Contract Management

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BizMentorsTM Pvt. Ltd. 1

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Introduction
• Participants are grouped in pairs and introduce

their partner on the basis of his / her experience
with Contract Management.
– How familiar am I with the contracting process?
– How many problems have I encountered?
– How often have I faced difficulties for which I
needed my superior’s support?
– What are my strengths and weaknesses in
contract management?

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Share Your Expectations
• Find out about the participants’ expectations using

question cards
• Participants visualize their expectations on the metaplan
board and explain them briefly.

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Program Objectives
• To know and understand the significance of a systematic

approach to contract management.
• To have command of all processes and techniques
involved.
• To apply the processes and techniques on trial cases.
• To know and be confident of handling all of one’s tasks
and responsibilities in contract management.

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Fundamentals of
Contracts

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What is a Contract?
• A contract is an agreement between 2 parties, wherein,

one party performs a pre-agreed delivery of supply or
service to the other, in consideration of which the
receiver of the delivery compensates the delivering
party in a pre-agreed manner.
• Thus a contract involves –

• Two Parties in agreement.
• A pre-agreed delivery
• A pre-agreed compensation for the delivery

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What is Contract Management?

• Contract management is a series of processes designed
to establish the rights & duties of each party to the
contract, and to ensure contracted delivery within agreed
time, quality & budget parameters.
• Contract management consists of the following major
phases in its life cycle –
• Request for Proposal / Tender (wherein complete
specifications of required delivery are provided as
criteria for selection of the vendor)

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(contd..)
• Vendor evaluation, selection and issue of contract,

• Monitoring, Tracking and Control of Delivery,
• Final Payment (after establishing completion) and
Closure.

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• Contract Management may also encompass the following

phases in certain cases –
• Course correction, when delivery does not proceed as
agreed under the contract, through dispute resolution.
• Contract Review / Extension – to accommodate
changes necessitated by Business
• Premature termination of contract when Dispute
Resolution cannot be effected.

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Components of a contract

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Components of a contract
• Contract Contents – all pertinent deliverables, timing,

deadlines, results-oriented reporting & expected
outcomes, with measurable indicators
• Contract Management Processes – monitoring &
tracking to ensure consistent adherence to agreed
performance parameters right through the execution.
• Contract Deliverables and Documents– at every
milestone when contracted product / service
installments of satisfactory quality are delivered at
appointed time and cost.
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Types of Contracts

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Types of Contracts – based on pricing
As per PMBOK, contract types based on pricing strategy

are:
Fixed Price Contracts
Firm Fixed Price Contracts (FFP)
Fixed Price Incentive Fee Contracts (FPIF)
Fixed Price with Economic Price Adjustment Contracts
(FP-EPA)

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Cost-Reimbursable Contracts
Cost Plus Fixed Fee Contracts (CPFF)
Cost Plus Incentive Fee Contracts (CPIF)
Cost Plus Award Fee Contracts (CPAF)
Time and Material Contracts

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Fixed Price Contracts
The category of contracts involves setting a fixed total price
for a defined product or service to be provided. Fixed-price
contracts may also incorporate financial incentives for
achieving or exceeding selected project objectives, such as
schedule delivery dates, cost and technical performance, or
anything that can be quantified and subsequently
measured.

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Fixed Price Contracts (contd…)
Sellers under fixed-price contracts are legally obligated to
complete such contracts, with possible financial damages if
they do not. Under the fixed-price arrangement, buyers must
precisely specify the product of services being procured.
Changes in scope can be accommodated, but generally at
an increase in contract price.

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Firm Fixed Price Contracts (FFP)

The most commonly used contract type is the FFP. It is
favored by most buying organizations because the price for
goods is set at the outset and not subject to change unless
the scope of work changes. Any cost increase due to
adverse performance is the responsibility of the seller, who
is obligated to complete the effort.

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Firm Fixed Price Contracts (FFP) (contd…)
Under the FFP contract, the buyer must precisely specify
the product or services to be procured, and any changes to
the procurement specification can increase the costs to the
buyer.
Example: Software Package for $25,000. The payment will

$25,000 regardless of the seller cost.

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Fixed Price Incentive Fee Contracts (FPIF)

This fixed-price arrangement gives the buyer and seller
some flexibility in that allows for deviation from
performance, with financial incentives tied to achieving
agreed to metrics. Typically such financial incentives are
related to cost, schedule, or technical performance of the
seller.

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Fixed Price Incentive Fee Contracts (FPIF) (contd…)

Performance targets are established at the outset, and the
final contract price is determined after completion of all
work based on the seller's performance. Under FPIF
contracts, a price ceiling is set, and all costs above the
price ceiling are the responsibility of the seller, who is
obligated to complete the work.

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Fixed Price with Economic Price Adjustment Contracts (FP-
EPA)
This contract type is used whenever the seller's
performance period spans a considerable period of years,
as is desired with many long-term relationships. It is a fixed-
price contract, but with a special provision allowing for pre-
defined final adjustments to the contract price due to
changed conditions, such as inflation changes, or cost
increases (or decreases) for specific commodities.

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Fixed Price with Economic Price Adjustment Contracts (FP-
EPA) (contd…)
The EPA clause must relate to some reliable financial index

which is used to precisely adjust the final price. The FP-
EPA contract is intended to protect both buyer and seller
from external conditions beyond their control.

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Cost-Reimbursable Contracts
This category of contract involves payments (cost
reimbursements) to the seller for all legitimate actual costs
incurred for completed work, plus a fee representing seller
profit. Cost-reimbursable contracts may also include
financial incentive clauses whenever the seller exceeds, of
falls below, defined objectives such as costs, schedule, or
technical performance targets.

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Cost-Reimbursable Contracts (contd…)

Cost-reimbursable contract gives the project flexibility to
redirect a seller whenever the scope of work cannot be
precisely defined at the start and needs to be altered, or
when high risks may exist in the effort.

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Cost Plus Fixed Fee Contracts (CPFF)
The seller is reimbursed for all allowable costs for
performing the contract work, and receives a fixed fee
payment calculated as a percentage of the initial estimated
project costs. Fee is paid only for completed work and does
not change due to seller performance. Fee amounts do not
change unless the project scope changes.

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Cost Plus Fixed Fee Contracts (CPFF) (contd..)
Example: If your cost ceiling is $80,000 and the fixed fee is

$8,000 for a total contract value of $88,000, the seller will
be reimbursed for cost incurred up to, but not
exceeding,$90,000 and will receive $8,000 as a fee. If the
seller spends more than $80,000 the reimbursement will be
$80,000 plus $8,000 fee. If the seller spent $70,000 the
reimbursement will be $70,000 and the fee will be $8,000
as agreed in the contract.

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Cost Plus Incentive Fee Contracts (CPIF)
The seller is reimbursed for all allowable costs for
performing the contract work and receives a predetermined
incentive fee based upon achieving certain performance
objectives as set forth in the contract. IN CPIF contracts, if
the final costs are less or greater than the origin estimated
costs, then both the buyer and seller share costs from the
departures based upon a pre-negotiated cost sharing
formula, e.g., an 80/20 split over/under target costs based
on the actual performance of the seller.

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Cost Plus Incentive Fee Contracts (CPIF) (contd…)

To achieve the incentive, in CPIF contracts, the seller is
paid his target cost plus an initially negotiated fee plus a
variable amount that is determined by subcontractor the
target cost from the actual cost, and multiplying the
difference by the buyer ratio.

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Cost Plus Incentive Fee Contracts (CPIF) (contd…)
Formula: Final payout = target cost + fixed fee + buyer
share ratio * (actual cost - target cost)
If there is a ceiling price involved and actual cost is more
than the ceiling final payout = target cost + fixed fee + buyer
share ratio * (ceiling price - target cost)
Example: If the final costs are higher than the target, say 1100,
the buyer will pay 1000 + 100 + 0.8 *(1100-1000)=1180 (seller
earns 80 which is less than if he had reached the target cost).

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Cost Plus Award Fee Contracts (CPAF)
The seller is reimbursed for all legitimate costs, but a
majority of the fee is only earned based on the satisfaction
of certain broad subjective performance criteria and
incorporated into the contract. The determination of fee is
based solely on the subjective determination of seller
performance by the buyer, and is generally not subject to
appeals.

