Aim for performance, not price, in your next CRO contract - with Tony Carita
by Auxilius on Aug 23, 2022 6:00:00 AM
As part of the CRO outsourcing process – read more about finance’s role in the procurement process here – initial contracting decisions can have significant downstream impacts on finance and accounting. An aligned, firm, and focus on study completion from the outset by both sponsor and CRO will set the stage for an effective partnership – yet too often this isn’t the case.
Time spent isn’t a performance metric
Unit-based contracts revolve around units of work some of which are deliverables but many of which are simply based on time. The price of these units may be fixed, but the amount of units may fluctuate based on study progression or needs. Rates will vary based on complexity, volume, personnel costs, hours required, or other factors, but will be set at the start of the study. When coupled with unit-based payments (where the CRO is paid for discrete units of work), up to “70% of your budget is often based on time and has nothing to do with enrollment,” says Tony Carita, Managing Director of Clinical Business Operations at Danforth Advisors. “You’ll end up paying in large part for the passage of time as opposed to actual progress on your study.”
Over his career, Auxilius executive David Fenske has found that this is commonplace across the sponsor community: “In a large set of contracts I reviewed with Auxilius clients recently, 60% of CRO direct costs were tied to monthly units and only 40% were tied to actual performance. This allows the CRO to get paid without an emphasis on work performed, incentivizing them if timelines slip,” David shared. The “site management” category is a fun example of this phenomenon: a CRO will typically charge for site management in hours per month not per site month. Say you are planning for 10 sites and the CRO calculates site management costs at 8 hours per site per month. The CRO would invoice for 80 hours per month regardless of how many sites are active. The typical study doesn’t enroll all ten sites the first month. If you are not tying these payments to a site curve, you could be wildly overspending for inactive or pending sites rather than for the active and enrolled ones (let’s say 1 site is open month 1, 2 sites are open the second month, and so on). If site activation is slow and lags expectations, don’t get stuck paying for site management that isn’t tied to activity or outcomes (after all, how can the CRO be managing a site that isn’t activated?).
The key takeaway? Don’t pay for the passage of time. There is a better way.
Combine unit-based contracts with milestone-based payments
Units can be used at the budget level, but payments can be anchored to milestones, achieving a granular level of detail on scope of work (units) but connecting that granularity to timely performance (milestones). “It’s great to have that unit-based budget so you understand what makes up your price but then we like to take those units of work and map them into specific milestones related to progress,” says Tony. These milestones should be discrete and material to the momentum of the study, for example: first patient enrolled; 25%, 50%, 75%, 100% of patients enrolled; % of patients completed; % of sites activated; pages/CRFs cleaned, and so on. When Danforth works with a sponsor client, Tony notes that “we’ll tie the sites activated [milestone payment] back to the site initiation visits [unit], plus some percentage of the project management, meetings and the rest of the units that are completed on a relatively constant basis throughout the course of the study.”
Taken together, milestone payments and unit-based contracting allow for a detailed view of your study’s financial state: from a forecasting perspective, milestone payments are a good indicator of when cash goes out the door, and from an accruals perspective, a unit-based budget allows sponsors to assess when actual work is being performed. Given this, it’s important that a sponsor outline clear reporting requirements in their contracts (monthly, quarterly accruals + consistent work performed updates) so they aren’t blindsided by cost overruns or lack of progress.
Alignment as a shared goal
As noted in a study on CRO and sponsor cooperation, “Business models of collaboration between companies and CROs are continuing to evolve to accommodate both the client’s and CROs changing needs and the increasing trend toward contract innovation, not just contract research.” As you enter into your next agreement, two keys to success are knowing what you are paying for (and when) in addition to tight alignment in execution and philosophy with your CRO. Alignment serves both parties, streamlining touchpoints and timelines while building sustainable partnerships.
“At the end of the day, sponsors need one thing from a study: good, clean and auditable data that reflects the patient count necessary to power the study,” shared Tony. “Make sure that your payment structure is incentivizing the provider to get you the data that you need."
Hear more from Tony below:
 Steadman V. A. (2018). Drug Discovery: Collaborations between Contract Research Organizations and the Pharmaceutical Industry. ACS medicinal chemistry letters, 9(7), 581–583. https://doi.org/10.1021/acsmedchemlett.8b00236