All contracts undergo through a definite lifecycle. The management of each stage of lifecycle is called the contract management. Whether you plan or not, you will have to go through each stage of the contract lifecycle. A good contract manager pays most attention at the planning stage. If the contract is planned meticulously at the planning stage, then the desired contract outcomes may be achieved with little effort later on. The contract lifecycle typically has following stages:
- Contract negotiation and award
- Contract execution
- Contract monitoring, payment and evaluation
- Contract closure and handover
Let us discusses about each stage of contract lifecycle one by one.
In the planning phase, different stakeholders decide upon the objectives of the assignment for which the contract has to be entered. They also appoint a team for planning, execution and monitoring of the contract. It is always better to appoint the contract manager at the planning stage because he or she will be involved in the preparation of terms & conditions and the specifications of the contract and hence will be well aware of everything at the later stage during the time of the contract execution. The planning stage also involves defining the objective of the assignment, establishing specifications, terms and conditions, cost estimation, decision on the procurement methods for the supplier, preparation of procurement documents such as RPF, RFQ, etc. This is the most important part of the contract management lifecycle. The specification, terms and conditions of the contract, RFP/ RFQ, etc. should be meticulously prepared by the contract planning and execution team as the success of a contract execution depends the most on these things.
Deciding upon the procurement method and market approach is also has a bearing on the success of the contract management. The planning team should carefully study the market and the bidders approach. Depending upon the market condition the market approach and method of procurement should be decided. Porter’s Five Forces Framework should be used to analyze the market.
Contract Negotiation and Award
The next step after the planning comes the contract award. After planning the objectives, specifications and method of procurement, the prospective bidders are approached based upon the method of procurement adopted. The bidder is selected as per the qualification criteria and the contract is awarded to the most responsive bidder. After the selection of the bidder, the draft contract is prepared and shared with the bidder. The contract is finalized as per the mutual consent between both the parties and the contract is signed between the parties.
Before the contract signing, contract negotiation takes place between the parties. All the provisions of the draft contract are discussed and both the parties arrive on a consensus. The contract negotiation should be such that there is a ‘win- win situation’ for both the parties.
Once the contract is signed, it is legally binding for the parties entering into the contract. The signed contract document is the binding force for all the stakeholders and further actions are decided as per the provisions of the contract. Therefore, each and every clause and provision of the contract should be carefully drafted to avoid future misunderstandings. Each contract should be registered in contract register and the original copy of the contract should be kept in safe storage. The copies of the contract should be distributed to all the stakeholders.
The contract is executed and per the timelines and the provisions of the contract agreement. Each party into the contract fulfills its obligations and try to achieve the objectives of the contract. The contract manager appointed by the client monitors whether the contract provisions are being followed by each party. Sometimes in the complex contracts, a third party is appointed to monitor the contract execution. Contract execution simply means fulfilling the obligations by each party entered into the contract.
Change requests, amendments or variations whatever you call it, is inevitable when the contract is executed. The contract is amended for any change is scope or obligation of either party after due approval from the competent authority.
The contract should be executed in such a way to mitigate the dispute between the parties. The contractor should raise their concern well in advance to the client through the contract manager. The contract manager should promptly make decision on the disputes and inform the client immediately so that the disputes may be resolved at early stages. The contractors should use the clauses such as ‘early warning’ to warn the client about any unforeseen situation. If any dispute is not resolved at the level of contract manager, then any party may raise their disputes to the ‘dispute resolution board’ through relevant clauses of the contract.
There are fixed time limits stipulated in the contract to fulfill obligations of the parties. In a good contract management practice, the time limits of the contract are honored by each party so that the contract may be closed within time.
Contract Monitoring, Payment and Evaluation
Contract monitoring is the most import aspect of contract lifecycle. Through contract monitoring, it is insured that the parties into the contract are fulfilling their obligations. Contract monitoring is usually done by the contract manager or a contract management team appointed by the client. In certain complex contracts such as contracts related to large construction projects, a separate contract monitoring agency like construction supervision consultant or Authority Engineer is appointed by the client. The role of contract management agency is very important. It monitors the progress of the contract and issues notices to the contractor if they are not fulfilling their obligations under the contract. In case the contractor feels any issue, he or she may approach to the contract management agency to solve the issue. In certain contracts there are provisions that allow the contract management agency to make final decision in case of any dispute between the parties. There are separate clauses for dispute resolution in the contracts. Either party may approach to the dispute resolution board in case of any dispute with the other party. The decision of the dispute resolution board is binding on both the parties, if within a stipulated timeline any party do not object to the decision of the board. Either party may approach to higher Courts of Law in case the dispute remains unsolved at the level of the dispute resolution board.
As per the provisions of the contract, the contractor or the supplier do certain work or supply some goods to the client and receives consideration for that. There are clauses in the contract which defines the payment conditions. In a good contract document, payment conditions should be clearly defined to avoid disputes later on. It’s the obligation of the client to make payments to the contractor on time so that the cash flow of the contractor is maintained and the work or supply may be done timely as per the specifications. A separate agency for quality monitoring may be appointed during the execution stage and the certificate of quality monitoring agency should be obtained before payment to the contractor/ supplier.
During the execution part, the contract management agency evaluates the performance of the contractor. It is very important to evaluate the performance of the contractor for future assignments. There should be some method defined in the contract for rating the contractor or supplier. If a contractor performs badly so that the interests of the client are harmed, there should be provision for debarment or blacklist the contractor for future assignments.
Contract Closure and Handover
Contract closure is as much important as contract commencement. Successful closure after timely completion of the contract assignment is a prerequisite of good contract management. There are separate clauses defined in the contract for contract closure and handover. During the closure of contract, the contract management agency should insure that all the obligations are fulfilled by the contractor as per the specifications or all the supplies has been made by the supplier as per quality standards defined in the contract. The measurements of the work done or the quantities of the supplies should be well documented and verified physically. The quality check should be done for all the works of the supplies delivered by the contractor/ supplier. All the quality certificates obtained by the quality monitoring agency should be verified again before closure of the contract to ensure that all the works or supplies delivered by the contractor are as per specifications. The certificate of all the stakeholders for satisfactory work may be obtained if necessary. The completion certificate is issued to the contractor by the client for successful completion of the work and assets generated due to execution of the contract are handed over to the authority. Handed over- taken over certificate is obtained from the authority and all the documents related to the contract are kept safely.
The contract evaluation report and rating of the contractor/ supplier is used for future assignments. A lesson learnt report should also be prepared for the organization to help achieve better performance in future.