Thursday, February 22, 2024
Thursday, February 22, 2024
HomeContract ManagementContract Management: Learning the Basics

Contract Management: Learning the Basics

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Before understanding the contract management, let us understand what are the contracts and how they provide legal enforcement. Contracts are simply the agreements between the parties enforceable by laws. The law applicable is the law of the country where the contract is being executed. Different countries have specific laws related to contract for e.g. in India, the law related to contracts is Indian Contract Law, 1872. Other legislatures related to the contracts are as follows:

The Indian Partnership Act, 1932

Sales of Goods Act, 1930

Negotiable Instruments Act, 1831

Companies Act, 2013

Other relevant Acts

Contracts

Indian contract act, 1872, lays down the general principles regarding contract formation and contract execution. One of the best provisions under this act is that the parties to the contract can make the laws for themselves. This act is not exhaustive, since it does not take into purview all the relevant legislations. Other legislations as mentioned above should also be read in conjunction with this act.

Other countries have their respective contract laws. For e.g., contract Law in the UK is legislated through the Sale and Supply of Goods Act (HMSO 1994), which provides for protection of the seller and the buyer.

In United States, the law of contracts varies from state to state; there is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law. The law governing transactions involving the sale of goods has become highly standardized nationwide through widespread adoption of the Uniform Commercial Code. There remains significant diversity in the interpretation of other kinds of contracts, depending upon the extent to which a given state has codified its common law of contracts or adopted portions of the Restatement (Second) of Contracts.

Types of Contracts

The contracts are categorized either as per their outcome or on the basis of payment mechanism. Certain types of contracts are mentioned below:

Based on the outcome

  1. Good
  2. Works
  3. Consulting Services
  4. Non Consulting Services

Based on payment mechanism

  1. Fixed Price
  2. Variable Price
  3. Cost/Cost reimbursement.
  4. Variable quantity
  5. Performance based price to Lump – sum price.

Contract Management

Contract management is performing and monitoring activities that enable both the contracting authority and the contractor to fulfill their obligations. A good contract management ensures that the contract meets the optimum combination of cost, time and quality during the contract period.

Contract Management

Aims of Good Contract Management

  1. To protect agreed contractual position
  2. Accepts deliverables in accordance with the contract
  3. Maintain agreed allocation of risk
  4. Monitor contractor’s performance against output specifications
  5. Take appropriate action on financial implications of any failure
  6. Ensure that payments are conditional upon the contractor’s quality of performance
  7. Maintain continuous improvement and service delivery

Players in Contract Management

Project Manager- Engineer

Contract Manager

Contractor

Contracting Authority

Contractor’s representative

Contract Management Lifecycle

Contract Management Lifecycle

All contracts undergo through a lifecycle. There are certain phases of contract lifecycle and each phase has its different activities and processes. The management of the processes under each phase is called contract management. Typically, the contract lifecycle has following phases:

  1. Planning
  2. Contract Negotiation and Award
  3. Contract Execution
  4. Contract Monitoring and Evaluation
  5. Contract Closure and Handover

 For further details about the contract lifecycle click here.

Issues in Contract Management

Issues in Contract Formation

The drafting of contract is the most important activity because the contract governs everything later on. The provisions of the contract should be meticulously drafted and the contract should be balanced otherwise later on there may be issues during execution of the contract, which may lead to litigation. The draft contract should be checked by the parties entering into the contract before signing the contract. There is a step in contract formation which is called contract negotiation. Each and every provision of the contract should be discussed by the parties during the contract negotiation. Although there is always a room for contract amendment later on but it should be avoided and the parties should frame the perfect contract in one go. The main issues in contract formation are as follows:

Poorly Defined Provisions

  1. Terms & Conditions
  2. Drawings
  3. Technical Specifications
  4. Provision for damages
  5. Provision for price adjustment

If the above provisions/ sections of the contract will be poorly defined, then either party may be dissatisfied during the execution and may approach to litigation.

Bidding Issues

The bidding issues are related to the selection process of the bidders. The following bidding issues are typically observed during the bidding process:

(a) Inadequate Assessment of qualifications of bidders- The qualification of bidders is not assessed properly. Sometimes, there is lack of assessment for the level of qualification required for a particular work and therefore the qualification criteria are poorly defined. Some other times, the evaluation team fails to scrutiny the qualification of bidders. Both the cases may lead to selection of inappropriate bidder which may ultimately result in implementation issues.

(b) Collusion between bidders-  In some cases, bidders may collude with each other and quote higher rates. True market competition cannot occur in such cases. Therefore, care should be taken by the procuring organizations to prevent collusion of bidders.

(c) Delay in Signing the contract- Sometimes, the contractor does not produce the performance security timely and hence there may be delay in signing of the contract. Strict adherence to the timeline should be implemented in such cases.

(d) There may be delayed submission of securities or insurance policies.

(e) Lack of understanding of govt. / entity procurement policies by the procurement team and the bidder may also be one of the issues.

