Managing contracts in MSD programmes

Managing the nuts and bolts of contracts with partners in MSD programmes

Managing contracts with partners in a market systems development (MSD) programme requires a nuanced and adaptive approach, different from traditional programme management.

MSD focuses on facilitating systemic changes within markets rather than directly implementing solutions. This requires flexible and incentive-aligned contracts that encourage innovation, collaboration and a commitment to sustainable market development.

Fit for business identifies key principles for MSD programme managers who want to modify internal procurement processes that allow adaptation of partnership agreements and contracts.

Contracting with partners

When structuring a partnership it is important to balance flexibility with accountability. Business processes are very different to donor or programme processes and are generally faster and more responsive to market signals.

Being a useful partner to these players requires that your systems reflect this dynamism. Nonetheless, holding partners accountable for donor funds will always require a degree of paperwork. At a minimum your partnership agreement should include the following components:

Statement of purpose: both parties establish their goals and objectives for entering into the agreement together.
Relationships among parties: establish the roles and responsibilities of each party.
Activities to be undertaken: description of all activities, deliverables and reporting requirements.
Financial responsibilities: detailed description of all financial expectations and obligations
Timeframe of events: timeframe with clearly established milestones attributed to each party and a clear exit strategy outlining the withdrawal of the facilitator’s involvement.
Monitoring and evaluation procedures: establishment of the right (roles and responsibilities and expectation) to collect and report on activities and outputs of the partnership.
Risk management: highlight potential risks and mitigation mechanisms
Dispute resolution mechanisms: establish a clear process for resolving disputes that may arise during the partnership.

Note that in your agreement you need to be clear about cost-sharing over funding activities outright. Part of the whole process is for your partner to demonstrate ownership. Agreements need to ultimately be structured around what behaviours you want to see from the partner, and ways to measure whether or not these are occurring.

Types of partnership agreements

Partnerships can come in a number of different forms - from a Memorandum of Understanding (MoU), a Framework Agreement or a Cost-Share Agreement, to a more formal contract. Deciding on what type of agreement to engage in depends on your own internal procedures as well as donor guidance. Some programmes have experimented with results-based models, where contracts may involve payment based on achieved results, such as increases in income for target populations or improvements in market efficiency.

Milestone-based payments are also commonly used, where payments are made upon achieving pre-defined milestones, which should be linked to progress toward systemic change. For this to be successful milestones need to be specific, measurable, achievable, relevant and time-bound (SMART). See below for an overview of the pros and cons of different contracting mechanisms.

Contracting mechanism	Pros	Cons	Best suited for
Fixed-price contracts	Simple to administer and understand. Provides cost certainty for the MSD programme.	Can stifle innovation and adaptation, as the partner is incentivised to stick to the defined scope.	Well-defined activities with predictable outcomes.
Cost-reimbursable contracts	Suitable for complex activities where the exact scope is difficult to define upfront. Facilitates collaboration and learning, as the focus is on achieving the objective rather than sticking to a fixed budget.	Requires significant administrative oversight to ensure costs are reasonable and justified. Puts more risk on the MSD programme	Programmes with high uncertainty and evolving requirements. When fostering innovation and learning is a priority.
Performance-based contracts	Focuses on achieving specific, measurable outcomes, aligning incentives between the MSD programme and the private sector. Transfers some risk to the private sector, as payment is contingent on results.	Can be challenging to define appropriate and measurable outcomes, especially for systemic changes. May lead to 'cherry-picking' of easier targets if outcomes are not well-designed.	When specific, measurable outcomes are desired. When the MSD programme wants to incentivise innovation and efficiency.
Milestone-based contracts	Provides clear milestones that both parties can track. Facilitates progress monitoring and adaptive management. Aligns payments with achievement of key deliverables or stages of work.	Requires careful definition of milestones to ensure they are meaningful and contribute to overall objectives. Potential for disputes	When the MSD programme wants to track progress against specific deliverables.
Matching grants/ challenge funds	Attracts innovative proposals from a wide range of private sector actors. Leverages private sector investment, as partners are required to contribute their own resources.	Requires a rigorous selection process to identify the most promising proposals. Can be administratively burdensome to manage multiple small grants.	When seeking innovative solutions from a diverse range of private sector actors.
Memorandum of Understanding (MOU)	Establishes a formal relationship and outlines areas of cooperation.	Not legally binding. Provides limited accountability. May not be sufficient to drive significant change.	Initial stages of partnership development. When exploring potential areas of collaboration.

How to! develop adaptive partnerships without breaking compliance rules describes an innovative grant and procurement mechanism utilised by a programme in Bangladesh allowing the team to create long-term strategic partnerships with private sector market actors.

The deal note provides a simple template that helps to explain the logic behind making an investment with a private company to advance the overall learning and transformation of a market system.