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Cost Plus Award Fee Contracts (CPAF) (contd…)
In other words, a contractor is offered an incentive award
amount that may be earned (in part of full) based on the
excellence displayed in contract completion time, cost,
effectiveness, quality of work, and technical ingenuity.
Example: Preparation of the technical modification to improve

the quality of the assembly line. The seller commits to reimburse
all cost including an incentive of $10,000, of which $5,000 will be
based on the cost effectiveness of this contract.

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Time & Material Contracts (T&M)
Time and material contracts are a hybrid type of contractual
arrangement that contain aspects of both cost-reimbursable
and fixed-price contracts. They are often used for staff
augmentation, acquisition of experts, and any outside
support when a precise statement of work cannot be
quickly prescribed.
These types of contracts resemble cost-reimbursable

contracts in that they can be left open ended and may be
subject to a cost increase for the buyer.
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Time & Material Contracts (T&M) (contd…)
The full value of the agreement and the exact quantity of
items to be delivered may not be defined by the buyer at
the time of the contract award. Thus, T&M contracts can
increase in contract value as if they were cost-reimbursable
contracts.

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Many organizations require not-to-exceed values and time
limits placed in all T&M contracts to prevent unlimited cost
growth. Consequently, T&M contracts can also resemble
fixed unit price arrangements when certain parameters are
specified in the contract.
Unit labor or material rates can be preset by the buyer and

seller, including seller profit, when both parties agree on the
values for specific resource categories.

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Example 1: Business consultant to an hourly rate of $150.

The consultant activity is limited to 500 hours.

The consultant activity is limited to $10,000.

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Contract Risk by type
BUYER
High Low
T&M CPFF CPAF CPIF FPEPA FPIF FFP
Low High
SELLER

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As per World Bank guidelines, contract types based on

pricing strategy are:
Lump Sum Contract

Time based Contract
Retainer and Contingency (Success) fee Contract
Percentage Contract
Indefinite Delivery Contract (Price Agreement)

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Lump Sum Contract
• Used mainly for assignments in which the content and the

duration of the services and the required output of the
consultants are clearly defined.
• Widely used for simple planning and feasibility studies,
environmental studies, detailed design of standard or
common structures, preparation of data processing
systems, and so forth.

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Lump Sum Contract (contd…)
• Payments are linked to outputs (deliverables), such as

reports, drawings, bills of quantities, bidding documents,
and software programs.
• Easy to administer because payments are due on clearly
specified outputs.

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Time based Contract

• Appropriate when it is difficult to define the scope and the
length of services.
• This type of contract is widely used for complex studies,
supervision of construction, advisory services, and most
training assignments.
• Payments are based on agreed hourly, daily, weekly, or
monthly rates for staff (who are normally named in the
contract) and on reimbursable items using actual expenses
and/or agreed unit prices.
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Time based Contract (contd…)

• The rates for staff include salary, social costs, overhead,
fee (or profit), and, where appropriate, special allowances.
• This type of contract shall include a maximum amount of
total payments to be made to the consultants. This ceiling
amount should include a contingency allowance for
unforeseen work and duration, and provision for price
adjustments, where appropriate.

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Time based Contract (contd…)
• Time-based contracts need to be closely monitored and

administered by the client to ensure that the assignment is
progressing satisfactorily, and payments claimed by the
consultants are appropriate.

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Retainer and Contingency (Success) fee Contract
• Retainer and contingency fee contracts are widely used

when consultants (or SMEs) are required for a specialised
work for an unknown length of time.
• The remuneration of the Consultant includes a retainer and
a success fee

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Percentage Contract
• They are normally used for procurement and inspection

agents. Percentage contracts directly relate the fees paid
to the Consultant to the estimated or actual project
construction cost, or the cost of the goods procured or
inspected.
• The contracts are negotiated on the basis of market norms
for the services and / or estimated staff-month costs for the
services, or competitively bid.
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Percentage Contract (contd…)
• It should be borne in mind that in the case of architectural

or engineering services, percentage contracts implicitly
lack incentive for economic design and are hence
discouraged.
• Therefore, the use of such a contract for architectural
services is recommended only if it is based on a fixed
target cost and covers precisely defined services (for
example, not works supervision).
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Indefinite Delivery Contract (Price Agreement)

These contracts are used when Borrowers need to have "on
call" specialized services to provide advice on a particular
activity, the extent and timing of which cannot be defined in
advance.
• These are commonly used to retain "advisers" for
implementation of complex projects (for example, dam
panel), expert adjudicators for dispute resolution panels,
institutional reforms, procurement advice, technical
troubleshooting, and so forth, normally for a period of a
year or more.
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Indefinite Delivery Contract (Price Agreement) (contd…)
• The Borrower and the firm agree on the unit rates to be

paid for the experts, and payments are made on the basis
of the time actually used.

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Types of Contracts – based on
deliverables
Contracts that result in material deliverables are:
• R&D Contracts. (Ex. Ap Labs, Various Research Labs of
Educational Institutions)
• Design Contracts. (Ex. Infosys, Wipro, etc. undertaking
design of software modules for IBM, Microsoft, etc.).
• Product development Contracts. (Ex. ASIC chip designing
companies undertaking design work for Apple, Samsung,
Quallcom, etc.)
• Prototyping Contracts. (Ex. Small Prototyping companies
undertaking work for auto giants).

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deliverables (Contd.)
Contracts that result in material deliverables are:
• Process design & Process validation Contracts. (Ex.
Auditing companies validating accounts of corporate clients).
• Testing & Certification Contracts. (Ex. Lloyds certifying
quality of export consignments).
• Mass Production (Supply of Goods) contracts. (Ex.
Suppliers of auto components to Tata Motors, etc.)
• Procurement Contracts. (Ex. Procurement Agents for buying
commodities from China).

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The other type are Services Contracts for providing all types
of outsourced services such as –
• Security services,
• Consulting,
• Training,
• Designing,
• Financial services,
• Brokerage,
• Recruitment,
• Sales, Marketing & Advertisement,
• PR & Event Management,
• etc… TM
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Contracts based on deliverables may also include –

• Labor contracts (body shopping – no responsibility for
delivery executed by the labor).
• Providing manpower for various areas of work like
construction, security, IT services, house keeping,
material handling, etc. (with responsibility for delivery
executed by the labor).

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Tea Break

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Procurement in
Contracts

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Procurement in Contracts
Thus, contracts involve procurement of any of the following –

Inventions / Products of Research (in R&D Contracts).
• Designs of Products (in product development contracts).
• Supplies of Goods
• Supplies of Services
• Supplies of Labor
Such procurement may be based on any of the pricing

strategies studied earlier.
Procurement contracts need to follow certain processes to be
effective.
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Procurement Contracts
in Projects

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Procurement Contracts in Projects

Contract and Procurement Management examines the
process by which goods and services are acquired in the
project environment, involving the following knowledge
areas:
– Contract law;
– Contracting and procurement strategies;
– Source selection,
– Contract type identification;
– Product liability and risk;

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Procurement Contracts in Projects

(contd…)
– Tender documents, invitation to bid, bid responses and
evaluation;
– Contract risk assessment; and
– Contract negotiation.

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Case Study-1 – Transporter Problem

Identify possible root causes for the
problem in this contract, and the
solution alternatives to salvage this
contract.

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Laws of Contracts

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Indian Contract Law

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Indian Contract Law
• Indian Contract Act 1872 forms the foundation

• The Act lays down the general principles relating to
formation, performance and enforceability of contracts and
the rules relating to certain special types of contracts like,
Indemnity and Guarantee; Bailment and Pledge, and
Agency.
• “Agreement” is enforceable by law
• A contract is considered valid if it is made with the free
consent of both parties (competent and with legal capacity)

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Indian Contract Law
• Stipulations for remedies against breach

• Suit for rescission revocation
• Suit for damages
• Suit upon “quantum merit”
• Non-Compete Clause is considered void and not
enforceable

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Indian Contract Law
The principal features of the Law of Contract are:-

• The parties to the contract make the law for
themselves.
• The Act is not exhaustive since it does not take into its
purview all the relevant legislations.
• It does not override customs or usages.
• The Law of Contracts is not the whole law of
agreements.

