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PPP – CONTRACT ADMINISTRATION Boswell, M.J. Michael Boswell & Associates Pty Ltd, 18 Kinnaird Crescent, Highbury, SA, 5089, Australia Abstract Contract Administration (CA) is a ‘mission critical’ element of the success, or otherwise, of every PPP project – in engineering parlance a ‘necessary but not sufficient’ element. There is much to be gained from a careful consideration of the lessons learned by others and in applying that experiential base to future prospective PPP initiatives. Lessons have been learned by many professions – each tends to apply their own discipline to continuous improvement. CA is not a spectator sport. It is not something to be added on after the contract is signed. Poor CA can directly lead to failure – but it will not, of itself, lead to success. This paper provides some of the lessons learned and otherwise collected over many years of experience as an engineer, as a senior bureaucrat and as an adviser. The paper provides a source document (not definitive answers) for the many professions and cultures likely to be involved in a major PPP initiative. Keywords: Contract administration, partnership, lessons experience. 1. Introduction Contract Administration is a mission critical element of every PPP, a significant matter to be addressed if the initiative is to be sustainably successful. It is better to start early to address CA properly as a necessary but not sufficient element of a successful initiative. Many authorities appear to treat CA as a side issue to whatever they see as mainstream – too little. Most authorities appear to consider CA after the contract has been signed or some crisis is realised – too late. This paper is intended to assist avoid the “too little, too late” criticism (and the career limiting connotations) by alerting readers to some of the lessons already learned and available. It is often better to learn from other people’s experiences – it is certainly cheaper. The practical materials provided are intended to gain your interest (for your own survival – let alone prospective success) and attempt to pass on a few lessons learned from various sources – remembering that “experience is what you get, just after you really need it”. Consider carefully - every PPP initiative is unique, each provides its own challenges and opportunities. The insights offered provide advice only and these are only the tip of an iceberg. 2. Foundation Issues PPP initiatives are based on 3 pillars: • The Government. It has a unique power to legislate for the community as a whole. It has a

unique power to tax (rather than merely charge fees). It is accountable. • The Private Sector. Tends to be the source of innovation in the provision of physical and

service infrastructure. Tends to demonstrate more flexibility in applying resources and processes to meet demands for results – less bound by custom and practice. Tends to manage risks, especially commercial risk, in response to prospective returns.

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• The Community. Demands access and use of infrastructure. Pays taxes and demands representation in return. Holds the government accountable through Parliament, review processes and the election cycle.

Each PPP is a contract – and there are specific legal requirements and obligations that arise. Consider the magnitude of the PPP initiative – each is a significant undertaking affecting many people and groups of people. While dreaming of the prospects – you will always be confronted by contextual reality. People need help to become good clients, good providers and good stakeholders – PPP initiatives are big enough to allow this developmental approach. The development of any PPP initiative tends to be based on the procurement processes used to obtain photocopiers or similar generic goods. Owners of a printing services business would probably not use the standard procurement methodology for their core business – why would you do so for a PPP initiative? We need considerable imagination and strategic insight when undertaking PPP initiatives – the consequences of failure are … career limiting at least. By any measure, PPP’s are major undertakings with major risks. From the perspective of the Government, the key steps to a successful PPP initiative are likely to include: • Scoping Paper

◊ What is the nature of the PPP initiative at hand - the required objective/ result? ◊ What are the boundary conditions of a successful initiative? Even ‘simple’ things like

definitions for key terms. ◊ What are the project protocols – how will we engage with colleagues, the market and other

stakeholders throughout the initiative? ◊ What enterprises might provide this result – the market?

• Registration of Interest - (RoI) ◊ Which enterprises could we do business with to deliver the result? ◊ Which enterprises share our values – enlightened self-interest? ◊ Which enterprises might share our vision for the initiative – prospectively over several

decades? • Request for Tender - (RfT) - through to Request for Proposal (RfP)

◊ Which is the best enterprise to do business with, to deliver the result, over several decades? • Contract formation

◊ How will the services be provided to deliver the result? ◊ How will we behave as a client – to request services?

• Contracted services commence – commissioning/ transition ◊ How do we change from one service arrangement to another? ◊ What are the new operational arrangements? ◊ How are we managing the contract?

• Performance reviews ◊ How do we ensure results stay on track during the term? ◊ How do we make sure the track remains valid?

• Preparation for end of contract ◊ What is our Plan B – eg for termination for any reason - at every phase? ◊ How do we extend or end the contract? ◊ How do we prepare the market and stakeholders for next steps?

