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Guidelines for Contracting with Non-Government Organisations for Services Sought by the Crown [2003] (2003)

Chapter 3 - Negotiating the Terms of the Contract

3.1 Negotiations

Once an agency has identified its objectives, the nature of the services it wants to purchase, the preferred provider, and is satisfied that the provider can deliver the services the next step is to negotiate the contract itself. The contract sets out each party’s undertakings to the other.

Where a provider has been selected on the basis of a tendering process, the bid and tender documents will provide a clear basis for negotiating the details of the contract. If negotiations result in a significantly different contract specification, it may be necessary to allow re-bidding by other bidders. Government agencies need to consider whether it is ethical to use concepts from an unsuccessful bidder in the final contract. They need to be able to explain any such apparent uses.

Negotiations will usually focus on aspects of the specifications for service delivery (particularly quality and quantity), and price. The price is likely to be a reflection of the quality requirements, but agencies should obtain an in-depth breakdown of how the NGO is determining its price and review the costs for reasonableness.

Contract managers should negotiate within a clear set of negotiating parameters. This benefits both the Government agency and the NGOs, as it:

  • Reduces the risk of the Government agency agreeing to terms that are inconsistent with its overall objectives.
  • Means that the NGO should be dealing with managers who can reach an agreement, rather than having to refer decisions elsewhere. Contract managers should have authority to conclude negotiations, even if they do not have authority to sign the contracts.

It is in the interests of both the Government agency and the NGO to approach negotiations in a collaborative rather than a confrontational manner. The outcome should be a situation where there is a mutual benefit - the Government agency is confident of getting the desired services for a reasonable price, the NGO is confident of delivering those services within the available resources.

Government agencies must enter negotiations with a clear idea of their interests and those of the Crown. The Crown should actively seek value for money. At the same time, Government agencies need to understand the interests of the NGO they are contracting with. Government agencies want NGOs to deliver services under the current contract, but also have an interest in their viability into the future, and maintaining a good relationship. NGOs – for profit and not-for-profit - must at least cover their costs of service provision, including the cost of capital.

Purchasers want to achieve cost-effective services. They need to be aware of the risk of under-pricing the service they are purchasing. ‘Driving down’ the price could undermine the quality of service delivery and damage the capacity of the NGO to deliver. This is particularly an issue with small or new not-for-profit organisations that may have limited management and contract negotiation experience. Similarly, Government agencies need to think about how risk is apportioned in the contract and which party is in the best position to manage particular risks. Government agencies should avoid negotiating contracts that leave the Crown holding an undue proportion of the risk.

Both parties need to be clear about whether the Government agency (or several Government agencies together) is paying for all or nearly all of the service. Alternatives include paying at full cost or for only part of the service, with other resources coming from the NGO or elsewhere.

It is sometimes helpful for the Government agency to disclose its negotiating parameters to the provider, including any constraints they operate under such as:

  • Budget – including appropriation authority.
  • Law.
  • Government Policy.
  • The need to maintain national consistency.
  • The need to operate within national standards.
  • The need to operate within convention or within ethical conduct requirements.

Following preliminary discussions, the Government agency should prepare a draft contract as a basis for further negotiations with the NGO. In situations where the Government agency has departed from its own contracting policies or procedures, the reasons for the variation should be recorded and the contract should outline what procedures have been put in place to mitigate any risks arising from the change, e.g. more intensive monitoring. A checklist of contents for a contract is set out below as a reminder of issues that need to be considered. This checklist does not take the place of advice from the agency’s own legal team.

It is possible to cover all of this in a short contract. Neither the order nor the language listed needs to be used, but it is important to think about whether each of the items is clearly covered in the contract. A contract can range from a lengthy document with detailed specification, to a document of a few pages, or even an oral agreement. Oral contracts are not appropriate for Government agencies, however, and NGOs should be clear that a contract does not arise until a contract document has been signed. The length and nature of the document signed will depend on the:

  • Nature of the activities or services being provided for.
  • Nature of the parties to the contract and the relationship between them.
  • Amount of money involved.
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