Construction Contract Management Guidelines and Administration

Contract plays a vital role in project management, business strategies, and relationships. It is the foundation of value for the business. Organizations both in public and private are looking for efficient performance at a reduced cost. They are now realizing the importance of contract management in delivering a successful project. Effective contract management can make or break organization's vision, strategy, and its reputation.
The main goal of this article is to emphasize the need for contract management guidelines and administration as a tool in project management. The project and organizational benefits derived from the application of the guidelines. It will also discuss the pre-award and post-award activities, processes and practices involved, and the critical success factors for good contract management. In addition, the article will also provide a background in contract management and its principles.

Section 1 - Contract Management Principles

What is a contract?

A contract is a legal document stating the obligations between two or more parties. The contract documents usually outline the principles of offer, acceptance, and consideration, it also defines the terms of payment, the principles of negotiation, the scope of work and the expected level of service.

What is a contract management and administration?

Contract Management and Administration is the process of managing the end to end contract lifecycle to ensure that the parties meet their contractual obligations. It involves decision-making and timely flow of information to achieve project goal in conformity with the contract documents. In practice, this means optimizing the process efficiency, balancing costs and risks against returns and ideally aiming for a continuous improvement in performance over the life of the contract. One of the key aims of contract management is to fulfill the agreed contractual terms and conditions and achieve value for money. Moreover, effective contract management can be measured if;

• The arrangements for service delivery continue to be satisfactory to both customer and supplier;

• Expected business benefits and value for money are being delivered;

• The supplier is being cooperative and responsive;

• All parties know their obligation in the contract;

• There are no disputes;

• There are no surprises;

• The contract is fully compliant and satisfied both legislative and requirements.

Contract management processes

Figure 1: Pre and Post Award Activities

Organizational requirements for effective contract management

To ensure efficiency in contract management. It is important for the organization to consider people skills and competencies. The type and level of resources required for contract management will vary for different types of contracts. Different levels of skills and competencies will be required for different types of contracts. Some will require the establishment of a contract management team while others will be managed by a single person.

To carry out the contract management activities efficiently. The contract managers and other commercial team members must have appropriate skills and competencies to understand the task at hand in connection with the types of contracts they are dealing with. In addition, senior management should also provide leadership to ensure commitment to improvement.

Types of FIDIC form of construction contract

Some of the most common types of FIDIC construction contracts used in the construction industry are the following:
FIDIC - acronym for its French name Fédération Internationale Des Ingénieurs-Conseils (The International Federation of consulting engineers - commonly known as FIDIC)

Figure 2.0 Fidic Form of Contract

1 Green Book - Short Form of Contract, First Edition 1999

The Short Form of Contract is recommended for engineering and building work of relatively small capital value. The Guidance Notes for the Green Book recommended that generally it should not be used on projects with a contract value greater than US$500,000.It is a flexible document containing all the essential administrative and commercial arrangements. The contents of contract book: (a) Agreement (b) General Conditions (c) Rules for Adjudication (d) Notes for Guidance.

2 Red Book - Conditions of Contract for Construction For Building and Engineering works designed by the Employer First Edition 1999

The Red Book provides conditions of contract for construction works where the design is carried out by the Employer. The Red Book is intended for use on projects where the employer carries out the design but it also allows for some elements of the project to be Contractor designed. Payments are normally determined by measurement and applying the rates and prices from the bill of quantities. There is an option for payment to be on the basis of a lump sum. The contents of contract book: (a) General Conditions (b) Guidance for the Preparation of the Particular Conditions (c) Forms of Tender and Contract Agreement (d) Dispute Adjudication Agreement.

3 Red Book Multilateral Development Bank (MDB) edition- Conditions of Contract for Construction For Building and Engineering works designed by the Employer (MDB Edition 2005)

The FIDIC MDB edition of the Red Book simplifies the use of the FIDIC contract for the MDBs, their borrowers and others involved with project procurement, such as consulting engineers, contractors, and contract lawyers. As part of their standard bidding documents, the Multilateral Development Banks (MDBs) have for a number of years required their borrowers or aid recipients to adopt the FIDIC Conditions of Contract. The contents of the contract book: (a) General Conditions (b) Guidance for the Preparation of the Particular Conditions (c) Forms of Tender and Contract Agreement (d) Dispute Adjudication Agreement.

