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Basics of Contract Management

Table of Content for Basics of Contract Management-

  1. Introduction
  2. What is Contract and Contract Management?
  3. Need for Contract Management
  4. Contract Management Life Cycle
  5. Stages of Contract Management
    1. Formulation of Contract
    2. Contract Administration
    3. Risk Management
    4. Ending Contract
    5. Contract Review
  6. Best Practices of Contract Management

1. Introduction-

The businesses require the collaboration of teams to successfully achieve their objectives. These collaborations happen with the vendors, suppliers, clients, contractors and even customers via signed contracts between them. The parties involved in contracts abide by the terms mentioned in it.

A clear understanding of the basics of contract management enables the contract manager to successfully execute the contract.

2. What is Contract and Contract Management?

The section 2(b) of Indian Contract Act, 1872 defines the contract as-

“any agreement enforceable by law”

The same section also defines the other terms related to the contract such as offer, acceptance, promise, promisor and promise, consideration, agreement, reciprocal promises, void agreement, etc. The same can be read in details here.

2.1 Contract Management-

Contract Management can be summarised as the process of performing activities that enables both the contracting authority and the contractor to fulfil their contractual obligations. It also ensures the contract meets the optimum combination of cost, time, and quality during the contract period.

3. Need for Contract Management-

A contract can’t run itself; it needs to be proactively managed. Contract management needs resources to manage it. The key resources are Project Manager, Contract Manager, Contracting Authority, and Contractor’s representative.

The contract management fulfils the following objectives-

  1. Protect the agreed contractual position.
  2. Accept deliverables under the contract.
  3. Maintain agreed allocation of risks.
  4. Monitor contractor’s performance against output specifications.
  5. Take appropriate action on the financial implication of any failure.
  6. Ensure that payments are conditional upon the contractor’s quality of performance.
  7. Maintain continuous improvements & service deliveries.

4. Contract Management Lifecycle-

The contract management lifecycle can be broadly classified into two parts- pre-award and post-award. The pre-award activities include initiation, planning, and tender preparation. The post-award activities are execution, performance measurement, closing and review.

Basics of Contract management-Lifecycle of contract
Contract Management Life Cycle

The steps of contract management lifecycle are-

4.1 Pre-award-

  1. Prepare a procurement note stating the purpose, requirement and need of the procurement.
  2. Develop Procurement Process, specifications, contract strategy, tender evaluation criteria.
  3. Do market survey for current market practices, trends, price schedules etc.
  4. Publish a Specific Procurement Note or an advertisement.
  5. Invite Tenders and Receive them.
  6. Clarify the ambiguities or doubts, if any from the contractors who have submitted the tenders.
  7. Evaluate the submitted contracts as per predefined tender evaluation criteria and award the contract to the most suitable bidder.
  8. Debrief the unsuccessful bidders or disqualified bidders.

4.2 Post-award-

  1. Manage contract during the execution by performance measurement of the contractor as per the defined contractual parameters, risk assessment and mitigation, maintaining timeline and quality during the contract period.
  2. Keep the contractor in the loop regarding the variations on contract and apprise the contractor of its performance.
  3. Post closure of the contract, maintain a feedback register to record findings, learnings, observations, risks, etc. to use them as the benchmark for the future procurement process.

5. Stages of Contract Management-

The basics of contract management must include the stages of contract management as it increases the control of contract manager over the entire process and helps in easier execution. The contract goes through five stages throughout its life. The stages are as formulation, administration, risk management, closure and review.

5.1 Formulation of a Contract-

A contract has component documents dealing with the different topics and bound together in a logical sequence. It has price schedules, schedules of works, requirement, technical specifications, agreement, distribution list, general terms and conditions, special conditions, other amendments to the contract, agreed work methodology, contractor’s notification of contract award.

The contract should be prepared in line with the equality, mutual benefit of the contracting authority and contractor and applicable law.