(f) Contract management staff not involved in bidding/award process- The contract management staff should be involved since beginning of the selection process due to the fact that, they will be aware of all the provisions of the contract and the competence of the bidder. This will help in better contract execution and management later on.

Management Issues

The management issues are mainly pertaining to the contract management team. These issues arise mainly either due to incompetence of the team members or due to their negligence. Sometimes these issues also arise due to unclear provisions in the contract documents or due to site conditions. The main management issues are as follows: 

  1. The Contract Manager and other players have unclear roles & responsibilities.
  2. The team managing the contracts has lack of experience in contract management.
  3. There are change in requirements during execution due to various reasons.
  4. Pricing errors or omissions in the contract document.
  5. Poor transition planning.
  6. Variations in contract.

Financial Issues

Financial issues in the contract implementation may arise due to following reasons:

  1. Contractors may experience financial difficulties.
  2. There may be delays in releasing payments by the client.
  3. Delays in submitting perform security and advance payment security by the contractor may also occur in some cases.
  4. One of the issue may be that payment schedules not properly linked to the physical process and hence the front loaded payments may occur.

Issues in Implementation

 There are always some issues in implementation of contracts which are as follows:

  1. Storage, delivery, transport problems.
  2. Adversarial relationships between the parties of the contract.
  3. Non availability of required work permit, Right of way (ROW), etc.
  4. Failure or refused to perform by contractor.
  5. Inadequate performance management planning.
  6. Lack of control over sub-contracting.
  7. Failure to define key hand outputs (KPI, SLA), service land Agreements.

Activities Performed in Contract Management

The activities performed in contract management are defined by P-D-C-A cycle, the full form of which is Plan- Define- Check- Act Cycle. Let us discuss each stage of the P-D-C-A cycle in context with contract management.

PDCA Cycle

Plan

(a) Planning- The planning stage involves overall planning about how to execute and manage the contract. It incorporates the setting the objective, market study, determining specifications, choosing the methodology and ty of contract to be employed, determining contractor selection process, etc.

(b) Setting up Team- In this stage the team for execution and management of contract is set up. The contract manager, consultant and other team members are appointed in this stage.

(c) Contract formation- This is the most important part of planning stage. In this phase the contract is drafted, contract negotiation takes place and contract is signed between the parties. Care must be taken in this stage so that all the relevant provisions are incorporated in the contract to avoid future disputes and litigations.

Do

(a) Startup- The contract is commenced in this stage. The parties under the contract initiate execution of the contract as per date of start given in the planning stage. If date of start is not given in the planning stage, then it is fixed in this stage.

(b) Administration- In this phase, the contact detail of key people is maintained. Meeting are scheduled to monitor the progress of work, notices are issued as per relevant clauses under the contract, cost and payment procedures are monitored, records & documents are maintained and stored and reporting to different stakeholders is done.

(c) Payment- Payment is the most important part of contract management. Payment terms and procedures should be clearly mentioned in the contact document to avoid confusions later on. The contractor should submit bills timely as per the procedure stipulated in the contract and the client should pay the contractor without any delay so that cash flow of the contractor is maintained. The client or authority should not misuse their power to unjustified delay of payments or to penalize the contractor.

Check

(a) Managing relationships- Cordial relationship should be maintained between the parties under the contract. If the parties trust each other than each party will fulfill their obligations as per contract and the contract will run smoothly. Mutual trust between the parties will avoid further litigation.

(b) Manage Performance- Performance management and monitoring is done by the contract manager or third party consultant. The progress of work as per milestones fixed in the contract, adherence to various government regulations and other guidelines like social and environmental norms, renewal of performance securities and bank guarantees, land acquisition, handing over of encumbrance free site, etc. are monitored under this process. The contract is monitored and the progress reports and other information is sent to different stakeholders. Monthly management meetings are conducted to coordinate between the stakeholders, if necessary.

(c) Risk Management- Unexpected and uncertain conditions may surprise many times during the contract execution. Risk profiling and risk mitigation plans should be employed at the planning stage itself to handle different risks.

Act

(a) Change Managements- Variations in the scope of work becomes inevitable in certain situations. This reason for variations may be change in site conditions, change in requirements of the client or some external factors. Whatever may be the reason, the changes or variations in the scope should be properly addressed. Amendments in the contract is made if found necessary to execute the changes. Approval of competent authority should always be taken before executing any change. It is better to stipulate detailed mechanism to handle changes in the contract document.

(b) Ensuring Integrity- Ensuring integrity is important for successful implementation of contract provisions. Each party under the contract should maintain integrity and different mechanisms like quality checks, quality assurance programs, employing technology like e- tendering, procurement and contract management software should be done to ensure integrity.

(c) Close Out- Close out of contract is as much important as other activities. Approval of final product, handing- taking over of the product/ site, storing contact documents, etc. are integral part of this stage.

(d) Performance Review- After closing the contract, performance of the contract is reviewed, document and reported to different stakeholders. Lessons learnt are also documented for future organizational learning.