These phases, particularly during service delivery, present a series of boundary conditions for the specific PPP in respect to a range of other environmental factors in context. Some of these boundary conditions provide terms of the contract, some are assumptions (that might be described

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in the contract) and some are mainifested in the operational interfaces between client, provider and stakeholder. Managing the intersections associated with a PPP initiative provides a series of intersecting ‘games’1 that need professional judgement. These intersections provide the ‘boundary conditions’ referred to elsewhere. In some senses they comprise the implicit and explicit ‘assumptions’ of the various players. As will be seen later, it is important to clarify these assumptions and a role of CA is to address ‘surprises’ about these intersections. 3. Project Conduct Building and maintaining a Project Team is a critical factor. Some key requirements are: • Broad range of expertise, approaches and values – to leave no stone unturned in the

development and maintenance of a robust, sustainable and ultimately successful initiative.

Figure 1: Build a team of passionate experts • The group will undoubtedly have many ‘experts’ in it - the Project Director will certainly need

access to expert knowledge. Successful PPP initiatives tend to be achieved by a star team (not a group of stars). The Project Director is the leader of the team.

• A questioning mind, creative insight while working with colleagues on vanguard issues – “you win the Nobel Prize for knowing the right question, answers are relatively easy”.

• Getting and keeping good people is not easy – star individuals are rather rare and star teams are rarer still.

• Provide forums for robust debate and decision-making – avoid group-think while pursuing Cabinet solidarity. Develop a Project Protocol and a Project Brief – to assist this.

• Develop a Project Management Office – to manage the myriad of elements of a major PPP initiative and lay the foundation for longer term CA:

1 See “A Beautiful Mind” – movie about John Nash and the approach to game theory that won the Nobel

Prize.

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Figure 2: Approach to PMO

Figure 3: Basic elements of a PMO

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Figure 4: Supportive detail for a PMO Do not be too focussed on facts and numbers - consider the system as a whole. See Mant2 re: the frog and the bike:

“Intelligent leaders understand that complex systems are more like frogs than like bikes. You can disassemble a bicycle completely, clean and oil all the separate parts, and reassemble it confident that it will work as before. Frogs are different. The moment you remove any part, all the rest of the system is affected instantly, in unpredictable ways, for the worse. Binary 'leaders', and quite a few management consultants too, really do think that complex organisational systems will respond to the bicycle treatment. They think you can get a realistic picture of the total system by simply aggregating its component parts. They are not wicked, just dim.”

Consider also the appropriate sense of scale – to differentiate between important detail and administrivia. I like to refer to the letter from Duke of Wellington to the War Office during the Napoleonic Wars.

A LETTER FROM THE DUKE OF WELLINGTON

TO THE WAR OFFICE British Lines, Talavera August 12, 1812 Gentlemen, Whilst marching from Portugal to a position which commands the approach to Madrid and the French Forces, my officers have been diligently complying with your requests which have been sent by His Majesty’s ships from London to Lisbon and thence by dispatch rider to our Headquarters.

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We have enumerated our saddles, bridles, tents and tent poles and all manner of sundry items for which His Majesty’s Government holds me accountable. I have dispatched reports on the character, wit and spleen of every officer. Each item and every farthing have been accounted for, with two regrettable exceptions for which I beg your indulgence. Unfortunately, the sum of one shilling and nine pence remains unaccounted for in one infantry battalion’s petty cash and there has been a hideous confusion as to the number of jars of raspberry jam issued to one cavalry regiment during a dust storm in Western Spain. This reprehensible carelessness may be related to the pressure of circumstances since we are at war with France, a fact which may come as a bit of a surprise to you gentlemen of Whitehall. This brings me to my present purpose, which is to request elucidation of my instructions from His Majesty’s Government so that I may better understand why I am dragging an army over these barren Spanish plains. I construe that perforce it must be of two alternatives duties as given below. I shall pursue one with the best of my ability but I cannot do both. • To train an army of uniformed British clerks in Spain for the benefit of the

accountants and copy-boys in London, or perchance, • To see to it that the forces of Napoleon are driven out of Spain.

Your most obedient servant, Wellington

Some of the lessons learned regarding the basic conduct of the project: • Consider the project objective. It needs to be clear, aspirational, challenging, well understood

and not constraining. It needs to be stable, though it’s interpretation might evolve during the course of the initiative.

• Consider the players. Consider their objectives, their history, probable relationships and conduct during the initiative – this will become an important element of risk management. In some instances the PPP initiative arises because of the failure of some other approach (one of the temporal boundary conditions). Remember: an important player is you – the Project Director – and your career and your whole of life aspirations.