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Indian Contract Law
As per the Indian Contract Act,1872, a "contract" is an

agreement enforceable by law. The agreements not
enforceable by law are not contracts. An "agreement"
means 'a promise or a set of promises' forming
consideration for each other. And a promise arises when a
proposal is accepted. By implication, an agreement is an
accepted proposal. In other words, an agreement consists
of an 'offer' and its 'acceptance'.

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Indian Contract Law
An "offer" is the starting point in the process of making an

agreement. Every agreement begins with one party
making an offer to sell something or to provide a service,
etc. When one person who desires to create a legal
obligation, communicates to another his willingness to do
or not to do a thing, with a view to obtaining the consent of
that other person towards such an act or abstinence, the
person is said to be making a proposal or offer.

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Indian Contract Law
An agreement emerges from the acceptance of the offer.

"Acceptance" is thus, the second stage of completing a
contract. An acceptance is the act of manifestation by the
offeree of his assent to the terms of the offer. It signifies
the offeree's willingness to be bound by the terms of the
proposal communicated to him. To be valid an acceptance
must correspond exactly with the terms of the offer, it must
be unconditional and absolute and it must be
communicated to the offeror.

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Indian Contract Law

An "agreement" is a contract if 'it is made by the free
consent of parties competent to contract, for a lawful
consideration and with a lawful object, and is not expressly
declared to be void'. The contract must be definite and its
purpose should be to create a legal relationship. The
parties to a contract must have the legal capacity to make
it. According to the Contract Act, " Every person is
competent to contract who is of the age of majority
according to the law to which he is subject, and who is of a
sound mind, and is not disqualified from contracting by any
law to which he is subject".
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Indian Contract Law

Thus, minors; persons of unsound mind and Persons
disqualified from contracting by any law are incompetent to
contract.

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Legal Classification of
Contracts
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Legal Classification of Contracts
Classification of Contracts
• On the basis of validity • On the basis of performance

Valid Contract Executed Contract
Void Contract Executory Contract
Voidable Contract Unilateral Contract
Void Agreement Bilateral Contract
• On the basis of formation

Express Contract
Implied Contract
Quasi Contracts
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Valid contract: An agreement which has all the essential
elements of a contract is called a valid contract. A valid contract
can be enforced by law.
Voidable contract [Section 2(i)]: An agreement which is

enforceable by law at the option of one or more of the parties
thereto, but not at the option of other or others, is a voidable
contract. If the essential element of free consent is missing in a
contract, the law confers right on the aggrieved party either to
reject the contract or to accept it. However, the contract
continues to be good and enforceable unless it is repudiated by
the aggrieved party.
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Void contract [Section 2(j)]: A void contract is a contract

which ceases to be enforceable by law. A contract when
originally entered into may be valid and binding on the
parties. It may subsequently become void.
Void agreement: An agreement not enforceable by law is

said to be void. Such agreement does not confer any right
to any of the parties to it. The agreement, in such a case,
is void-ab-initio (from the very beginning). Such an
agreement does not result in a contract at all.
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Unenforceable contracts: Where a contract is good in substance
but because of some technical defect cannot be enforced by law
is called unenforceable contract. These contracts are neither
void nor voidable.
Illegal agreement: An agreement is illegal if it is forbidden by law;

or is of such nature that, if permitted, would defeat the
provisions of nay law or is fraudulent; or involves or implies
injury to a person or property of another, or court regards it as
immoral or opposed to public policy. These agreements are
punishable by law. These are void-ab-initio. “All illegal
agreements are void agreements but all void agreements are
not illegal.” BizMentorsTM Pvt. Ltd.
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Express contract: Where the terms of the contract are

expressly agreed upon in words (written or spoken) at the
time of formation, the contract is said to be express
contract.
Implied contract: An implied contract is one which is

inferred from the acts or conduct of the parties or from the
circumstances of the cases. Where a proposal or
acceptance is made otherwise than in words, promise is
said to be implied.
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Quasi contracts: A quasi contract is created by law. Thus,

quasi contracts are strictly not contracts as there is no
intention of parties to enter into a contract. It is legal
obligation which is imposed on a party who is required to
perform it. A quasi contract is based on the principle that a
person shall not be allowed to enrich himself at the
expense of another.
Executed contract: An executed contract is one in which

both the parties have performed their respective obligation.
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Executory contract: An executory contract is one where

one or both the parties to the contract have still to perform
their obligations in future. Thus, a contract which is
partially performed or wholly unperformed is termed as
executory contract.

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Unilateral contract: A unilateral contract is one in which
only one party has to perform his obligation at the time of
the formation of the contract, the other party having fulfilled
his obligation at the time o the contract or before the
contract comes into existence.
Bilateral contract: A bilateral contract is one in which the

obligation on both the parties to the contract is outstanding
at the time of the formation of the contract. Bilateral
contracts are also known as contracts with executory
consideration.
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International Law of
Contracts

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International Law of Contracts
1980 - United Nations Convention on Contracts for the

International Sale of Goods (CISG)
Date of adoption: 11 April 1980
Purpose: The purpose of the CISG is to provide a modern,

uniform and fair regime for contracts for the international
sale of goods. Thus, the CISG contributes significantly to
introducing certainty in commercial exchanges and
decreasing transaction costs.

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The terminologies and components are the same as both

Indian and International Law of Contracts. However,
certain business circumstances render an international law
relevant.
In the following slides, we will see the relevance and the

particularities of International Law of Contracts

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Relevance
The adoption of the CISG provides modern, uniform
legislation for the international sale of goods that would
apply whenever contracts for the sale of goods are
concluded between parties with a place of business in
Contracting States. In these cases, the CISG would apply
directly, avoiding recourse to rules of private international
law to determine the law applicable to the contract, adding
significantly to the certainty and predictability of
international sales contracts.

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Relevance (contd…)
Moreover, the CISG may apply to a contract for international
sale of goods when the rules of private international law
point at the law of a Contracting State as the applicable
one, or by virtue of the choice of the contractual parties,
regardless of whether their places of business are located
in a Contracting State. In this latter case, the CISG
provides a neutral body of rules that can be easily
accepted in light of its transnational nature and of the wide
availability of interpretative materials.

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Key Aspects
The CISG governs contracts for the international sales of
goods between private businesses, excluding sales to
consumers and sales of services, as well as sales of certain
specified types of goods. Certain matters relating to the
international sales of goods, for instance the validity of the
contract and the effect of the contract on the property in the
goods sold, fall outside the CISG’s scope.
The second part of the CISG deals with the formation of the
contract, which is concluded by the exchange of offer and
acceptance.
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Key Aspects (contd..)

The third part of the CISG deals with the obligations of the
parties to the contract. Obligations of the sellers include
delivering goods in conformity with the quantity and quality
stipulated in the contract, as well as related documents,
and transferring the property in the goods. Obligations of
the buyer include payment of the price and taking delivery
of the goods.

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Key Aspects (contd..)

In addition, this part provides common rules regarding
remedies for breach of the contract. The aggrieved party
may require performance, claim damages or avoid the
contract in case of fundamental breach. Additional rules
regulate passing of risk, anticipatory breach of contract,
damages, and exemption from performance of the
contract. Finally, while the CISG allows for freedom of form
of the contract, States may lodge a declaration requiring
the written form.

