CONTRACT MANAGEMENT

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• CONTRACT MANAGEMENT

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• Terminology
• Agent a person/group officially authorized to
  make decisions and represent their firm.
• Arbitration Settling of a dispute by a third
  party who renders a decision.
• Bid tender, offer, proposal to purchase a
  certain item.
• Breach of Contract to violate a law by an act or
  omission or to break a legal obligation.
• Contract an agreement entered into by two or
  more parties and the agreement can be enforced in
  a court of law.
• Customer is used to denote the buying
  organization,
• normally a government department or other
  public body.
• Intelligent customer denotes a capability of the
  customer organization in understanding both
  customer and provider businesses fully.

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• End user the people who actually use the service
• Force Majeure Clause a provision in a contract
  that excuses the parties involved from any
  liability or contractual obligations because of
  acts of God, wars, terrorism, etc.
• Infringement a violation of someones legally
  recognized right.
• Provider the company providing services under
  the contract.
• Partnership and partnering denote a long term
  arrangement between a public sector department
  and a private sector company.
• Liquidated Damages an amount specified in a
  contract that stipulates the reasonable
  estimation of damages that will occur as a result
  of a breach of contract.
• Negligence the failure to exercise ones
  activity in such a manner that a reasonable
  person would do in a similar situation.

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• Noncompete Clause a covenant providing
  restrictions on starting up a competing business
  or working for a competitor within a specified
  time period.
• Nondisclosure Clause a covenant providing
  restrictions on a certain proprietary information
  such that it cannot be disclosed without written
  permission.
• Nonconformance performance of work in such a
  manner that it does not conform to contractual
  specifications/requirements.
• Penalty Clause an agreement or covenant,
  identified in financial terms, for failure to
  perform.
• Privity of Contract the relationship that exists
  between the buyer and seller of a contract.
• Procurement the acquisition of goods or
  services.
• Termination/Termination Liability an agreement
  between the buyer and the seller as to how much
  money the seller will receive should the project
  be terminated prior to the scheduled

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• completion date without all of the contractual
  deliverable being
• Completed.
• Waiver an intentional relinquishment of a legal
  right.
• Warranty a promise, either verbal or written,
  that certain facts
• are true as represented.
• Contract Management is more comprehensive
  than/includes
• Procurement Management

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• Introduction
• The main areas covered are
• managing service delivery
• managing the relationship,
• contract administration,
• seeking performance improvements,
• managing changes.
• Long-term service contracts
• Short-term service contract

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• What is contract management?
• 1. It is the process that enables both parties to
  meet their obligations
• in order to deliver the objectives required from
  the contract.
• It also involves building a good working
  relationship between
• customer and provider (Buyer/Seller).
• 2. It is the art and science of managing a
  contractual agreement
• throughout the contracting process.
• The central aim of contract management is to
  obtain the services
• as agreed in the contract and achieve value for
  money by
• - Optimizing the efficiency, effectiveness and
  economy of the
• service or relationship described by the
  contract,

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• - Balancing costs against risks and actively
  managing the
• customerprovider relationship
• - Aiming for continuous improvement in
  performance over the
• life of the contract.
• Contract Management Processes consist of the
  following activities
• ? Presales Activity
• ? Bid/No Bid Decision-Making
• ? Bid/Proposal Preparation
• ? Contract Negotiation and Formation
• ? Contract Administration
• ? Contract Closeout

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• Overview
• Contract management activities can be broadly
  grouped into three areas.
• Service delivery management ensures that the
  service is being delivered as agreed, to the
  required level of performance and quality.
• Relationship management keeps the relationship
  between the two parties open and constructive,
  aiming to resolve or ease tensions and identify
  problems early.
• Contract administration handles the formal
  governance of the contract and changes to the
  contract documentation.

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• Getting the contract right
• The concern is on customer activities following
  the award of a
• service, not the procurement process that leads
  up to the award of
• contract.
• The terms of the contract should include an
  agreed level of
• service, pricing mechanisms, provider incentives,
  contract
• timetable, means to measure performance,
  communication routes,
• escalation procedures, change control procedures,
  agreed exit
• strategy and agreed break options, and all the
  other formal
• mechanisms that enable a contract to function.

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• Construction contracts
• Construction contracts are fundamentally
  different from
• major service contracts.
• There are various types of construction contract.
  The
• choice of contract depends on the basis of
  pricing and
• the contract strategy that best meets the project
• objectives, risk transfer, responsibility for
  performance,
• cost certainty, and complexity.

