Contracting and SLAs

Most voluntary and community organisations and social enterprises will be familiar with the term ‘Service Level Agreement’ [SLA]. SLAs are common when working with the public sector.

An SLA is sometimes a form of ‘grant’ by the local authority. For example, the local authority provides a regular grant payment and agrees a certain level of service for the grant.

The service level agreement has the specific details and targets written into it and if the organisation meets these it would receive the grant [see also finance section]. In this circumstance there may not be a need for a ‘contract’ as the funding is a grant [i.e. it’s a gift, but with strings attached]. Under performance usually doesn’t amount to a loss of grant already paid [clawback], but will likely affect grant funding that is due to be paid.

However, Service Level Agreements are often used in tandem with a contract so it is important to understand the differences between them.

The contract is the legally binding document which is likely to be set in stone and unlikely to be subject to amendment or review during a particular contracting period. It is extremely important to ensure you understand a contract before signing and if you’re in any doubt whatsoever you should seek legal advice on the contract and its implications to your organisation.

It is possible to amend a contract [usually small amendments] prior to signing, but it is much more difficult to amend once they have been signed.

Not understanding a contract can have serious implications. A little fictional [but not unrealistic] case study:

Organisation A was delighted after it had tendered for a contract with a local authority and won. The contract would enable the organisation to grow and create new jobs and provide services for vulnerable clients.

Organisation A negotiated a six month upfront payment with the local authority so that they could recruit the staff they needed and get operational for the new service.

Everything went well during the first stages of the contract with Organisation A recruiting staff, creating leaflets, sending out a newsletter.

The first review of the contract performance was due after six months delivery and duly after six months Organisation A met with the contract managers at the local authority. At the meeting it was identified that the delivery profile expected was down by 50% and that 80% of the contract funding was based on outcomes. A re-profile was needed and undertaken based on the delivery that had actually been achieved and profiled payments were amended accordingly.

On closer examination of the new profile Organisation A noted that over the course of the following six months it would just about break even at the end of the year if it met the new revised profile. Organisation A thought this would be achievable and the expected profit [surplus] that they could generate in year two whilst not what they expected at the beginning of the contract was still a reasonable margin.

The Local Authority agreed to make a second up-front payment in line with the new profile, but when this was calculated Organisation A noted it would have a serious cash-flow problem before it received another payment as the organisation’s expected income was now down by over 50%.

The local authority was unwilling to provide a higher level of upfront funding as the risk was too great because the organisation had already underperformed and may well underperform again.

We could continue this story, but you should get the picture by now.

A contract will stipulate such things as data processing, dispute resolution, copyright, intellectual property, payment schedules, who the legal entities are, penalty clauses,  etc, and will refer to the Service Level Agreement which defines the level of service required under the contract.

The SLA is often an appendix to a contract [sometimes referred to as a schedule] and forms part of the contract, but crucially defines the level of service that is expected for contractual relationship. A service level agreement is the part of the agreement that can be amended and changed through negotiation and is easier to change than a contract. The SLA may well be reviewed and at times amended [e.g. on a quarterly basis] without the need for a renewed contract.

The SLA will therefore state such things like:

  • The service will be open from 9am-5pm Monday to Friday
  • The number of clients will be XXX per month
  • Clients’ enquiries will be followed up within two working days
  • Staff will be required to be CRB checked

The SLA is then the living part of the agreement and is used to monitor performance expected against performance achieved. It is important to understand that if you aim to get involved in contracts and SLAs you must monitor your performance against expected delivery and fully understand any penalty clauses. If you see a shortfall, discuss it as early as possible with the contracting authority / organisation and have a contingency plan!

A few pointers:

If a contract value is greater than 25% of your turnover you are potentially putting yourself at great risk; indeed most authorities will no longer contract with you if the value of the contract is greater than 25% of your turnover.

Monitor your performance regularly and when agreeing the outputs and outcomes consider risk factors and contingencies.

In project planning generally it is sensible to consider Project Evaluation and Review Technique [PERT] that is:

  • What is the best case scenario i.e. if everything goes to plan?
  • What is the worst case scenario i.e. if everything that can go wrong does go wrong what would this mean?
  • The reality of the project is likely to be in the middle.

See also Solihull Council’s rules on contracts here

See also procurement and contracting links in our quick links section here

We have pointed to some areas where you need to consider contracting very carefully, to balance this, contracts can be very valuable ways of sustaining and developing your organisation once you have the necessary infrastructure and systems in place as:

  • They are a steady source of income for the delivery against the contracts outputs
  • They can be for 3 years or more
  • Good performance on contracts will potentially lead to further contracting opportunities

If you aim to gain contracts from the public sector consider some of the following questions:

  • Does your organisation’s governance document allow you to trade?
  • Does the contract fit within your organisation’s remit and mission?
  • Do you have the appropriate policies and procedures in place for delivery?
  • Do you have good monitoring systems to ensure you meet the outputs and outcomes in the contract?
  • Do you have appropriate skills in the organisation to deliver the contract?
  • Do you have the resource and capacity to tender for the contracts on offer?
  • Have you considered how you will ensure continuation of contracts and any re-tendering or service design changes?