Skills of the Contract Manager

Contract management Skills

The contract manager should be skilled enough to handle the issues arising during the execution of contract. Main skills required by the contract manager are summarized as below:

Specific Skills

  1. Contract Management skills.
  2. Negotiating skills.

General Skills

  1. Commercial experience for managing contracts
  2. Communication skills
  3. Change Management skills
  4. Accounting principles

Roles and Responsibilities of Contract Manager

The project manager possesses Clarity of roles, level of authority and reporting lines. A contract manager typically has following roles and responsibilities. He/ she:

  1. Should be able to communicate effectively with all stakeholders.
  2. Must ensure that the contractor performs all contractual obligations.
  3. Must ensure obligations of the employer or client are met & deals with disputes and default.
  4. Should provide quality assurance and review contract extension.
  5. Should take responsibility for the ongoing train program.
  6. Should be able to provide quality assurance and should review contract extension.
  7. Should take responsibility for the ongoing training program.
  8. Should undertake planning with the contractor.
  9. Looks for opportunities to enhance delivery.

Payment

Payment is an important Component of the Contract Management. Incorporation of payment schedule in the contract document is good practice. The contract drafting team should draft payment schedule in consultation with finance/technical staff. The client or authority should not misuse power of procurement stage to unjustly delay or withhold payment from contractors, who complete their work.

There are three stages of payment process during the contract execution which are given below:

  1. Receipt of request for payment.
  2. Authorization and matching.
  3. Transfer of funds.

Potential Problem Areas and Causes

The potential problem areas in a contract are time overrun, cost overrun, inferior quality, inconvenience in construction and not taking adequate safety measures. The causes for above mentioned potential problems are summarized below:

Causes for time overrun

  1. Variations
  2. Design changes
  3. Scope changes
  4. Slow decision making
  5. Delay in land requisitions.
  6. Delay in shifting the utilities.
  7. Slack supervision
  8. Improper / non availability of required plant and equipment.

Causes for cost overrun

  1. Cost changes due to time lag between project preparation and implementation, leading to variations.
  2. Design changes.
  3. Unrealistic estimates based on impractical Schedule of Rates.
  4. Absence of the required flow of funds.

Reasons for inferior quality

  1. Improper / non-availability of the required plant and equipment.
  2. Inexperienced contractors.
  3. Slack supervision.
  4. Absence of required funds.

Causes of inconvenience in construction

  1. Local law and order problem
  2. Delay in shifting of utilities
  3. Lack of planning.

Reasons behind taking inadequate safety measures

  1. Lack of implementation of safety measures.
  2. Lack of awareness of contractor’s employees.
  3. Lack of implementation of law and non-investment of funds for safety equipment.

Processes prior to Commencement of Work

As a standard and good practice the following processes must be completed before the commencement of work to avoid potential future disputes and litigations:

  1. Land acquisition.
  2. Relocation of utilities
  3. Complete the resettlement action plan, that is relocate the Project Affected Persons (PAPs).
  4. Prepare the strip plan.
  5. Evolve an appropriate Rehabilitation and Resettlement (R&R) Policy and accordingly the Rehabilitation Action Plan (RAP).
  6. Publish the policy in local language.
  7. Conduct village meetings to educate people.
  8. Take the assistance of NGOs, wherever necessary.

Key Takeaways

(1) Contracts are governed by the law of land where the contracts are being executed.

(2) Contracts are classified either based on their outcome or on the basis of payment mechanisms.

(3) Contract management is performing and monitoring activities that enable both the contracting authority and the contractor to fulfill their obligations.

(4) All contracts undergo through a lifecycle. The management of the processes under each phase is called contract management.

(5) There are always some issues in contract management. If the contract document is prepared meticulously with all the relevant stipulated in the document, then most of the issued pertaining to contract execution may be avoided.

(6) Contract negotiation should necessarily be held before contract signing and each and every provision of the contract should be discussed and mutually agreed by the parties.

(7) Activities performed in the contract management can be defined by P-D-C-A cycle, where P-D-C-A stands for Plan-Do-Check-Act.

(8) Payment is an important Component of the Contract Management. Incorporation of payment schedule in the contract document is good practice. The contract drafting team should draft payment schedule in consultation with finance/technical staff.

(9) The contract manager should be skilled enough to handle the issues arising during the execution of contract.

(9) As a standard practice, some processes like land acquisition, relocation of utilities, etc. should always be finished before commencement of the contract.

(10) Contract closure is as important as contract commencement. The contract documents and lesson learnt documentation should be stored carefully for future reference and learning.

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Rajesh Pant
Rajesh Panthttps://managemententhusiast.com
My name is Rajesh Pant. I am M. Tech. (Civil Engineering) and M. B. A. (Infrastructure Management). I have gained knowledge of contract management, procurement & project management while I handled various infrastructure projects as Executive Engineer/ Procurement & Contract Management Expert in Govt. Sector. I also have exposure of handling projects financed by multi-lateral organizations like the World Bank Projects. During my MBA studies I developed interest in management concepts.
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