7 Steps for Effective Contract Management
Contract administration and management have become key roles in managing projects, especially in complex projects with numerous technicalities.
When I started my my career in designing and delivering projects, contract management was only a small part of my role. However, as the complexities of turning a shell and core, or in simpler words, turning a bare space into a fully operational built environment started becoming more detailed, contract administration and its management became more complex.
In the most basic terms, a contract is formed when two organisations wish to do business with each other. It specifies the activities and terms through which they will fulfill their parts of the contract or agreement. Managing the contract from inception to closure is contract management. This is an important aspect of work, and I still see large organisations spending $100K+ on projects with a simple two-page Terms and Conditions (T&C) document rather than contracts.
Initially, everything is smooth when both parties discuss scope, close tenders, and lock the cost for services or goods. However, it’s only when things turn sour that organisations start scrambling to see what options are available to protect their interests.
Hence, as a case in point, every project or program should have a contract in place. Depending on the complexity of the activities across all stages of the contract lifecycle, there needs to be dedicated resources to manage it.
Hiring Contract Administrators and Contract Managers with specialised knowledge is advantageous as it helps organisations gain an edge over their competitors. It also ensures they derive true value from the processes and technology working behind the scenes.
Now, let’s break down the contract management process at a high level into seven steps.
Goal of the process
- To realise all negotiated contract benefits
- To control costs.
- To mitigate risk by supplier compliance
- To have clear reporting,
- To ensure specialists such as legal teams does not spend their time on non-specialist work
- And to benefit from better relationships with the contracted partners.
Step 1: Initiation / Gathering Requirements
This is one of the most important steps in this process.
Imagine you are working on a hospital expansion or refurbishment project, and there are a number of compliance requirements that need to be incorporated into the design of the premises.
Or, you are working on a technology infrastructure upgrade project at a university to support the teaching, learning, and research activities on campus.
Both of these projects have very different requirements.
Here, you need to ask the right questions to the right people and gather the right information. As a project manager, it is good to have a working knowledge of your industry, as it makes the process of gathering requirements to closing the project smoother. However, in many cases, this is not essential, as there are subject matter experts working as part of the project team. However, it is important that the project manager has the right project management knowledge and skills.
Whatever the case may be, it is imperative that the project team members working on the contract have business acumen along with strategic and technical skills.
The requirement will dictate the scope, time, cost, and quality, therefore, we need to have a clear understanding of it.
Step 2: Analysing Requirements
Once you have all the information, you need to analyse it, including reviewing both internal and external organisational factors. Check if the requirements can be fulfilled in-house, or if they have to be contracted to an external vendor.
Throughout my career, I have worked under various organisational structures, and each has its pros and cons. One may have an in-house design team, joinery factory, and a project management department, whereas another might have to outsource these functions.
Evaluate your internal teams based on their capability and capacity to complete the scope of work. Understand timeframes and costs involved in completing activities or projects. Also, review how procurement will play a part in deciding the execution strategy. Based on these factors, make a decision on whether to contract a job or do it in-house with the existing team.
Analyse if the contract needs to be continued beyond the scope of the project or program. If so, consolidate the requirements and negotiate a better deal. This helps in getting better terms and deepening the relationship with suppliers.
Sometimes the difference in cost on paper might not be much. It is the unaccounted time and paperwork that actually costs more.
Step 3: Tendering and Negotiations
Once you have analyzed all your requirements, make sure all the details have been translated into a detailed document, as this will form part of the tender brief. It should contain all information on the scope, including specifications, delivery dates, and budgets, to provide clarity to the vendors. Based on this, float tender packages, also called bid packages, to get quotes. Today, there are many software options in the market that can help us manage the tendering process. Again, ignorance or lack of exposure is one of the key deterrents that hinder companies from adopting them.
For larger projects, holding a bidder’s conference can help clarify queries and obtain accurate quotes.
Most companies have empanelled vendors and suppliers to carry out various scopes of work. Teams develop a rapport over time, making these vendors their go-to contractors without question. As these contractors have a history of completing similar works in the past, it becomes easier for the teams to translate their requirements and get the work done. And this is a good thing, don’t get me wrong. However, on the flip side, I have seen contractors getting too comfortable once they have the confidence of their clients, failing to notice gaps in their capabilities.
I always recommend empanelling new vendors for healthy competition. However, before switching to a new contractor or vendor, it is essential that you understand the risks and cost implications, as there may be times when these associated costs are substantial and sometimes difficult to quantify.
It always best to have at least three vendor bids before making a decision, unless, certain works had been tried and tested by different vendors and failed to reach the desired quality. In such cases, one quote from a specialised vendor would be enough.
With this step, the pre-signature phase closes. Once a vendor is finalized, the rates are negotiated and prices confirmed.
Step 4: Awarding Contracts
Steps 3 and 4 go hand-in-hand. While making contracts, all positives and negatives of the contracted work or items need to be discussed.
All relevant stakeholders, whether internal or external, need to respect and work around each other’s deadlines to ensure contract success. It is important that contracts be transparent and understood by everyone. Contracts should not merely be documents created for litigation purposes, but should set out plans, processes, agreements, and penalties that can be understood by everyone involved.
