Contract Management

Dr. Khalid Mahmood Lodhi

 Contract Management
Contract management is “the process
of systematically and efficiently
managing contract creation, execution
and analysis for maximizing operational
and financial performance and
minimizing risk”
 Contract Cycle

Contract
Planning/Designing
Administration
specifications

Payments
Pre-
qualification

Grievance
Redressal Solicitation of
Bids

Contract Bids opening and

Award Evaluation
 Contract management is
successful when:
Contract management is successful when:
 The arrangements for service delivery continue to
be satisfactory to both parties, and the expected
business benefits and value for money are
realized;
 The supplier is co-operative and responsive;

 The organization understands its obligations

under the contract;
 There are no disputes;

 There are no surprises;

 An objective debate can be had over issues;

 Efficiencies are identified.

 Pre-award activity and
contract preparation
 Building a project team (consider
nature of the project, work environment,
management style, internal and external
communication
 Resources (financial Resources are to be
estimated on certain percentage of the
contract value)
 Assessing needs (dissatisfaction with
the existing supplier, cost savings, aims,
outputs)
 Preparing initial requirements (Goods,
services, acceptable standards, duration
of contract etc)
 Contract Negotiation

 In negotiating a contract it is the

buyer's objective to maintain an
incentive for efficient and economical
performance while placing maximum
risk on the seller. The objective of
the seller is to maximize the profit
potential while minimizing the risk.
Contracts generally fall into one of
three broad categories.
 Contract Incentives
 Contract incentives are fundamentally designed
to provide motivation for desired performance.
There is growing recognition that contract
incentives are valuable tools to motivate the
desired performance.
 Incentives can be objectively based and
evaluated or subjectively based and evaluated
 Objectively based and evaluated are tied to
performance areas like cost, schedule or delivery,
and quality
 Subjectively based and evaluated involve award
fees and other special incentives
 Dispute Resolution

The parties may agree disputes are

to be resolved by the court (or
arbitration). However, dispute
resolution could be agreed using
alternative dispute resolution (ADR)
such as mediation. Indeed, the
courts often insist on ADR before
court/arbitration.
 Contract Origination

 Two ways in which a contract can

originate: unilaterally or bilaterally
 Unilaterally:
• Common form for contract is a relatively
simple type of document called a purchase
order.
• A purchase order is used when routine,
standard cost items are needed.
• A purchase order is legally binding and should
be specific.
 Bilaterally:
• Procurement documents are used to
solicit proposals from prospective
sellers. The procurement document
then becomes the basis for the
seller’s proposal. The following are
examples of procurement
documents:
1. RFQ
2. RFP
3. IFB
1. Request for quotation (RFQ)

• from different suppliers

• Items are of relatively low dollar value
such as supplies and materials
• A survey of potential suppliers is
completed.
• The quotation request informing
suppliers of the goods or services
needed is sent to a scaled-down
number of possible suppliers.
2. Request for proposal (RFP)

 Items or services are usually high dollar

and non-standard.
 Examples: construction project, a
research and development project; a
made-to-order, highly complex piece of
machinery.
 Blueprints, drawings, specifications, and
other appropriate data should be
included with proposal.
 3. Invitation for bid (IFB)
 Appropriate for high dollar, standard items.
 A prerequisite to this process is a clear and
accurate description of the supplies,
equipment, and services required.
 Includes specifications, drawings, industry
standards, performance requirements, etc.
 Must ensure fair competition among all
bidders.
 Provisions should be stated in such a
manner to avoid misinterpretation.
 Formal bids are submitted to the
contracting department in sealed envelopes.
 Contd…
 All bids are opened at a specific time.
 In most cases, the contract award goes to
the lowest responsible bidder. If not
awarded to the lowest bidder, must
document reasons carefully.
 Type of contract is open to fraud, collusion,
and other dishonest conduct.
 Hence, PM and contracting personnel must
practice defined ethical business
procedures.
 Contract Types
Fixed price or lump sum contracts
• Fixed total price for a well-defined product
• If the product is not well-defined, both the buyer and
seller are at risk
• Fixed price contracts may also include incentives
Cost reimbursable contracts
• Payment (reimbursement) to the seller for actual costs
• Costs are classified as direct costs or indirect costs
• Direct costs are costs incurred for the exclusive benefit of
the project
• Indirect costs, (overhead costs) are costs allocated to the
project by the performing organization
• It may include incentives for meeting or
exceeding selected project objectives
Unit price/T&M contracts
• Preset amount per unit of goods or service
• Total value of the contract is a function of the quantities
needed
Cost Reimbursable Contracts
Cost-Plus-a-Percentage-of-Cost
 Seller is reimbursed for allowable costs of performing
the contract and receives as profit (a fee) an agreed
upon percentage of the costs.
 No limit on the seller’s profit. If the seller’s cost
increases, so does the profit.
 Most undesirable type of contract from buyer’s
standpoint.
 Prohibited for federal government use. Used in private
industry, particularly construction projects.
 Susceptible to abuse. No motivation for seller to
decrease costs.
 The buyer bears 100% of the risk.
 The buyer project manager must pay particular
attention to the control of the labor and material costs
so that the seller does not purposely increase these
costs.
 Bottom line: no limit on seller’s profit!
Fixed Price Contract
 Firm-Fixed Price (FFP)
 Seller agrees to perform a service or
furnish supplies at the established
contract price.
 Will also be called lump sum.
 Seller bears the greatest degree of risk.
 Seller is motivated to decrease costs by
producing efficiently.
 Best specifications are available and costs
are relatively certain.
 Common type of contract.
 Purchase Order
Purchase Order A purchase order is the simplest
type of fixed price contract. This type of contract is
normally unilateral (signed by one party) instead of
bilateral (signed by both parties). It is usually used
for simple commodity procurements. Purchase
orders are considered contracts when they are
accepted either by performance (i.e, equipment is
shipped by the seller-a unilateral PO) are by signing
a purchase order (a bilateral PO).

