|
Supplying Principles and Practices > USPS Supplying Practices Process Process Step 5: Measure and Manage Supply > Decide to Renew a Contract or Exercise Options
Decide to Renew a Contract or Exercise Options
As discussed in the Consider Use of Renewals and Options topic of the
Develop Sourcing Strategy task of Process Step 2: Evaluate Sources, the
Purchase/SCM Team should consider whether a particular contract should
include clauses that will allow the Postal Service to renew a contract or
exercise options to purchase additional items or services, once the original
term of the contract has expired. The renewal of a contract or the exercise of
a contractual option takes place when the Purchase/SCM Team decides that
a need is continuing and that maintaining the current Supplier's performance
would represent the best value to the Postal Service.
Contracts cannot be renewed and options cannot be exercised unless the
current contract contains either Clause B-78: Renewal or the relevant
clauses discussed in the Consider Use of Renewals and Options topic of the
Develop Sourcing Strategy task of Process Step 2: Evaluate Sources. A
contract is renewed via modification and the mutual agreement of the Postal
Service and the Supplier; contractual options can be exercised unilaterally by
the Postal Service or following discussions and negotiations, depending on
the clauses in the contract. The renewal of certain mail transportation
contracts must follow specific procedures, and these are contained in the
commodity-specific business practices.
Contract renewal decisions are guided by the following:
• Supplier contract performance
• Item purchase history
• Discussions and negotiations
• Assessment of switching cost conditions and considerations
• Market research
• Assessment of pricing conditions
• Restrictions on Postal Service action
The decision to renew a contract is based on the Postal Service's continuing
need for the good or service, the Supplier's successful completion of a
contract, and the Supplier's proposed price. The Contracting Officer must
leverage the findings generated during the Evaluate Contract Effectiveness
topic of the Manage Delivery and Contract Performance task of Process
Step 5: Measure and Manage Supply. The information from this topic is an
assessment of whether the contract met the identified needs and
expectations of the Postal Service. It also addresses whether project
objectives were met, and determines what corrective action needs to be
taken.
Suppliers that successfully meet the terms and conditions of a contract, and
are positively evaluated by the Performance Evaluation Team (which is often
the Purchase/SCM Team with a new function as discussed in the Evaluate
Contract Effectiveness topic of the Manage Delivery and Contract
Performance task of Process Step 5: Measure and Manage Supply), should
be considered for contract renewal. While contracts should not be renewed if
the Supplier has performed unsatisfactorily, a minor or temporary deviation
from target measures and performance indicators should not automatically
lead to a decision not to renew. The Contracting Officer, in conjunction with
the entire Purchase/SCM Team, must review any such deviations and
consider them when engaging in discussions and negotiations with the
Supplier.
Purchase histories contribute to a clear understanding of the existing
purchasing process while providing an opportunity to determine whether any
steps require modification or elimination. Some benefits of reviewing
purchase histories include:
• Controlling inventory discrepancies and late orders
• Determining the extent to which suppliers can lower prices
• Improving the quality and timeliness of the delivered product or
service
Renewals with an existing supplier should only be made when the
Purchase/SCM Team determines that doing so will be the best business
decision. To make this determination, the Purchase/SCM Team must
examine the marketplace to ensure that the incumbent supplier provides the
best value in relation to other potential suppliers.
The Contracting Officer is responsible for holding discussions and
negotiations with the Supplier to determine the contract terms and conditions
that will be established upon contract renewal. If the new terms and
conditions are so different from those of the original contract that they are
outside the scope of the original contract, then renewal should be abandoned
and the new requirement solicited. Before the renewal can be awarded, the
entire Purchase/SCM Team is responsible for determining whether the
Supplier is still capable of offering best value.
Depending on the outcome of the discussions, the Contracting Officer
consults the Purchase/SCM Team and decides whether renewal is the best
business solution. However, before renewing the contract, the Contracting
Officer must also verify that the current contract type still reflects the
appropriate risk and responsibility assumed by the Supplier, as explained in
the Select Contract Type topic of the Develop Sourcing Strategy task of
Process Step 2: Evaluate Sources. If the contract type is no longer
favorable, a more appropriate contract type should be selected. All
discussions and negotiations must be documented and included in the
contract file.
Switching cost considerations associated with changing suppliers should
influence the overall contract renewal decision. In certain cases (e.g., when
other suppliers can meet Postal Service demand more efficiently and less
expensively than the current Supplier), the extent of competition in the
marketplace mitigates the investigation and development of new relationships
with other suppliers. However, changing suppliers has the consequence of
procedural, financial, and relational switching costs. Because switching costs
can become quite substantial, it can be in the Postal Service's best interest to
resist changing suppliers and instead renew the contract, unless the cost
savings from the alternative supplier(s) are greater than the cost of switching.
The Contracting Officer is responsible for leveraging the results of the
switching cost analysis when deciding whether to renew the current
Supplier's contract. This analysis is discussed in the Perform Switching Cost
Analysis topic of the Develop Sourcing Strategy task of Process Step 2:
Evaluate Sources.
The Purchase/SCM Team should renew a contract only when doing so
reflects the best value to the Postal Service. When making this decision, the
Purchase/SCM Team must consider whether the performance and
administrative benefits of the renewal outweigh the potential benefits of
competition and other business considerations. If the Purchase/SCM Team
decides to renew a contract, the Contracting Officer provides written notice of
renewal to the Supplier. This notification must be provided 60 days before
contract expiration (preliminary notice will not be deemed to commit the
Postal Service to a renewal). The contract file should be documented with the
rationale for the renewal decision. Contracts may be renewed only once, and
the term of the renewal may not exceed four years.
Before exercising an option, the Purchase/SCM Team must determine that:
• Funds are available
• The Postal Service still needs the supplies or services covered by
the option
• Exercising the option is the most advantageous alternative, price
and other factors considered ("other factors" includes any need
for continuity of operations and the switching costs or other costs
of disrupting operations discussed above)
The Contracting Officer must determine that the option price is the most
advantageous to the Postal Service, based on one of the following:
• Market research clearly indicates that a better price than that
offered by the option cannot be obtained.
• The time between the award of the contract containing the option
and the exercise of the option is so short that the option price is
probably the lowest obtainable, considering such factors as
market stability and usual duration of supply or service contracts.
• A new solicitation fails to produce a better price than that offered
by the option (this method of testing the market should be used
only if neither of the other methods is satisfactory).
If the contract provides for economic price adjustment, the effect of such
adjustment on prices under the option must be ascertained in determining
whether to exercise the option.
When an option is to be exercised, the Contracting Officer must, in writing:
• Determine that the option may properly be exercised (as
discussed above)
• Notify the Supplier within the time specified in the contract that
the option is being exercised
• Modify the contract as needed, citing the option clause as
authority
Conduct Spend Analysis topic, Develop Sourcing Strategy task, Process
Step 2: Evaluate Sources
Select Contract Type topic, Develop Sourcing Strategy task, Process Step 2:
Evaluate Sources
Consider Use of Renewals and Options topic, Develop Sourcing Strategy
task, Process Step 2: Evaluate Sources
Perform Switching Cost Analysis topic, Develop Sourcing Strategy task,
Process Step 2: Evaluate Sources.
Evaluate Contract Effectiveness topic, Manage Delivery and Contract
Performance task, Process Step 5: Measure and Manage Supply
Clause B-78: Renewal
Clause 2-17: Option for Increased Quantity
Clause 2-18: Option Item
Clause 2-19: Option to Extend (Service Contract)
Clause 2-20: Option to Renew (with Preliminary Notice)
Clause 2-25: Unpriced Options
|
