The Procurement Act 2023 obliges local authorities to set 3 key performance indicators (KPIs) for each contract valued over £5million.  Every year, data about must be published about the supplier’s performance measured by those KPIs on the Central Digital Platform in a Contract Performance Notice.

KPIs are becoming more important.  How should you set robust KPIs?  What behaviours are you trying to drive?  What incentives or punishment awaits a supplier as a result of meeting or breaching your KPI targets?  How do you gather data in a way that is robust enough to publish the indicators to the whole world?

Tip 1 - Measure what is important to you

Your choice of KPIs flag to the supplier the behaviours you are trying to drive.  Usually, you should pick an area where performance could be variable but which the supplier can strive to improve.  For example, if fixing housing repairs or potholes in one visit is important, setting this as a KPI will drive behaviours to enhance end customer experience. Avoid using indicators which must be 100% - for example, on a gas servicing contract for housing, having a KPI for statutory inspections every 12 months would be a waste of time, as it is an absolute must for 100% so is a matter for the specification rather than the KPI handbook.

Tip 2 - Set minimum levels and targets

You would usually set targets - coming in below target usually means the supplier would need to provide and deliver on an improvement plan.  If that improvement is not made, there would usually be a right (but not an obligation) to terminate within a period after that.

You can also set minimum levels of acceptable performance below which you have the right to terminate.  All these matters are usually set out in the KPI handbook, which should be a comprehensive guide to the KPIs.

Tip 3 - Earn their profit? Or an extension?

Can you ask suppliers to put some of their profit on the line to earn against KPIs?  On a large materials supply procurement, materials were priced without profit. Half the profit of each supplier was put at risk and was only recovered if performance indicators relating to materials availability and financial reporting were met.  An alternative or additional approach is to allow suppliers to earn extensions – for example, if a supplier meets its KPI targets for one year, then it earns a further year of service period added to the end of the contract.

Tip 4 – Data robustness check 

Can you gather the data needed to calculate the KPIs reliably?  What factors will affect data quality?  For example, if you are reliant on surveys or satisfaction ratings from end users, how likely are you to obtain feedback in sufficient volumes that one or two “difficult customers” do not sway the KPI entirely?  Could the KPI data be swayed by factors other than supplier performance? For example, one KPI in a materials supply contract targeted delivering a high percentage of materials to site – but the client continued to order materials to be picked up from the stores. The veracity of KPI data can also be undermined if the supplier is the only one gathering the data where it cannot be checked effectively.

Tip 5 - Prepare for publication

You must publish the KPI performance in the Contract Performance Notice each year.  For some more “partnering” style contracts, it will be appropriate to try to agree the KPI data and ratings with a supplier before it is published – and rather than waiting for the end of each contract year, you might want to do this at monthly supplier meetings.  For other more straightforward supplies, where simpler KPIs are used and there is robust data collection, just publishing the data would seem appropriate.  Whichever approach you are pursuing, it would be best to describe this in the KPI handbook so that both your and the supplier’s expectations are aligned. 

There is a prescribed way of classifying tiers of KPI performance in the Procurement Regulations 2024 – and these descriptions must be used in the published Contract Performance Notice - Setting out your KPIs so that they use these descriptors from the beginning is important.

• Good: Performance is meeting or exceeding the key performance indicator.
• Approaching Target: Performance is close to meeting the key performance indicator.
• Requires Improvement: Performance is below the key performance indicator.
• Inadequate: Performance is significantly below the key performance indicator.
• Other: Used when the authority's assessment cannot be described as Good, Approaching Target, Requires Improvement, or Inadequate.

Get set, go!

KPIs are a great tool but will need significantly more thought now the results have to be published.  Whilst you are thinking, also consider how your KPIs can be used to drive the right behaviours and how you want the KPIs to be integrated into the payment mechanism (eg. earning profit) or the contract terms (eg. earning extensions).