PROCUREMENT CONTRACTS MANAGEMENT

MANAGE PROCUREMENT CONTRACTS

LECTURE GUIDE - NOTES

6.1 Introduction
Procurement contracts management unit of competency is a core unit of competence
offered in the TVET level 6 qualification for supply chain. The unit specifies the
competencies required to manage procurement contracts which involves establishing and
maintaining a good relationship between vendors and the procuring entity, monitoring the
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progress of procurement contracts and evaluating vendor contract performance. This unit
is significant in providing contracts management skills to the trainee in the field of
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purchasing, warehousing and materials management which will enable him/her to
succeed in the today’s fast paced business environment.
The critical aspects of competencies to be covered includes demonstrating ability to
develop tools and schedule for monitoring contracts progress, monitoring progress of
contracts and preparing progress report, taking appropriate action-based progress report,
preparing clear specifications for procurement of goods, works and services, conducting
vendors and bids evaluation and awarded contracts fairly, objectively and legally,
demonstrating understanding of incentives used to enhance buyer supplier relationships.
The basic resources required include; computers, stationery, classroom and classroom
resources, the constitution of kenya 2010, Public Procurement and Asset Disposal Act
2015 and its regulations, Public Officers Ethics Act, Anti-Corruption and Economic
Crimes Act 2003, and Pubic Finance Management Act 2012. This unit covers three
learning outcomes. Each of the learning outcome presents learning activities that covers
performance criteria statements, thus creating trainees an opportunity to demonstrate
knowledge and skills in the occupational standards and contents in the curriculum.
Information sheet provides definition of key terms, content and illustrations to guide in
training. The competency may be assessed through written tests, demonstration practical
assignment and case study. Self-assessment is provided at the end of each learning
outcomes.

6.2 Performance Standard

Manage procurement contracts, monitor the progress of procurement contracts, manage
vendor relationships, evaluate vendor contract performance in accordance with workplace
policy, the monitoring schedule and legal requirements and standards operating
procedures.

6.3 Learning Outcomes

6.3.1 List of learning outcomes
a. Monitor progress of procurement contracts.
b. Manage vendor relationships.
c. Evaluate vendor contract performance.

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 6.3.2 Learning Outcome No 1: Monitor progress of procurement contracts
6.3.2.1 Learning Activities
Learning Outcome No 1: Monitor progress of procurement contracts
Learning Activities Special Instructions

1.1 Develop tools for monitoring progress (data  Groups of 5-10 to develop
collection tools) of contract based on tools to monitor business
parameters to be measured. progress
1.2 Monitor contract progress schedule developed
as per workplace policy.
 4
Provide a sample contract
monitoring report
1.3 Conduct contract progress monitoring in  07273 4
Class tests
accordance with the monitoring schedule.
1.4 Prepare contract progress monitoring report as

6 3
Simulation

per workplace policy.

1.5 Take action on the contract progress report
based on workplace policy.

6.3.2.2 Information Sheet No6/LO1: Monitor Progress of Procurement Contracts

Introduction
Contract progress monitoring is conducted in accordance with the monitoring schedule.
This unit will specify the competence required to monitor progress of procurement
contracts. It will expose the trainee to the legal requirements that are followed in the
monitoring of the procurement contracts. The learning outcome will also expose trainees
to the contract progress report.

Definition of Key Terms

Monitoring progress tool: These are the tools used by the Contracting officers
Representative (COR) for post-award management of the contract. The COR uses these
tools to monitor contractor performance based on contract terms and conditions.
Legal requirements: These are the stated rules and regulations required by law for
engaging in a certain activity (business) i.e. official approval, a license or a permit.
Contract progress report: It means a report prepared by the contractor in the form and
details prescribed by the specification and submitted in a certain agreement upon period
to the clients in accordance with standard operating procedures.

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Content/Procedures/Methods/Illustrations
6.1 Contract Monitoring
Contract monitoring is a process of making sure that vendors adequately or efficiently
perform a contracted service or work.
1.1 Tools for monitoring progress of contract are developed based on parameters to
be measured
Tools for monitoring progress
The most effective tools for monitoring contractor performance based on contract terms
and conditions are as stated below:
 Contractor Progress Reports
 Contractor Quality Assurance Plan (QAP)
 Quality Assurance Surveillance Plan (QASP)
 Earned Value Management (EVM)
 Performance Assessment
 Product or Service Inspection and Acceptance
 Contract Administration Plan (CAP)
Development of tools for monitoring procurement contract progress
A successful procurement contract progress is dependent on effective contract management
and contract administration processes and tools which result to lower operational costs,
increased user agency, efficiency in delivering services to taxpayers, and user
satisfaction. The following are essential elements for development of tools to monitor
contract progress;
 Preparing a Contract Administration Plan (CAP).
 Scheduling regular meetings or on-site visits to customer agencies to monitor and
discuss the progress of the contract and the performance of the contractor.
 Convening kick-off meetings.
 Training for best practices in contract administration.
 Collecting meaningful data from user agencies.
 Establishing good communication between the central procurement office and
customer agencies before, during and after the contract has been awarded and
signed.
 Assessing contract risks and monitoring after the contract has been awarded.
 Using tracking tools to monitor spending patterns and whether a contract is
working as intended.
 Establishing performance metrics.

1.2 Contract Monitoring Progress is Scheduled

Contract administration plan
This is a document developed as tool in the pre-award stage of contract management to
aid in contract monitoring and ensures that all activities are carried out effectively by
the

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contractor. The following is the information documented in the contract administration
plan (CAP):
 Contract administration team members.
 Justification of solicitation source section method.
 Scope of work on specification that include deliverables.
 Contract goals.
 Pricing structure for contract.
 Delivery terms and requirement.
 Potential contractual risks and assignment risk levels.
 Key contract terms and conditions to include risk mitigation and information
security.
 Contract monitory methods.
 How performance will be measured and accepted.
 Milestones for measurement (linked to payment terms).
 Payment terms.
 Reporting methods and frequency.
 Documentation required.
 Names of contract administration team members responsible for measuring
performance, reporting, documenting files, payment, approval of change orders,
contract close out checklist, procedures and who is responsible for contract
closeout files.