Example
Contract to purchase 30 linear meters of wood at $9
per meter
Unit Price/Time and Material
Contract
 Unit Price/T&M Contracts
Time and Material (T&M) or Unit Price This type
of contract is usually used for small dollar amounts.
The contract is priced on a per hour or per item basis
and has elements of a fixed price contract (in the
fixed price per hour) and a cost reimbursable
contract (in the material costs and the fact that the
total cost is unknown).
In this type, the buyer has a medium amount of cost
risk compared to CR and FP because the contract is
usually for small dollar amounts and for shorter
length of time.
Example
Contract =$100 per hour plus expenses or material
at cost or $5 per linear meter of wood.
 Cost Reimbursable
Advantages Disadvantages
Simple contract Requires auditing seller’s
statement of work invoices
Usually requires less Requires more work for
work to write the scope the buyer to mange
than fixed price
Generally lower cost Seller has only a moderate
than fixed price incentive to control costs
because the seller does
not have to add as
much for risk
Total price is unknown
 Time and Material
Advantages Disadvantages
Quick to create Profit is in every hour
billed
Contract duration is Seller has no incentive to
brief control costs
Good choice when you Appropriate only for small
are hiring “bodies” or projects
people to augment your
staff
Requires the most day to
day oversight from the
buyer
 Fixed Price
Advantages Disadvantages
Less work for Seller may underprice the work
buyer to manage and try to make up profits on
change orders
Seller has a Seller may not complete some of
strong incentive the contract statement of work if
to control costs they begin to lose money
Companies have More work for buyer to write the
experience with contract statement of work
this type
Buyer knows the Can be more expensive than CR if
total price at the contract statement of work is
project start incomplete The seller will need to
add to the price for their
increased risk
 Contract clauses
Contracts will normally vary depending upon the type of goods and/or
services ordered. However, some typical clauses listed below are
commonly included in contracts (although not necessarily in this order)

