Property owners and managers typically have a handful of core service contracts necessary for business operation such as janitorial, security, parking, and engineering. While these services typically don’t vary much between businesses, every building or operation has its own specific needs.
To enhance controls and mitigate risk in these core contracts, there are several steps property owners and managers can take:
The scope of specific janitorial or security functions may differ from one owner or manager to the next, as do the controls and KPIs in these contracts.
Assess Existing Contracts
Your vendors are only as good as you make them. You hired them to be experts in their service areas and understand your unique business needs. You expect them to bring solutions and opportunities for increasing revenue and efficiency within your business. Unfortunately, not every vendor consistently delivers, and it’s important to know you can fall back on contract language if needed.
Understand what needs to go into your core contracts to be able to extract maximum value from the relationship. Quantify expectations such as defined minimum reporting standards, audit provisions, deliverables, standard forms, approval requirements, and even remedies for not meeting minimum service level requirements.
You may also consider allowing other groups within your business to weigh in during contract drafting to identify as many risk factors as possible that you or your contracts team may not think to consider. For example, your IT team may have feedback on your security contract if your security guards or alarm monitoring company will have direct access to your cameras or access card systems.
Annual contract reviews by others should also be considered. Often managers don’t look back at service contracts for long periods of time and forget certain controls or deliverables. It’s also good practice simply to get fresh eyes on contracts from time to time.
Improve Competitive Bid Procedures
It’s important to obtain comparative bids on vendor work to find competitive pricing. Requiring three bids is a good place to start. This will provide an effective comparison between bidders and cost competitiveness without being overly burdensome for either the contractor, owner, or developer.
Contract Type Selection Considerations
Contract-type selection can be as critical to managing budgets as competitive bidding procedures. Understanding the different available contract types that comply with grant requirements can help increase transparency and accountability.
Each contract type, such as lump sum, time and materials, or cost plus a fee with not-to-exceed budget limitation, needs to be evaluated for appropriateness with common factors such as project size, schedule, and scope complexity.
Selecting strong cost-of-work definitions with defined minimum performance requirements and standards have many benefits when coupled with a contract with audit rights. A not-to-exceed contract, for example, allows owners and vendors to define adequate allowable and unallowable costs of work for a project, which helps both parties manage and control costs.
At the same time, cost-of-work definitions—with a right-to-audit clause—must be sufficiently clear to enable the efficient validation of compliant charges and minimum level service requirements being met.
Key Contract Provisions
All contract scopes should set up your vendor and therefore you for success. If a vendor still finds themselves in contract noncompliance, remediations should be clearly defined. Every service contract that supports your operations should include audit provisions.
Consider the following to enhance your auditing capability.
Annual Audits
For contracts where revenue is to be received such as with a parking operator, include language stating an annual financial audit will occur each year so your vendor is aware and can prepare. Set yourself up for success by noting that audited financial statements will be expected from your vendor so the data can be relied upon.
Allow Third-Party Audits
Include language allowing for third-party audits to maximize your options for who can perform an audit.
Decide Who Pays
Make it clear who’s paying for the audit. For example, you may want the costs for an annual financial audit to be included in your service fees but depending on the findings you may be able to push the cost back onto your vendor.
Require Visibility
Detail the access you want visibility into. If you’re concerned about labor backup, perhaps call out time records as a specific document the audit can require. This will help avoid pushback later.
Multiple Types of Audits
If a contract may require multiple types of audits, give each a name, such as contract compliance or financial, with the scope defined.
Consider going beyond listing the reports or information you’d like to see from your service provider and at which frequency. If there’s a specific format or template that would make your review easier, include it as an exhibit to your agreement.
Identify the Right KPIs to Monitor
Define KPIs when it comes to service contracts. Key performance indicators (KPIs) are essentially vendor management tools. They should be used to hold your vendors accountable and ensure they are supporting your business needs and goals.
You know your assets best. If security staffing has been an issue for your property or business and the vendor you’re contracting with promises they can do better, include KPIs to hold them to that promise.
Examples of ways to strengthen your KPIs for your core service contracts to enhance decision making could include defining requirements:
- A security vendor must provide a substitute guard within a certain amount of time from call-off to site arrival or to perform an annual building key audit.
- A janitorial provider must meet, maintain, or improve defined waste sorting goals or provide a semiannual janitorial supply price comparison report.