• Consider the operational requirements for service delivery under the prospective PPP. There is worth in working hard to characterise these in result terms – by asking questions like “what will success look like? - from the perspective of various stakeholders.”

• Consider the various ways in which these results might be delivered – this will help identify the prospective market of providers. If a problem is given to lawyers – they will find a legal solution. Ditto for any number of other special interest groups. Is there a traffic problem at the end of a major event - say a F1 Grand Prix - or an entertainment problem so that not every one sees the same ‘main event’.

• Consider the key steps identified above. ◊ Prepare for due diligence – the final checks before the contract is signed – so that there are

‘no surprises’ from the outset. The boundary conditions are explored from several perspectives.

◊ Consider transition. How will the PPP initiative be brought to reality with a minimum of fuss? Remember that the new arrangements must upset the equilibrium of whatever existed before.

◊ Consider CA. There are at least 3 basic approaches that might be used, with a few practical examples.

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Figure 5: Forms of contract and CA

4. Cost and Consequences of Contract Administration Consider the nature of CA. There are 4 levels to be considered, of the form:

Figure 6: Layers of CA

• The 4 layers should be preserved and managed to be separate - while recognising that practical and sustained achievement requires flexible interfaces between them. Effective commissioning might encourage a greater role of operational staff in strategic matters. Operational ineffectiveness will ‘invite’ interference from head office.

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Figure 7: Flexible CA interfaces Consider the prospective cost and consequences of CA. • In the case of prisoner escort, on behalf of several agencies, we considered whether to

administer the contract on the basis of the ‘spaghetti’ or the ‘meat-balls’. The meatball representing the sites serviced and the spaghetti representing the services.

Figure 8: Spaghetti and meat ball Consider the difference between: ◊ The real services required for the administration of justice – compared with operational

requirements for a specific person or case.

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◊ Counting the ‘services’, in terms of client management and an audit trail. ◊ The reality of less than 70 meatballs and more than 70 000 strands of spaghetti. We chose ‘meat balls’ and the system has worked for a decade.

• With respect to the notion of prospective penalties and bonuses, consider: ◊ The maturity of any particular KPI. There are few (if any) mature specific measures

with robust accounting rules – the rules are evolving, at best. ◊ The confidence in setting desired performance against specific measures and the

interaction of desired levels of performance against several performance indicators simultaneously over the long and short term. (Be aware that international standards for basic measures of time, mass and distance are recent phenomena and these are physical parameters not ‘professional judgements’.)

◊ The use of bonuses and penalties (as carrots and sticks) to manage in the context of a PPP initiative amongst associated professional judgements.

◊ The prospect of innovation and sensible risk taking, as an element of continuous improvement - in an environment of penalties and bonuses and a relationship approach to contract administration.

◊ The financial consequences of such managerial instruments - likely to focus the relationship on financial matters that divert attention from the real objectives.

• Consider that in most instances, the PPP contract will be for a period longer then the agency’s strategic plan, the ½ life of a Government or CEO and even the ½ life of most legislation. This factor alone can provide a significant problem, especially if the contract locks in some specific ‘best practice’ contemporary approach. Such limitations might arise from:

◊ A mandated corporate structure for the contracted provider. ◊ Required processes that preserve status quo for one of the boundary conditions – such

as employment of particular people or their conditions of employment. ◊ ‘Enabling’ legislation formed in the hot house of Parliament. Is this really likely to

provide the best foundation for a sustainable contract? • Consider a useful legislative/ contractual model – the Constitution. Over a long period of time,

the specific words of the Constitution of most Countries remain relatively static. However, the interpretation of the words is likely to change over time in response to evolving expectations and requirements of the community that it guides.

• Consider CA as a role for ‘cooks’ (preparing food according to a book) or for ‘chefs’ (preparing a meal or eating experience to delight participants). CA is not a spectator sport. However, there are important governance, probity and stewardship issues to be properly addressed - according to the book.

• A surprisingly common issue is the dichotomy between confidence and bullies. The latter mistake a question (a challenge requiring a solution) as a challenge to their authority. And might seek to crush the person, to shoot the messenger. A Project Manager who bullies will not have the right project team – a confident one might have the right team.