4 Yellow Book - Conditions of Contract for Plant and Design-Build For electrical and mechanical plant, and for building works, designed by the Contractor First Edition 1999

The Yellow Book provides conditions of contract for construction works where the design is carried out by the Contractor. It is applicable to the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works. Under the usual arrangements for this type of contract, the Contractor designs and provides the works in accordance with the Employer’s requirements which may include any combination of civil, mechanical, electrical and/or construction works. The contents of the contract book: (a) General Conditions (b) Guidance for the Preparation of the Particular Conditions (c) Forms of Tender and Contract Agreement (d) Dispute Adjudication Agreement.

5 Orange Book - Conditions of Contract for Design-Build and Turnkey First Edition 1995

The Orange Book is intended for use on turnkey contracts, under which the Employer's requirements usually include the provision of a fully-equipped facility, ready for operation at the turn of a key. The exact Employer requirements will need to be fully detailed to describe the design, construction, fixtures, fittings, and equipment required to be provided by the Contractor’s design. The contents of contract book : (a) General Conditions (b) Guidance for the Preparation of the Particular Conditions (c) Forms of Tender and Agreement.

6 Silver Book - Conditions of Contract for EPC/Turnkey Projects First Edition 1999

The Silver Book is suitable for use on process, power and private-infrastructure projects where a Contractor is to take on full responsibility for the design and execution of a project. Risks for completion to time, cost and quality is transferred to the Contractor and so the Silver Book is only suitable for use with experienced Contractors familiar with sophisticated risk management techniques. The Silver Book provides conditions relating to ‘Tests on Completion’ and Taking Over only takes place after successful completion of the tests. Such provisions are important for EPC/Turnkey projects where the purpose of the contract is to provide the Employer with a working facility. The contents of contract book: (a) General Conditions (b) Guidance for the Preparation of the Particular Conditions (c) Forms of Tender and Contract Agreement (d) Dispute Adjudication Agreement.

7 DBO Contract - Conditions of Contract for Design, Build and Operate Projects First Edition 2008

The DBO contract adopts a “green-field” DBO scenario with a 20 year operation period and a single contract awarded to a single contracting entity (which will almost certainly be a consortium or joint venture) to optimise the coordination of innovation, quality, and performance, rather than award separate contracts for design-build and for operation.The document is recommended for general use where tenders are invited on an international basis. The contents of contract book: (a) General Conditions (b) Particular Conditions (c) Sample Forms.

Section 2 - Guidelines for Contract Management and Administration Practices

The key to successful post-award contract implementation is to ensure that the pre-award activities (tender) are properly carried out. It is important that contracts are actively monitored throughout its lifecycle to help ensure supplier performance is satisfactory, stakeholders are well informed and all contract requirements are being met.

Pre-award contract management practices

Planning for effective contract management

There are 3 key stages to consider in planning for effective contract management during the pre-award stage. The below Figure 3.0 image from PMMS Contract Management Guidelines

Contract establishment

Some of the key issues that will determine the long-term success or failure of contract management include:

1. Planning – to address issues such as what is the type of specifications involve, how many numbers of contractors needed, how long are the contract duration and the role of sub-contractors should be considered in procurement planning.
   
2. Specification development - A Clear specifications that include measurable KPIs to reduce the risk of contract disputes, cost blow-outs and poor outcomes
   
3. Contract Transition Planning - well-planned contract execution strategy that will ensure the expectations, roles, and responsibilities are clear in the transition to the contract management phase
   

Determining the contract management approach

To determine the contract management approach, the contract management plan formation should be based on the assessment of key issues such as:

1. Contract value;
   
2. Contract complexity;
   
3. Scale of risk and potential for risk mitigation through a sound contract management practice;
   
4. Importance of the contract;
   
5. Potential benefits and increased value available through contract management practice;
   

Identifying and managing risk

To ensure an effective contract planning, it is necessary to undertake a risk assessment to consider possible issues that might arise. Figure 4.0 is a sample of contract risk.

Figure 4.0 Sample of Contract Risk. Image from PMMS Contract Management Guidelines

Post-award contract management practices

Elements to be considered during the post-award contract management practices.

