Have you ever completed a Request for Proposal (RFP) for a complex service agreement only to realize that you are not satisfied with your best choice? You’re either not sure about the pricing (worried that you are overpaying or underpaying and will get hit with change orders later on) or whether the service provider can truly deliver the quality of service that you expect. I know that I have many times felt this way.
Now what? It may be time for you to pursue a “Mutually Beneficial Contract” with your service provider.
“Mutually Beneficial Contract”(MBC) is a term that I coined when I could not find the type of contract that I describe here after using several search engines. So you heard it here first.
“Mutually Beneficial Contracts” definition by Ed Novak:
“A Mutually Beneficial Contracts is a contract or agreement between two parties, usually for complex services where a detailed scope may be difficult to define, based on shared values, Key Performance indicators and common goals that usually result positively for both the Service Procurer (buyer) and the Service Provider (seller).”
Since an organization (service procurer) and its suppliers (service providers) should be interdependent with aligned goals in a mutually beneficial relationship, a MBC between them strengthens that relationship and increases the ability of both to add value and ensure success. There are five core shared values in a MBC:
- Openness – willing to share information that one may not normally do when negotiating a service contract.
- Trust – believing that both parties are working towards a common goal that will be mutually beneficial for both. In typical negotiations, there is not a lot of trust; both parties try to maximize their financial position and believe that the other party is doing likewise. main driver other is trying to maximize.
- Respect – treating each other as equal parties that both bring value to the relationship. One party may understand how the business runs while the other can provide insight on how to improve that type of business. The two parties work as a team to arrive at the best solution.
- Honesty – working together to achieve a mutually beneficial goal by sharing information openly, accurately and timely.
- Flexibility – willing to change positions and pricing as more information is obtained.
Both parties must practice these five shared values to ensure a successful Mutually Beneficial Contract. In addition, Key Performance Indicators (KPI) must be established prior to final contract execution which will be used as the basis for final financial cost of the service. Sound good? Here is how it works,
Steps for Implementing a Mutually Beneficial Contract
The potential service provider and the procurer each submit a Rough Order of Magnitude (ROM) budget on a slip of paper and share the amounts with each other. In most cases, you can split the difference and make that your new baseline budget. Since I already have pricing from the RFP, I have a reasonably good idea what this should cost. Note: if the service provider’s ROM is significantly higher, then further analysis should be performed to determine the reason for the budget disconnect.
Once you have two budget numbers that are fairly close, the procurer issues a Time and Material (T&M) Not To Exceed (NTE) purchase order or contract for and amount that is the difference between the two ROM budgets. This is not a final budget amount; both parties understand that the final amount will change because the scope requires fine-tuning.
Part of the T&M expense will be used at this point to help with detailed planning to help get to the next budget, GMP. It’s only fair to pay the service provider for this service, but if planned well, it should more than pay for itself by resulting in a successful move or project.
As the scope becomes more refined and the service provider has shared his proposed costs for hourly labor, equipment, etc., the service provider should be able to generate a detailed project budget and schedule that will replace the original ROM budget. This will become a Guaranteed Maximum Price (GMP) for the service and will not change unless either the procurer changes the scope or Key Performance Indicators affect the GMP price. OK, under a Mutually Beneficial Contract, the final price is not known until the work is complete because the procurer will place both incentives and penalties in the contract. Work with your service provider early on to establish the KPIs that will go into your MBC. Here are the areas that most project managers would consider when evaluating or being evaluated for a project:
Time & Schedule – Did the work get completed on-time? Were deadlines met? How responsive was the service provider to changes? Were agreed upon down-times met?
Cost – This should not be a factor with a GMP contract, but if your service provider asks for more money that were not caused or initiated by the procurer, then you have a problem
Customer Satisfaction – While I generally like customer satisfaction surveys, I don’t like them as part of the KPI that effects the final payment amount in a MBC because it is too subjective. I can measure time and schedules and waste (see next item) but perceptions are arbitrary.
Waste – In complex projects careful planning is required for flawless execution is required to minimize or avoid waste. If you project has the potential to cause waste to your inventory or product then you should include at least one waste KPI.
I don’t believe in using only sticks – I like to use carrots too. Therefore, if the service provider can exceed the approved KPIs, then it is worth giving the provider some of the money back that we removed from the budget in Step 2.
Mutually Beneficial Contracts are not for every situation, but they are worth pursuing in the right situation as long as the five core values are shared and meaningful Key Performance Indicators are deployed.