed with the supplier. For example, it may not be necessary to hold daily calls early in the mobilisation period, but it could be beneficial to do so towards the end of mobilisation.

4.4.4 Service commencement

The end of the mobilisation period triggers the go-live date or service commencement. On this day at a specified time the supplier becomes responsible for services and staff transfer to the DO. The choice of day and time should be carefully thought through to avoid service disruption. Practical considerations should also be thought of, such as handover of keys, access passes, occupation of office space, distribution of new uniforms, etc. It may be better to go live over a weekend or during a quiet period so that any last-minute problems can be resolved before service delivery is impacted.

4.4.5 Transition

The transition or stabilisation period is the time following mobilisation when suppliers implement agreed changes to the delivery model and achieve steady state delivery. Transition can be slow or rapid; a slow transition may not see changes as rapidly expected but can be less disruptive. Typically transition can occupy between the first 3 months and the whole of year one of a contract.

DOs should understand from the supplier when they are going to make changes, how great the level of change will be, how they are going to manage it and make communication plans with the supplier to inform the rest of the DO's organisation about changes.

4.4.6 Transformation

Longer term changes to service delivery, perhaps over the first year of a contract, are often referred to as a transformation phase. Before transformation, the supplier will have successfully mobilised the contract and transitioned into the new delivery model. Transformation results from the supplier learning more about the DO's requirements, analysing data that they have recorded and developing new ideas for effectiveness and efficiency gains that they could not have identified before being responsible for the services. It is during a transformation phase when gainshare mechanisms can come into play to share benefits arising from transformation between the supplier and the DO. Transformation will typically not continue for more than a year. Smaller changes and improvements after this should be considered as continuous improvement.