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• Critical success factors
• Good preparation.
• The right contract.
• Single business focus.
• Service delivery management and contract
  administration.
• Relationship management.
• Continuous improvement.
• People, skills and continuity.
• Knowledge.
• Flexibility.
• Change management.
• Proactivity.

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• What can go wrong, and why?
• The provider is obliged to take control,
  resulting in unbalanced decisions that do not
  serve the customers interests
• Decisions are not taken at the right time or
  not at all
• New business processes do not integrate with
  existing processes, and therefore fail
• People (in both organizations) fail to understand
  their
• obligations and responsibilities
• There are misunderstandings, disagreements and
  underestimations too many issues are escalated
  inappropriately
• Progress is slow or there seems to be an
  inability to move forward

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• The intended benefits are not realized
• Opportunities to improve value for money and
  performance are missed.
• Why organizations fail to manage contracts
  successfully
• Poorly drafted contracts
• Inadequate resources are assigned to contract
  management
• The customer team does not match the provider
  team in terms of either skills or experience (or
  both)
• The wrong people are put in place, leading to
  personality clashes
• The context, complexities and dependencies of the
  contract are not well understood

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• There is a failure to check provider assumptions
• Authorities or responsibilities relating to
  commercial decisions are not clear
• A lack of performance measurement or benchmarking
  by the customer
• A focus on current arrangements rather than what
  is possible or the potential for improvement
• A failure to monitor and manage retained risks
  (statutory, political and commercial).

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• Plan Procurements
• Defining the need for the project
• Development of the procurement statement of work,
  specifications, and work breakdown structure
• Preparing a WBS dictionary, if necessary
• Performing a make or buy analysis
• Laying out the major milestones and the
  timing/schedule
• Determining if long lead procurement is necessary
• Cost estimating, including life-cycle costing
• Determining whether qualified sellers exist
• Identifying the source selection criteria
• Preparing a listing of possible
  project/procurement risks (i.e., a risk register)
• Developing a procurement plan
• Obtaining authorization and approval to proceed

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• Specifications are written, pictorial, or graphic
  information that
• describe, define, or specify the services or
  items to be procured.
• There are three types of specifications
• Design Specifications physical characteristics.
• Performance Specifications measurable
  capabilities.
• Functional Specifications description of the end
  use of the item.

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• Factors involving the make or buy analysis
• The make decision
• ? Less costly (but not always!!)
• ? Easy integration of operations
• ? Utilize existing capacity that is idle
• ? Maintain direct control
• ? Maintain design/production secrecy
• ? Avoid unreliable supplier base
• ? Stabilize existing workforce
• The buy decision
• ? Less costly (but not always!!)
• ? Utilize skills of suppliers
• ? Small volume requirement (not cost effective to
  produce)
• ? Having limited capacity or capability
• ? Augment existing labor force
• ? Maintain multiple sources (qualified vendor
  list)
• ? Indirect control

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• Procurement risks as identified in the ABB
  Project Management
• Manual
• ? Contract and agreements (penalty/liquidated
  damages,
• specifications open to misinterpretation, vague
  wording,
• permits/licenses, paperwork requirements)
• ? Responsibility and liability (force majeure,
  liability limits for
• each party, unclear scope limitations)
• ? Financial (letters of credit, payment plans,
  inflation, currency
• exchange, bonds)
• ? Political (political stability, changes in
  legislation, import/export
• restrictions, arbitration laws)
• ? Warranty (nonstandard requirements, repairs)
• ? Schedule (unrealistic delivery time, work by
  others not finished
• on time, approval process, limitations on
  available resources)
• ? Technical and technology (nonstandard
  solutions, quality
• assurance regulations, inspections, customer
  acceptance criteria)
• ? Resources (availability, skill levels, local
  versus external)

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• The procurement plan will address the following
  questions
• How much procurement will be necessary?
• Will they be standard or specialized procurement
  activities?
• Will we make some of the products or purchase all
  of them?
• Will there be qualified suppliers?
• Will we need to pre-qualify some of the
  suppliers?
• Will we use open bidding or bidding from a
  preferred supplier list?
• How will we manage multiple suppliers?
• Are there items that require long lead
  procurement?
• What type of contract will be used, considering
  the contractual risks?
• Will we need different contract types for
  multiple suppliers?
• What evaluation criteria will be used to score
  the proposals?