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Contract Language:
Negotiation of international contracts usually involves use of
a foreign language (for at least one of the parties).
Translating technical terms
The CISG only exists in six languages (Arabic, Chinese,

English, French, Russian and Spanish) unofficial
translations must be made for those who need them
Interpretation of terms can differ from country to country
even for speakers of the same language
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Contract Language: (contd…)

The contract’s legal obligations can be misunderstood and
interpreted differently by the two parties which can result in a
dispute to be settled in court

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Cultural Aspects
The role of the contract can be viewed differently in different
cultures
Relational contracting is rooted in group-oriented societies

where personal ties built on trust matter more than written
documents and where the preferred mode of settling
disputes is out of court

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Cultural Aspects (contd…)

Arms length contracting in which the agreement is
paramount is the norm in individualistic societies where the
preferred mode of settling disputes is through litigation

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Contractual disputes
In the basic transaction of buying / selling goods, at least
one of the contracting firms will find its rights governed by
foreign law, adding to the legal risk in a number of ways.
1. The distance and unfamiliarity of the law and the cultural

environment
2. The danger of what contract law in the foreign
jurisdiction stipulates

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Contractual disputes (contd…)

3. The possibility of going through the courts in the foreign
country
4. The problems faced of getting a foreign court judgment
enforced in the firm’s own country

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Contractual disputes (contd…)

Contracts between firms based in different countries may
specify a choice of law to govern their contracts, this will
also dictate the forum in which disputes will be resolved.
Litigation can result in extremely costly damage payments

which themselves lead to a higher cost of liability
insurance. Additionally it brings undesired bad publicity to
a firm, especially in high profile cases.

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Dispute Resolution
When the jurisdiction is clearly established in the contract,
the law of the jurisdictional area will apply for resolution in
courts
Out of court settlement by the parties

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Dispute Resolution (contd…)

Mediation: the introduction of a third party in an attempt to
settle differences
Arbitration: the submission of a dispute to a named person

or organization in accordance with the agreement

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Lunch Break

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Warm Up Game – Solve

Logic Puzzle- 1

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Case Study 2: Enron. What

were the factors, (both legal
and performance related), that
led to the failure of this
contract?

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Specifications of
Contracts

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Types and sources of specifications

• Specifications in a contract may arise from any or all of
the following sources –
– Technical / Functional Requirements.
– Transport and Handling Requirements.
– Quality / Warranty Requirements
– Safety Requirements.
– Environmental Requirements.
– Legal Requirements.
– Schedule Requirements.
– Commercial Requirements.
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• Specifications emanating from Functional Requirements –
– Dimensions
– Performance / Capacity
– Etc.
• Specifications emanating from Transport and Handling
Requirements –
– Packaging
– Storage / Stacking
– Weather protection
– Etc.
TM
• Specifications emanating from Quality / Warranty

Requirements –
• Input Material Specifications
• Test Specifications for inputs and outputs
• Usage specifications / instructions.
• Life
• Specifications emanating from Safety Requirements –
• Input Material and Source Specifications
• Storage / Stacking / Usage Specifications
TM

• Specifications emanating from Environmental
Requirements –
• Prohibition / Caution in usage
• Storage / Usage Specifications
• Specifications curtailing hazardous inputs and
packaging materials.
• Specifications on disposability.
• Specifications emanating from Legal Requirements –
• Penal Specifications for defaults / non-compliances.
• Dispute Related Specifications
TM
• Specifications emanating from Schedule Requirements –

• Time-line Specifications.
• Penal / Bonus Specifications for Failing / Bettering
dead-lines.
• Specifications emanating from Commercial Requirements –
• Prices and Payment Terms.
• Charges and Deductions.
• Taxes and Duties.

TM
Tea Break

TM
Vendor Selection
procedures.

TM
Vendor Selection
Start procedures.
Need Identification
Freeze Requirements
Buy Make
Make / Buy
Decision
BizMentorsTM Pvt. Ltd. Production 107

TM
Vendor Selection
procedures
Buy (contd…)
RFP / RFQ
Vendor Search
Receive Proposals
Evaluate and Shortlist Vendors Negotiate

Disagree
Agree
Contract
TM
Vendor Selection procedures.
Analyze Business Requirements

Lack of effort, poor planning or taking shortcuts will seriously
jeopardize the success of the vendor selection process.
Assemble an Evaluation Team, Define the Product, Material
or Service, Define the Technical and Business
Requirements, Define the Vendor Requirements, Publish
a Requirements Document for Approval

TM
Make / Buy Analysis

A Make or Buy analysis is a general management technique
used to determine whether a particular work / items can
best be accomplished by the in-house resources or must
be purchased from outside sources. Sometimes,
capability may exist within the organisation but may be
committed to working on other assignments, in which
case, the organisation need to source such work / items
from outside the organisation in order to meet its schedule
commitments.
TM
Make / Buy Analysis (contd…)

Budget constraints may influence make-or-buy decisions. If
a buy decision is made, then a further decision of whether
to purchase or lease is also made. A make-or-buy
analysis should consider all related costs; both direct and
indirect support costs. For example, the buy-side of the
analysis includes both the actual out-of-pocket costs to
purchase the product, as well as the indirect costs of
supporting the purchasing process and purchased item.

TM
Vendor Search
The second step in the vendor selection process is to
execute a vendor search in order to compile a
comprehensive list of vendors that may be able to meet
the requirements as defined in the business analysis
phase
Compile a List of Possible Vendors, Select Vendors to
Request More Information From, Write a Request for
Information (RFI), Evaluate Responses and Create a
"Short List" of Vendors
TM

Request for Proposal (RFP) and Request for Quotation
(RFQ)
An RFP is used for services or complex products where
quality, service or the engineered final product will be
different from each vendor that is responding.
An RFQ is used for commodities, simple services or
straightforward/uncomplicated parts with little or no room
for product or service differentiation between responding
vendors. Negotiation points could include: delivery
schedules, packaging options, etc.

TM

Objectives of a RFP or RFQ
• Obtain detailed proposals in order to evaluate each vendors'
response so that the best interests of your company are met on
all fronts
• Leverage the competitive nature of the vendor selection
process to negotiate the best possible deal
• Ensure that the interests of all stakeholders within your
company will be met and a consensus reached
• Puts your company in control of the entire vendor selection
process and sets the selection rules up front
• Starts building the partnership between you and the vendor
right from the start
TM

Sections of RFP and RFQ
Submission Details, Introduction and Executive Summary,

Business Overview & Background, Detailed
Specifications, Assumptions & Constraints, Terms and
Conditions and Selection Criteria
Distribute the RFP/RFQ to Selected Vendors

TM

Proposal Evaluation and Vendor Selection
The main objective of this phase is to minimize human
emotion and political positioning in order to arrive at a
decision that is in the best interest of the company
Preliminary Review of All Vendor Proposals, Record

Business Requirements and Vendor Requirements,
Assign Importance Value for Each Requirement, Assign a
Performance Value for Each Requirement, Calculate a
Total Performance Score, Select the Winning Vendor

TM
Contract Negotiation Strategies

The final stage in the vendor selection process is developing
a contract negotiation strategy. The worst contract
negotiation objective is to bleed every last cent out of the
vendor for the lowest price. Remember, you want to
"partner" with your vendor so that both of you will meet
your corporate goals and objectives by signing the
contract.

TM

Strategies for Planning Contract Negotiations
List Rank Your Priorities Along With Alternatives, Know the
Difference Between What You Need and What You Want,
Know Your Bottom Line So You Know When to Walk
Away, Define Any Time Constraints and Benchmarks,
Assess Potential Liabilities and Risks, Confidentiality,
non-compete, dispute resolution, changes in requirements
and Do the Same for Your Vendor (i.e. Walk a Mile in
Their Shoes)

TM
Tendering & Vendor Selection
procedures.
• Closed Tenders
• Open Tenders
• Auctions
• Offers against enquiries.
• Past supplier relationships.
• Certification based selection.
• Specific capability / technology based selection.
• Monopoly vendors.

TM
Role Play-1: Selection of

Vendor for a tender
based supply Contract.

TM
Closing Round
• General impression questions

• Participants fill out a Personal training log, wherein they
undertake action projects for implementation of lessons
learnt at work.
• Feedback on Day-1

TM

TM

TM
Contract Mgt. Quiz on

Day-1 Lessons

TM
Contract Management processes
Contract Costing
Negotiation
Monitoring & Control of performance
Change Management
Risk Management

TM
Contract
Costing

TM
Components of Contract Costing

 Contract costing consists of –
 Target Costing for supplied goods / services
 Effort, and thereby cost, estimation for all the activities
involved. This includes any development activities
involved (such as designing, prototyping, testing etc.).
 Determine the distribution of the Budgeted costs,
phase-wise and activity-wise. This is required for
subsequent tracking and control of contract costs as
they are incurred. This is especially crucial, in
construction contracts, where contractual payments
are made phase-wise based on executed delivery.
BizMentorsTM Pvt. Ltd. 6/9/2012
127
TM
Target Costing
Target costing is the process of determining the

maximum allowable cost for a new product and then
developing a prototype that can be profitably made for
that maximum target cost figure. A number of
companies--primarily in Japan--use target costing,
including Compaq, Culp, Cummins Engine, Daihatsu
Motors, DaimlerChrysler, Ford, Isuzu Motors, ITT, NEC,
and Toyota etc.

