From the December 2021 print edition
Recent audits and legal decisions underscore the importance of establishing clear contract performance benchmarks to measure contract success and enforce contractual obligations.
Turning first to recent audits, in the July 2020 report entitled New Zealand Transport Agency: Maintaining state highways through Network Outcomes Contracts, New Zealand’s auditor-general found that while the New Zealand Transportation Agency had consolidated new results-based highway maintenance contracts, that new program continued to use outdated, specification-based performance benchmarks.
This resulted in an overall lack of clarity in confirming whether the contractors were meeting their objectives. Rather than repurposing old contract management strategies to administer new contract structures, this report underscores the importance of developing new contract performance benchmarks when deploying new contracting strategies.
Similarly, in its November 2020 report entitled Weapon System Sustainment, the US Government Accountability Office (GAO) reviewed the mission readiness of 46 different types of military aircraft and recommended the adoption of better performance tracking metrics. As the report explained, the “mission capable rate” measures “the percentage of total time when the aircraft can fly and perform at least one mission.” While the GAO concluded that none of the aircraft achieved the desired 80 per cent mission capable target, the report provides a useful example of how performance benchmarks can help measure the success of contract management goals.
Further, in its September 2021 report entitled Defence’s Contract Administration — Defence Industry Security Program, Australia’s auditor general noted the importance of establishing procedures for contract enforcement. The auditor general concluded that the Defence Industry Security Program, which is aimed at supporting Australian contractors in meeting their security obligations under Department of Defence contracts, failed to establish arrangements to monitor compliance with the requirements. The report ultimately recommended that new contract performance requirements should be “supported by an agreed implementation plan and appropriate levels of resourcing.”
As recent court cases illustrate, failing to properly define performance benchmarks can undermine the downstream enforcement of contractual obligations. For example, in its June 2020 decision in Blackpool Borough Council v. Volkerfitzpatrick Limited, the England and Wales High Court of Justice dealt with a dispute over the construction of a new tramway depot in the coastal town of Blackpool, England. The Council claimed that the design was not suitable for the exposed coastal marine environment. While the Council was awarded £1.1 million in damages, that award was significantly less than originally claimed since that claim assumed a “design life obligation” of 50 years, whereas the design life expectations established under the contract were for a period of 25 years. The failure to clearly define the baseline assumption for the building’s design and construction undermined the ability to recover damages fully for the alleged defects.
Further, the August 2020 decision of the Ontario Court of Appeal in Grasshopper Solar Corporation v. Independent Electricity System Operator dealt with the cancellation of a solar power facility contract due to the contractor’s failure to meet the prescribed milestone date for commercial operations. In challenging the termination, the contractor alleged that the government agency led the contractor to believe that it would not be terminated since the agency issued a July 2013 bulletin informing solar facility contractors that the operational deadlines would not be strictly enforced. However, since the agency subsequently served the contractor fresh notice of breach in September 2019, the application judge ruled that the agency still had the right to terminate for non-performance. While the Court of Appeal upheld that ruling, this case highlights the risk of granting indulgences against strict performance since those indulgences can create uncertainty regarding the enforcement of future contractual obligations.
Finally, in its April 2021 decision in Tower Restoration v. Attorney General of Canada, the Ontario Superior Court of Justice rejected a contractor’s extra-cost claim after finding that the contractor should have anticipated the challenging conditions under which it was expected to perform its work. The dispute dealt with a $3.2 million contract awarded to a low bidder for the replacement of windows at the Millhaven Maximum Security Penitentiary. The contractor encountered logistical issues accessing the interior of the facility, which led to delays and increased its costs. However, the Court rejected the $1 million extra-cost claim, ruling that the contractor should have anticipated those conditions when it bid on the work.
To guard against future extra-cost claims, purchasing institutions should ensure that bidders are fully informed of the site conditions that they will encounter during contract performance.
As these recent case studies illustrate, purchasing institutions should ensure that they clearly define their contract performance benchmarks if they hope to enforce future contractual obligations.