 Parties
 Background (explains reasons of entering into a
specific contract)
 Definitions (Acronyms used in the contract)
 Goods and Services
 Standards
 Supplier staff
 Use of premises, equipment, third party
contract
 Customer’s assistance
 Service charges, payments etc
 Change Control ( Mechanism to agree any
contractual changes)
 (Cont..)
 Dispute Resolution
 Assignments and Sub-Contracting
 Intellectual Property Rights (IPR)
 Confidentiality
 Customer data and data protection
 Compliance with relevant laws
 Insurance policies
 Exclusions and limitations of liability
 Term and termination
 Consequences of termination
 Non-solicitation (Luring or Poaching other
parties employees should be avoided)
 Waiver (failure of claim from any party
should not prejudice its right to make a
claim or any action later on)
 (Cont..)
 Cumulation of remedies (claiming one remedy
does not bar a part from claiming other
remedies)
 Severability (to the extent of invalid clause not
effecting the remaining clauses of contract)
 No partnership or agency ( No party will act
agent of the other party)
 Set-off (monies i.e. duty taxes etc which one
party owes to the other party against money that
the other party owes it )
 Currency (specify the currency for payments
(GBP sterling, US$, Rs. or euros, etc)
 VAT
 Indemnities (party is liable to pay the other party
a full reimbursement of losses suffered in case
subject of indemnity is triggered)
 (Cont..)
 Third-party rights
 Notices (to whom notices are to be given)
 Entire agreement (sets out that only the terms
and conditions written down in the agreement
will apply to the relationship)
 Governing law and jurisdiction (the contract is
governed and construed in accordance with
Local or International law )
 Counterparts
 Precedence (the terms of this contract will
prevail over any supplier terms and conditions )
 Force majeure (exclusion clause which means
that if events occur which are outside the
reasonable control of the supplier then the
supplier will not be liable for the consequences )
 Schedules to be included
 A. Description of goods/services
 B. Contract management
 An explanation of how the contract will be
managed on a day-to-day basis (eg, contact
details, timetables, dispute resolution
mechanisms).
 C. Customer IP
 A description of what will be deemed to be IP of
your organization.
 D. Explanation of disaster recovery plan
 E. Equipment schedule
 An explanation of who owns what equipment and
who is responsible for its maintenance.
 F. Exit management plan
 Drawn up at the start of the contract (and updated
regularly) to explain what the supplier must do at
the end of the contract.
 Cont…..
 G. Key personnel
 A list of key personnel that are designated by the
supplier to operate the account.
 H. Licence on termination schedule
 A list of ongoing rights to use supplier goods/services
after the end of the contract.
 I. Customer policies schedule
 A list of your organization’s policies that the supplier
must adhere to (eg, health and safety, on-site access,
IT security).
 J. Service charges schedule
 K. Service levels and service credits schedule
 (ie, a Service Level Agreement (SLA)
 This should also include targets and pre-agreed
compensation (service level credits) if targets are not
achieved.
 L. Support contracts schedule
 Details of contracts which the supplier has entered into
with third parties
 Post Award Activities
Whose responsibility is it?

Depending on the organization, there

may be a contract management team
waiting in the wings for the next
contract. contract management depends
on a number of criteria, such as:
• Contract value;
• Contract length;
• Complexity of services;
• Level of risk.
 Contract Manager’s
Responsibilities
As a Contract Manager, a useful way of becoming
more familiar with the contract is to develop a tool for
tracking contract obligations and deliverables such as:

 Contract document (eg, “main terms” or “schedule

1”);
 Contract section (eg, “business continuity”);
 Contract reference
 Title (eg, “prepare draft business continuity plan”);
 Description (eg, “Supplier shall provide a draft
business continuity plan for review by the parties”);
 Due date (eg, the date the first draft is due);
 Responsible party (eg, “supplier”);
 Frequency of meetings (annually, quarterly and
monthly etc.)
 Status (eg, “in progress”)
 Relationship Management
 Establish ground rules in a supplier relationship
from the start
 Ensure both parties respect each other and
accommodate each other’s requirements
 In relationships such as outsourcing agreements,
where suppliers and buyers work closely
together, try to create ‘positive tension’.
 When negotiating the commercial terms of the
contract, incentives the supplier to deliver results
 Nurturing the relationship
 Where appropriate, allow suppliers access
 Allow suppliers to give feedback
 Ensure suppliers are paid in time
 Risk Management
To understand what could go wrong on a
project might be the difference between
survival and failure. Best practice would
be to:
 Include risk management obligations on
the parties in the contract
 Insist on regular risk meetings and the
frequency and format of the reporting as
contractual commitments.
 Fully understand the contract and the
deliverables of both parties to be able to
monitor the likelihood of a risk.
Exiting or Terminating a Contract

There are three parts of drafting

termination clauses:
 Planning for exit;
 When exit occurs;
 Post-exit.
 Contract Execution
Special Consideration/Changes
 Changes
 The change control system should be defined and
included in the changes clause of the project.
 The system should cover who initiates a change
request, how is it processed and funded and who
has the final approval authority.
 For major projects, a configuration control
committee should be established
 The change proposal must be explicit in terms of
the impact of the change on the contract work
statement, specifications and drawings.
 Legal: there must be mutual agreement to modify
a contract and that agreement must be supported
by consideration (change clause is important!) OR
 Change may also be accomplished by unilateral
action if pursuant to the exercise of options
contained in the terms of the original contract.
 Contract Closure
There are three types of closing of
contract:
1. Performance of the contract
(successful completion)
2. Discharge of a contract

3. Breach of a contract
Thank You