128
TM
Target Costing
The target costing for a product is calculated by starting

with the product's anticipated selling price and then
deducting the desired profit.
Following formula or equation further explains this
concept:
Target Cost = Anticipated selling price – Desired profit
The product development team is then given the

responsibility of designing the product so that it can be
made for no more than the target cost.
129
TM
Target Costing
Determine Customer Wants and Price
Sensitivity
↓
Planned Selling Price is Set
↓
Target Cost is Determined As: Selling

Price Less Desired Profit
↓
Teams of Employees from Various
Areas and Trusted Vendors
Simultaneously

130
TM
Target Costing
↓
Determine
Determine
Design Necessary
Manufacturi
Product Raw
ng Process
Materials
↓
Costs are Considered Throughout this
Process. The Process Requires Trade-
offs to Meet Target Costs
↓
Once Target Cost is Achieved the
Manufacturing Begins and Product is
Sold
131
TM
Target Costing
The target costing approach was developed in
recognition of two important characteristics of markets and
costs. The first is that many companies have less control
over price than they would like to think. The market (i.e.,
supply and demand) really determines prices, and a
company that attempts to ignore this does so at its peril.
Therefore, the anticipated market price is taken as a given
in target costing. The second observation is that most of
the cost of a product is determined in the design stage.

132
TM
Target Costing
(contd…)
Once a product has been designed and has gone into

production, not much can be done to significantly reduce
its cost. Most of the opportunities to reduce cost come
from designing the product so that it is simple to make,
uses inexpensive parts, and is robust and reliable.

133
TM
Target Costing
If the company has little control over market price and little
control over cost once the product has gone into production,
then it follows that the major opportunities for affecting profit
come in the design stage where valuable features that
customers are willing to pay for can be added and where
most of the costs are really determined. So that it is where
the effort is concentrated--in designing and developing the
product. The difference between target costing and other
approaches to product development is profound. Instead of
designing the product and then finding out how much it costs,
the target cost is set first and then the product is designed so
that the target cost is attained.
134
TM
Target Costing
Example of Target Costing:
To provide a simple numerical example of target costing,
assume the following situations:
Handy Appliance Company feels that there is a market

niche for a hand mixer with certain new features. Surveying
the features and prices of hand mixers already in the
market, the marketing department believes that a price of
$30 would be about right for the new mixer. At that price,
marketing estimates that 40,000 of new mixers could be
sold annually.
135
TM
Target Costing
Example of Target Costing: (contd…)
To design, develop, and produce these new mixers, an

investment of $2,000,000 would be required. The company
desires a 15% return on investment (ROI). Given these
data, the target cost to manufacture, sell, distribute, and
service one mixer is $22.50 as calculated below:

136
TM
Target Costing
Example of Target Costing:
Projected sales (40,000 mixers $30 per mixer )

$1,200,000
Less desired profit (15% $2,000,000) $ 300,000
------------
Target cost for 40,000 mixers $9,00,000
=======
Target cost per mixer ($9,00,000 / 40,000 mixer)
$22.50

137
TM
Target Costing
Example of Target Costing: (contd…)
This $22.5 target cost would be broken into target cost for
the various functions: manufacturing, marketing, distribution,
after-sales service, and so on. Each functional area would
be responsible for keeping its actual costs within target.

138
TM
Target Costing
Target costing has the following main advantages or
benefits:
Proactive approach to cost management.
• Orients organizations towards customers.
• Breaks down barriers between departments.
• Implementation enhances employee awareness and
empowerment.
• Foster partnerships with suppliers.
• Minimize non value-added activities.
• Encourages selection of lowest cost value added
activities.
• Reduced time to market.
139
TM
Target Costing
Target costing approach has the following main
disadvantages or limitations:
•Effective implementation and use requires the
development of detailed cost data.
•Its implementation requires willingness to cooperate
•Requires many meetings for coordination
•Requires clarity of understanding of the solution
concept and its target cost in a common way by both
the offerer and the acceptor, failing which, it may lead
to attempts to bridge the cost gap through
compromises on various delivery parameters.
140
TM
Activity Based Costing

Activity-Based Costing (ABC) arose in the 1980s from the
increasing lack of relevance of traditional cost accounting
methods. The traditional cost accounting methods were
designed around 1870 - 1920 and in those days industry was
labor intensive, there was no automation, the product variety
was small and the overhead costs in companies were
generally very low compared to today. However, from the
1960s - particularly 1980s - this changed rapidly. For these
reasons, and more, traditional cost accounting has been
called everything from 'number 1 enemy of production' and
questions whether it is 'an asset or a liability' have been
raised.
141
TM
So what is really the difference between ABC and

traditional cost accounting methods? Despite the
enormous difference in performance, there are three
major differences:
• In traditional cost accounting it is assumed that cost

objects consume resources whereas in ABC it is
assumed that cost objects consume activities.

142
TM
(contd…)
• Traditional cost accounting mostly utilizes volume
related allocation bases while ABC uses drivers at
various levels.
• Traditional cost accounting is structure-oriented

whereas ABC is process-oriented.

143
TM
Consumption of resources versus consumption of

activities
ABC acknowledges that you cannot manage costs, you

can only managed what is being done and then costs will
change as a consequence. In traditional cost accounting,
however, the underlying assumption is that costs can be
managed, but as most managers have found out the hard
way - managing costs is almost impossible.

144
TM
The benefit of the ABC mindset is that it opens up for a

much wider array of measures when it comes to improving
productivity. By investigating systematically what is being
done, i.e. the activities, one will not only be able to identify
surplus capacity if it occurs, but also lack of capacity and
misallocation of capacity. A result of this might be that costs
are cut the traditional way, but it might as well lead to a
reallocation of capacity to where it is most needed which will
yield high productivity more effectively than the traditional
way.

145
TM
Construction Costing
Construction projects require a range of inputs, from labor

to various types of materials and tools. Identifying the
exact cost of all inputs for specific jobs can be
challenging. Costing techniques in construction
management require input workers on the job and solid
record-keeping. The activity-based costing and job
costing techniques can be especially useful for costing
construction projects

146
TM
Activity-Based Costing
Step 1
Write a list of all resources and materials that go into
performing each activity on a specific job.
Step 2
Write down the cost of each resource. Consult your purchase
receipts to determine the actual cost of materials for a
specific job, or calculate an average cost based on
purchase receipts for a specific period of time. Choose a
common, measurable unit of each resource, and calculate
the cost per unit.
147
TM
Activity-Based Costing (contd…)

Step 3
Write a list of the activities performed in the process of each
job, and determine exactly how much of each resource is
consumed by each activity. Multiply the per-unit cost of
each material by the amount of each material used in the
job to determine the total cost of materials. Add expenses
for direct labor and overhead to determine the total job
cost. Overhead consists of all rents, machinery payments,
office salaries and other costs that do not directly contribute
to completing a job.
148
TM
Job Costing
Step 1
Read employees' time cards or other records of labor-hours
to determine the labor cost of the specific job in question.
Calculate the effective wages of subcontractors and
salaried workers by dividing their salary or contract price
by the number of hours spent on the job in question.
Multiply the time each employee worked on the specific
job by his effective wage to calculate the exact wage
expense.

149
TM
Job Costing (contd…)

Step 2
Assign direct and indirect material costs to the specific job.
Classify materials, such as wood, steel and electrical
wiring, as direct materials; classify materials, such as
nails, screws and caulk, as indirect materials. Keep track
of all the materials used during each specific job, and
use purchase order receipts to determine the cost of all
materials used in the job.