Contracts also need to address the ownership of intellectual property, design reproduction, the use of certain methodologies, claims for progressive payments, extensions of time (EOT), and even information about managing any associated risks.
For example, clear information on how shortages, excesses, or damages (SED) of certain items are to be treated, including responsibility and ownership of bearing the costs for shortages and damages. If procurement is from an overseas supplier, a plan for damage rectification should be included.
Getting approvals on contracts can be a bottleneck and sometimes time-consuming. To avoid this, having streamlined processes that automate the workflow using Contract Management systems, while obtaining parallel and serial signatures and approvals, helps keep decisions moving at a rapid pace.
All factors need to be considered and clearly addressed to avoid any discrepancies or disputes at later stages.
Step 5: Monitoring Contracts
In this step, we enter the post-signature period, where activities such as compliance management, performance monitoring, obligation tracking, dispute resolution, and renewals are taken care of. It’s important to understand that although contracts have been agreed upon, they are not set in stone. They can always be amended if required, and the involved parties agree
We need to constantly monitor the scope of works along with the contract and immediately address any discrepancies.
It is vital to have regular check-ins and performance review checkpoints written into contracts. They help identify problems at the early stages of a project, thereby avoiding any issues that can lead to rushed decisions. This prevents us from getting inferior results and from losing out on the value the contract was supposed to deliver.
Linking payments to the performance review checkpoints ensures that the contractor is aware of their obligations and deliveries at each stage. Organisations that run multiple projects often have their own Enterprise Resource Planning (ERP) systems, which may include contract tracking modules. This helps automate the contract management process and understand the spend and revenue against the targets and milestones.
Step 6: Contract Renewals
Now, you’re at the stage where you’ve delivered the project, but you need to ensure that certain services contracted as part of the project continues. These services go beyond the Project and Program Lifecycle; hence, they are renewed and become part of the day-to-day operations, taken care of by the facilities management or maintenance teams.
A typical example of this would be when a contractor is hired to carry out Mechanical, Electrical, and Plumbing works (MEP) for a retail, commercial, or residential project. Once they have completed their scope and delivered everything as per the agreement, their contract is ready to be closed. However, the firefighting system, fire/smoke alarms, and the Fire Alarm Panel (FAP) /Fire Indicator Panel (FIP) works or services, which are also part of the same project, do not end with the project.
As these services need to be checked periodically to ensure compliance with legislative requirements, the contract may be renewed with the same qualified vendors.
Step 7: Contract Closures and Lessons Learnt
I cannot stress enough about the importance of verification or scope, and documentation of the same before closing a project. And sometimes this might even mean getting things physically verified.
Closing a contract is an easy step to skip because we have other competing priorities in a fast-paced project environment. This is especially the case when we are no longer dealing with the contracted vendor and have moved on to other pressing issues, leaving the verification and closure for a later date. This potentially gives rise to two problems: one, closing contracts without verification; two, having no or inaccurate information when audited.
I have seen numerous times where project teams keep postponing closing contracts, only to rush into contract closures when the finance department starts sending reminders for payment verifications. We have all been there.
You don’t remember all the details, nor the reasons for the numerous variation bills, so you trust the contractor as they have done one or two jobs previously. You glance over and try to close them quickly, as you have to get to your current project. In the bargain, there may be discrepancies that go unnoticed, and the contractor gets paid if everything is well within budget. This is where the contractor has taken advantage of your trust (and carelessness!).
A colleague once told me about a large infrastructure project where one of his long-time contractors knew their working patterns and had taken advantage of their trust. The contractor knew the client didn’t have time to verify each project detail, as they had time and resource constraints. So, he billed them as he pleased and got paid without further questions. However, in this project (since the workload was less in that period), my colleague asked one of the team members to check certain quantities like the flooring and ceiling works to see if there were any gaps. To his surprise, the quantities were inflated by 15 – 25%. As the areas were large and the scope of works too many, no one noticed the variations. As a result, every contractor was viewed with suspicion.
Compliance requirements change quickly. Audits may be conducted to ensure the workings of a department are in line with the organisation’s policies and standards. Therefore, it is imperative to verify all scopes of work, quantities, costs, and document the lessons learned before closing contracts.
I can honestly tell you I have fallen behind in documenting lessons learned and have learned the importance of it the hard way. In every project, we undergo a learning process. It provides us with positive and negative lessons that we need to document for future reference.
For example, in a high-level discussion with senior management on budgets, it would be helpful to go through the lessons learned documented on similar projects. This would give an understanding of the kind of funds required, the problems encountered, leading to variations, etc.
It is crucial to document important points as soon as they occur. It doesn’t have to be elaborate or formal.
Conclusion
Next time you’re making a contract, consider these 7 steps: Gather the requirements, analyse them, float the tenders, negotiate with the vendors, and finalize. Once the contract has been awarded, monitor it to ensure you’re reaping the benefits. Consider renewing certain contracts if necessary, or close them upon completion and compile lessons learned.
