I have spent much of my career working with contracts from both sides of the fence.
I have sat on the client side responsible for outcomes, performance, risk and value.
I have also sat on the supplier side responsible for delivering against contractual requirements, managing resources, protecting margin and meeting the measures against which the organisation is being paid.
That experience has taught me something important.
Clients and suppliers can both do exactly what the contract asks of them and still destroy value!
The problem is not necessarily poor contract management.
Sometimes, the contract itself is the problem.
More specifically, it is how the contract has translated the organisation’s Asset Management objectives into commercial obligations, performance measures, incentives, and behaviours.
Think of a Contract as reflecting an organisation’s Strategic Asset Management Plan (SAMP)
A Contract Is More Than a Commercial Instrument
Through an Asset Management lens, a contract is not simply an agreement to provide goods or services.
It is part of the mechanism through which an organisation manages its assets, risks, costs, performance and ultimately value.
That distinction matters.
- A maintenance contract may determine whether preventative work is performed at the right time.
- A design contract may influence maintainability for the next 30 years.
- A construction contract may determine the quality of asset information handed to operations.
- A technology contract may establish data structures that influence decision-making long after implementation.
- An operations contract may influence deterioration, reliability and asset life.
Yet contracts are often designed around the contract term, rather than the asset lifecycle!
Those are two very different horizons.
The Client Owns the Lifecycle. The Supplier May Only Steward Part of It.
One of the most important questions when designing a contract should be:
Where does this contract sit in the asset lifecycle?
The asset owner may be considering:
Plan > Acquire > Design > Build > Operate > Maintain > Renew > Dispose
The supplier may only be responsible for:
Operate & Maintain
Or perhaps:
Design & Build
That creates an unavoidable difference in perspective.
The client is typically the long-term custodian of value.
The supplier is temporarily stewarding part of the lifecycle.
Neither perspective is inherently wrong, but when a contract ends up dividing either side, we create “Negative Tension”
The danger occurs when we pretend they are the same.
A supplier operating under a five-year contract cannot reasonably be expected to make every decision as though it owns the asset for 40 years unless the commercial model, requirements, measures and incentives encourage that behaviour.
Likewise, a client cannot outsource an activity and assume it has outsourced accountability for the long-term consequences.
You can outsource work. You cannot outsource stewardship of value.
The Contract Boundary Is Not the Asset Lifecycle Boundary
This is where many commercial models begin to struggle.
Consider a contractor approaching the final year of a contract.
- Maintenance activities may improve reliability over the next five years.
- Opportunities may exist to improve asset information.
- Emerging defects may not yet be failures.
- Some components may be approaching an economically optimal renewal point.
But what does the contract reward?
If the measures are predominantly based on today’s availability, today’s cost, today’s response times, and today’s service levels, the rational commercial response may differ greatly from the rational Asset Management response.
That is not necessarily supplier failure.
It may be contract design failure!
The same applies in reverse.
If a client continuously changes priorities, defers decisions, underfunds preventative activities or pushes commercial risk onto a supplier that cannot realistically control it, the supplier will eventually price, manage or defend itself accordingly.
Commercial behaviour does not occur in a vacuum. The system we design influences the behaviour we receive.
Lead Measures, Lag Measures and the Illusion of Performance
This becomes particularly important when we consider performance measurement.
Contracts naturally gravitate towards lag measures.
- Failures.
- Availability.
- Response times.
- Backlogs.
- Cost.
- Safety incidents.
- Customer complaints.
- Schedule performance.
These measures matter. They tell us what has happened.
But they do not necessarily tell us what is going to happen.
Asset Management requires us to pay equal attention to lead measures.
- Are critical maintenance activities being completed?
- Is defect growth being understood?
- Are recurring failures being eliminated?
- Is asset information improving?
- Are lifecycle plans being maintained?
- Are risks being treated?
- Are competency gaps being addressed?
- Are design decisions considering operability and maintainability?
- Are we improving the system’s condition or simply reporting its outputs?
A contract dominated by lag measures can create the appearance of performance while deterioration quietly accumulates underneath it.
The dashboard stays green. (Until it doesn’t.) And that is usually after the contract has ended!
Think of Lag measures as a bias toward the “Management of Assets“
Think of Lead measures as a bias toward “Asset Management”
Urgent Versus Important
The same tension appears in day-to-day delivery.
Most operational environments contain an endless supply of urgent work.
- Failures need responding to.
- Customers need answers.
- Schedules need recovering.
- Executive questions need addressing.
- KPIs need protecting.
- Invoices need processing.
- The urgent is visible.
- The important is often less visible.
- Reliability improvement.
- Preventative maintenance optimisation.
- Asset information.
- Capability development.
- Root cause analysis.
- Lifecycle planning.
- Obsolescence management.
- Risk reduction.
- Continuous improvement.