Functions of the central procurement office during contract administration

The central procurement office should work with users’ agencies to determine:
 Roles and responsibilities and who is responsible for each activity.
 How performance will be evaluated.
 Reporting tools and processes.
 Monitoring methods.
 Process for resolution of dispute and claims

Aspects of contractor performance

 Delivery i.e. lead time
 Service level
 End user and stakeholder’s vendor performance rating
 Final decision on agency complaints

Best practices in monitoring procurement contracts progress

 Gathering feedback from user agencies or department about the service or work
done through survey, telephone or face-face inquiry.

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  Documenting and maintaining of contract file to ensure the delivery is in line with
the contract requirements issues addressed timely.
 All contract performance reports should be properly documented and included in
the official contract file.
 The contract file should contain the essential record of contract award and
performance.
 Documenting contract compliance and performance issues when the contractor
has underperformed as agreed upon and addressing them timely.
 Regular communication with the contractor to identify problems in time.
 Dispute resolution processes being in place to resolve problems and reach
agreement rather than seeking legal solution.
 Anticipating amendments such as contract prices, time of performance, extension
and renewals since contract changes are inevitable.
 Provision of written guidance by the procurement manager to agencies on contract
dispute and escalation procedures.
 Poor or non-performance should never be accepted.

1.3 Conducting Contract Progress Monitoring

Developing of procurement contract progress monitoring schedule Contract
progress monitoring schedule
This is where a procurement manager plans out each contractor’s activity for the project
work. It includes the following information:
 The company’s standard documents to be used.
 The types of contracts the manager plan to use and any metrics that will be used
to measure the contractor’s performance.
 The planned delivery dates for the work or products the manager is contracting.
 The number of vendors or contractors involved and how they will be managed.
 How purchasing may impact the constraints and assumptions of the project plan.
 The coordination of purchasing lead times with the development of the project
schedule.
 The identification of the prequalified sellers (if known).

Implementation of contract monitoring schedule

a) Procurement team
List everyone authorized to participate in the procurement planning and decision-making
process with their contract information.

b) Item requirement
Item requirement include several levels of information about every item that needs to be
purchased. Gathering information about all materials required by the project depending on

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the type of project. This list might include tangible assets i.e. building materials or
equipment and intangible assets like software licenses. Include all pertinent information
about each item, size, quality, technical requirement and any information that ensures
purchase of the correct tool or material for the job.

1.4 Preparation of Contract Monitoring Report

Preparation of contract progress monitoring report
The progress report: Is a document prepared by the project team members or by the
management team members to provide regular feedback to the contract manager
regarding the progress of the contract. The vendor provides weekly or monthly progress
report of the actual status adequate to allow the supplier to monitor the progress against
the original schedule and toward the timely completion. The contract progress monitoring
report should reflect the work left to be completed and the completed work as per
standard operating procedures. It may also include tasks that have been delayed and
require rescheduling.

Basic requirements for preparation of contract progress monitory report

 Look at what has happened since the last review.
 Plan the way forward from the current point in time.
 Revise the schedule as necessary.
 Communicate the revised schedule to all concerned parties.

1.5 Action is taken

Implementation of contract progress report
Performance reporting: It is about collecting, processing and communication
information to key stakeholders regarding the performance of the project. it can be used
using various tools and techniques such as;
 Performance review meetings that take place to assess the projects progress.
 Variance analysis which is about comparing actual project results (in terms
of schedule, resources, cost, scope, quality and risk) against planned or
expected ones.
 Earned Value Analysis (EVA) used to assess project performance in terms of
time (schedule) and cost.
 Financial and output performance indicators-used to measure financial and
physical progress of the project.

Typical contents of a progress report

 Reporting period
 Project title
 Project managers name
 Authors of the report

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  Date of submission
 Project synopsis
 Project progress in the reporting period
 Work program for the following reporting period
 Updated and revised activities schedule

Conclusion
This learning outcome unit covered contract monitoring schedule, report and their
preparation and implementation as per workplace policy. It also talked about the required
tools and techniques in procurement contract progress monitoring and contractor
performance measurement and management.

6.3.2.3 Self-Assessment
Written assessment
1. The procurement manager approves the purchases requested by the user department.
(yes or no).
2. The following are the contents of a progress report. Which one is not?
a) Reporting period
b) Project title
c) Date of submission
d) Lead time
3. Which one of the following is not a content of progress report?
a) Project title
b) Synopsis
c) Reporting period
d) Company name
4. Which one is not an aspect of contractor performance?
a) Delivery i.e. lead time
b) Service level
c) End user and stakeholder’s vendor performance rating

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 d) None of the above
5. Highlight five functions of the procurement manager during contract management.
6. Define performance reporting.
7. Research on what the contract file should contain as far as the essential record of
contract award and performance is concerned

Practical Assessment
Visit a busy manufacturing firm and engage the procurement for you to analyze sample
monitoring reports and pick out the specific areas.

Project
Compare two manufacturing firms and evaluate the similarities and differences in their
monitoring of contract tools.

6.3.2.4 Tools, Equipment, Supplies and Materials

 Direct instruction
 Role play
 Case studies
 Field trips
 Discussions
 Demonstration by trainer
 Practice by the trainee
 Simulation

6.3.2.5 References
Department of Health (DH), (2013). Securing Best Value for NHS patients:
Requirements for Commissioner to Adhere to Good Procurement Practice and
Protect Patient Choice. London: DH.
Department of health DH, (2011). Equity and Excellence: Managing the Transition.
London: DH.
Kirkman, Marshall M., (1887). The Handling of Railway Supplies: Their Purchase and
Disposition. Chicago.
Lewis, M.A. and Roehria, J.K. (2009). Contracts, Relationship and Integration: Toward a
Model of the Procurement of Complex Performance. International Journal of
Procurement Management, 2(2):125-142.
National Audit Office, (2011). The Procurement of Consumable by NHS Acute and
Foundation Trusts. London: National Audit Office.

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 6.3.3 Learning Outcome No 2: Manage Vendor Relationships
6.3.3.1 Learning Activities
Learning Outcome No 2: Manage vendor relationships
Learning Activities Special Instructions

2.1 Prepare clear specifications in accordance with needs  Groups of 5-10

of user as per workplace policy.  Class tests
2.2 Evaluate vendors fairly and objectively as per legal  Simulation
requirements (contract, procurement laws, terms and
conditions).
4  Visit a functional
supermarket and
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2.3 Award contracts fairly and objectively as per legal engage the marketing
requirements and standards operating procedures.
6 3 manager to determine

to vendors as per workplace policy. WhatsAp

2.4 Give incentives (extended contracts, timely payment) how vendors are
evaluated
p
2.5 Exercise flexibility based on the case at hand.
2.6 Pay vendors in accordance with the contract and
workplace policy.
2.7 Appraise vendors as per SOPs. Manage Buyer-Supplier
relationship.

