Developing effective contracts for the public sector

Public procurement professionals have an increasingly difficult job when it comes to developing and awarding contracts. They have to quickly understand and synthesize new information to provide best value services for their agency. Contract managers must anticipate the needs for a number of different users, including internal users (e.g., agency subject matter experts, lawyers, and maintenance personnel) and external users (e.g., contractors and the public). Key information in the contract must be presented in a manner that is clear, concise, complete, and orderly. This task requires significant skill on the contract manager’s behalf because they must be able to conceptualize an entire project, ask analytical questions, understand sequential steps, translate complex thoughts into words, and manage the process.

A contract manager’s time is more effectively used when they do not have to spend time rebidding and renegotiating contracts. Reducing the number of rebid contracts an agency has requires that an agency spend more time researching the requirements, developing the scope/requirements, and including the proper legal clauses in the contracts at the beginning of the process. Although, this is more time consuming, doing the additional work up front saves time and money in the long run because it reduces the possibility of having to do a rebid. In addition, well-written contracts minimize the number of costly legal disputes and delays in service an agency has with contractors. When an agency and contractor cannot come to a resolution on the meaning behind a contract term, not only is the provision of service delayed, but the long-term effects can be damaging. Many times the only viable option is to resolve the dispute in court. Costly legal battles drive up the cost of services to public agencies, even if the agency wins; this is because the agency must still prepare for the legal battle using staff time and agency resources.

Well-written contracts save public agencies money. When the scope and terms of a contract are clearly defined, a contractor’s risk subsides, allowing them to be more competitive with their pricing. Contractors who are clear on what is being requested of them can more accurately develop their proposals. Contractors tend to inflate their contract pricing when the contract scope and terms are unclear; in order to cover any risk they may incur, contractors may add an additional “cushion” to their pricing. They also may use ambiguous contract language to provide inferior products or services that are less desirable than what the agency originally intended.

At a time when public agencies are more conscientious about how public dollars are spent, it is imperative that contracts are initially developed with an end-goal in mind on how they will be administered once the process is complete. Five steps contract managers can follow to develop effective contracts are:    

1. Develop clear specifications/scope of work

Every contract should specify what is expected of the contractor. This allows the contractor to be clear on their role and responsibility. It also allows the agency and contractor to determine when the contractual obligation has been fulfilled. Well-written contracts should include delivery requirements and milestone completion dates. In addition, the contract should specify what the end product should look like once the contract is complete. For example, a professional services contract for an operational review may state that the final deliverable is a report that details a new organizational structure and a presentation to the agency’s governing body.

Contract managers should ask themselves the five Ws (What, Where, When, Who, and Why) to help develop clear specifications/scope of work. These five basic questions can help generate more detailed questions that will help shape the contract and ensure that basic requirements are not omitted. The table below provides a comprehensive list of questions that contract managers should consider when drafting scope of services and contract requirements.  

ComponentGeneric questionDetailed questions
What?What do you need?
  1. What is the complete description of the items/services needed?
  2. What are the expected outcomes?
  3. What are the quantities and unit of measure needed?
  4. What is the frequency of need?
  5. Are there future needs?
  6. Is any additional training or are warranties needed?
Where?Where is the physical location of delivery or performance?
  1. Where will the services be performed or delivered?
  2. Who is the agency contact person?
When?When do you need it?
  1. What is the timeframe/term for delivery or service performance?
  2. Does the contract require renewal options for future needs?
  3. Are there project milestones (e.g., monthly, quarterly, upon completion)?
  4. What are the payment terms?
Who?Who will perform, provide, or receive the services?
  1. Are there any special requirements (e.g., insurance requirements, vendor certifications)?
  2. Do firms need to have any special qualifications/certifications (e.g., familiarity with biohazard waste, auditing experience, or construction experience)?
  3. Who will provide approvals?
Why?Why do you need it?
  1. Is this a first-time request?
  2. Is this a replacement purchase?
  3. Are services being outsourced or augmented, or is advice necessary?

There is no guarantee that the list of detailed questions will be applicable to every contract. However, this is a good checklist to ensure that contracts include the basic requirements for a specifications / scope-of-work section.

2. Establish a baseline for cost and quantity

It is important to establish clear cost and quantity baselines prior to procuring a service and awarding a contract.  By understanding the current costs for services now being provided—either internally or to other public agencies—the agency is able to determine if they are receiving fair and reasonable pricing from vendors once the bids are received. This sort of analysis provides a point of reference for a more thoughtful analysis between the services now being provided versus those that are proposed. Such analysis allows contract administrators to determine if the proposed new contract will provide any cost savings and improvements in services provided.

During the contract award phase, it is important to document the contract award amount within the contract. This allows the vendors to know what their maximum contract value is so that they do not exceed the agency’s budget. In most commodity contracts, unit price prevails. This means, regardless of the number of widgets an agency purchases, the individual price for one widget will not fluctuate no matter when it is purchased or what quantity is purchased for the life of the contract. At a time when public agencies are conscientious about their budgets and are looking for ways to save money, it is important that projects stay within budget. Placing the contract award amount in the contract makes vendors equally responsible for managing their contracts.

