The three phases of contract management in Aerospace & Defence – and how to avoid the deep pitfalls at each stage
06 November 2015
The procurement and contracting process in Aerospace & Defence (A&D) is different from that in virtually any other industry, set apart by its combination of high technical complexity, multi-year timescales and narrow and political supply base. For A&D companies, these characteristics create unique challenges in realising the value they’re seeking from their contracts. Our experience shows that the biggest problems trend to arise at three specific stages of the tendering process.
The good news is that by asking a few searching questions at each stage, companies can navigate around the pitfalls and ensure their contracts actually deliver what they say on the tin. By way of illustration, we’d like tell a story about an all-too-typical A&D contract. While the contract is fictional, the challenges it raises are anything but.
So, to start our story we have looked at the first stage at which a problem could arise. Imagine you’re an A&D company planning to build a new jet aircraft, and you’re negotiating with technology vendors during the design phase. The specific component on the table is a radar system – and even as the price negotiations continue, you’re refining your design to incorporate this piece of equipment.
The dichotomy is that the more you design your aircraft around the supplier’s radar system, the greater the costs of switching to anyone else’s – and the weaker your negotiating position with the supplier. Conversely, if you commit to the vendor’s radar system too early in the design process, you find it more difficult to provide hard specifications, resulting in costly changes down the line.
As if this dilemma weren’t challenging enough, it’s been heightened by tight timescales and time overruns. With engineering running late, your procurement team is told to “just go and do the deal”, without being given time to influence the design and complete Value Engineering activities such as designing to cost, optimising commercial leverage and market stimulation. There is also little time to negotiate properly to get the best commercial deal. Also, what looks like a major deal to the supplier – meriting senior executive involvement in the negotiations – is relatively small beer for you as the customer, meaning your business allocates relatively junior, inexperienced people to the negotiations. This mismatch in experience and “clout” on the two sides of the table further weakens your ability to negotiate the best deal. Getting this phase right typically provides the largest cost benefit.
Anyway, the deal gets done. And the second phase where problems arise is in managing the contract once it’s up and running. During the multi-year programme, the ownership of the contract in your business changes several times, partly because the rushed negotiation has created a contract that’s difficult to manage. Over time there are also multiple changes to the contract itself and related budgets.
As a result, what’s written in black-and-white gradually diverges from what’s actually happening on the ground. But your contract management processes are not rigorous enough to define clearly what these changes are. And the people rotating in and out of running the contract are too focused on their day-to-day duties to bother with the “housekeeping” of documenting the changes, making it increasingly difficult to establish the original intend and obligations of the contracts and its subsequent changes.
Despite these issues, the contract runs its term. And the third phase problems arise – and also where the issues we’ve already described all come home to roost – is at the contract close. The largely undocumented variations to the contract and budgets over the term make it virtually impossible to tell whether your company has received the value it’s paid for, and hence whether or not you’re due any money back from the supplier.
So, how could these pitfalls have been avoided? Essentially by asking the right questions at each stage. First, in the design and negotiation phase, the questions should include: what’s the role of the procurement team? Just to “buy stuff quickly”, or to work with the engineers from inception of the project to ensure the best possible value is designed in from the start? Also, how senior are your people handling the negotiations – are they sufficiently experienced to get the best deal?
Next, during the stage of managing the “living and breathing” contract, another set of questions needs to be asked. Is delivery by the supplier meeting both the original intention of the contract – and also the detailed performance requirements? Are you defining and documenting every change?
If the questions above have been answered properly in the first two stages, then the final step – the contract close – should be relatively straightforward. If not, then you’ll have to expend significant effort on contract diligence to establish whether the agreed value has been delivered. Faced with this, do you want to close the contract quickly and put the problems down to experience? Or decide you’ve had the wool pulled over your eyes, and carry out a forensic analysis aimed at challenging the supplier with view to recovering some value?
Overall, the message is clear. If your A&D business asks itself the right searching questions at the start of the contracting process, then you shouldn’t end up having to go into conflict with the contractor at the close. But get the beginning wrong – and you’re storing up problems at more stages down the line.