Contract Administration and Record Keeping

The management of the contract and changes to the contract document. It is required to manage the design specification, contractual agreement, variations, final accounts, claims and disputes

Contract Management Roles and Responsibilities

one of the elements to be considered in developing a contract management plan is the type and level of resource to manage the contract. Ensuring that the right people are in place to carry out the contract management activities is crucial. The below image outlines the typical roles in roles and responsibilities split between procurement and the operational contract manager:

Figure 5.0 Sample roles & responsibilities split between procurement and operational contract manager

Managing Relationships

Relationship management underpins successful contract management. A good relationship should have been established in the earlier stages of the procurement lifecycle. Relationship management main goal is to keep the relationship between the two parties open and constructive to resolve and identify problems early.

Figure 6.0 Sample of A typical approach to managing relationships adopted in a long-term services contract.

Performance Management

The process involves performance monitoring, performance assessment and taking appropriate action. It must be undertaken throughout the contract lifecycle for all contracts (simple or complex contract), Along with performance indicators and standards, arrangements for monitoring and assessment should have been set out and agreed in the contract along with the action that would result from non-performance.

Contract Monitoring

Focuses on collecting and analyzing information to provide assurance to the customer that progress is being made in line with agreed timeframes and towards providing the contract deliverables.

Negotiating Contract Variations

Provisions to allow and regulate reasonable contract variations should be a standard feature of all contracts. The ability to vary the contract should be directed or controlled by the customer and should only occur in defined circumstances. Variations should be undertaken in the line of change management. All the variations have the potential to affect the viability and scope of the contracts.

Managing Contract Disputes

Many disagreements and disputes arise when the parties cannot agree on issues related to the interpretation of contract provisions, the definition of deliverables, meeting performance standards and/or the effect of unexpected events. what a dispute is and when it is deemed to have occurred is defined in the contract, often in a dispute resolution clause. Avoiding the escalation of disagreements can impact on contract deliverables and reduce the costs to both parties. Dispute resolution processes may be a negotiation, facilitative or determinative or, in some cases, a combination of these.

Figure 7.0 Dispute Resolution process

Contract Completion

The most common way a contract ends is where each party performs according to the terms of the contract, that is, the contract is discharged through due performance.

Section 3 - Critical Success Factors for Good Contract Management

The following factors are essential for good contract management.

• GOOD PREPARATION - An accurate assessment of project goal helps create a clear output-based specification. An Effective evaluation procedure and selection will ensure that the contract is awarded to the right service provider.
  
• THE RIGHT CONTRACT - The contract is the foundation for the relationship. It should include aspects such as allocation of risk, the quality of service required, and value for money, as well as procedures for communication and dispute resolution.
  
• SINGLE BUSINESS FOCUS - Each party needs to understand the objectives and business of the other. The customer must have clear business objectives, coupled with a clear understanding of why the contract will contribute to them; the service provider must also be able to achieve their objectives, including making a reasonable margin.
  
• SERVICE DELIVERY MANAGEMENT AND CONTRACT ADMINISTRATION - Effective governance will ensure that the customer gets what is agreed, to the level of quality required. The performance under the contract must be monitored to ensure that the customer continues to get value for money.
  
• RELATIONSHIP MANAGEMENT - Mutual trust and understanding, openness, and excellent communications are as important to the success of an arrangement as the fulfillment of the formal contract terms and conditions.
  
• CONTINUOUS IMPROVEMENT - Improvements in price, quality or service should be sought and, where possible, built into the contract terms.
  
• PEOPLE SKILLS AND CONTINUITY - There must be people with the right interpersonal and management skills to manage these relationships on a peer-to-peer basis and at multiple levels in the organization. Clear roles and responsibilities should be defined, and continuity of key staff should be ensured as far as possible. A contract manager (or contract management team) should be designated early on in the procurement process.
  
• KNOWLEDGE- Those involved in managing the contract must understand the business fully and know the contract documentation inside out ("intelligent customer" capability). This is essential if they are to understand the implications of problems (or opportunities) over the life of the contract.
  
• FLEXIBILITY -Management of contracts usually requires some flexibility on both sides and a willingness to adapt to the terms of the contract to reflect a rapidly changing world. Problems are bound to arise that could not be foreseen when the contract was awarded.
  
• CHANGE MANAGEMENT - Contracts should be capable of change (to terms, requirements and perhaps scope) and the relationship should be strong and flexible enough to facilitate it.
  
• PROACTIVITY - Good contract management is not reactive, but aims to anticipate and respond to business needs of the future.
  