150
TM
Job Costing (contd…)

Step 3
Calculate your overhead expenses for each job. Determine
a standard rate at which to assign overhead to individual
jobs. Because overhead expenses do not directly
contribute to the completion of specific jobs, it is
necessary to approximate the cost.
Step 4
Add the costs of materials, labor and overhead together to
determine the total job cost.
151
TM
Case Study: Carry Out

Costing of Hand Pump, using
the excel costing tool
provided and arrive at the
target price for supplies by
vendor.
TM
Negotiation
“Many a times, You don't get what you deserve,

You get what you negotiate”.
TM
What is Negotiation?
• A process for resolving disagreements,

• using give-and-take approach
• within the context of a particular relationship.
• A Process of bargaining that precedes an agreement.
• Negotiation occurs in all aspects of life
• With in & between individuals
• Intra-team & Inter-team negotiation
• Thus, to succeed in any Endeavour, learning the
nuances of negotiation is mandatory .

154
TM
What is Negotiation?
• Involves
• Sharing ideas and information
• Communication
• Understanding human behaviour
• Seeking a mutually acceptable outcome
• It is an attempted trade off between getting what

you want and keeping the relationship intact!

155
TM
Principles of Negotiation
• Principle 1: Separate people from the problem
• Separating the people from the problem means
separating relationship issues from substantive issues,
and dealing with them independently.
• Disentangle the people from the problem
• Deal with the people problem: acknowledge perceptions,
emotions
• Listen actively
• Speak to be understood
• Speak about yourself, not them
156
TM
• Principle 2 : Focus on interests not positions
• Negotiating about interests means negotiating about
things that people really want and need, not what they
say that want or need.
• Positions: What disputants maintain they want in a
negotiation: a particular price, job, work schedule, change
in someone else’s behavior, revised contract provision,
etc.
• Interests: Underlying desires or concerns that motivate
people in particular situations (May sometimes be the
same as their positions!)
157
TM
Example for Position vs interest
• Problem: barking dog

• My interpretation: my neighbor doesn’t care about my
needs
• My position: quiet the dog
• My interest: I need sleep
• Issue: how to control the barking

158
TM
Principle 3 : Invent options for mutual gains
• By focusing on interests, disputing parties can easily fulfill the
third principle--invent options for mutual gain.
• This means negotiators should look for new solutions that will
allow both sides to win, not just fight over the original positions
which assume that for one side to win, the other side must
lose.
• Brainstorm on variety of solutions
• Avoid assuming there’s a single solution
• Separate brainstorming from evaluation of options
• Don’t assume zero-sum conditions
• Think creatively.

159
TM
Principle 4 : Insist on objective criteria

• While not always available, if some outside, objective
criteria for fairness can be found, this can greatly simplify
the negotiation process.
• Fair standards: market value, precedent, blue book
value, professional standards, “best practice,” industry
average, equal treatment, etc.
• Fair procedures: e.g. last best offers, taking turns,
drawing lots

160
TM
Process of Negotiation
• Negotiation Process has 3 stages –
• Preparation
• Conduction
• Closing
• Conduction has 5 phases –
• Establishing relationship
• Clarification of issues
• Exchanges of interests
• Discussion on solutions
• Summary & Conclusion
161
TM
Negotiation Process-Preparation
• Know what you want -goal
• Assess Own Position and other side’s
• Use Johari window for situational analysis
• Know ( Estimate / Research ) what other side wants
• Collect relevant information-intelligence
• Agenda
• Clearly mentioning the time, date and place of the
meeting and the issues to be resolved.
• Set up the meeting

162
TM
Conduct Negotiation
• Establishing relationship
• A small talk to set the right ambience would facilitate
a good start;
• Clarification of issues
• The issues to be resolved and underlying
assumptions need to be clarified leaving no doubts
on either side
• Exchanges of interests
• Cleary expressing the goals/interest/expectation of
either side would keep the negotiation focused
163
TM
Conduct Negotiation
(contd…)
• Discussion on solutions
• All possible solutions to achieve the goals of either
side should be brainstormed and agreed.
• Summary & Conclusion
• What is agreed should be signed off by both parties
to avoid confusion later.

164
TM
Closing of Negotiation
Various aspects of closure

• Move to closure
• Agree the details
• Breakdown – mediator
• Confirm the agreement
• Implementing decision
• Following up / sustenance

165
TM
Tea Break

TM
Contract Role Play-2:

Negotiation of a
Government Supply
Contract.

TM
Monitoring & Control of

Contracts

TM
Monitoring & Control of Contract
Performance - 1
Key Administrative Actions
 Establishment of Contracts Register
 Establishment of Contract Monitoring Register
 Establishment of Individual Contract Monitoring

Sheet
 Establishment of Contract Monitoring Form
Key tip
Contract Management Guidelines – Service Providers

TM
Performance - 2
Key Performance Indicators
Consulting  Timely delivery of key outputs

Services  Responsiveness to reasonable requests
 The quality services of services provided
Goods  The timeliness of delivery

 Quantity delivered
 Compliance with specifications
Works  Timeliness of each stage of the works

 Compliance with the bill of works
 The quality of the works
TM
Performance - 3
B Tips
• indicate actual delivery date of goods/ works/

services (or agreed milestones)
• written reminders to contractors/ consultants where

there is a default (including penalties)
• file response from contractors/ consultants

• record agreed changes in delivery dates & penalties
exacted
TM
Performance - 4
Inspections
As necessary, especially for works, it is necessary

to ensure that qualified independent oversight is
provided to ensure that works are constructed
according to industry standards

TM
Performance - 5
Acceptance
written confirmation that the required services have

Services
been delivered on time & of an acceptable quality
completion of the Receipt and Inspection Report (RIR).

Goods It may be necessary for the supply of goods to ensure
that suitably qualified staff or consultants are involved
in the RIR
Works engineer’s report that timely construction of acceptable

standard has been completed

TM
Lunch Break

TM

Logic Puzzle-2

TM
Change Management in
Contracts

TM
Change Management
• Includes avoiding unnecessary changes as well as

incorporating necessary changes into contract
• It is important is ensure necessary prior approval is

obtained including a no objection from financing
agency if the value of cumulative change exceeds
pre-set limits of contract value.

TM
Contract Terms - Revisions to Existing
contracts.
• Terms of a contract can be revised only by mutual

agreement, leading to an extension / amendment of
existing contract.
• Changed terms need to be separately documented and
signed of mutually by all concerned parties, on legal
paper for validity of changes.
• The period from which the change becomes effective
should be specified for effective implementation.

TM
Changes Happen !

TM
Change Management - Target Modifications (I)
Every target modification, which is going to be

undertaken during the contract duration, has
an effect on the contract duration, effort and
costs.
Types of target modifications:

Avoidable target modifications
Non-avoidable target modifications
TM
Change Management - Target Modifications
(II)
Avoidable target modifications Un-avoidable target
modifications
Target modifications which Target modifications
become necessary due to necessitated by
lack of clarity in the beginning environmental changes /
and communication gaps changes in business
need to be absolutely requirements or
avoided. beneficial innovation in
complex projects cannot
be avoided.

TM
Change Management - Target

Modifications (III)
Procedure for target modifications:
1. Getting approval for the target modification from the contract
steering group and the contract owner.
2. Report target modification in a written form, update the
change register and performance target description in
contract.
3. Modify and update the contract execution plan (solution
concept, time and resource planning, work package
definition)
4. Inform all concerned participants to the contract about the
target modification.
TM
Contract Review
• Review involves assessment of adherence by all parties
to their respective obligations under the contract.
• Deviations have to be clearly specified, agreed upon and
recorded, as also the corrective steps to be taken by the
concerned parties, within specific time-frames.
• Counter-measures for non-compliance also need to be
firmed up during such reviews.
• Changes necessitated, in the terms of the contract, by
business / environmental situations have to be firmed up
and implemented.