The main focus should be kept on following areas while preparing the contract-

  1. Specifications
  2. General Clauses- Applicable law, the language of communication, the order of precedence, communication route etc.
  3. Main responsibilities of the owner and contractor.
  4. Commercial Clauses.
  5. Contract Execution Timeline- Commencement, work program, procurement and delivery, delays etc.
  6. Compliance with specifications- QA policy, inspection, testing, the rectification of defects.
  7. Payment- Assessment and certification method, time of payment, method of payment and delayed payment etc.
  8. Variations and Claims.
  9. Titles-Ownership of objects, materials, equipment at the site.
  10. Risks- Provision for damage in transportation, theft etc.
  11. Insurances.
  12. Force Majeure.
  13. Failure to Perform-Termination, security, delay damages, performance guarantee.
  14. Other area-Breach of contract, social and environmental issue.
  15. Resolution of Disputes.

5.2 Contract Administration-

The contract administration can be explained by following activities-

  1. Maintaining contact details of key personnel.
  2. Scheduling of meetings and notice periods.
  3. Developing and maintain a mechanism for managing things.
  4. Monitoring cost and payment procedure.
  5. Establishment & maintaining contract documentation.
  6. Management reporting.

5.3 Risk Management-

The study of risk is an integral part of contract management. When studying the basics of contract management, it comes important to get an understanding of the process of risk management.

The risk management process involves the identification and assessment of risks, their evaluation, treatment and mitigation.

The major risks arise from variations in the contract. The variations arise due to the change in work scope, design change, error/omission in design, different site conditions, value engineering, change in technology, the extension of duration, legislative change, poor contract management, safety consideration, genuine unforeseen circumstances.

Further, the variations in the contract can lead to the change in cost, change in funding requirement, delays and EOTs, wasted or additional efforts, unproductive labour cost, reprogramming of contract to absorb or reduce the effects of variations.

5.4 Ending Contract-

A contract is closed when the contractual obligations of both the parties have been completed. Sometimes, the contract is ended even if any one of the parties don’t perform their contractual obligations well.

Upon closure of contract; joint inspection, commissioning and handover are done followed by settlement of final bill of the contractor and the issuance pf the taking-over certificate by the employer to the contractor along with the release of securities and retention amount.

The employer can end the contract after 14 days of giving written notice or immediately when the contractor fails to perform its duties, abandon the project, non-compliance with the quality, sub-contracting to another contractor without written notice, bankruptcy etc.

The contractor can also end the contract when the employer fails to perform its duties, failure to issue IPC within 56 days of receipt of documents, non-receipt of payment after 42 days of issuance of IPC, bankruptcy etc.

5.5 Contract Review-

The purpose of the contract review is to develop good practices of procurement and to establish the benchmarks.

After the closure of the contract, arrangement benefits are assessed, the lessons learnt are recorded, best practices are capitalised and performance is recorded for future reference.

The contract review checklist must include the review requirement, assessment of how the requirements have developed, analysis of contract performance, recording of milestones.

6. The Best Practices of Contract Management-

Some of the best practices of the contract management are as follows-

  1. The contract should be such formulated and administered to avoid/minimise the variations, claims and delays.
  2. Thorough planning, market survey and site inspection to be done when formulating the contract to minimise/avoid the variance.
  3. Technical specifications, QA/QC program and performance measurement should be clearly defined to avoid any ambiguity at the execution stage.
  4. Project kick-off meeting to be organised after contract award to bring the employer and the contractor on the same page before starting execution.
  5. In the Kick-off meeting, both the employer and the contractor to be apprised of each other’s contractual obligations.
  6. Payments should be linked with time and quality performance of the contractor.
  7. Delays on account of employer and contractor should be separately recorded.
  8. The risk register should be maintained.
  9. Formal communication between the parties, minutes of the meetings etc. should be recorded for future references.
  10. Both the employer and the contractor should try to maintain the same staff throughout the contract life as it builds the relationship and helps in the successful implementation of the contract.

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Check out my other article on Project Scheduling here.

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