Effective contract management may help you to reach an efficient work processes and meet your objectives.
Contract management is a continuous process, starting with analysis and evaluation of the customer’s requirements, and carrying on until contract closure, upon fulfillment of all contractual obligations.
On a global overview, contract management activities are based on minimizing the risk exposure and maximizing the profit by fulfilling three below areas:
- Service delivery management ensures that the service is being delivered as agreed to the required performance
- Relationship management the relationship between the two parties open and constructive aiming to identify problems early.
- Contract administration handles the formal governance of the contract and changes to the contract documentation.
The aim of contract management is to ensure that all parties meet their contractual obligations after contract award and during the period of contract administration and implementation for each awarded contract.
The below figure describes the contract management processes in three stages:
- Precontract award
- Contract administration / Contract Management
- Contract closure.
Stage 1 Precontract Award
Contract management needs to be considered early in the procurement process for it to be effective. It should be based on a risk assessment developed early on as part of project preparation. Such risk assessment will lay the foundation of a contract strategy. The contract strategy will then inform the contract management plan (CMP).
To develop the contract and to prepare its implementation, a risk assessment should be conducted in the early stage of the procurement process.
These risks need to be identified as exhaustively as possible and prepared together with an action plan for their mitigation. The consolidation of all identified risks, including the associated action plan, is usually referred to the risk management plan. It should be managed throughout the contract implementation period. The risk management plan is a component of the contract management plan.
Contract Management Strategy
The contract management strategy is the approach to be adopted to ensure the proper management. This involves the calibration of the relevant resources needed to conduct contract administration activities and to manage the risk management plan, identification of the key performance indicators that will be monitored during contract implementation; and definition of the communication during contract implementation (meetings, performance monitoring and reporting, etc.).
Contract Management Plan
The CMP is a tool that monitors contractor performance. It is internal document and is not a contract document. It comprises a set of documents, tables, graphs, or flowcharts that illustrate the contract’s key figures, roles, responsibilities, and objectives.
The CMP should be developed during the precontract award stage, which will make it a useful tool that will inform on the characteristics of the contract, the issues to look out for during the contract implementation phase, and the measures against which contractor performance will be gauged.
The scope and content of a CMP should be proportional to the complexity, risk, and value of the contract, to ensure that the level of contract performance monitoring and control are commensurate with the contract.
For simple contracts, the CMP may be limited to the following:
- Key roles and responsibilities,
- Contractual dates and delivery milestones,
- Payment milestones
Stage 2 Contract Administration – Contract Management
Contract administration starts at contract award and continues throughout the contract implementation period. It refers to the management of the day-to-day practicalities and administrative requirements under the contract. It makes up the bulk of contract management activities.
Contract administration typically involves the following:
- Records management by use of tools
- Managing and tracking of payments
- Managing performance;
- Conducting review meetings;
- Managing changes & claims
Records management is an important part of contract administration. Key contract information should always be kept up to date in the records to provide a comprehensive source of information. A no exhaustive list of records should be maintained. The list should be compiled to reflect the specific nature of the contract in question.
Good records management requires the maintenance of accurate records that are accessible at all times. For projects where many documents are generated, it may be necessary that this function be dedicated to a document administrator. For certain projects, it may also be necessary to use an electronic document management system such as Oracle Aconex.
After contract award, the performance is monitored on the following items:
- Charts and detailed descriptions of progress
- Safety statistics as a spreadsheet;
- Based on cut-of-dates, comparison of actual and planned progress, with details of any events or circumstances that may impact the contractual milestones. The use of Primavera P6 could be a good option for this type of expertise.
It is recommended to use sophisticated integrated systems with BI to save time and promote the communication between the parties.
Management of payments means not only making payments as and when required under the contract, but also monitoring actual against planned payments and assessing payments that will be due. Cashflow curves are produced on monthly basis for the management reporting.
The contract manager is in charge of setting processes for variations (compensation events) during implementation of the contract. Efficient and effective management of the processing of contract variations is one of the most critical parts of contract management.
The contract should set out the process for handling variations. Such provisions should cover those with authority to approve changes depending on value and significance (in terms of quality, cost, and timing), and how initiation and implementation of approved changes will take place. Variations are validated on priority basis with the criterion “highest impact on time and cost”.
Contract variations can occur for a variety of reasons, including but not limited to
- Changes in the scope of the work;
- Unforeseen events, e.g., ground conditions, climatic conditions, …
- Settlement of a claim arising from the contract.
In handling a variation claim we should
- Assess the reasons for the variation, and whether this may show an emerging or actual performance problem;
- Assess the impact of the variation on the contract deliverables;
- Determine the effect that the variation will have on the overall contract price and schedule (project objectives); and
- Follow the terms and conditions stated in the contract for review and approval of variations.
- On some variations, the steering committee is required to
Claims and Dispute Management
Things can go wrong on projects despite regular monitoring, leading to disputes. In the first instance, the parties should endeavor to resolve disputes agreeably. Cordial resolution is sometimes not possible. Therefore, it is essential that a dispute resolution mechanism is specified in the contract at the time of drafting. This dispute resolution mechanism can then be used where disputes cannot be resolved amicably.
Stage 3 Contract Closure
The last stage of contract management is the contract closure. Contract closure is often handled badly, since the main deliverables have been completed and parties to the contract focus on other priorities. Contract closure is very important because it provides a clear end to the contract between the parties for potential contractual claims and finance. Contracts close when both parties have discharged their obligations. Where the contract is completed under its terms and conditions.
Post Contract Review
The post contract review includes a post closure contract review of the following items:
- Impact on the initial contract amount of changes to quantities
- Impact on the contract cost of variations, claims, and disputes;
- Comparison between the baseline program and final time schedule;
- Overall performance based on the key performance indicators
- Lessons learned.
Our next article in contract management will highlight the Contract Management Plan on large scale and complex project …
There is no single industry standard for project controls and contract management, meaning practice can vary across organizations and industries depending on their specific requirements and context. Expertise from experienced and knowledgeable project controls specialists is essential to ensure that the design of the project controls disciplines meets the needs of your organization.
Please contact us for any inquiry on project or contract management consulting, project management tool implementation, project management, contract management, claims management training or whenever a contract manager or project controls engineer is required to staff your project or tender stage.