6.3.3.2 Information Sheet No6/LO2: Manage Vendor Relationships

Introduction
This unit specifies the competency in vendor evaluation and awarding of contracts which
should be done fairly and objectively as per legal requirements and standards operating
procedures. It exposes the trainee to the supplier appraisal and criteria for selecting new
suppliers.

Definition of Key Terms

Incentives: A thing that motivates or encourages someone to do something.

Legal requirements: These are the stated rules and regulations required by law for
engaging in a certain activity (business) i.e. official approval, a license or a permit.

Supplier appraisal: An assessment of the potential supplier so as to be used as the

company future suppliers. Basically, used for selecting new suppliers.

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Content/Procedures/Methods/Illustrations
2.1 Clear Specifications are Prepared
Preparation of specifications of needs/requirements in contracts
Specifications are statements of requirements from the supplier.

The general process of developing specification

a. Planning and analysis
Planning takes place before writing begins. Key people who can help such as purchasing
staffs, technical officers, project officers and manager. Planning helps in understanding of
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requirements and alternative solutions defining and knowing what is available to meet the
agency or department needs.
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Value analysis-Can be to highlight and explore possible solutions. It’s a complex cost
technique requiring expertise for its successful use.
b. Consultations and information gathering
Can be obtained by discussing with purchasing officers, technical and users of other
similar goods or services within the department agency. Purchasing should be involved
from start to the end. Other sources of information include:
 Other department’s federal and local government. Either industry association
or companies ensure that industry does not assume pre-offer negotiations.
 Educational institutions e.g. universities and TAFE institute.
 County standards
 Industrial supplies office limited (ISO Queensland which can assist in
identifying and evaluating appropriate local industry capabilities).
c. Writing specification
 Use of simple language without jargon to minimize misinterpretation.
 Define terms, symbols and acronyms.
 Do not explain the same requirement more than one section.
 Define each aspect to the requirement in one or two paragraphs if possible.
 Adopt a user-friendly format.
 Number the sections and paragraphs.
 Seek feedback from someone.
 Discuss the draft and refine it.
 No fixed rules on formats and structures because each specification effects a
different requirement or need.
 A specification should list the functional performances and technical
characteristics separately.
Refine the structure before writing by discussing with colleagues and purchasing officers.
Include: tables, sketches, diagrams and statistical matter. If these helps to make the
specification clearer. Be careful that these types of information do not limit the options
for offers to provide alternative solution.

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d. Vetting specifications and obtaining approval
After writing the specification, ask a colleague who is unfamiliar with the requirement to
criticize it from a potential supplier’s view. Try to identify improvements by considering:
 Reliability
 Simplicity of meaning
 Clarity
 Logic
 Seek approval from the appropriate financial purchasing delegates in the

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department/agency after vetting the specification.

e. Issuing the specification 44

The specification should be included as part of “invitation to offer” document. The
invitation to offer should target suppliers that are capable of meeting the specification by
direct approach, coffer market analysis or through advertising in news, websites, industry
magazine, etc.

f. Revising and storing the specification

Specification should be renewed at the end of the purchasing activity to ensure that it
effectively defined the goods and services that were actually bought when review is
completed and relates to goods or services that are likely to be purchased frequently or
when review specification has been completed and it relates to goods and services that
are likely to be purchased.

g. Selecting the right approach to describe requirement

 Use of a brand name or samples frequently best described requirements.
 Use of brand name is appropriate.
 Obtain desired level of quality or skill when these are not described.
 Gain the benefit of wide advertising of the brand name.
 Accommodate users who have a bias or prejudice (whether founded or
unfounded) in favor of the brand.

How specification should be written

 Use of simple language.
 Adoption of user-friendly format.
 Define terms, symbols and acronyms.
 Number sections and paragraphs.
 Seek feedback from people.
 Be concise.
 Discuss draft and define it.

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2.2 Vendors Evaluation is Done Fairly
Evaluation of vendors
Evaluation criteria
The basic evaluation criteria:
 Cost
 Quality
 Delivery performance
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a) 44
Supplies cost: An organization can measure cost in a number of ways. Most
common method is to track supplier’s real cost after adjustment for inflation.
Another method is to compare supplier’s cost against others within the industry or
business.
b) Quality: A buyer can compare quality against some previously specified
performance objectives. Track improvement rates and compare with similar
suppliers. It is important for a supplier to define clearly supplier’s quality
requirement.
c) Delivery performance: Orders or material releases sent to a supplier have a
quality and material due date. A buyer can track how well a supplier satisfies the
quantity and due date commitments. A buyer can also track the supplier’s material
lead time.

NOTE: Quality lead time performance and due date compliance helps define a supplier’s
delivery performance.

Other qualitative factors to be measured

 Problem resolution ability
 Technical ability
 Supplier new product support
 Supplier management capability
 Production scheduling and control system
 Information system capability
 Electronic data interchange
 Long term relationship potential

Reasons for evaluating supplier’s performance

 It signifies supplier performance.
 Assists in decision making regarding whether a supplier is to be retained or
removed.
 Assists in deciding to which supplier a specific order should be placed.

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  Prevents performance slip page.
 Provide suppliers with incentives for continuous improvement.
 Helps decide how to distribute the expenses for an item.

Common supplier rating methods

a) Subjective method: Generally assigned as a questionnaire with numerical rating
scale compared with a number of viewers. This is a simple approach with the
small businesses with a supplier base.

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b) Survey method: It is a purchased service in which a research organization
contacts a number of other customers to obtain their view on the performance of a
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supplier. It is usually used by large organizations.
Disadvantages
 Expensive
 Evaluation is based

c) Comparative method: Suppliers are evaluated independently on agreed factors

such as price, quality and delivery.
d) Weighted point method: A weighted factor is established for each of the area
score is assigned to each factor that indicates supplier performance. The score is
multiplied by the weight and then averaged.
e) Percentage based methods: It measures the percentage of quality defects of late
delivery and uses that percentage to rate the supplier.
f) Cost based method: Evaluate supplier performance based on total non-
productive cost associated with supplier’s performance. Non- productive cost is
estimated cost of non-compliance e.g. cost of rejection.

