Mid-term contract reviews – what can they achieve?

Contract 2 iStock 000003466551XSmall 146x219Justin Mendelle examines the benefits of a mid-term contract review of outsourcing and PPP service contracts.

Outsourcing and public-private partnership (PPP) service contracts are increasingly being let on a long-term partnership basis. One question that often arises is how effectively are those partnerships being delivered?

It is common practice for local and central government organisations to include extensive drafting in their contracts relating to the management of the relationship between the authority and its provider. It is also common to have detailed provisions regarding governance structures and partnership boards. In competitive dialogue procurements, management and governance are often the subject of meetings and a key component of the subsequent written tenders.

Authorities often ask for and expect their providers to sign-up to obligations which are almost impossible to resist but can be difficult to deliver in practice. It is here that the mid-contract review can be of real benefit.

One of the key questions that needs to be asked is whether the quick wins that were achieved in the early stages have translated into tangible benefits once the contract has reached a steady state. For instance, most partnering contracts make provision for a board to be set up, with representatives from both the authority and the provider. During the first few months of service delivery, the boards are operated as intended. Indeed, given that PPP contracts normally involve quite a significant change to the manner in which services are delivered, the parties are usually open and honest with each other about what is required. However, once the honeymoon period has ended, the service levels have been met and the KPIs are being achieved, complacency tends to creep in and standards may start to slip. Furthermore, if commitments to invest in and improve the service have been made, then it can be difficult for the provider to find new ways to keep delivering new improvements.

Another key benefit of the mid-contract review is that it provides the parties with an opportunity to analyse the contract on an objective basis. This is best achieved by asking whether the contract is being operated as intended? If the answer is yes, then it’s likely that the partnering terms were realistic and achievable and the mid-term review will result in a clean bill of health. However, if the parties have developed a relationship which does not reflect the contractual agreements (or even simply ignores it), then the review provides an opportunity to get things back on track. In order to achieve this, the parties need to be open with each other about why they are not adhering to the terms of the agreement. Both parties need to contribute to this process and be willing to listen to the other side. Following the review, an action plan should be tabled, with clear commitments on both the authority and the provider and definite timescales for achieving agreed objectives.

A further benefit of the mid-contract review is that it can give both parties an opportunity to consider whether the extension or break provisions should be operated when they come into effect. Historically, it was standard practice to have long-term contracts that had break clauses towards the final years (an option to break after 7 years of a 10 year contract). More recently, it has become more common to adopt the alternative approach (i.e. an option to extend by a 7 year contract by 3 years). In either case, the mid-contract review can serve to highlight the issues that would usually be discussed when deciding whether to extend or break the contract. This gives both parties the chance to address the shortcomings of previous years, whilst having a clear goal to work towards in the coming years.

Finally, the mid-contract review allows both parties to take the temperature of the relationship, without going through the formal procedures in the contract, such as benchmarking, market-testing or indeed dispute resolution. To this end, it may be worth considering having an independent third party review the contract, so as to provide an objective and unbiased view.

With clear goals, an open and collaborative approach and a willingness to improve on both sides, mid-contract reviews are an efficient and cost-effective way to ensure the partnering contracts continue to deliver for both parties for the life of the contract.

Justin Mendelle is a partner and head of construction at Sharpe Pritchard. He can be contacted on 020 7405 4600 or This email address is being protected from spambots. You need JavaScript enabled to view it..