- A parking vendor must track the average length of stay at your property or provide quarterly neighborhood pricing comparisons.
- An engineering vendor must meet a specific work order response rate with the goal of improving tenant satisfaction.
- Your deferred maintenance plan must incorporate asset information such as asset type, condition, make, model year, work order tracking, warranty compliance requirements, reserves, and schedule to optimize property function and utility.
- Your capital improvement plan must include project scope, status, budget, forecasting, commitments, schedule, and expenditure data so that your projects can meet budget and timeline goals and objectives.
Having more information available allows you to work with your vendor and deploy strategic business decisions which can lead to cost savings or increased revenue.
Monitor Contract Compliance and Vendor Performance to Service Level Agreements
You can’t assume your contracts are still performing as intended. Key people who negotiated your original contract on both sides may no longer be with the organizations. Do new city or state requirements expand your contract scope? Are you receiving all the reports your vendor is supposed to provide and at the right intervals?
Ongoing monthly monitoring procedures and controls can identify minor issues to correct before they become major issues. Have an annual meeting with your vendor to review contract requirements, overall satisfaction, and future planning. Interacting regularly with your vendors helps preserve relationships and reduce the cost of finding a new vendor.
Leverage Current Technology
There are many systems which can help an organization coordinate, report, and monitor contract performance.
You might already use a few. Do you have access to live reporting on your EV parking station revenue or utility usage? Does your trash utility provider routinely audit your waste sorting results?
It’s especially important to understand and at times question where your data is coming from so you can rely on it to make critical decisions. It might not be a good idea to count on data manually collected or provided by the vendor being monitored.
Add Solutions to Help Detect and Mitigate Risk
If ongoing coordination, reporting, and monitoring show a vendor’s noncompliance resulted in a fine, penalty, or loss to the organization, the organization can more easily hold the vendor accountable.
For example, if a monthly gas bill is particularly high in one month in the summer when usage is typically low, it could indicate a leak or equipment malfunction. If you enlist your engineering team to investigate and get bids for repair but weeks pass with the gas bills still high, it’s a sign your engineering provider isn’t acting with your interests in mind.
Another example would be reviewing how building keys are tracked. Get a regular report from your security provider or whoever facilitates daily building access to ensure keys are being tracked properly. If keys aren’t being checked in at the end of every shift by engineering, janitorial, parking, or security there is risk to your asset.
Your day shift security officers shouldn’t hand off keys to swing shift without logging it. Following the chain of possession is essential should a set of keys go missing—especially if the cost of a building re-key is at stake.
Incorporate ESG Goals into Your Contracts
Service Providers Should Support Your ESG Priorities
Many companies have invested time and effort to develop robust ESG strategies with defined goals and action items. These plans and the many status updates that follow are often shared with employees, investors, clients, and sometimes even the public.
The contract phase is good time to consider ESG priorities and metrics and how your core vendors can help reach goals like reducing utility usage and operational spend—especially when there are incentives like tax savings you may be able to take advantage of.
What Does Support Look Like?
Consider building in expectations and accountability mechanisms, such as annual or quarterly reporting, from your vendors. You could require your janitorial service to use green cleaning solutions that help achieve and maintain environmental safety standards or certifications such as Leadership in Energy and Environmental Design (LEED) or Fitwel.
Also consider if the vendor’s hiring practices are in line with your organization’s inclusion and diversity goals. Did you also want to reduce your trash waste stream by a certain percentage this contract year? Make it a first quarter deliverable from your janitorial service provider to come up with a plan based on industry expertise and knowledge from working at your asset.
Hire Experienced Property Management and Contract Compliance Specialists
It’s key to establish an adequate internal control system to account for, monitor, and report on your property and program.
Business operators and owners should assess whether their team includes experienced property management, construction, and contract professionals who can help manage the property and optimize operations.
Key property management personnel need a thorough understanding of your objectives. Managing a property requires making strategic and informed decisions about:
- Lease agreement management and controls
- Vendor selection and management
- Current and deferred maintenance management
- Construction management
- Contract and performance compliance
Common program pitfalls might include cost overruns resulting from costly procurement practices, ineffective vendor management practices, reluctance to think ahead in terms of green programs, and inadequate performance reporting that impacts the ability to make informed decisions impacting your bottom line.
We’re Here to Help
For guidance in assessing your contracts and controls, contact your Moss Adams professional. You can also visit our Contract Compliance Services page for additional resources.