Contract Approach: NAO Insights & Emerging Best Practices

By Allan Watton on

If you are looking for ways in which to improve your commercial and contract management, then you are in good company. The National Audit Office (NAO) has spent years reviewing the public sector market to identify where weaknesses in processes and implementation exist with the aim of creating a more robust and widely adopted practice to improve performance, value for money, and the potential for outcome achievement.

This research culminated in a report titled ‘Commercial and contract management: insights and emerging best practice’, highlighting 20 issues the NAO believes to be pivotal to the success or failure of a large proportion of the 140 projects analysed for this report.

This article looks into the three issues related to Contract Approach (4th in the series).

Issue #10 of 20: Ensure shared understanding

A common cause for stresses and strains in client-supplier relationships is when misunderstandings occur. While something to strive for, completely ambiguity-free clarity in all your communications is rarely something that can be totally guaranteed. The one place where the extra effort to do so will be most beneficial is your contract.

As your project guide, your shared agreement, your legal cornerstone, the contract must be as clear as possible, and it is in your best interest to ensure that everyone understands it fully. Jargon, excessive length, overly complex structures and language, and inconsistency can breed confusion and misunderstandings.

As conflict impacts on commercial trust, productivity and your ability to achieve your stated outcomes, it should be avoided where possible. Take extra time to ensure that your agreements are easily understood by all involved on the project, and that they are consistent, clear, and well drafted.

Warning Indicators

  • Badly drawn-up contracts, with, for example, undefined terms and a lack of plain English.
  • ‘Core terms’ differing across similar contracts and limited standardisation across contracts.
  • Terms and references that are overly complex and difficult to understand – this may introduce ambiguities and lead to different interpretations.

Emerging Best Practice

  1. Pre-Procurement

Clarity should not be limited to contractual agreements. Awareness of its importance should permeate all communications, from pre-contract market engagement through to contract management. Be clear, and confirm understanding with all stakeholders.

  1. Procurement

Best results at procurement stage will be achieved through a clear understanding of process and needs. Agree heads of terms in advance to fully appreciate what is to be negotiated and what is expected.

  1. Drafting

Contracts that are clear are those that are easily understood, follow a familiar format, and where bespoke terms are created to fit with the demands of the project they are highlighted and explained in a way that all can follow.

A shared understanding can encourage improvements in value for money, but unclear contractual terms can result in overcharging, delays, disputes and even early termination.

Issue #11 of 20: Understand risks

In an ideal world, suppliers and clients would follow a detailed process of risk evaluation based on complete and accurate information, adapting their efforts and resources to the needs of the project and the reality of the environment in which it takes place. However, the NAO has highlighted that such a process simply does not exist consistently across government departments. In our own experience, this is also true for many private sector organisations. The result is that risk is all too often not calculated to a degree that would enable mitigating actions at appropriate junctures.

Warning Indicators

  • Not understanding and quantifying risks in advance.
  • Failing to allocate risks to those best able to manage them.
  • A lack of recognition that risks will often return to the buying organisation when things go wrong. The approach to the contract should be borne by the party most able and competent to deal with the risk.

Emerging Best Practice

  1. Identification and Qualification

It is vital to consider contracts as adaptive to the real-life situation of the relationships they govern and guide. Because of this, it is important to regularly review and refine your agreements, to assess their suitability for the task at hand, and to amend where necessary to encourage value and innovation.

Part of this process is a regular review of the risks involved, an evaluation of how to mitigate those risks or how to deal with the consequences should they ever occur, and to share this information with others in the organisation.

  1. Allocation

A risk allocation matrix should consider who is best able to manage risk. The default for this in public sector agreements falls to the party identified, in the due diligence process, as most able and competent to deal with the appropriate risks.

  1. Plan

Project management of risk should not be approached in an ad hoc fashion. It needs to be planned for, understood, and agreed to in advance. Allocation of risk should be accompanied by appropriate incentives for the managing party to exercise reasonable care and skill to practically mitigate the risks, and appropriate accountability to bring to bear on those who do not.

Issue #12 of 20: Design performance measures that work

The purpose of a well drafted and considered contract is to guide the parties to agreed ends, but for this to be effectively workable, measures must be established and monitored throughout the relationship. The NAO found that all too often performance measures are not being adequately monitored and even when they are, performance is being left unchecked.

Warning Indicators

  • A lack of alignment between overall business outcomes and performance measures.
  • Measures that are complicated, vague, or ill thought through.
  • Financial incentives linked to performance measures being too small to have an impact.
  • Measures becoming out of date during the contract.

Emerging Best Practice

  1. Get Measures Right

In a time-poor contract management environment, prioritise. Choose which measures are most important to the success of your project and focus on them before others. Excessive measurement can lead to an administrative headache, so be realistic with your monitoring capacity, and once again, prioritise what’s most important. Document everything to ensure that credit is given where credit is due, accountabilities allocated where appropriate, and evidence is gathered that could support a claim should things go in the wrong direction.

  1. Review and Update

Just as the contract for a project needs to be adapted to the reality of the relationship’s environment, your key performance indicators (KPIs) must also change with the needs of the project. However, care must be taken to ensure that the risk-reward balance is maintained to incentivise suppliers.

  1. Use Other Levers

Performance measures and incentives should encourage good supplier performance, but there are other levers which we discuss in our Contract Management article (to be released next week).


Performance measures that not only work to guide the parties towards project outcomes, but that are properly managed, risks that are understood and mitigated against, and contracts that are clear and fully understood and adapted regularly to tweak your relationship to offer a better chance of success. These three elements are vital to the commercial success of almost any complex service delivery relationships.

Previous articles have focused on several of the 20 fundamental issues highlighted within the NAO’s ‘Commercial and contract management: insights and emerging best practice’ report. These issues are grouped under seven key judgements for commercial relationships. So, for a full and detailed picture of these issues click on the following links to be taken to the relevant article. (These are being completed in order, so if a link does not exist watch out for the additional article over the next few weeks.) Commercial Strategy, Commercial Capability, Market Management and Sourcing, Contract Approach, Contract Management, Contract Lifecycle, Transition and Termination.

Photo Credit: iStock

Free ebook download, click here!