Function of specification
 Helps supplier to give the organization quality goods.
 Helps in comparison between quotations from different suppliers.
 Helps to solve disputes arising from what has been supplied.

Types of specification
a) Standard specification
This is used for recurrent needs.
Advantages of using standard specification
 Facilitates communication.
 Cost effective.
 Results in wider competition and lower prices.
 Can be used in an organization standardization programs resulting into purchasing
savings, price inspection, material handling.

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  Standardized items are readily available.
 Designs by professionals’ societies are often state of art and tested.
 Cost of developing a design specification is avoided.

Disadvantages
 Maybe dated. The buyer may take advantage of the latest technology.
 Specifications may call for inputs or processes that are difficult or expensive to
achieve.

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 Use of standardized result to purchase of standardized items. The incorporation of
such standardized items may conduct with marketing desire to sell a unique
product. 44
b) Design specification
Spell out in details the materials to be used, their sizes, tolerance exact chemical and
physical characteristic and how the item is to be fabricated.
Advantages of design specification
 Purchasing organization avoid purchasing on a single source basis and enjoy cost
saving.
 Purchasing organization avoid paying.
 Facilitate cooperates standardization program and many saving are enjoyed through
such a program.
 Can solve a problem that no supplier can design if it’s true.
Disadvantages
 Expensive to develop both time and human resources required.
 Purchaser is responsible for adequacy of specification and buying firm may use
obsolete.
 May deny purchaser latest advances in both technical development and
manufacturing process.

c) Performance specification
It generally describes a product by capacity, function or operation instead of its chemical,
physical or quality characteristic. Supplier need demonstrates acceptable performance to
achieve acceptance of product.
Advantages of performance specification
 Easy to prepare.
 Their use of performance specification tends to avail the purchaser to latest
technology.
 Purchaser obtains specified level of quality.
 several already designed items can meet performance specification depth of
competition is enhanced.

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  Allow a greater degree of innovation by suppliers

Supplier relationship management

It is the interaction between two or more parties either by buying or supplying goods and
services. The relationship must be of two way and it should be in the position to benefit
either from the parties by improving its performance.

Satisfaction profitably
Management and building of this relationship involve 3 phases i.e.

i. WhatsApp 0726 733

Initiation phase: During this phase all parties concerned identify their needs as
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well as their inspiration taking into consideration the strategic fitness of all
parties.
ii. Agreement phase: The parties determine how their needs will be met and how
the specification will be sold, who will be responsible for determining and
defining performance indicators as well as how they will be measured.
iii. The delivery phase: The parties perform their obligations as defined within the
agreements which must be acceptable to both of them. in most cases it is the
longest phase characterized by continuous improvement, supplier performance
measurement, supplier rating as well as quality.
Conflict in supply relationship
 Delay in delivery.
 Lack of information.
 Poor quality products and services.
 Delay in payment.
Advantages of buyer-seller relationship
 Development of pure mutual trust.
 This is the foundation of all strong relationship, trust refer to the belief, to the
character, ability strength or truth of another party.
 Solving product quality problems.
 Working together with the supplier enables teams from both sides to assess the
quality of the products and come up with ways of improving on the quality
leading to low cost for the buyer.
 Opportunity to evaluate which supplier should receive long term contracts.
The characteristic of successful buyer-seller relationship
 Win-win approach reward sharing.
 Joint effort to resolve disputes.
 One or limited number of suppliers for each purchased item.
 A commitment to quality defect free product having correct specifications as
required by the buyer.
 Open exchange of information i.e. on new products, cost etc.

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  A credible commitment to work together during difficult times.

2.3 Contracts awarding.

Factors to consider in supplier selection
 Cost.
 One should look for suppliers with fair prices.
 Quality.
 Suppliers with improved technology/equipment are likely to produce quality goods.
 Availability.
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 If the supplier is present when they are needed for any supplies.
 Innovation. 44
 The capability of a supplier being able.
 Responsiveness.
 How quick one can respond.
 Commitment.
 If the supplier is committed to work with the buyer.
 Risk mitigation.
 Showing machines to mitigate the risks.

2.4 Incentives are Given to

Vendors Supplier incentives
Supplier’s incentives are well described when an organization (buyer) aligns its
incentives that is if the risks, cost and rewards of doing business, are distributed fairly
between the parties.
Importance of aligning supplier incentives
 To prevent excess inventory.
 To prevent stock out.
 To avoid incorrect forecasts.
 To encourage adequate sales efforts.
 To promote good customer service.
 It leads to operational efficiency.
 It promotes good buyer-seller relationship.
Challenges facing supplier incentives
 Hidden actions by partner firms.
 Hidden information. The failure of both parties to share information i.e. data or
knowledge about firms.
 Badly designed incentives.
Solutions to challenges facing supplier incentives
 Acknowledge by both parties that such problems exist.

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  Diagnosing the cause-hidden actions, hidden information or badly designed
incentives.
 Creating or redesigning incentives that will induce pertness to behave in ways that
maximize the supply chains profits.
 Sharing information that was previously hidden among the parties.
 Buyers using personal relationship or intermediaries to develop trust with suppliers.
 Buyers conducting incentives audits when they adopt new technologies, enter new
markets, or launch supply chain improvement programs.

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Training managers about processes and incentives at the organization.

2.5 Supply Flexibility 44

This is the speed in which the supply chain responds to changes in demand and the business
environment in order to create or preserve competitive advantage.
Ways to improve supply chain flexibility
 Institutionalizing partners with suppliers and subcontractors in order to
“straighten the chain” while dealing with fluctuations and changes in demand.
 Transferring operations to external sources i.e. outsourcing.
 Building tools and capabilities to quickly identify changes in demand.
 Building means of dealing with variable demand and supply chain efficiency.
 Formulation of organizational structure and work support processes.
Barriers to supply chain flexibility
 Integration capabilities between various information systems throughout the
supply chain.
 Organizational structure and processes that don’t support s in supply chain
flexibility.
 Management requests to lower cost at expense of flexibility.
 Harnessing the management due to the difficulty quantifying the economic value
of “upgrading” the flexibility in the supply chain.

2.6 Payment of Vendors

Supplier payment is the final step in the procurement cycle. This is done after the goods
and services ordered arrive from the supplier then the buyer receives an invoice from the
supplier. The buyer verifies the purchase order and the invoice to make sure the details in
both documents matches and then they are entered into the account payable system is
controlled and managed by the finance department which processes the payment of
vendors.

