7 steps to better Contract Management
Aligning people, processes and technology have become even more important today. With that in mind, contract management has become a key business process, having a range of activities across all stages of the contract lifecycle. Hiring Contract Administrators and Contract Managers with specialised knowledge helps us to get an edge over our competitors. This ensures we get true value from the processes and technology working behind the scenes. However, not every organisation will have a contract manager. Hence the Project Manager, Quantity Surveyors, Estimators, and Project Coordinator may share this role. Here, I have broken down the contract management process into seven steps providing a very high-level overview.
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 a legal team does not spend the time on non-specialist work
- And to benefit from better relationships with the contracted partners.
Step 1: Initiation / Gathering Requirements
Depending on the nature of the organisation, as well as the type of project, requirements may vary. Therefore, we need to ask the right questions to the right people and gather the right information. For example, a retail organisation looking at opening a new store will have a very different scope from a hospital undergoing an expansion. The scope for fulfilling a legal requirement such as having a separate electrical room, will be different from the scope of updating the IT infrastructure. Whatever may be the case, it is imperative that the project team members working on the contract have business acumen along with strategic and technical skills. Identify the right stakeholders, collect their requirements and see how both the internal and external environments will affect the project.
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 we have all the information, we need to analyse it. Look at the requirements by analysing the both internal and external organisational factors. Check if the requirements can be fulfilled in-house, or if it has to be contracted to an external vendor.
Organisation operates in different styles and structures. One may have an in-house design team, joinery factory, and a project management department, whereas another might have these functions outsourced. In my career, I have worked under many organisational structures, and each has its plus and minus. Evaluate the teams on the basis of their capability to complete the scope of work. Understand the timeframes available, and the cost it would incur to complete the work. Based on these factors, make a decision whether to contract the job externally or do it internally.
Another factor to consider would be the ease of approvals and contract management. It may be easier to have certain work done as part of a bigger project than doing it individually. For example, procuring electrical fixtures as part of the project where they will be installed is easier than procuring them separately.
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
Analysing requirements from all aspects help us understand parts that need to be contracted internally and externally. A detailed document compiled with information on the scope, including specifications, delivery dates, and budgets will provide clarity to vendors. On the basis of this, float tenders to get quotes. For larger projects, holding a bidder’s conferences can help clarify queries, and get accurate quotes.
In my experience, most of the companies have approved vendors and suppliers. New vendors can be enlisted, provided they meet certain quality criteria, and financial obligations. However, there are always costs for switching contractors or suppliers who have a history of delivering certain works or products. And these costs are substantial and sometimes difficult to quantify.
Another aspect that needs to be discussed before awarding a contract is the style of delivery. For example, I have had shop fittings manufactured by the brand (like TOMS, BATA, ECCO, etc) in their home countries. It would be ready for dispatch when required by the franchisees (e.g, the retail organisation where I worked). In this case, I only had to place an order with them and not worry about the specifications. Alternatively, for in-house brands (like Lifestyle, Athletes Co) I would engage Just-In-Time (JIT) procurement techniques for manufacturing shop fittings, or sourcing of materials like parquet flooring, lights, etc. This technique helps when we did not have large dedicated spaces to hold construction inventory.
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. One vendor is finalised, the rates negotiated and prices confirmed.
Step 4: Awarding Contracts
Step 3 and 4 goes hand-in-hand. While making contracts, all negatives and positives of the contracted work or items need to be discussed. All relevant stakeholders whether internal or external, needs to respect and work around each other’s deadlines to make a contract successful. It is important that contracts be transparent and understood by everyone. Contracts should not merely be a document created for litigation purposes, but set out plans, processes, agreements and penalties which can be understood by everyone involved.
Contracts also need to address the ownership of intellectual property, design reproduction, use of certain methodology, claims to progressive payments, or even risk management. For example, clear information on how the Shortage, Excess or Damage (SED) of certain items be treated. Responsibility and ownership of bearing the cost for shortages and damages. If the procurement is from an overseas supplier, the plan for damage rectification.
Getting approvals on contracts can be a bottleneck and sometimes time consuming. To avoid this, having streamlined processes which automates the workflow using a Contract Management systems, while getting parallel and serial signatures and approvals help 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 start the post-signature period, where activities such as compliance management, performance monitoring, obligation tracking, dispute resolution and renewals are taken care. We need to understand that although contracts have been agreed, 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 the regular check-ins and performance review check-points written into the contracts. Linking payments to the performance review check-points ensure that the contractor is aware of his/her obligations and deliveries at each stage. Organisation who run multiple projects have their own Enterprise Resource Planning (ERP) which may include contract tracking modules. This helps in automating the contract management process, as well as understanding the spend and revenue against the targets and milestones.
By monitoring the contract, problems can be detected at the early stages of a project. This in turn helps in avoiding any rush into making decisions at the end of the delivery stage. It prevents us from getting inferior results, as well as from losing out on the value the contract was supposed to deliver.
Step 6: Contract Renewals
We are at that stage where we need to take a closer look at what has been achieved so far. It helps us evaluate our vendor’s working style and how they look at the working relationship. Here, we will have certain contracts that need to be terminated, and some that maybe continued even after a project has been delivered. They can go even beyond the Project and Program’s Lifecycle. This is where it becomes a part of the day-to-day operations, taken care by the facilities management or maintenance teams.
I will give two scenarios here, one, I would work with a contractor to do the Mechanical, Electrical and Plumbing works (MEP) for a retail, commercial or residential space. Once they have completed their scope and delivered everything as per agreement, I would close their contract. However, in the second scenario, the Fire fighting system, the Fire/Smoke Alarms and the Fire Alarm Panel(FAP) /Fire Indicator Panel (FIP) which is also part of the same project does not end with the project. As these services need to be checked to ensure compliance with the legislative requirements every year, the contract maybe renewed with the same qualified vendors.
Step 7: Contract Closures and Lessons Learnt
I cannot stress enough about the importance of verification and documentation 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 faced 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 contractors without verification, two, no or inaccurate information when audited.
When the finance department starts sending reminders upon reminders to close the contract, as they need to reconcile the accounts on their end, we decide to quickly close it and move on. We have all been there. You don’t remember all the details, nor the reasons for the numerous variation bills, hence, you trust the contractor as he has 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 maybe discrepancies which goes 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 shopping mall 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, 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 do a check on certain quantities like the flooring and ceiling works to see if there were any gaps. To his surprise, the quantities were hiked by 15 – 25 %. As the areas were large and scope of works too many, no one noticed the variations. As a result, every contractor was looked at, with suspicion.
Compliance requirements change quickly. Audits may be conducted to ensure the working of a department is in line with the organisation’s policy and standards. Therefore, it is imperative to verify all scope of works, quantities, cost and document the lessons learned before closing contracts.
I can honestly tell you I have fallen behind in documenting lessons learnt and have learnt 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 references. For example, in a high level discussion with senior management on budgets: it would be helpful going through the lesson learnt documented on similar projects. This would give an understanding on 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.