Execution of contracts is a complicated task, especially for large value contracts. Every contract has its own features and implementation of contract provisions amidst ground realities is a difficult task. Out of the different phases of contract lifecycle, contract execution is the most important part of the contract management. Out of several contracts running under an organization, some contracts are said to be executed successfully and some may not be able to derive value for the customers. As said by Peter Drucker once, what is measured, can be managed. Therefore, measuring the performance of the contract management is a factor that plays a very important role for improvement in the contract management processes of an organization. But the question arises, how to measure the performance of a contract.
There are some key performance indicators that facilitate in measuring the performance of a contract. The contract management processes of an organization should be aligned with these performance indicators, to optimize the performance of the contracts, the organization is handling. Some of the key performance indicators are discussed below.
Key Performance Indicators
Time Taken in Signing the Contract
Time taken since inception of procurement processes up to signing of the contract is an important indicator which indicates effectiveness and efficiency of procurement and contract management processes. A mature organization which is at the highest level (optimized level) of the Contract Management Maturity Model shows consistency in the time taken for the procurement & contract signing processes. If there is an unexpected delay in the contract signing, then entire procurement processes should be reviewed to identify the bottlenecks and necessary actions should be taken to improve the procurement practices of the organization.
In this KPI we measure whether the contract is completed within the stipulated time period. The time extension given to the contractor are monitored and the reason is analyzed. If the contracts are being extended without justified cause, it means that the parties under the contract are not fulfilling their obligations timely. From the procuring agency side, there may be delay in according approvals, utility shifting or providing free access to the site. The reasons of delay from the contractor may be, not deploying proper resources (manpower and machinery) or not delivering the work timely. If there are unjustified delays in completion of the contract, then the reasons behind the delay should be analyzed and proper action should be taken.
Time Taken in Approvals
Time taken in approvals is a major key indicator under which the time taken in various approvals such as change requests, variations, time extensions, etc. are monitored. In every contract, there is a time limit stipulated for approvals of change requests, extension of time, etc. If there is unexpected delay in according approvals form the procuring organization, it means, proper system for handling these issues in not in place. The delay in approvals increase project risks such as delay in project completion, disputes, litigations, etc.
Contract Risk Management
There are several risks before and during the performance of the contracts. Some are concerned with procuring organization and others may be related to the contractor. Proper risk allocation under the should be done in the contract to insure that the contract risks are effectively handled. Proper risk management system and processes should be in place to handle the contract risks. Both the contractor as well as the procuring agency should be competent to manage the risks.
If the contracts running under an organization are not being renewed before expiration, it means, the procuring organizations contract management processes are not matured. The organization is at the beginner level of the Contract Management Maturity Model. If the contracts are not renewed before expiration, then there is a risk that the contractor or supplier may become free from their obligations under the contract without delivering the stipulated deliverable under the contract. This may lead to further litigations and disputes. Therefore, this indicator helps us to scale the organization on the contract management maturity model.
Timely payment as per the provisions of the contract helps contractor or supplier to fulfill its obligations under the contract timely. A good contract stipulates a definite timeline for the payment. Delay in payments means that either the procuring organization is not serious about timely completion of the project or short of funds. In both the cases, the risk of timely completion of the contract is enhanced and it may further lead to disputes and litigations. If an organization makes timely payments to its contractors and suppliers, it increases the credibility of the organization in the market and every contractor or supplier will be willing to work with the organization. This indicator is therefore, shows the seriousness, financial standing and the credibility of the organization.
The key performance indicators for effective contact management helps us to evaluate the procurement and contact management processes of the organization. It also helps us to scale the organization on the Contract Management Maturity Model and indicates the potential areas of improvement. The contractors and suppliers may also take help of these indicators before being associated with an organization for any assignment. Click the link below to know more about the Contact Management Maturity Model.