Framework Agreement vs. Dynamic Purchasing Systems

What innovative option provides better Value for Money (VfM) in the management of donor funded projects using non-FPEPA based contracts?
 
There is a general perception that donor agencies around the world do not manage their project implementation funds as well as the private sector. While this is debatable, I can confidently say that with over two decades of experience as a contracts specialist in both the public, private and international governmental organisation (IGO) environments, this perception is somewhat true.
 
In all honesty, I have to admit that the rigorous approaches to contracting in the private sector and the IGO environment are miles apart. The reason is quite simple: Private sector organisations are prepared to use litigation to ensure that every cent spent gets the same or better value for money. This is very typical of that cliché ".... trying to make a dollar out of 15 cents". The IGOs, on the other hand, avoid bad publicity. This means that if a project is not implemented as expected, they will rather use mediation and avoidance measures to try to resolve the matter "quietly" or use avoidance to ignore the matter completely and simply avoid litigation in an attempt to avoid "bad publicity".
 
Private sector companies will enforce penalty and liability contractual clauses to address a project that receives a negative Schedule Variance (SV), while IGOs will simply extend the project duration or deadline(s).
 
The question, then, is which innovative contractual approach can best create the platform for IGOs to effectively implement projects, avoid "bad publicity" and still deliver value for donor funds spent.
 
There are only a few main types of agreements that can be used to address this unfortunate perception and challenge: Framework Agreements and Dynamic Purchasing Systems, as well as an understanding of project Earned Value Management (EVM).

According to the United Nations Economic Commission for Europe, "Framework agreements are arrangements between one or more buyers and one or more suppliers that provide the terms governing contracts to be established for a certain period of time, in particular with regard to price and, where necessary, the quantity envisaged". 
 
In simpler terms, it is a type of contractual arrangement whereby the contracting authority engages a pre-selected supplier, contractor or service provider who has gone through a tendering process and has been found to be qualified to perform certain obligatory acts in return for financial reward(s) based on a predetermined criterion for long-term projects.
 
The Framework Agreement serves as a sort of "basket" from which the actual implanting contract(s), usually known as a Call Off, is / are drawn to request the provision of goods, works and services on an as-needed basis.

Thornton & Lowe describe a Dynamic Purchasing System (DPS) as "an electronic method of procurement, used for the supply of goods and / or services. It’s different to traditional procurement routes as it operates an ‘open market’ for suppliers to join either constantly or very frequently.”
 
What makes DPS uniquely interesting is that it is entirely electronic and interested parties can join at any time. This means it is open to qualified parties all year round, creating the least waste in the procurement process while adding the most value. It offers interested parties an easier and more flexible way to compete for public sector contracts in particular.

Earned Value Management (EVM) provides a basis for evaluating the progress of work against an original plan, establishing the links between technical, time and financial performance, providing information to facilitate proactive management intervention and providing management with a concise overview to support informed decision making.
 
This, along with Burn Rate Management, is one of the overlooked tools by donor-funded agencies to effectively manage how money is spent on projects.

Understanding how to access project Earned Value (EV) is a very important aspect of selecting the type of innovative contracting to use. 
 
In the diagram above, being able to identify the Actual Cost (AC), the Schedule Variance (SV), the Actual Progress (AP) and the Planned Schedule (PS), the Forecast At Completion (FAC) and the Budget At Completion (BAC) will inform the donor agency that the Spend Value for this project should have been CHF 525.000 and not CHF 675.000.
 
In the illustrative EVM diagram above, this would inform the Contract Specialist to take a closer look at what is actually happening in the project and what measures can be taken to ensure that the donor funds used to implement this illustrative project are disbursed and spent to generate the nominal values expected by the project beneficiaries, contributors and partners.

There are also three general categories of contracts. 
 
Time & Material (T&M), Cost Plus (CP) and Fixed Price (FP) based contracts. The establishment of the Total Cost (TC) and Actual Cost (AC) elements for each option have interdependent costings that vary the final cost of the options.
 
Time & Materials (T&M) based:

This type of contract is the simplest, but is cumbersome in environments where inflation is uncontrollable. The time element represents a Fixed Labour Rate (LBR) and the materials element represents a direct reimbursement to the contractor, i.e. supplier, contractor or service provider, for the actual cost of materials procured to complete the project.
 