Importance of paying suppliers on time

 Creates a positive relationship between parties.
 Suppliers are keen to work with the buyer.

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  Suppliers confidence is increased in the buyer as a business partner.
 The buyer is able to negotiate better deals.
 The buyer avoids late payment interest charges.

Best practices in vendor payment

 Agreeing the terms of payment from the outset.
 Monitoring payment system to ensure its flexible enough to meet any different
payment terms agreed upon.

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 Paying of undisputed bills by their due date.
 Fostering good relations with clients.
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 Agreeing on a system for resolving any payment disputes.
Supplier’s assessment methods
The two types of supplier assessment methods include:
 Supplier appraisal
 Vendor rating

2.7 Supplier/Vendor Appraisal

Assessment of the potential supplier so as to be used as the company future suppliers.
Basically, used for selecting new suppliers.

Two main researches

a) Desk research
Analysis of the supplier’s documents by use of CVs whereby one publishes financial
information in the internet and analyzes it. It includes;
 Organization of charts.
 Statement of financial position.
 Cash flow statement.
b) Field research on capacity survey
This is whereby the buyer has to visit the supplier’s premises to ascertain the following:
 Quality assurance system.
 Cost control system.
 Effectiveness of production system.
 Appropriateness of equipment.
 Morale level of motivation of workplace.

What should be appraised?

 Financial status.
 Production capacity.
 Human Resource.

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  Quality Assurance systems.
 Performance.
 Environmental and ethical factors.
 Information Technology.
Vendor/supplier rating
Used to assess the performance of already existing suppliers so as to improve their
performance or replace them.

Subjective supplier
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A purchasing officer is appointed to observe on how well the suppliers are performing
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and then judge each supplier. It’s subjective because different individual have different
value of judgment.
Advantages
 Fast to carry out.
 Cheap to carry out.
Disadvantages
 May not be factual because of personal likes and dislikes.
 May not be accurate.
 May be prone a subject to bribery.
 No records kept for future reference.

Objectives supplier ratings

Marks are allocated to each of the factors that determine a good supplier each time a
supplier performs. These factors include right time, quality, cost, price, quantity, place
and responsiveness. The marks are completed at the end of each period and used to come
up with a conclusion.
Advantages
 The method is more accurate than subjective.
 Avoids complains as it is based on facts.
 Minimizes chances of bribe.
 Reference in form of records kept.
Disadvantages
 Record keeping may be expensive.
 Time consuming.
 Requires a trained personality.

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 Conclusion
This learning outcome covered the interaction between two or more parties either by
buying or supplying goods and services. It is important for the learner to be able to
prepare clear specifications, evaluate vendors fairly and objectively, award contracts, give
incentives, exercise flexibility based on the case at hand, pay vendors, and appraise
vendors as per SOPs.

Further Reading
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44
National Audit Office. (2011). The Procurement of Consumables by NHS Acute and
Foundation Trust. London: National Audit Offices.

6.3.3.3 Self-Assessment

Written Assessment
1. The following of paying supplier of time include the following except one. Name it?
a) Negotiate better deals.
b) Avoid late payment.
c) Positive relationship between the parties involved.
d) None of the above.
2. Supplier’s incentives are well described when an organization (buyer) aligns its
incentives.
a) True
b) False
3. Delay in delivery can cause conflict in supply.
a) True.
b) False.
4. The following are reasons for evaluating supplier except
a) It signifies supplier performance.
b) To know their worth.
c) Assists in decision making regarding whether a supplier is to be retained or
removed.
d) Assists in deciding to which supplier a specific order should be placed.
5. Define supplier appraisal.
6. Explain how vendor should be appraised.
7. Discuss obstacle to buyer supplier relationships.

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8. Discuss role of customer relationship management in supplier relationships.
9. Select an organization of your choice and carryout supplier quality management and
submit a report

6.3.3.4 Tools, Equipment, Supplies and Materials

 Direct instruction
 Role play
 Case studies
 Field trips
 Discussions
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 Demonstration by trainer 44
 Practice by the trainee
 Simulation

6.3.3.5 References

Department of health (DH) Equity and Excellence: Managing the Transition. London:
DH: 3022.

Department of Health (DH). (2013). Securing Best Value for NHS Patients; Requirement
for Commissioners to Adhere to Good Procurement Practice and Protect Patient
Choice. London: DH.

National Audit Office. (2011). The Procurement of Consumaldes by NHS Acute and
Foundation Trust. London: National Audit Offices.

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 6.3.4 Learning Outcome No 3: Evaluate vendor contract performance
6.3.4.1 Learning Activities

Learning Outcome No 3: Evaluate vendor contract performance

Learning Activities Special Instructions

3.1 Develop vendor contract progress evaluation tools  Groups of 5-10

based on parameters to be measured.
3.2 Appoint vendor contract progress evaluation 4

Class tests
Simulation
committee as per workplace policy.
3.3 Prepare and circulate notice for vendor contract
73 4 Site visits to the supplier
premises and get
progress evaluation committee meeting as per
workplace policy.
0723 information to conduct
vendor contract
6
3.4 Conduct vendor contract progress evaluation as per evaluation
workplace policy. WhatsAp
3.5 Prepare vendor contract progress report as per
workplace policy. p
3.6 Terminate none performing vendor contracts as per
legal requirements as per standard operating procedures.

6.3.4.2 Information Sheet No 6/LO3: Evaluate Vendor Contract Performance

Introduction
This learning outcome will train on how to evaluate vendor contract performance.
Evaluation of vendor performance is important in ensuring that an organization/ company
is able to purchase quality products or receive value for their money. In this learning
outcome trainees will get skills and knowledge of how to develop vendor progress
evaluation tools, appoint a vendor evaluation committee, preparing and circulating vendor
committee meeting. The trainee will also acquire knowledge and skills in preparing
vendor report and procedures to follow to terminate non performing contracts.

Definition of Key Terms

Legal requirements: These are the standards, rules, codes, regulations or rights imposed
on an organization by law.
Vendor Evaluation: This is the monitoring of vendors’ performance by a person or
department against set standards.

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 Performance: This is the execution of tasks as per the guidelines or set organizational
indicators.

