The information in this section is intended to aid State agency managers in establishing or enhancing the agency’s contract monitoring process.

State agencies enter into contracts for a variety of reasons that help the agencies achieve their overall mission. Contracts for goods and services account for significant expenditure of public funds. As such, it is incumbent for managers to ensure those funds are spent appropriately.

Every agency should have a process to monitor and evaluate contractors’ performance to determine whether contractors deliver goods and services in accordance with the contract terms and other requirements. This process should be championed by a high-level manager capable of directing or influencing the activities carried out in multiple areas, including: program, purchasing/contracting, accounts payable and receiving, whether centralized in a receiving unit or decentralized with the end users.

Effective contract monitoring helps ensure agencies get what they need, provides a basis for payment, supports programmatic objectives, and helps reduce the risk of fraud and waste. In allocating resources to monitoring contracts, managers should employ a risk-based approach, with greater resources allocated to monitoring contracts that pose a higher risk. The foundation of effective contract monitoring is well-defined contract terms.

Process and Document Preparation:

CONTRACT TERMS

The success of contract monitoring is dependent on the quality of contract terms. The effective design of contract terms begins in the solicitation requirements development phase, when it is critical to involve end-users and fiscal, program, audit, and legal staff. These groups bring specialized knowledge and expertise to the process and may have distinct needs for the procurement. As such, involving them in designing the requirements, which are later translated into contract terms, helps ensure the contract addresses those needs.

To the greatest extent possible, contract terms should be Specific, Measurable, Achievable, Relevant and Time-bound (SMART). Specific terms are well-defined, focused and explicit. Measurable terms are concrete and define such attributes as quantity, quality, and cost. Achievable terms are feasible and within the contractor’s influence, given the available resources and time. Relevant terms are those essential to the contract deliverables. Time-bound terms impose specific deadlines by which the contractor must perform.

At a minimum, SMART contract terms address the following:

Contract terms should be clear and unambiguous. Vague language can: (i) contribute to errors in interpretation by the contractor and the agency, (ii) diminish an agency’s ability to effectively monitor and evaluate a contractor’s performance, (iii) result in the agency having to pay for inferior goods or services, and (iv) prevent an agency from recovering moneys paid to the contractor for underperformance. The following words are vague and should be avoided in defining contract terms: variety, typically, usually, can, may, periodic, often, and good faith effort.

To determine whether the agency has successfully designed SMART contract terms, someone reading the contract should clearly understand the following:

• What is the contractor expected to do?
• When is the contractor to provide the deliverables?
• Where is the contractor to perform required activities?
• How will the contractor communicate to the agency that contract terms have been satisfied?
• How is the contractor to bill the agency for goods or services?
• How much money is the contractor allowed to bill the agency for goods or services?
• What information must be included on the invoice?
• How and to whom should the contractor send the invoice?
• What’s at risk if the contractor fails to perform as required?

In addition, managers should be able to answer these questions for each contract term:

• How will the agency verify that the contractor did exactly what was expected for the contract term?
• What is the agency’s recourse if the contractor does not perform as required?

If managers are unable to answer the previous questions, the contract terms need to be clarified or refined.

Contract Monitoring Steps

Effective contract monitoring includes the following steps:

1. Identify a prioritized list of contracts to monitor
2. Understand contract terms and other requirements
3. Identify risks
4. Prioritize risks
5. Determine the agency’s response to the risks
6. Design and implement monitoring activities
7. Follow up

Exhibit A contains a template agency managers may use to document their contract monitoring process. It also includes examples of contract terms, associated risks, and potential monitoring activities. This template is designed to take managers and staff all the way through the process beginning with step 2: Understand contract terms and other requirements. It does not include the first step – Identify a prioritized list of contracts to monitor, which must be done based on an analysis of risks and resources, as described next.

1. Identify a prioritized list of contracts to monitor

Managers should design a method to ensure resources are appropriately allocated to monitoring contracts based on risk. Contracts that carry a higher risk should be more closely monitored than those with a lower risk. Contract risks can include not achieving the agency’s mission, misspending dollars, jeopardizing persons’ health or safety.

