Hannah Feddon, Senior Consultant, writes:
As a Strategic Facilities Management (FM) consultant, clients often ask me how they should define their ideal FM contract duration. There’s no one answer that suits all situations, but there are many influencing factors. These include the range of services, service coverage, levels of risk being transferred, specification type, procurement and contract administration costs, the need for competitive tension and the intended role of the service provider. Contract duration will form an important part of an organisation’s business-case to (re)procure FM services.
Size and complexity of the FM contract
The primary guide to FM contract duration is value and complexity. The greater the value and complexity of the contract, the greater the time required to achieve the return on the investment for both client and supplier in making the change.
Duration ranges from single service procurement to the 25 to 30 years associated with Private Finance Initiative (PFI). Larger or more complex projects typically have longer durations to allow sufficient time for the sourcing strategy to be achieved.
Figure 1 below identifies the types of contract solutions that are common in the FM market place and their typical contract durations.
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Figure 1: Relationship between Contract Complexity and Contract Duration
Simple single service contracts such as cleaning or pest control tend to have the shortest contract duration of two to three years. This increases to four years for slightly more complex bundled contracts. Total Facilities Management (TFM) or Integrated Facilities Management (IFM) contracts are more complex, typically between five and ten years. Integrator services incorporate a TFM/IFM solution and an independent helpdesk and ten-year durations are typical. Contracts such as PFI, which are very complex due to various types of risk transfer, have the longest durations of around 25 to 30 years.
Why longer contract durations for more complex projects?
- Mobilisation period for complex projects can be costly, and longer contract durations spread this cost.
- Contract changes may result in service performance fluctuations as the new service provider mobilises and integrates with the client organisation. This has a potentially greater detrimental impact on complex projects, or projects with critical needs and no flexibility on service performance (hospitals, for example).
- The service provider needs time to build up knowledge of the client and their assets, which should result in increased efficiency over time. The more complex the project, the longer and more costly the knowledge assimilation exercise.
- Relationships should improve as the contract duration proceeds and familiarity is established. This should lead to greater efficiencies, and improved contract performance, for both service provider and client.
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