TM
Risk Management in
Contracts

TM
Risk Management
• What is risk?
• Sources of risk
• Risk Management
Process
• Risk Matrix

TM
TM
Risk Management
“I have never been in an accident of any sort worth

speaking about. I never saw a wreck and have never
been wrecked, nor was I ever in any predicament that
threatened to end in disaster of any sort.”
EJ Smith (1 April)
The Titanic sank on 14 April 1912 …1,500 perished

EJ Smith was the captain...
186
TM
TM
Risk Management
“The biggest risk is

not to take the risk
at all.”
-Raul Garcia Bravo –the Great Latin

American Thinker
187
TM
Risk Management
• Risk is defined as a FUTURE, UNCERTAIN,

EVENT, which if it occurs, will have a NEGATIVE or
a POSITIVE effect on the contract.
• Negative risks are Threats and positive risks are

opportunities.
• We need to take cognizance of both types of risks

and manage them for best results in the contract.

TM
Risk Management
• Since every assumption is source of risk, we must
validate all assumptions in a contract.
• Similarly, since changes also have a significant
impact on the risk profile of a contract, avoiding
unnecessary changes as well as assessing and
incorporating necessary changes into contract is
necessary.
• It is important is ensure necessary prior approval is
obtained including a no objection from IFAD if the
value of cumulative change exceeds 15% (or other
pre-set limits) of contract value.
TM
Sources of Risk
Technical Financial
Contractual/ Personnel Environmental

Legal
TM
Risk Management Process
Risk Risk
Risk Analysis Risk Planning
Identification Monitoring
List of Risk avoidance

Prioritized Risk
Potential And contingent
Risk list Assessment
Risks Plans

TM

TM

TM
Risk Matrix
Evaluation of risks in the project

Effects on the project
high 5 High
3
2
Priority
medium 1
little 6 4
little medium high

Probability of the risk occurrence
TM
Tea Break

TM
Simulate the Risk Matrix tool for

analyzing the risks in the Enron Case,
at 2 stages of the contract–
1. At the tendering stage,
2. At the execution stage.
Identify possible risk mitigation
strategies at each stage.
TM
Closing Round

learnt at work.

TM

TM

TM
Contracts types quiz

TM
Contract Management processes
Financial Management & Payment
Dispute Resolution
Contract Administration
Contract Completion and Closure

201
Measurement of Contract Management Maturity

TM
Financial Management
of Contracts

TM
Finance Management & Payments
• Payments need to be made in line with the contract terms

(within agreed days of submission of a valid invoice)
• It is important to maintain an expected payment schedule
as part of the Contract Monitoring Register to ensure that
there is sufficient liquidity in the Special Account or to
promptly process request for direct payment
• Delayed payments negatively affect the cost of future
contracts – where delayed payments are a regular feature,
suppliers & contractors build in margins to cover
anticipated delays in payment or refuse to tender

TM
• Thus effective management of working capital is necessary

to ensure fair adherence to payment terms.
• Timely payments bestows significant power on the
contracting principal over the supplier.
• Delayed payments result in squeezing of the supplier’s
working capital and consequently limit his abilities to deliver
contractual performance.

TM
Performance Securities
Where required these should be provided by the

supplier/contractor in a timely manner. These should be
returned within pre-set number of days of final
acceptance (contract completion as per contract terms),
including any warranty or maintenance period

TM
Insurance
Routine deployment of insurance in contracts in following

cases–
1.Transport damages / losses of goods.
2.Storage damages / losses of goods.
3.Losses / damage of goods or equipment through force
majeure events like fire, floods, etc.

TM
Insurance (contd…)
4. Losses of goods / equipment through theft / pilferage.

5. Losses of goods / equipment / human limbs or lives
through accidents.
6. Losses of goods / equipment / human lives through
terrorism has also gained currency in recent times.

TM
Financial Penalties
Penalizing deviations from contracted terms is also

resorted to as follows –
1.Quality failures in the field demand warranty / guarantee
performances by suppliers.
2.Safety failures in usage demand back-to-back consumer
liability undertakings by suppliers.

TM
Financial Penalties (contd…)
3. Delays in supplies / execution result in imposition of

time-based Penalties and Liquidated Damages on vendors.
4. Delivery failures result in reduction of contracted
quantities and even partial diversion of supply contract to
alternate vendors.

TM
Case Study-7: Analyze the

case. Identify the aspects of
Financial Mgt. that led to the
success of this contract.

TM
Tea Break

TM
Disputes Resolution in
Contracts

TM
Disputes in Contracts
• Ensuring fair and equitable contracts is the first step in
avoiding contractual disputes.
• However, following factors could lead to disputes –
– Changes in performance targets that are difficult / one-
sided.
– Continuous deviation from performance targets (quality,
delivery, schedule, performance, etc.).

TM
Disputes in Contracts
(contd…)
– Safety failures leading to financial and social losses.
– Un-ethical practices by either party.
– Any event that leads to loss of confidence and trust
between parties.
• Disputes can be settled by either resolution or termination.

TM
Dispute Resolution Strategies
Termination
seek legal advice

determine if liquidated damages should apply in
accordance with contract
Dispute
Resolution
negotiation
arbitration
TM
Dispute Resolution Strategies
Good Contract Administration is the foundation which serves

to avoid disputes and also enables effective resolution, when
disputes inevitably arise.

TM
Administering Contracts

TM
• Administration of a contract may be simply receiving,

inspecting and accepting goods and paying the invoice
• Become familiar with a statement of work (SOW)
• Become familiar with the contract terms and conditions.
• Develop a contract administration plan
• Create a checklist of all aspects of the contract that will
need to be monitored
• Conduct internal and external pre-performance
conferences
TM
• The contract administration plan would entail –

• Performance Management
• Quality Management
• Cost Management
• Finance Management
• Risk Management
• HR Management
• Communication Management
• Schedule / Delivery Management
• Change Management
TM
• Contract Administration involves the following tasks:
–Documenting contract changes. Any changes to the
contract itself must be executed by a formal Amendment.
Discussing this with concerned buyer in Purchasing.
–Monitoring and documenting progress. Conducting
regular progress reviews with the vendor and the contract
administration team
–Identifying problems, discussing solutions with contractor,
and working with the contractor to resolve the problems.

TM
• Contract Administration involves the following tasks:
– Accepting or rejecting goods / services provided.
– Reviewing checklist to ensure that all issues of
performance are being or have been completed.
– Reviewing and accepting / rejecting invoices. Paying
according to the payment schedule.
– Documenting lessons learned for the next round of
contract administration.
– Closing the contract.

TM
Lunch Break

TM

Logic Puzzle - 3

TM
Case Study -1-

Transporter Problem:
Discuss w.r.t Dispute
Resolution, and thereby
identify possible
resolution strategies.
TM
Case Study–4, (Novo Nordisk) -

Evaluate the Contract
Administration challenges in this
case and how they were
overcome.

TM
Tea Break

TM
Contract Completion
and Closure

TM

Verify that –
• All products/ services have been provided
• Documentation in the contract file shows receipt & formal
acceptance of all contract terms
• There are no claims or investigations pending
• Any property provided by the Project is returned &
discrepancies resolved

TM

(contd…)
• All actions regarding contract amendments have been
attended to
• All sub-contracting issues have been attended to
• Warranty matters are resolved and defect period elapsed
• Any necessary audit has been satisfactorily finalised
• The final invoice has been submitted & paid

TM
Termination of Contracts

TM
• Know the legal terms used in contract termination

• Ascertain the grounds for termination of contracts
• Termination for default
• Termination for convenience
• Termination for insolvency
• Termination for Unlawful Acts

TM
Termination for default

• Outside of Force Majeure
• As a result of Force Majeure
• Supplier fails to perform any other obligation
under contract

TM
Termination for Convenience
The Procuring entity may terminate the contract, in whole
or in part, at any time for its convenience. The Head of the
Procuring Entity may terminate a contract for convenience,
if he has determined the existence of conditions that make
Project Implementation economically, financially or
technically impractical and / or unnecessary, such as, but
not limited to, fortuitous event(s) or changes in law and
National Government policies.

TM
Termination for Insolvency
The Procuring Entity shall terminate the contract if the
Supplier / Contractor / Consultant is declared bankrupt or
insolvent as determined with finality by a court of
competent jurisdiction. In this event, termination will be
without compensation to the Supplier / Contractor /
Consultant, provided that such termination will not
prejudice or affect any right of action or remedy which has
accrued or will accrue thereafter to the Procuring Entity
and/or the Supplier / Contractor / Consultant.

