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Contractual obligations

Outsourcing of facilities from specialised agencies has become more popular with the advent of service industries particularly, IT companies, BPOs, insurance, shopping malls and others. Service concepts have moved from traditional areas like security and catering to many newer areas which requires core competencies. To list the most common outsourced services today are: housekeeping, pest control, office support services, pantry service, catering, transportation, horticulture, garbage management, property maintenance, electro mechanical services, guesthouse management, sewage cleaning, energy audits, EHS, project camp management, fire protection and many more.

In order to have a proper understanding of the service obligations, it is essential to have a clear written agreement between the client and the service provider. Explained below are the various critical aspects of drawing up a contract with an illustration covering the area of “housekeeping” as an outsourced service.

Contracts/Agreements

The most common type of contracts or agreements made by clients are

a. Manpower supply contacts

b. Input based contracts

c. SLA based contracts

d. Output based contracts

One has to choose which is most suited to both client and service provider or make a combination of them.

Manpower based contracts

This is the most traditionally practiced system in most of the establishments, particularly with manufacturing units. Under this system, the service provider deploys the head counts as required by the client. It is left to the client to decide how to get the work done by them. The vendor is responsible for fulfilling the statutory obligations. This model is used by even some of the multinational companies mainly to circumvent the headache of maintaining the statutory records. In this system, manpower gets their minimum prescribed wages and statutory benefits and no other welfare, motivation or safety protections. They are treated worse than cattle class. Off late, many of the enlightened establishments are moving out of this model and have started taking services from specialised agencies in this field.

Input based contracts

This is a system followed by clients who are progressive but assume that they have expertise to manage the service. The client decides the manpower quantum, the type of equipment to be deployed the ownership of equipment and the type of cleaning materials & accessories to be used. The client mainly negotiates the cost and quantity of inputs and decides the total cost to be paid to the service provider, including the management cost. The client gets the satisfaction of the optimised cost within the knowledge they have but do not necessarily have the best output for the cost involved. They forget that the service provider has much more wider experience of dealing with various sites and suppliers to get the best cost benefits. The client does not get the value additions which the service provider may be able to provide.

Many of the public and government sectors work on this model as they wish to compare apple to apple based on the tender stipulations. Some of the unscrupulous vendors manage to get the business even below realistic costs by manipulating the statutory obligations which is around 27-30% of the basic wage cost.

The problem arises, when the outputs do not meet the standards expected by the client. The service provider meets the inputs agreed but does not support them with intangibles like training, motivation and management controls.

SLA based contracts:

Under this model, both the client and service provider agree to the level of service to be provided. A good, professional, experienced and competent service provider, after doing the survey of the property to be serviced as desired by the client, arrives at the type and quantum of service to be deployed to meet the client requirement. For example, the vendor puts down

  • Washroom to be cleaned once in an hour
  • Canteen to be cleaned three times a day
  • Utility area to be cleaned once a week
  • Prescribes the type of equipment to be deployed
  • Prescribes the cleaning materials to be used

Based on the agreed service level inputs, the cost and the management fees are worked out to arrive at the final cost. Some of the vendors do also indicate the satisfaction level expected to be maintained say 85% satisfaction level. And, it is measured from time to time based on a feedback system to make the measurement of quality of the service delivery. In some cases, it is also backed up by a reward bonus and penalty to make it more attractive for the service provider to perform.

Many of the professionally managed service providers desire SLA based contracts. Drawing up an SLA is a task requiring in depth discussion. There are SLAs which run to 800 pages or limited to 10 pages. Besides, what is put in writing in the agreement is the spirit in which both the vendor and the service provider deal with each other. Once the agreement is signed, the vendor and his people are treated as part of the client organisation or taken as a partner to have the ownership. Under these conditions it is the client who benefits the most as the team deployed at the site feels the responsibility towards the client.

Output based contracts

This is the simplest form but most difficult to practice. The client rightly assumes that the service provider has better experience and knowledge in the field of service he is providing and that there is no need to prescribe any input. Rather than that the client prescribes the output desired. In this case, one needs an agreed measurement methodology for the output to be measured. To illustrate the point, just read the following discussion: A client is drawing up an SLA for the plumbing system. The technical person from the vendor’s side writes down an SLA of about five pages describing, the preventive maintenance frequency in the year, frequency of cleaning the water tank, and the member of times the washer of taps to be changed. The client after agreeing to it asked, “Will water come?” The vendor has lost the objectivity and is concentrating only on the mechanics of it.

As against this the client wrote down only two sentences:

  • When I open the tap the water should come, and after closing it, not one drop should fall.
  • The water should be clean for use. For me this is an out based contract.

At the end, whatever may the conditions agreed by the vendor and the client be, the focus should be on output. So long as one can be clear about the output expected and it can be measurable in comparable numbers, it is the best form of contract to be entered.

Legal provisions in the contracts

While the main theme of the contract is the service in focus, one need to also draw up a proper legally valid contract document to prevent complications, in an unlikely event of contract going sore. Some of the critical points to be included are taxes applicable, labour law compliances, jurisdiction of minimum wages applicability, risk and liability of accidents and incidents, safety of manpower outsourced, statutory holidays, dispute handling procedure and court of jurisdiction and payment terms.

It is advisable to get the legal documents prepared by a qualified legal professional. In case the client chooses not to make a legal agreement and chooses to place a purchase order or any other documentary procedure, the vendor should clearly understand the terms mentioned in the back of order in fine prints and give his acceptance for the same.

However, it is the spirit in which you build the partnership between the two parties which will make the best bonding and not the legal documents.

S.S. Moni, Head Operations Audit,
ISS Integrated Facility Services Pvt. Ltd
Outsourcing of facilities from specialised agencies has become more popular with the advent of service industries particularly, IT companies, BPOs, insurance, shopping malls and others. Service concepts have moved from traditional areas like security and catering to many newer areas which requires core competencies. To list the most common outsourced services today are: housekeeping, pest control, office support services, pantry service, catering, transportation, horticulture, garbage management, property maintenance, electro mechanical services, guesthouse management, sewage cleaning, energy audits, EHS, project camp management, fire protection and many more. In order to have a proper understanding of the service obligations, it is essential…

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