Benefits for efficient contract management through guidelines application

• Improved quality of service and customer focus.
  
• Greater value for money and cost control.
  
• Reduced crisis management.
  
• Decreased level of risk.
  
• Effective implementation in relation to risk
  
• Continued improvement through incentive based contracting and risk sharing
  
• Early identification and resolution of poor contract performance and associated problems
  
• Controls over performance, costs, and standards
  
• Identification of areas of improvement to benefit the future contracts.

Business Case Example for Contract Management Guidelines and Administration

Contracts are increasingly described as a framework for business operations. More than just a semantics this is a move towards portfolio agreements that embed the relational components needed to achieve mutual objectives and the behaviors that contribute to success. Public and private organizations realize the need for contract management guidelines and administration. Some of the public institutions who use contract guidelines to drive efficiency improvements in project delivery are the following:

• Best Practice Guide for Tendering and Contract Management, Government of Australia
  

http://webcache.googleusercontent.com/search?q=cache:BIUuTlbFriYJ:www.wellington.vic.gov.au/files/a708f74e-1c2f-4365-8b53-a1d300a96e05/VCCI-Best-Practice-Guide-for-Tendering-and-Contract-Management.pdf+&cd=1&hl=en&ct=clnk&gl=dk

• Good practice contract management framework, National Audit Office, United Kingdom
  

https://www.nao.org.uk/wp-content/uploads/2016/12/Good_practice_contract_management_framework.pdf

• Project and Contract Management Guidelines, Republic of Mauritius November 2015
  

http://webcache.googleusercontent.com/searchq=cache:3snkvFu8gkkJ:ppo.govmu.org/English/Documents/Project%2520and%2520Contract%2520Management%2520Guideline_Version%25201_draft%2520for%2520comment.pdf+&cd=1&hl=en&ct=clnk&gl=dk

Furthermore, in 2013 the Business Integrity’s contract management survey conducts a survey in the importance of contract management benefits.

Discussion

Generally, the project management people have a general perception that contract is purely a legal framework, that the contract drafting must be left to a specialist like lawyers. A perception that comes with a considerable risk, as it removes business people from the business document that underpins the relationship.Developing appropriate and valuable input to contract formation is a skill that is honed throughout a business career.The only way a contract can effectively represent and support the desired relationship is if it is created with input from the business people involved. They could help to ensure that contracts are designed, developed, negotiated and managed in a way that is ‘fit for purpose’ because of the knowledge, experiences, and challenges they encountered in the day to day transaction.

The significant impact of contractual issues affecting the overall performance of an organization leads to a realization that proper contract management guidance and administration is necessary to ensure minimal contractual risk, claim dispute and as a project management tool for many individuals who find themselves undertaking project management responsibilities with little or no preparation.

A good practice in contract management and administration through the guidelines application has the capacity to increase revenue and opportunities, decrease cost and enhance service delivery for the project and the organization.

Conclusion

All over the world projects are losing billions of monies due to poor contract. However, the problem is not the contract failing rather than the poor contract management practices.

The issues of non-compliance with the rules of legislation can be attributed to a general lack of knowledge with regards to managing projects or proper contract administration. Guidance is required to ensure adherence to the laws, to support the application of good practice within a project to avoid project/contract cost overruns and delays, and to support the development and application of an effective overall organizational approach to contract management.

Apart from the lack of knowledge with regards to proper contract administration, the other factors affecting poor contract management like the impact of globalization creating a thicker volume of the document, strict government rules and legislation, technological innovation like BIM, and speed of change in contracting norm.Proper contract management guidelines would enable the contract/project manager to manage the contracts more effectively and efficiently.

Annotated

• Chartered Institute of Procurement and Supply (CIPS) - CIPS is the premier global organization serving the procurement and supply profession. Dedicated to promoting best practice in contract, procurement, and supply. https://www.cips.org/
  

• International Association for Contract and Commercial Management (IACCM) - A non-profit professional organization dedicated in raising the global standards in the contract and commercial management. Its library contains over 7000 research reports, tools, templates, articles, news, and discussions relating to the entire contract lifecycle of Contract & Commercial Management.

• International Federation of Consulting Engineers (FIDIC) - represents the consulting engineer globally. It publishes international standard forms of contracts for works and for clients, consultants, sub-consultants, joint ventures, and representatives, together with related materials such as standard pre-qualification forms.