Cost Plus (CP) Based:

Most contracting authorities shy away from this type of contract. Under this type of contract, the seller (supplier) is reimbursed for its costs plus an additional amount. The purchaser has the greatest cost risk as the total cost is unknown. This form of contracting is only used when the buyer does not have a full Statement of Work (SOW).
 
There are three main types of Cost Plus (CP) Based Contracting:
 

• Cost Plus Fee (CPF) or Cost Plus Percentage of Cost (CPPC) which is TC = AC + X% of AC.
• Cost-Plus-Fixed-Fee (CPFF), where TC = AC + Fixed Fee (FF)
• Cost-Plus-Incentive-Fee (CPIF), where TC = AC + Fixed Fee + Incentive (80/20)

 
Fixed Price (FP) based:

This type of contract is usually the better option for projects to be implemented in environments where the External Environmental Factors (EEFs) such as inflation and exchange rates are totally unstable.
 
There are three main examples:
 

• Purchase Order, which is TC = Fixed Price per Itemised Cost
• Fixed Price Incentive Fee (FPIF), where TC = Fixed Fee + Agreed Incentive Fee (IF)
• Fixed Price Economic Price Adjustment (FPEPA), which is TC = Fixed Fee + Adjusted Increases due to changes in inflation rates

FPEPA contracts are ideal for long term engagements, may be advisable for single contracts and in environments where there is a high level of economic stability. For some environments, such as developing countries where inflation rates are almost uncontrollable, adapting an FPEPA contract for long-term projects could create scenarios where project costs simply become uncontrollable. Most IGO donor funded projects are usually implemented in developing countries, disaster areas i.e. places affected by floods, forest fires, war zones, poverty stricken environments and sometimes the nature of these projects is such that it is designed for a 0-3 year implementation plan.
 
Therefore, the most Value for Money (VfM) based innovative contracting feasible for donor funded projects at this point is a choice between Framework Agreement and Dynamic Purchasing Systems (DPS) and the question now is which offers the best option. To determine this, the focus will be on the key differences that distinguish one from the other. So what is the difference?

Framework Agreement
 

• Offline based
• Run Tender to shortlist and select supplier, contractor & service provider. Participants can only join within a selected opening.
• Selected participants are tied to the LIFE of the Framework Agreement. That means no new Participants can be added unto that particular Framework Agreement.
• The Contract Pricing fixed at the Tender Stage. For project implementation, where the contracting authority is external and the items to be used to implement the project are sourced internally in an environment where inflation and import duties are unstable, there is the challenge that at the end of a tender process the base prices used do not correspond to the prices of goods, works and services at the project implementation stage.

Dyanamic Purchasing Systems
 

• Mainly electronic (online) based
• Run Tender to shortlist and select supplier, contractor & service provider. Unlimited participants can join at any time.
• Selected participants are NOT tied to the LIFE of the Framework Agreement. During the DPS Life Cycle mini Tenders can be run to add on a new supplier, contractor & service provider.
• Contract Award Prices is established at the Contract Award Stage. What this means is assuming the Prices of items change during the Tender period, based on a price reasonableness test the Contract Award Prices can be adjusted when the contract is being issued.

The comparison above illustrates a very important but salient issue with contracting for long term projects in the absence of an FPEPA based contract. How can experienced contracting specialists like myself create innovative contracting vehicles that take the receptivity of procurement procedures out of the equation and allow interested parties to enter and exit at any time during the Contract Life Cycle (CLC) for long term projects, the answer is simply to adapt Dynamic Purchasing Systems (DPS) as the first choice contracting vehicle.

Unfortunately, most IGOs are now fixated on issuing framework agreements for long-term contracts. The question is whether this will eventually become the panacea for establishing the best contracts for IGOs to ensure Value for Money (VfM) in the management of donor-funded projects. Only time can tell.

Author: Dr. Nana Sackey PhD is a Contract Portfolio Specialist with several years of experience in innovative contracting across shipping, telecoms, managing donor funded projects and academia. He is a Certified Agile Project Manager (IAPM), holds an M.Sc. in Procurement and a PhD in Contract Management. He has facilitated several corporate trainings in the past, focused on contract administration, cost estimation, spend analysis and risk management within contract portfolios. He remains committed to shaping the future of contract design, structure, analysis and management.
He is happily married to Debbie with whom he shares three kids – Iden, Ibby & Ilse – with.