Content/Procedures/Methods/Illustrations
3.1 Vendor Contract Progress Evaluation Tools are Developed Based on Parameters to
Be Measured
Vendor evaluation is a process that company use to make decision on which vendor
should be allowed to provide services of products in case where there are many vendors.
This process can also be used when the progress of a contract is being required. This can
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happen when items are being purchased for the first time, the item is sourced differently.
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Evaluation of vendor performance is very important in organizations. This is because:
 It assists organizations to reduce procurement costs
 It assists organizations to manage risks effectively
 Helps organizations to be strategic in their relationship with vendors
 It develops supply chain management strategies
 It helps vendors to improve their performance
A vendor’s performance should be evaluated based on context of their contractual
obligations. The following is a list of categories which organizations may consider using
as performance evaluation criteria. Recommended criteria for vendor performance
evaluation are:
 Accountability
 Hazard and Risk Assessment
 Accuracy
 Human Resources
 Administration
 Innovation
 Collaboration
 Invoicing
 Communication
 Quality
 Compliance
 Safety
 Cost
 Schedule
 Delivery
 Scope
 Emergency Response
 Supervision

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 Vendor Evaluation Tools
To be able to evaluate vendor performance it is critical that the various evaluation tools
be developed. The following tools are used in evaluating vendor contract progress:
a) Key performance Indicators (KPIs): This is the obligations that if a vendor meets,
an organization considers as important to the overall success of the organization.
Before initiating procurement processes, an organization needs to identify what
activities they consider most crucial to the success of the organization.
b) Procurement-Supplier Meetings: Scheduled meetings between procuring
organizations and vendors are an effective way of monitoring performance. Meetings
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between suppliers and procurers also help the two parties build relationships while
performance is being monitored.
44
c) Technical review meetings: These are meetings between procurers’ technical team
and the supplier’s technical experts to review reports, performance results and come
up with ways to improve processes.
d) Audits and long-term reviews: Audits are very effective in determining the extent to
which contracts are being adhered to as well as determining how to adhere to
emerging change. This could also help to do an effective cost benefit analysis.
e) Spot checks: These are important as they ensure that vendors adhere to the contract
standards. Spot checks on vendors can either be announced or spontaneous,
unannounced spot checks should however be included in the contract and not be
frequent to maintain trust.
f) Contract reports: When signing contracts with vendors, it is important to include
performance as one of the deliverables. This acts as a monitoring tool.

Sample of vendor performance evaluation form

Contract Name Description
Purchasing representative Department
Vendor Name Address
Contact Name Email:
Check One: Final evaluation Interim Evaluation
Evaluation Criteria (including butEvaluation Assessment Evaluator Commen
not limited to)
Rating Category (see
Score out of 10
chart on

Administration: Exceptional
• Invoice accuracy
Good
• Customer Service
Satisfactory
• Communication (public &Cautionary
staff) Not satisfactory

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 Unacceptable
Quality of Product Exceptional
• Product Delivery
Good
• Quality of product
• Communication
Satisfactory

Cautionary
Not satisfactory

Timelines
Unacceptable
Exceptional
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Adherence to product delivery 44
schedule
Good
Satisfactory

Cautionary
Not satisfactory
Unacceptable
Cost Control: Exceptional
Number of Change Orders
Cost of Additional Service
and/or Work Good
Compliance with Original
Contract Price Satisfactory

Cautionary

Not satisfactory

Unacceptable
Total Score /70 = %
Overall comments

Evaluator Name: Signature

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Supervisor Name
Signature:
Purchasing Rep: Signature

I declare that I have completed this evaluation in a fair and honest manner. I further
confirm that my judgment in completing this evaluation has not been influenced by
any actual or potential “Conflict of Interest”, as outlined in the laws and rules
regulating Public procurement act.
Rating Description of Rating
10 Exceptional Performance 4
significantly exceeds Contract
73 4
requirements to the County’s benefit, for example, the
Contractor implemented innovative or business process

0723
reengineering techniques, which resulted in added
value to the County. The contractual performance of
6
the element or sub-element being assessed was
WhatsAp
accomplished with few minor problems for which
corrective actions taken by the Contractor were highly
effective. p
8-9 Good Performance meets contractual requirements and
exceeds in some area(s) to the County’s benefit. The
contractual performance of the element or sub element
being assessed was accomplished with some minor
problems for which corrective actions taken by the
Contractor were effective.
6-7 Satisfactory Performance meets contractual requirements. The
contractual performance of the element or sub-element
contains some minor problems for which proposed
corrective actions taken by the Contractor appear
satisfactory, or completed corrective actions were
satisfactory.
5 Cautionary Performance did not quite meet contractual
requirements. The contractual performance of the
element or sub-element contains some minor problems
for which proposed corrective actions taken by the
Contractor appear to be a continued minor concern, or
completed corrective actions were slightly below
satisfactory
3-4 Not Performance does not meet some contractual
Satisfactory requirements. The contractual performance of the
element or sub-element being assessed reflects a serious

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 problem for which the Contractor has submitted
minimal corrective actions, if any. The Contractor’s
proposed actions appear only marginally effective or
were not fully implemented.
0-2 Unacceptable Performance does not meet contractual requirements
and/or recovery is not likely in a timely or cost-
effective manner. The contractual performance of the
element or sub-element contains serious problem(s) for
which the Contractor’s corrective actions appear to
be or were 0726 733
Figure 38: vendor performance ineffective.
evaluation form 44
Techniques for measuring Vendor contract

performance
There are various techniques used in evaluating vendor performance such as
 Price-based metrics
 Quality-based metrics
 Cost based metrics
WhatsAp
p
Many companies use a vendor evaluation tool that allows transaction data to be analyzed
to give a comparison between vendors. The vendor evaluation uses criteria that have been
determined by the purchasing or department to compare vendors such as:
 Price
 Delivery reliability
 Delivery date adherence
 Quality of the item
There are any numbers of criteria that can be used in a comparison and these are usually
weighted so that important criteria are given more credence. For example, a company
may decide that the quality of the items it receives from vendors is more important than
price, which in turn is more important than delivery reliability. The company would then
weight these criteria so that the overall score reflects that requirement.

1.2 Appoint Vendor Contract Progress Evaluation Committee as Per Workplace

Policy
Vendor evaluation committee is a group of people selected from the organization
procurement department and other areas to provide reviews and criteria for evaluation of
vendor’s performance. They are useful in reviewing scope of work, purchase
description/specification and development of evaluation criteria. They are used in
measuring how well an offer or approach meets the needs of the requesting department or
RFPs of performance requirements. It is equally important to keep a written record of all
correspondence with the Vendor. If the Vendor’s response or corrective action is still a
concern, departmental staff should involve the Purchasing Department. Where it is
deemed

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 appropriate an Interim Performance Evaluation should be performed by the Project
Evaluator(s) and provided to the Vendor by the Purchasing department. The Vendor will
be held responsible for the performance of its sub-contractors. If the Vendor’s response
or corrective action continues to be a concern, the terms and conditions of the contract
regarding non-performance may be enforced by the Purchasing & Risk Manager.