These activities may not create an immediate crisis if they are postponed.
That is precisely why they are so easy to postpone.
And contracts can amplify this behaviour.
- If a supplier is measured heavily on response to failure but lightly on preventing failure, we should not be surprised when resources gravitate toward response.
- If the commercial model rewards activity rather than outcomes, we should not be surprised when activity increases.
- If preventative work can be deferred without immediate contractual consequence, we should not be surprised when today’s urgent problem wins over tomorrow’s important one.
Eventually, today’s neglected important work becomes tomorrow’s urgent work.
One of my favouriate sayings that my now adult children used to roll their eyes at…
“We didnt have time to do it correctly the first time, but we forund time to do it twice”
And frequently at considerably greater cost.
What Are We Actually Incentivising?
This is perhaps the uncomfortable question.
Every contract creates incentives whether we deliberately design them or not.
Consider what happens when we reward:
- lowest cost,
- maximum utilisation,
- rapid response,
- work-order closure,
- short-term availability,
- schedule compliance,
- or minimum staffing.
Each may be entirely reasonable.
But each can also create unintended behaviour when considered in isolation.
- A contractor paid for completed work may have little commercial incentive to eliminate the underlying cause of that work.
- A contractor penalised heavily for downtime may favour temporary restoration over permanent resolution.
- A client focused on annual budget performance may defer expenditure that represents better whole-of-life value.
- A procurement process focused overwhelmingly on acquisition price may transfer costs into operations for decades.
Again, nobody necessarily has to be behaving badly.
People respond rationally to the environment we create around them.
That is why Asset Management thinking needs to enter the conversation before the contract is signed.
Risk Transfer Is Not the Same as Risk Management
Contracts also tend to treat risk as something that can simply be transferred.
Commercially, certain liabilities can certainly be allocated.
Operationally, however, risk is rarely that obedient.
Writing a clause transferring responsibility does not necessarily transfer the supplier’s ability to control the underlying risk.
And transferring excessive or poorly understood risk does not make it disappear.
It may return as:
- higher pricing,
- commercial disputes,
- claims,
- defensive behaviour,
- reduced innovation,
- lower trust,
- minimum compliance,
- or suppliers pricing uncertainty into future contracts.
From an Asset Management perspective, the better question is not simply:
Who carries the risk?
It is:
Who is best positioned to understand, control and treat the risk throughout this part of the asset lifecycle?
That produces a very different commercial conversation.
The Supplier Has Responsibilities Too
Working on both sides of the fence has also taught me that lifecycle thinking cannot be demanded solely from the client.
Suppliers need to understand the environment their services fit into.
Meeting the literal wording of a contract while knowingly creating downstream problems is NOT good stewardship.
The best suppliers I have worked with understand something beyond their scope of work.
- They understand why the work exists.
- They understand the assets.
- They understand the operational context.
- They understand the client’s risks.
- And they understand where their activities sit within the broader lifecycle.
That allows a supplier to move from simply delivering contractual outputs to becoming a genuine contributor to value.
Perhaps We Need to Design Contracts Backwards
Instead of beginning with:
What services do we want to procure?
Perhaps we should begin with:
What value are these assets expected to deliver?
Then:
- What lifecycle outcomes are required?
- What risks threaten those outcomes?
- Which party can influence those risks?
- What behaviours do we need from each party?
- What information needs to move across organisational boundaries?
- What decisions need to be made?
- What lead indicators tell us whether we are moving in the right direction?
- What lag indicators confirm whether the intended outcomes were achieved?
And only then:
What should the contract require, measure and incentivise?
That is a fundamentally different way of thinking about contracting.
The Fence Is Part of the Problem!
After working as client, supplier, operator, maintainer, commercial manager and advisor, I have become increasingly uncomfortable with the phrase “both sides of the fence.”
Because the assets do not know the fence exists.
- Neither does the failure mechanism.
- Neither does deterioration.
- Neither does lifecycle cost.
- Neither does operational risk.
The fence is something organisations create.
Commercial boundaries are necessary, but they should not become barriers to Asset Management thinking.
The objective is not to eliminate the natural tension between client and supplier.
Some tension is healthy.
The objective is to design that tension deliberately so that commercial interests AND Asset Management outcomes pull broadly in the same direction.
That requires more than good procurement.
It requires an understanding of Asset Management, operations, maintenance, commercial management, organisational behaviour and the realities of actually delivering contracts.
I have spent much of my career working at those intersections and on both sides of that commercial fence.
And increasingly, I believe some of the greatest opportunities for organisations are not found by squeezing another percentage point from a supplier or negotiating another KPI.
They are found by asking a much more fundamental question:
Have we designed the commercial relationship to create sustainable value across the asset lifecycle
or have we simply designed a contract that can be successfully administered?
Those are not the same thing!
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