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• Conducting the Procurement
• Evaluating/confirming specifications (are they
  current?)
• Confirming qualified sources
• Reviewing past performance of sources
• Reviewing of team or partnership agreements
• Producing the solicitation package
• A typical solicitation package would include
• ? Bid documents (usually standardized)
• ? Listing of qualified vendors (expected to bid)
• ? Proposal evaluation criteria (source selection
  criteria)
• ? Bidder conferences
• ? How change requests will be managed
• ? Supplier payment plan

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• Points of proposal evaluation scoring for
  awarding a
• contract to bidders
• Understanding of the requirements
• Overall bid price
• Technical superiority
• Management capability
• Previous performance (or references)
• Financial strength (ability to stay in business)
• Intellectual property rights
• Production capacity (based upon existing
  contracts and potential new contracts)

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• Request Seller Responses
• There are three common methods for acquisition
• Advertising sealed bids, no negotiations.
• Negotiation
• ? Request for information (RFI)
• ? Request for quotation (RFQ)
• ? Request for proposal (RFP)
• ? Invitation for bids (IFB)
• Small purchases (i.e., office supplies)

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• Selecting Appropriate Sellers
• Evaluation criteria time, cost, expected
  management team of the project, and previous
  performance history
• Contract award strategy price-based/best-value.
• A negotiation process 3 major factors of
  negotiations
• ? Compromise ability
• ? Adaptability
• ? Good faith
• Negotiations should be planned for
• Develop objectives (i.e., min-max positions)
• Evaluate your opponent
• Define your strategy and tactics
• Gather the facts
• Perform a complete price/cost analysis
• Arrange hygiene factors

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• There are certain basic elements of most
  contracts
• Mutual Agreement There must be an offer and
  acceptance.
• Consideration There must be a down payment.
• Contract Capability The contract is binding only
  if the contractor has the capability to perform
  the work.
• Legal Purpose The contract must be for a legal
  purpose.
• Form Provided by Law The contract must reflect
  the contractors legal obligation, or lack of
  obligation, to deliver end products.

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• The two most common contract forms are
• Completion Contract definitive end product.
• Term Contract a specific level of effort.
• The type of contract selected is based upon the
  following
• ? Overall degree of cost and schedule risk
• ? Type and complexity of requirement (technical
  risk)
• ? Extent of price competition
• ? Urgency of the requirements
• ? Performance period
• ? Contractors responsibility (and risk)
• ? Contractors accounting system (is it capable
  of earned value reporting?)
• ? Concurrent contracts (will my contract take a
  back seat to existing work?)
• ? Extent of subcontracting (how much work will
  the contractor outsource?)

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• Some Terminology found in contracts
• The target cost or estimated cost
• Target or expected profit
• Profit ceiling and profit floor
• Price ceiling or ceiling price
• Maximum and minimum fees
• The sharing arrangement or formula
• Point of total assumption

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• A wide variety of contractual arrangements
• Cost-plus percentage fee
• Cost-plus fixed fee
• Cost-plus guaranteed maximum
• Cost-plus guaranteed maximum and shared savings
• Cost-plus incentive (award fee)
• Cost and cost sharing
• Fixed price or lump sum
• Fixed price with re-determination
• Fixed price incentive fee
• Fixed price with economic price adjustment
• Fixed price incentive with successive targets

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• Fixed price for services, material, and labor at
  cost (purchase orders, blanket agreements)
• Time and material/labor hours only
• Bonus-penalty
• Combinations
• Joint venture

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• There are generally five types of contracts
• 1. Fixed-price (FP), or lump-sum,
• 2. Cost-plus-fixed-fee (CPFF), or
  cost-plus-percentage-fee (CPPF),
• 3. Guaranteed maximum-shared savings (GMSS),
• 4. Fixed-price-incentive-fee (FPIF),
• 5. Cost-plus-incentive-fee (CPIF)
• Other types of contracts that are not used
  frequently
• 1. The fixed-price incentive successive targets
  contract
• 2. The fixed-price with re-determination contract
• 3. Cost (CR) and cost-sharing (CS) contracts

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• Incentive Contracts
• The fixed-price-incentive-fee (FPIF) contract is
  an example of this.
• The essence of the incentive contract is that it
  offers a contractor
• more profit if costs are reduced or performance
  is improved and less
• profit if costs are raised or if performance
  goals are not met. Cost
• incentives take the form of a sharing formula
  generally expressed as
• a ratio.
• In the FPIF contract, the contractor agrees to
  perform a service at a
• given fixed cost. If the total cost is less than
  the target cost, then the
• contractor has made a profit according to the
  incentive-fee formula.
• If the total cost exceeds the target cost, then
  the contractor loses money.