Managers should consider the following to identify the priority of contracts for monitoring:

• How critical the contract is to achieving the agency’s mission,
• Likelihood that nonperformance, or underperformance, would jeopardize health or safety,
• Dollar value of the contract,
• Total number and aggregate dollar value of all contracts with individual contractors at the agency and among all State agencies,
• Favorable and unfavorable knowledge of contractors’ performance,
• Age of the contract,
• Length of time the contractor has been doing business with the agency,
• Information in the contractor’s audited financial statements, including the notes, where available,
• State or Federal agency audit findings for: (i) the contractor or (ii) the goods or services under contract,
• Available public information about the contractor or type of goods or services under contract,
• Availability of alternatives should the contractor be unable to perform,
• Extent to which any contractor’s activities, payments or other items within a program do not conform to similar contracts within the program, and
• Impact on public confidence.

Effectively evaluating risks among the population of agency contracts facilitates the development of a prioritized list of contracts for monitoring. Monitoring then begins with the highest priority contracts and proceeds down the list. If correctly prioritized, the contracts at the bottom of the list pose the lowest comparative risk to the agency. After managers have completed monitoring of the highest risk contracts, they should assess whether to start back at the top of the list or proceed to the contracts posing a lower comparative risk to the agency.

Organizations should evaluate this overall process annually for its effectiveness in identifying the highest risk contracts for monitoring and make adjustments as appropriate.

2. Understand contract terms and other requirements

Managers should identify and understand all of the requirements for the contractor. Requirements may be embodied in the contract terms and appendices. Requirements may also be outside the contract itself, such as requirements in New York State law, the Federal Acquisition Regulations or other industry-specific requirements, such as those published by the Occupational Safety and Health Administration and the American Society of Mechanical Engineers. Contract terms and other requirements will become the basis of the monitoring activities.

Managers may question whether to include in contract terms those requirements that are embodied in laws, rules and regulations, or other industry-specific requirements, since the contractor is obligated to adhere to these anyway. It is advisable to include these requirements in the contract terms, either in their entirety or by specific reference to the section of the laws, rules and regulations or other publication – especially when they address health and safety issues. This helps ensure contractors are aware of all their requirements.

If agency managers have designed SMART terms, it will be easy to identify specific contractor performance requirements. However, if contract terms are not SMART, managers should notify agency staff responsible for revising contract terms to address the insufficiencies. It may be possible if the contractor agrees to amend the contract to clarify the performance requirements. Alternatively, managers need to wait until the solicitation phase for a successor contract to address performance requirements.

3. Identify risks

For each contract term and other requirement not included in the contract, managers need to identify: (i) events or actions that may prevent the contractor from meeting the terms and other requirements, and (ii) actions the contractor may take to receive payment that the contractor did not earn under the contract. This risk identification process can be challenging. Managers must be skeptical and question many aspects of a contract term or other requirement to identify the variety of ways a contractor may avoid compliance.

It is helpful to think along programmatic and fiscal lines to identify risks. With this in mind, managers should consider involving employees with a variety of perspectives in the risk assessment process, such as employees from finance, program, legal, audit and other subject matter experts as appropriate. Group brainstorming is useful for identifying the full range of possible risks associated with each contract term and other requirement. Managers should document each programmatic and fiscal risk identified.

4. Prioritize risks

Managers should assess the adverse impact if the identified risks occur. The assessment should be done on a predetermined scale, such as a scale of 1 to 10 or low, medium, or high. Adverse impacts can include not achieving the agency’s mission, misspending dollars, jeopardizing public health or safety, and failure to provide critical services.

Managers should then assess the likelihood that absent any agency controls each identified risk might occur. Again, the assessment should be done on a predetermined scale. In making this assessment, managers should consider the risk associated with the nature of the service or commodity under contract and the method by which the contractor earns money. For example, preventive maintenance services provided on a fixed fee basis have a greater inherent risk for contractor underperformance than preventive maintenance services provided on a time and materials basis. In addition, managers should consider the controls the contractor has in place. For example, the agency may have verified that a contractor employs a nine-step interview and credential verification process to ensure personnel provided under the contract meet the required qualifications.