Duties and responsibilities of vendor evaluation committee

 Establish the criteria and standards to be considered in the evaluation

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 Agree upon scoring methods to be used in rating and ranking the performance
 Review the solicitation documents (Request for Bids or Request for Proposals)
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 Review procedures to be used during the process.

Procedures for appointing vendor evaluation committee

a) Clarify each member’s role on the committee and establish a work plan and
schedule that includes clear milestone dates.
b) Appoint a chair for the committee who can be the procurement representative.
c) Work out an acceptable workload arrangement with their supervisor in order to
allow time for committee activities.
d) Management must be supportive of all the arrangements so that committee
members can adequately fulfill their evaluation duties.
Vendor evaluation committee should include
 Procurement officer who acts as the chair.
 Technical expert in the product or service being procured.
 Representative from accounts.
 Any other stakeholder that is affected by services and products being procured.

3.3 Prepare and Circulate Notice for Vendor Contract Progress Evaluation Committee
Meeting as Per Workplace Policy
To effectively manage vendor performance, it is important have an open communication
with the vendors throughout the project. The vendors should be informed in writing when
their performance is being evaluated and if there are any concerns. A request for
appropriate measures to be undertaken should be communicated in writing within an
acceptable timeframe. This is done with reports generated from vendor contract progress
evaluation process. The people involved in the evaluation of the vendors should be
informed in time about the exercise.

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1.3 Conduct Vendor Contract Progress Report as Per Workplace Policy
Conducting a vendor performance report is a key process and important in supporting an
effective purchasing and contracting function of an organization. Vendors need to be
monitored and evaluated to ensure that timely receipt of supplies from vendors,
completion of assignment by consultants and complete execution of order by a vendor
within scheduled completion period.

Methods for conducting vendor evaluation

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Step1: Preparation of Performance Rating Data Sheet. In this step separate data rating

44
sheet with the measurement parameters are prepared.
Step 2: Compute and grade vendor performance data as received.
Step 3: Initiation measures. Depending on results from the computing and grading
corrective measures would be initiated by taking up the matter with the concerned
vendor. The vendor is supposed to respond to the concerns based on the response the
vendoring committee and decide the next course of action.
Step 4: Implementation of Corrective Measures
Develop an outline with the vendor of how the corrective measures will be implemented.

3.5 Prepare Vendor Contract Progress Report as Per Work Policy

The last step in the evaluation process is the preparation of an evaluation report, which
will later be used as the basis for the recommendation of award. The following sections
are included in a vendor contract progress report:
a) An executive summary of the evaluation process.
b) Steps used in evaluation.
c) Clarification of any invalidation, rejection, non-compliance, and clarification of
offers should be stated, including a list with the final ranking of the offers and the
reasoning on how the best offer was selected.
d) Signature section for evaluation team to sign on the report.
e) A declaration of on conflict of interest of the members of the evaluation team.

Dissemination of vendor contract report

Vendors can be evaluated and results may indicate poor performance. In such instances,
some strategies may be important to help deal with this. When vendors have been found
to perform poorly, it is important to;
 Hold progress meetings and reviews to identify.
 Come up with problem solving techniques that would result in an improved action
 Use contracts that include legal action.
 When the performance is very poor and there are no signs of improvement, it is
always wise to terminate the contract.

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 It is important to have open communication with the vendor throughout the project and to
inform the vendor in writing when their performance is a concern and to request
appropriate corrective actions within an acceptable timeframe, in accordance with the
Solicitation’s terms and conditions. It is equally important to keep a written record of all
correspondence with the vendor. If the vendor’s response or corrective action is still a
concern, departmental staff should involve the Purchasing Department. Where it is
deemed appropriate an Interim Performance Evaluation should be performed by the
Project Evaluator(s) and provided to the Vendor by the Purchasing department. The
Vendor will be held responsible for the performance of its sub-contractors. If the
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Vendor’s response or corrective action continues to be a concern, the terms and

44
conditions of the contract regarding non-performance may be enforced by the Purchasing
& Risk Manager. Results obtained from vendor performance evaluation can become less
useful with time. It is therefore suggested that individuals should share the information
immediately or with a timeframe of not less than 7 years. Dissemination of vendor
performance is significant in making decisions in an RFP process as well as identifying
reliable vendors for the company.

3.6 Terminate Non-Performing Vendor Contracts as Per Legal Requirement as Per

Standard Operating Procedures
A contract can be terminated prior to completion of a project or prior to the expiration of
a contract period term due to Vendor performance issues. However, it is important for
careful decision to be made during vendor termination as this might affect overall
performance of the organization in meeting its goals. The following steps can be used in
vendor termination:
a) Be sure of need to terminate the contract
One need to be very sure that the vendor relationship cannot continue. This can be done
by appointing an independent person to evaluate the performance of the vendor. The
vendor should have been informed on areas of improvement and failed to act on them.
There must be evidence that the vendor has breached the contract in delivering what was
required.
b) Conduct a cost benefit analysis
Ask yourself what are the risks of terminating the contract and what could be the benefit.
If the risks are more than benefit then consider not to terminate the contract.
c) Work out what/who will replace the vendor
When a strategic vendor agreement goes wrong, the stress and emotional strain can
dominate your thoughts. However, unless you find a new way of getting the service
delivered (whether in-house, via an alternative strategic partner or a combination of both)
and undertake appropriate due diligence on it, then there is no guarantee that you will be
better off once you’ve exited the relationship. One of the best uses of your time ahead of
termination is therefore to consider what ‘good looks like’ for the service delivery once
you’ve terminated, whether that also involves bringing the services in-house or

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transitioning to another vendor. In either case, you need to begin preparation and have
completed your due diligence before you terminate, to smooth the handover process and
minimize the risk.
d) Plan your exit
Getting out of a relationship is as much of a project as is getting in, but with potentially
more operational and financial risks. A well-considered exit plan allows you to identify
what you will need to make a successful transition. There are many issues that often get
missed during the exit process, so a proper plan will ensure you cover these off too,
minimizing the potential for disruption. You can use the business plan created in step 3 to
4
measure the progress of your exit and ensure everything is proceeding as intended.
e) Prepare your evidence
73 4
Most vendors will not like their contracts terminated. Termination can get messy and case