5. Role of Contract Administrator Consider the role of the CA, as the Client Principal’s representative. From the Government’s perspective, overall responsibility for contract administration rests with the Crown’s Contract Administrator. The role of the Contract Administrator is likely to include: • maintain the form and level of CA identified during the formation of the contract and make use

of information arising; • maintain contract files; • establish and maintain contract reporting systems; • establish and maintain contract monitoring systems; • review performance reports and conduct occasional physical inspection of the facilities; • chair meetings concerning contract progress;

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• maintain records of meetings, decisions and other activities that impact on the contract; • maintain currency of the contract, reflecting any interpretations and amendments which may be

required during the term of the contract; • approve any variations arising from changes to contract requirements; • regularly liaise with the Contractor’s Contract Administrator; • authorise contract payments; • maintain a proper approach to probity, at all levels and on all occasions; • resolve disputes; • act fairly and ensure that the provisions of the contract are complied with; • deal with Ministerial, CEO and media inquiries; and • continually interpret and reinterpret the contract to ensure stability. 6. Other Issues A significant foundation issue for a PPP initiative is the proper identification of the true cost of component services. Differences in accounting and governance protocols can cause distortion: • Funding models developed by Treasury rarely, if ever, reflect the real costs to the operating

agency. They are normally based on capacity rather than actual demand or utilisation. • Models should clearly differentiate between the ‘cost’ of providing services and the ‘price’

paid to contracted service providers. Inevitably the cost structures to various prospective providers (including the public sector) will not be the same – they have differing organisation structures, differing overhead structures, differing contracts of employment with staff and will utilise differing management models to control these costs and the like. There is no credible reason why cost paid and price charged will ever align in a PPP initiative

• If there is a ‘trick’ in any PPP initiative it is how to manage the differences between cost and price at particular levels of demand/ supply and quality as they occur over time. Otherwise, the resulting ‘obscene profit’ or ‘unsustainable loss’ will compromise prospective success.

6.1 Some One Liners of PPP Contracts

◊ Be careful what you wish for – you just might get it. ◊ If this is the Answer – what was the Question? ◊ The answer to how is why. ◊ The price of peace is eternal vigilance. ◊ If two people keep agreeing – at least one of them is redundant. ◊ For any complex endeavour - you cannot simultaneously control result, process and

resources. ◊ If you owe the Bank a million dollars and can’t pay, you are in serious trouble – if you

owe a billion, the Bank’s in trouble.

6.2 Key lessons

◊ Clarity of purpose is a key factor, as is its stability. ◊ Contract administration arrangements are a strategic matter. ◊ Generic processes are possible and even desirable to a degree – but each project is

unique and there are few ‘templates’. ◊ A major project inevitably has multiple and complex linkages which need to be

managed. ◊ Project protocols and a project brief assist project management processes. ◊ Legislative and contractual arrangements need specialist attention. ◊ Financial and economic matters need specialist attention. ◊ Prudential management is an ongoing and important issue.

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◊ Small, multi-skilled teams work best – though they need good access to specialists. ◊ Corporate memory can become an issue. ◊ Key competencies are required of each team member - the question is how to get,

develop, manage & keep. Mentoring can help. On-going support is required. ◊ All of the above also applies to the contracted provider. Successful PPP initiatives

draw on good clients and good providers.

7. Further References There are a number of sources that might be useful in various circumstances, including: • “Co-opetition” by A Brandenberger and B Nalebuff – it provides some useful insights into how

‘partners’ might also be ‘competitors’ under differing circumstances and how to manage the various dimensions of such relationships.

• “Creating the Project Office” by Englund and “Securing the Future: Strategies for Exponential Growth Using the Theory of Constraints” and “Advanced Project Portfolio Management and the PMO” by Kendall – covering the development and implementation of the Project Management Office approach to complex initiatives such as PPP.

• “Empowered Manager” and “Stewardship” by P Block – provides guidance to executive about how to manage and be accountable for things you can’t control.

• “Good to Great” by J Collins – provides guidance on how to convert from ‘good’ initiative to great initiatives (using PPP).

• “Intelligent Leadership” by A Mant – provides common sense guidance to the identification and resolution of the big issues.

• “MindMix” by Smith and Ainsworth – a book about innovation in general and how to work at a whole of organisation level to generate and use innovations in its activities.

• “The Commanding Heights” by D Yergin and J Stanislaw – a global view of the relationship between planning and economic well-being and the interaction between government, business and the community.

• “The Profit Zone” by A Slywotsky and D Morrison – to assist understand the decision-making processes of private enterprise in building sustainable organisations.

• “The Pyramid Principle” by B Minto – provides useful advice in the presentation of complex issues to facilitate informed decision-making.

• “Theory of Constraints”, “The Race”, “Necessary But Not Sufficient”, “The Haystack Syndrome”, “The Goal”, “Critical Chain” and “It’s Not Luck” by E Goldratt – provides (written in the form of a novel) great insights into successful management, to establish a new way of doing things.

• “Re-inventing Government” by D Osbourne and E Gaeber – identifies some alternate approaches to service delivery and thus specific prospective PPP initiatives.