3. Develop strong contract language

A strong contract is the by-product of a well-written procurement solicitation document. The contract should stipulate language that details minimum performance standards, dispute resolution steps, and penalties for failure to meet performance expectations. A sample list of essential clauses includes:

Legal clausePurpose
Abandonment or defaultIn the event that a contractor fails to perform, or defaults, this clause states that the agency reserves the right to cancel the contract, re-solicit the request and award the contract to the vendor that meets the requirements. Most agencies do not allow the defaulting contractor to be considered in the re-solicitation process. Some agencies go a step further and prohibit the contractor from being considered on future procurements for a set period of time. The period of suspension will be determined by the agency, based on the seriousness of the default.
Contractor responsibilityStipulates that the contractor shall comply with all federal, state, and local laws, statutes, ordinances, rules, and regulations. It also stipulates that the contractor is responsible and liable for the safety, injury, and health of its contractors and employees while performing work at the agency’s site. Finally, this clause states the applicable labor and equipment the contractor is required to have to perform the requested services.
Certificates and licensesState statute and local ordinances detail the requirements for certification. This may include certificates of insurance, business licenses, professional licenses, and hazardous waste removal licenses. Whenever a certificate or license is required, the contractor should be required to submit a copy of the document prior to contract award.
Dispute resolutionThe dispute resolution process prescribes the steps for the contractor and agency to resolve their differences once it is clear that the dispute cannot be resolved through the course of regular business. Dispute resolution clauses typically state that if the agency and contractor cannot resolve their differences through direct discussions and negotiations, then the disputes may be mediated by a neutral third party, resolved at the final determination of the agency’s Chief Procurement Officer, or settled in court.
Non-appropriationA non-appropriation clause states that an agency will not be obligated for the contractor’s performance if the agency does not receive funding for the contract beyond the initial fiscal year. In the event that money is not appropriated to continue services, then the agency will notify the contractor in writing and the contract will terminate typically thirty days thereafter or at the end of the fiscal year for which funds were last appropriated.
Proprietary or confidential informationStates that the contractor will not disclose proprietary or confidential information that it may receive while working for the agency without prior written consent of the agency. In the event that the contractor is faced with legal action due to disclosure of the proprietary or confidential information, then the contractor is required to indemnify and hold harmless the agency and its employees from any applicable claims or damages that may arise. This protects the agency from legal lawsuits.
Right to auditProvides a means for the agency to audit the contractor’s records during and after the contract. Further, this clause requires that the contractor cooperate fully with the agency and their representatives during an audit or investigation. This clause stipulates how the contractor is to maintain its fiscal records, work papers, reports, books, data, files, software, records, and other supporting documents pertaining to the contract and provides a determined timeframe for keeping the records after the contract has ended and the final invoice issued.
SubstitutionsSubstitutions are not permitted without the written approval of the agency. This clause is typically applicable to goods; however, it can apply to some services. For example, when contracting for forensic accountants, if the selection is made based upon the assignment of highly qualified personnel, and then after award the contractor substitutes less-qualified individuals, this can be a problem for the agency. For these types of service contracts, a provision should be added which requires substitution only with equally qualified personnel and prior agency approval.
Termination clauses

Stipulates that the contract will terminate upon completion of the terms within the contract. There are two types of termination clauses:

  • Termination for Convenience states that the agency and the contractor reserve the right to terminate the contract at any time for convenience and at no fault of either party by providing advance written notice of its intent to terminate. Typically, the agency will not allow the contractor to terminate for convenience unless the agency can do so as well. However, the agency may include this clause in the contract, but not allow the contractor to terminate for convenience.
  • Termination for Cause is when the contractor is provided a written notice of default for failure to perform in full compliance with the contract requirements, through no fault of the agency. Once the contractor receives its written notice to terminate, the contractor shall promptly discontinue all services and is required to deliver all data, drawings, and materials accumulated while performing duties under the contract to the agency.

Clauses such as these are essential for contract effectiveness and should be considered when developing contracts. It is recommended that, prior to including these clauses in contracts, agencies consult with their legal counsel and statutory requirements regarding the applicability.

4. Develop clear performance measures

The National Institute for Government Purchasing defines performance measurement as “the process by which procurement establishes criteria, based on strategic planning goals, for determining the results and quality of its activities.”1 It involves creating a system for determining whether procurement is meeting its objectives.

In order for contract managers to identify if they are getting what they paid for once the contract is awarded, the solicitation document must identify the level of quality required for acceptable performance. The agency may use commercial standards established by the American National Standards Institute (ANSI), American Society for Testing and Materials (ASTM), or International Organization for Standardization (ISO) to assist in defining the contract performance requirements2. Using established standards provides consistency in measuring acceptability, quality, and accuracy and can be incorporated in the contract by reference.

If established standards are not available, then agencies must define contractor requirements in a manner that allows performance to be monitored against known levels of acceptability.  Examples of this include:

  • Benchmarking
  • Efficiency ratings
  • Outcome measures
  • Past performance
  • Specific technical data such as plans, drawings, or reports
  • Performance indictors/targets

Agencies need to continuously evaluate performance measures in contracts to determine if the measures are accurate, meaningful, relevant, and focused on the right outcomes.

5. Perform ongoing contract management

Monitoring the performance of the contractor is a key function of proper contract management. The goal of contract administration is to ensure the contract is satisfactorily performed and the responsibilities of both parties are clearly understood. Effective contract management minimizes problems and reduces potential claims and disputes.

The primary objectives of contract management are to:

  • Verify contractor performance for purposes of payment;
  • Identify material breach of the contract by assessing the difference between the contractor’s performance and contract requirements; and,
  • Determine if corrective action is necessary and take required action.

Contract management occurs through site visits to the contractor’s office, review and submission of reports, inspection of work performed, and audits/investigations. All vendor reports should remain in the contractor’s vendor file for future reference.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.


1National Institute of Governmental Purchasing. “Public Procurement Practice: Performance Management” www.nigp.org/eweb/docs/Practices/PerformanceMeasurement.pdf
2Elisabeth Wright, Ph.D., CPCM and William D. Davidson. Contract Administration in the Public Sector. (Herndon, Va: NIGP, 20111)Page 70