Finally, managers should use their judgment to evaluate the overall risk taking into consideration the combined impact and likelihood of each risk.

The above chart graphically depicts a reasonable approach to evaluating risks, with quadrant 1 representing the lowest priority and quadrant 4 representing the highest priority risk. Management should prioritize risks in a logical manner, from the most significant (high impact) and most likely to occur (high likelihood) - as indicated in quadrant 4 - to the least significant (low impact) and least likely to occur (low likelihood), as indicated in quadrant 1 of the graph.

5. Determine the agency’s response to the risks

Once risks are prioritized, managers can then determine whether to mitigate the risks or accept the risks. Risk mitigation strategies include increased contract monitoring, revised administrative processes, increased reporting, improved system controls, increased auditing, and other activities to reduce the likelihood the risk will occur.

It is also important that agencies periodically re-assess risks and modify responses accordingly.

6. Design and implement monitoring activities

Managers should create a written monitoring plan for each risk they determined should be mitigated. Monitoring activities should be specifically assigned to appropriate staff and identify:

• The name and or title of the individuals(s) who will perform monitoring activities,
• The activities the monitor(s) will perform, including the type of evidence the monitor(s) will obtain to determine whether the contractor complied with the contract terms (see Exhibit B for information about the types and reliability of evidence),
• Where the monitor(s) should complete the activities,
• How often the monitor(s) should complete the activities,
• How the monitor(s) should document the outcome of the monitoring activities,
• Who should received the documentation, and
• Where the documentation will be stored.

Managers should communicate the monitoring activities to the employees responsible for monitoring the contractor. Managers should also ensure that any concerns identified about a contractor are shared with appropriate agency employees, including program monitors, fiscal monitors, Finance Office staff, and Contract Office staff. Agencies should also consider sharing pertinent information with other State agencies that have contracts with the same contractor, as well as with OSC Directors of the Bureau of Contracts and the Bureau of State Expenditures. This can help to facilitate a more unified, informed approach to mitigating risk and awarding future contracts.

7. Follow-up

Managers should evaluate the results of monitoring activities, including the quantity and quality of the work performed, the timeliness of contract deliverables, the adequacy of cost and performance records and other supporting documentation, and whether performance to date is commensurate with the amount the contractor has been paid.

The agency’s response to the contractor’s performance will vary depending on the degree to which the contractor is compliant with the requirements. The following table includes potential agency responses in light of varying degrees of contractor compliance with contract terms and other requirements.

During the contract monitoring process, the monitor may discover that certain contract terms were not SMART or that other issues identified during the monitoring process should be addressed or clarified in any subsequent amendment or contract, as applicable. In these instances, the monitor should ensure managers responsible for designing and/or modifying the contract requirements are aware of these improvement opportunities.

Knowledge, Skills and Abilities

Agencies can increase the overall success of contract monitoring by ensuring the monitors have the appropriate knowledge, skills and abilities to carry out the activities to identify, prevent and reduce contract risks.

• Knowledge: the degree of familiarity with contract terms, applicable legal requirements, relevant agency policies and guidelines, and potential fraud schemes.
• Skills: the level of competence and expertise in programmatic and fiscal contract monitoring, observation, analysis, written and oral communication, judgment, problem solving, conflict management and interpersonal skills.
• Abilities: the demonstrated performance of effectively applying the knowledge and skills when needed.

Managers may find it beneficial to incorporate relevant knowledge, skills and abilities into monitors’ performance expectations, training plans, and evaluations. Also, managers should consider establishing written policies, procedures, and/or task lists for monitors.

Questions

If you have questions regarding contract terms or want to share information with the Bureau of Contracts, please call (518) 474-6494.

If you have questions concerning contract monitoring or want to share information with the Bureau of State Expenditures, please contact the Customer Service Help Desk at (518) 474-4868.

If you are interested in training, please contact the Office of Operations Agency Outreach Training Program at [email protected] or visit https://www.osc.state.ny.us/state-agencies/training.

Guide to Financial Operations

REV. 03/27/2020