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September 9, 2013
A closer look at long-term contracts
Procurement Perspectives | Stephen Bauld
Municipalities are now entering into long-term contracting agreements. To a very large extent, the nature of municipal operations (i.e., the operation of ongoing programs, the delivery of continuous services, such as fire, ambulance and policing) lends itself to long-term contracts.
However, historically, the terms of municipalities elected officials have been both fixed and short.
Since there are obvious political disadvantages in having one municipality council saddled with a large number of long-term contracts entered into by its predecessors, there has been a strong preference in municipal contracting for contracts of relatively short duration. This practice is unfortunate, because there are significant opportunities for cost-saving in many longer-term types of arrangements. Fortunately, the trend is now in the other direction.
Many municipalities prefer not to let out contracts for longer than a single council term, and thus in many cases procurement contracts will be set up on a three year cycle. One will often find that service contracts for plumbing, electrical, grass-cutting, snow plowing, to name but a few, are set up on a three-year basis.
Contracts dependent upon provincial (or federal funding) are often entered into on a single year basis, in view of section 11.3(2) of the “Financial Administration Act” (and its federal equivalent) which provides: — 11.3(2) Every agreement providing for the payment of money by the Crown is deemed to contain a provision stating that the payment by the Crown of moneys that due under the agreement shall be subject to, an appropriation to which that payment can be charged being available in the fiscal year in which the payment becomes due; or the payment having been charged to an appropriation for a previous fiscal year.
In order to control the quality of service that is provided, longer-term contracts require a built-in method of performance monitoring. Frequently, such contracts will be set up to provide for a formal annual review during each year of the contract, at which time the municipality will have the option to decide whether to continue the contract for a further year, or terminate it on the basis of the performance record.
In legal terms, care must be taken in drafting contractual provisions of this sort, or otherwise the process will not work at all. It is highly advisable to make clear in the document that the annual review process does not allow the contractor up to a year to get things right. Even if the language of the documents are correct, a municipality would be wise to document any deficient work over the course of each year, and to notify the contractor of any perceived deficiency well in advance of the formal review meeting.
A failure to demand that deficient work be rectified may colour a court’s perception of any subsequent effort by the municipality to terminate the contract. Unless the contractor was told at the time what it was doing wrong, and what it needed to do to perform at an acceptable level, any effort to terminate the contract at the review stage is likely to come across as little more than an effort by the municipality to shed itself of an expensive contract.
Subject to the foregoing concerns, the annual review process should be incorporated into every long-term service contract. There should be both rewards for top performance and potential penalties for poor performance. Indeed, the approach is for contracts to provide for an ongoing comparative review as against other sources of supply.
Paradoxically, proper service review and performance appraisal is rare in municipal contraction.
The tendency is to complain if necessary, but not necessarily to complain. Such an approach is of limited value from a forensic perspective.
Stephen Bauld, Canada's leading expert on government procurement, is a member of the Daily Commercial News editorial advisory board. He can be reached at firstname.lastname@example.org.
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