0723
a lot of time wastage or even court cases. To avoid messy termination and court cases one
is required to prepare their evidence on non-performance of the vendor. Focusing on the
6
right element is important. One would use the contract issued while awarding the tender
WhatsAp
and evaluation report from an independent party. A report advising vendors on how to
improve the service is also a good evidence if the vendors did not implement it.
f) Sanity check your evidence p
Once you’ve gathered your evidence, the next step is to evaluate whether it shows what
you thought it would and that it’s strong enough to proceed. Evidence is often imperfect.
At the end of this stage you should know whether or not it shows, on balance, that the
vendor delivered to your expected business outcomes (not necessarily just to their
contractual KPIs, which may not align with your business outcomes). You will also be
clear whether you have interpreted vital elements of your evidence correctly, such as
your vendor’s expert responsibilities and how they should be benchmarked against what
is reasonable. The safest and most cost-effective way to check your evidence is to have
someone independent undertake a ‘critical friend’ challenge, so they can advise you of
what works, what doesn’t and where your focus of evidence should be, according to the
business outcomes you are trying to achieve.
g) Choosing the right forum for your termination
Different forums are used in contract termination
 Negotiations & mediation
 expert determination
 Arbitration or litigation.
Each has advantages and disadvantages, depending on what you are trying to achieve.
Selecting the right forum can significantly reduce your costs and speed up the process.
There is little point proceeding directly to litigation if a less formal and lower cost
process can achieve your goals.

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 h) Negotiating the termination and exit with your vendor
Negotiating a termination and exit of a strategic relationship is challenging and emotions
often run high on both sides. However, there are steps you can follow which will smooth
the process and increase your chances of a successful outcome. In particular, if your
vendor has breached both its express contractual KPIs and its expert responsibilities, and
you have had the evidence independently validated, then the negotiation process will be
much swifter.
Setting out your arguments clearly, with solid and independently validated evidence, will
4
help your vendor to understand that it will cost them more to resist the termination and
73 4
exit than it will to comply, agree and support the process. Always be sure to align your
termination and exit negotiation strategy with the written contract terms, and always seek

0723
independent and qualified advice in respect of formal termination. Damages for adopting
the wrong termination and exit procedure can be penal.
i) Managing the exit process 6
WhatsAp
Once you have formally terminated the relationship, you need to treat the exit process as
a key project in its own right. As with any project, it must have resources allocated to it,
p
external and internal support, key milestones, objectives, payment profiles and
performance targets to be met. Governance and performance management are critical to a
successful termination and exit process. Make sure you give it the time and attention it
needs.
j) Seek legal and technical support
Many organizations need independent support when terminating a contract, to avoid the
potential financial damages that a vendor can claim if the contract is terminated
incorrectly. It is therefore vital to choose the right lawyer and technical expert, instruct
them properly and to manage their output, so you get the outcomes you want and achieve
value for money. The right lawyer or technical expert can add considerable value by
keeping the focus of your evidence right, speeding up the process and minimizing all
costs (including their own). They will help you to avoid mistakes that will undermine
your position and give you the support and independent perspective you need to
successfully pursue your case.

Conclusion
The learning outcome covered vendor contract performance with the aim of imparting
knowledge to the learner on ways of identifying early signs when the vendor is not
adhering to the set terms and conditions. The unit also covers interventions one should
seek before termination of the contract such as increased monitoring.

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 Further Reading

Weber, C. A. (1996). A Data Envelopment Analysis Approach To Measuring Vendor

Performance. Supply Chain Management: An International Journal, 1(1), 28-39.

6.3.4.3 Self-Assessment
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Written assessment
44
Seven multiple choice questions
1. Which of the following is a KPI in Vendor performance evaluation?
a) Price.
b) Time of delivery.
c) Number of free deliveries.
d) Vendors region.
2. Three of the tools listed below are not used in Vendor performance. Which one is?
a) Gantt chart.
b) Benefits management platform.
c) Payroll service.
d) KPI.
3. Which of the following is not a strategy to managing poor performance?
a) Hold progress meetings.
b) Ignoring small mistakes.
c) Come up with problem solving techniques.
d) Terminate contract.
4. Which of the following is not considered in the vendor performance checklist?
a) Product
b) Rapport
c) Delivery
d) Customer service
5. Which of the following is not an importance of vendor contract performance
evaluation?
a) Helps organizations to be strategic in their relationship with vendors.
b) It develops supply chain management strategies.
c) It helps vendors to improve their performance.
d) It allows organizations to receive discounts.

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 6. Explain two importance of vendor contract performance evaluation.
7. Discuss the various considerations one should make before terminating a contract.
8. Describe three main tools used in vendor performance evaluation.
9. Explain some of the criteria used by vendor evaluation committee during vendor
performance evaluation.
Oral Assessment
1. What are the main procedures for terminating a non performing contract
performance?
2. Explain the main components of a vendor progress report.
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3. Why is it important to evaluate vendor contract performance?

Practical Assessment
44
Company XYZ issued Kilu general supplies a tender to supply books in public secondary
schools in Eastern region. You have been contracted to evaluate Kilu contract performance.
a) Prepare a document showing the procedures you will apply to evaluate Kilu
contract performance.
b) Outline the key parameters that you will use in measuring vendor contract
performance of Kilu generals.
c) Develop the tool you will use in this vendor contract performance evaluation.
d) Prepare an outline of a evaluation progress report.

6.3.4.4 Tools, Equipment, Supplies and Materials

 Direct instruction
 Role play
 Case studies
 Field trips
 Discussions
 Demonstration by trainer
 Practice by the trainee
 Simulation

6.3.4.5 References

Talluri, S., Narasimhan, R., & Nair, A. (2006). Vendor Performance with Supply Risk: A
chance-constrained DEA approach. International Journal of Production
Economics, 100(2), 212-222.
Weber, C. A. (1996). A Data Envelopment Analysis Approach to Measuring Vendor
Performance. Supply Chain Management: An International Journal, 1(1), 28-39.

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Xu, J., Li, B., & Wu, D. (2009). Rough Data Envelopment Analysis and its Application
to Supply Chain Performance Evaluation. International Journal of Production
Economics, 122(2), 628-638.

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