"What Factors Determine the Duration of a Facilities Management Contract?"
FM Contracts come in many different sizes and complexities; from the simple single service for a small site to multi service FM contracts across hundreds of buildings.
There are a number of variables which will influence the choice of the length of the contract. These include need to optimise value from the market, cost of change, and need for good supplier relationships.
Regular competition impacts service cost with Buyers often able to reduce their annual cost by 5-12% making it appealing to have frequent tenders.
However there are significant costs and potential disruption that the Buyer will need to consider, particularly for complex contracts, which will reduce any potential operational cost savings. These will include costs for both Buyer and Supplier during the tender process and then significant mobilisation costs. There are also likely to be disruption costs for the Buyer’s business as new systems are introduced as well as potentially significant change for supplier personnel on the contract.
A positive for longer contracts is that the significant investment in setting up supplier systems can be amortised over a longer period making the annual contract cost more affordable.
With service contracts the importance of a good working relationship is a fundamental part of a successful contract. However, contracts need to be long enough to develop a good working relationship but not too long that the value is lost. The supplier market and the Buyer’s business is constantly evolving and the dynamic of a relationship will inevitably change over time. The supplier market is very different now than 10 years ago; with major suppliers like Carillion failing and major consolidation in the market such as Bouygues acquiring Equans (Engie) and Mitie acquiring Interserve. It is also rare that a buyers business will not have changed dramatically even over a 3 year horizon and ensuring the FM model is aligned with the latest business position, without market testing, is challenging.
Other reasons why Buyers may select a certain length of contract have included the need to re-align with other contracts and concerns about indexation distorting contract value.
When setting the length of the FM contract Buyers need balance between testing value, cost of change and supporting better relationships. Typically the market is moving towards the following (although individual circumstances will impact on these generalisations):
Small simple contracts typically 2-3 years as easy to review value and there is a low cost of change.
Medium to large contracts typically 3-5 years
More complex very large contracts 7-10 years
Whatever length is agreed, it is important to have mechanisms to shorten the contract for poor performance and equally to have mechanisms in place to extend the contract if the relationship is working well and is good value.