TM
Termination for Unlawful Acts
The Procuring Entity may terminate the contract in case it is
determined prima facie that the Supplier / Contractor /
Consultant has engaged, before or during the
implementation of the contract, in unlawful deeds and
behaviors relative to contract acquisition and
implementation.

TM
(contd…)
Unlawful acts include, but are not limited to, the following:
a) Corrupt, fraudulent, collusive and coercive practices;
b) Drawing up or using forged documents;
c) Using adulterated materials, means or methods, or
engaging in production contrary to rules of science or the
trade; and
d) Any other act analogous to the foregoing.

TM
• Accepted Procedures for termination of contracts
• Verification of grounds for termination
• Notice to terminate
• Show Cause
• Rescission of Notice of Termination
• Decision
• Contract Termination Review Committee
• Notice by Contractor / Consultant

TM
Case Study– Successful Closure

of 2 PPP Contracts by
Municipality of Copenhagen.
Discuss how closure was
achieved. What factors were
considered to establish closure?
TM
Measuring Contract
Management Process
Maturity

TM
Measuring Contract Management
Process Maturity
Introduction to Contract Management Maturity Model

(CMMM)
Why measure Contract Management Process Maturity?

TM
Contract Management Maturity
Model
Five levels of maturity

1 Adhoc
2 Basic
3 Structured
4 Integrated
5 Optimized

TM
Model
Level 1—Ad Hoc.

The organization at this initial level of maturity
acknowledges that contract management processes exist;
that these processes are accepted and practiced
throughout various industries, and within the public and
private sectors. In addition, the organization’s management
understands the benefit and value of using contract
management processes.

TM
Model
Level 1—Ad Hoc. (contd..)

Although there are not any organization-wide established
basic contract management processes, some established
contract management processes do exist and are used
within the organization, but these established processes
are applied only on an ad-hoc and sporadic basis to
various contracts. There is no rhyme or reason as to which
contracts these processes are applied.

TM
Model
Level 1—Ad Hoc. (contd..)

Furthermore, there is informal documentation of contract
management processes existing within the organization,
but this documentation is used only on an ad-hoc and
sporadic basis on various contracts. Finally, organizational
managers and contract management personnel are not
held accountable for adhering to or complying with any
basic contract management processes or standards.

TM
Model
Level 2—Basic.
Organizations at this level of maturity have established
some basic contract management processes and
standards within the organization, but these processes are
required only on selected complex, critical, or high-visibility
contracts, such as contracts meeting certain dollar
thresholds, or contracts with certain customers. Some
formal documentation has been developed for these
established contract management processes and
standards.

TM
Model
Level 2—Basic. (contd..)

Furthermore, the organization does not consider these
contract management processes or standards established
or institutionalized throughout the entire organization.
Finally, at this maturity level, there is no organizational
policy requiring the consistent use of these contract
management processes and standards on other than the
required contracts.

TM
Model
Level 3—Structured.
At this level of maturity, contract management processes
and standards are fully established, institutionalized, and
mandated throughout the entire organization. Formal
documentation has been developed for these contract
management processes and standards, and some
processes may even be automated.

TM
Model
Level 3—Structured. (contd..)

Furthermore, since these contract management processes
are mandated, the organization allows the tailoring of
processes and documents, allowing consideration for the
unique aspects of each contract, such as contracting
strategy, contract type, terms and conditions, dollar value,
and type of requirement (product or service).

TM
Model
Level 3—Structured. (contd..)

Finally, senior organizational management is involved in
providing guidance, direction, and even approval of key
contracting strategy, decisions, related contract terms and
conditions, and contract management documents..

TM
Model
Level 4—Integrated.
Organizations at this level of maturity have contract
management processes that are fully integrated with other
organizational core processes such as financial
management, schedule management, performance
management, and systems engineering.

TM
Model
Level 4—Integrated. (contd..)

In addition to representatives from other organizational
functional offices, the contract’s end-user customer is also
an integral member of the buying or selling contracts team.
Finally, the organization’s management periodically uses

metrics to measure various aspects of the contract
management process and to make contracts-related
decisions.

TM
Model
Level 5—Optimized.
The final and highest level of maturity reflects an
organization whose management systematically uses
performance metrics to measure the quality and evaluate
the efficiency and effectiveness of the contract
management processes. At this level, continuous process
improvement efforts are also implemented to improve the
contract management processes.

TM
Model
Level 5—Optimized. (contd..)

Furthermore, the organization has established lessons
learned and best practices programs to improve contract
management processes, standards, and documentation.
Finally, contract management process streamlining
initiatives are implemented by the organization as part of its
continuous process improvement program.

TM
Model
These five levels of maturity allow an organization to

assess its level of capability and effectiveness for its critical
contract management process. The CMMM gives the
organization a greater degree of visibility and granularity
into its contract management process by dissecting the
process into six key process areas. Furthermore, the
CMMM provides a representation reflecting the contract
management buying processes, as well as the selling
processes.

TM
Model
Benefits of CMMM
• CMMM Provides maturity at the project office level as
well as at the contract management functional level. The
results may indicate varying levels of process capability
maturity for each CM key process area.
• Assessment results provide insight to the organisation in
terms of which key process areas in CM need
improvement, changes, training, policy shift, etc.

TM
Closing Round

learnt at work.

TM

TM

Contract Management

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Contract Management

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TM

BizMentorsTM Pvt. Ltd. 1

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• Participants are grouped in pairs and introduce

BizMentorsTM Pvt. Ltd. 3

Share Your Expectations

• Find out about the participants’ expectations using

BizMentorsTM Pvt. Ltd. 4

• To know and understand the significance of a systematic

BizMentorsTM Pvt. Ltd. 5

BizMentorsTM Pvt. Ltd. 6

• A contract is an agreement between 2 parties, wherein,

• Thus a contract involves –

BizMentorsTM Pvt. Ltd. 7

What is Contract Management?

BizMentorsTM Pvt. Ltd. 8

• Vendor evaluation, selection and issue of contract,

BizMentorsTM Pvt. Ltd. 9

What is Contract Management?

• Contract Management may also encompass the following

BizMentorsTM Pvt. Ltd. 10

BizMentorsTM Pvt. Ltd. 11

• Contract Contents – all pertinent deliverables, timing,

BizMentorsTM Pvt. Ltd. 13

Types of Contracts – based on pricing

As per PMBOK, contract types based on pricing strategy

BizMentorsTM Pvt. Ltd. 14

Types of Contracts – based on pricing

Time and Material Contracts

BizMentorsTM Pvt. Ltd. 15

Types of Contracts – based on pricing

BizMentorsTM Pvt. Ltd. 16

Types of Contracts – based on pricing

BizMentorsTM Pvt. Ltd. 17

Types of Contracts – based on pricing

Firm Fixed Price Contracts (FFP)

BizMentorsTM Pvt. Ltd. 18

Types of Contracts – based on pricing

Example: Software Package for $25,000. The payment will

BizMentorsTM Pvt. Ltd. 19

Types of Contracts – based on pricing

Fixed Price Incentive Fee Contracts (FPIF)

BizMentorsTM Pvt. Ltd. 20

Types of Contracts – based on pricing

Fixed Price Incentive Fee Contracts (FPIF) (contd…)

BizMentorsTM Pvt. Ltd. 21

Types of Contracts – based on pricing

BizMentorsTM Pvt. Ltd. 22

Types of Contracts – based on pricing

The EPA clause must relate to some reliable financial index

BizMentorsTM Pvt. Ltd. 23

Types of Contracts – based on pricing

BizMentorsTM Pvt. Ltd. 24

Types of Contracts – based on pricing

Cost-Reimbursable Contracts (contd…)

BizMentorsTM Pvt. Ltd. 25

Types of Contracts – based on pricing

BizMentorsTM Pvt. Ltd. 26

Types of Contracts – based on pricing

Example: If your cost ceiling is $80,000 and the fixed fee is

BizMentorsTM Pvt. Ltd. 27

Types of Contracts – based on pricing

BizMentorsTM Pvt. Ltd. 28

Types of Contracts – based on pricing