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• Contract administration
• contract maintenance and change control,
• charges and cost monitoring,
• ordering and payment procedures,
• management reporting, and so on.
• Its importance should not be underestimated.
• All parties understand who does what, when, and
  how.
• The contract documentation reflects the
  arrangement,
• and changes to it carefully controlled.

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• Contract Administration Cycle
• The functions of the corporate administrator
  include
• ? Change management
• ? Specification interpretation
• ? Adherence to quality requirements
• ? Inspections and audits
• ? Warranties
• ? Performance reporting
• ? Records management
• ? Contractor (seller) management
• ? Contractor (seller) performance report card
• ? Documenting sellers performance (for future
  source selection teams)
• ? Production surveillance

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• ? Approval of waivers
• ? Breach of contract
• ? Claims administration
• ? Resolution of disputes
• ? Payment schedules
• ? Project termination
• ? Project closure
• The order of precedence specifies that any
  inconsistency in the
• solicitation of the contract shall be resolved in
  a given order of
• procedure such as
• A. Specifications (first priority)
• B. Other instructions (second priority)

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• C. Other documents, such as exhibits,
  attachments, appendices,
• SOW, contract data requirements list (CDRL), etc.
  (third priority)
• D. Contract clauses (fourth priority)
• E. The schedule (fifth priority)
• The changes handled by the contract
  administrator
• ? Administrative change
• ? Change order
• ? Contract modification
• ? Undefinitized contractual action
• ? Supplemental agreement
• ? Constructive change

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• Typical causes of constructive changes include
• ? Defective specification with impossibility of
  performance
• ? Erroneous interpretation of contract
• ? Over inspection of work
• ? Failure to disclose superior knowledge
• ? Acceleration of performance
• ? Late or unsuitable owner or customer furnished
  property
• ? Failure to cooperate
• ? Improperly exercised options
• ? Misusing proprietary data

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• Reasons for termination for convenience of the
  customer
• ? Elimination of the requirement
• ? Technological advances in the state-of-the-art
• ? Budgetary changes
• ? Related requirements and/or procurements
• ? Anticipating profits not allowed
• Reasons for termination for default due to
  contractors actions
• ? Failure to make delivery on scheduled date.
• ? Failure to make progress so as to endanger
  performance of the
• contract and its terms.
• ? Failure to perform any other provisions of the
  contract.

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• Contract Closure
• ? Documented verification that the output was
  accepted
• by the buyer
• ? Debriefing the seller on their overall
  performance
• ? Documenting sellers performance (documentation
• will be used in future source selections when
  evaluating
• contractors past performance)
• ? Identifying room for improvement on future
  contracts
• ? Archiving all necessary project documentation
• ? Performing a lessons-learned review
• ? Identifying best practices

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• Contract Management and Claim Management
• This is a tool for managing and dealing with
  suppliers, contracts,
• variation orders, and accounts.
• Also the Contract Management and Claim Management
  have
• modules in instruction of bonds, insurances, and
  warranties. You
• can also accredit the proposal documents,
  contract, variation order
• documents, and default lists (in MS-Word or
  MS-EXCEL) to
• contracts.
• Reports in the projects statuss about the
  supplier, contract status
• report, difference of orders and causes, invoice
  ledgers and
• compilations, project status etc strengthen the
  Contract
• Management and Claim Management. Photo
  documentation can
• be a qualified structure where the categories are
  defined to the user

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• (like General, Work Progress, Defaults, etc), and
  can be chosen
• from and sorted according to multiple criteria.
• The module invoices permits the input of normal
  invoices as well
• as cumulative (interim), partial-final and final
  statements.
• The Contract Management and Claim Management
  takes note the
• chances to go into contract risks (expected
  variation orders,
• variation of quantities, claims at hand,
  assessment of excluded
• risks) which will be summed together through the
  commitment
• values so it can be alerted on time of a possible
  over costing.

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• Contract Management