What is Contract Management?
Contract management is an intricate oversight process that follows contracts from pre-
award to completion, including execution, vendor selection, issue detection and control,
tracking and processing. When implemented properly, contract management processes
ensure that budgets and abilities are in alignment with project objectives.
The best contract management flows seamlessly through the organization and
integrates with project management and control, always involving the team members
for input and outcomes, and carefully monitoring contractors for performance and
deadlines.
While contract management can be beneficial in any industry, it is vital for industrial and
construction projects. In fact, contracts in these industries ensure that operations and
financial goals are met and risk is reduced. Supervision, quality control and the ability to
manage numerous professionals at a time can all be handled by a contract
management program specifically implemented for these types of projects.
The Stages of Contract Management
Contract management is not solely about creating agreements and getting them
approved. It includes a series of stages that follow the process through to a successful
conclusion. Any missed steps can cause delays and mistakes down the line. Here’s an
outline of five fundamental areas of importance:
1. Create: The contract management system must have the ability to incorporate
standardized procedures with details specific to the goals of the organization.
First steps include identifying the type of contract and who will be responsible for
each task. The planning process should consider company resources, objectives
and team member strengths and weaknesses, while developing an overview of
potential challenges and risks.
2. Negotiate: The contract should be written in a manner that reflects the
organizational needs and values, helping to establish trust between the two
parties. Once the initial contract has been designed, negotiation is the obvious
next step. Line items can be discussed, changed or removed, as part of the
negotiation process.
3. Approve: Approval usually includes multiple sign-offs. Numerous managers,
departments and even contractors, may have to sign off on the specifics before
the final deal is made.
4. Finalize: The contract signing process between enterprises is the final step
before getting the project underway. Obtaining signatures from numerous parties
and entities quickly—even when distance is a factor—is crucial to avoiding
postponements to the process.
5. Manage: Once the project begins, changes can still occur. Revisions need to be
carefully managed and communicated to the appropriate parties. Deadlines,
audits, revenue, and expenditures need to be tracked, completed and shared with
the rest of the team.
A standardized program that is customizable to an organization’s specific needs helps
a contract run smoothly. When these five areas are carefully managed, the odds of a
successful relationship and a closed deal go up exponentially.
Why is Contract Management Important?
A contract provides parameters for key aspects of a project including business strategy
and relationships. Competing in today’s global marketplace means team members can
be located all over the world, adding challenges concerning time-zone, cultural needs
and understanding.
Contracts include payment terms, negotiations, workflow, service expectations, and
compliance obligations. Contract management helps reduce risk by ensuring
compliance when necessary, as well as providing monitoring and tracking to prove it. It
also augments the bottom line by comparing prices and reducing spending. Real-time
visibility of all aspects of a contract over time enables management to make data-
driven decisions and necessary course corrections before it’s too late.
When a contract is initiated, it should reflect goals, timelines, budgets, resources, risks,
regulations, and specifications. Each phase of the process requires specific elements,
purpose and management in order to proceed to the next step.
Technicians, engineers, and other skilled professionals must be carefully chosen to
complete the contract and execute the project. Technology provides an active thread
connecting all aspects of the project, helping to fill in the holes during revisions, and
ensure communication with the right team members, at the right time.
Many construction companies are faced with re-thinking how business processes like
productivity, performance, labor, and inventory are affecting growth and profitability.
Communication, tracking, managing revisions and a variety of other tasks can add to an
already complicated process. Good contract management and operational efficiency go
hand-in-hand.
Contract Management Challenges
Tracking and managing the array of moving parts of a contract can present a variety of
challenges. In the engineering and construction industry, projects are often large and
complex, involving joint ventures, numerous sub-contractors and complications related
to global execution.
The processes of contract management can present serious challenges, especially
when handled manually. Specific challenges include:
Execution: Without proper management, files are easily lost, and final approvals
and signatures take much longer than necessary.
Tracking: It can be difficult to track and audit contracts once they have been
signed and are passed on to other staff who may not understand the details that
must be monitored. Budget information, e-mails, information from important
meetings, and changes are stuck in transit before being addressed. Time is
money, and project delays decrease profitability.
Revisions: Managing change before a contract is approved and after it has been
executed is equally important. Larger projects frequently include national or
global teams and create obstacles to deadlines and cohesiveness. Updates to
original documentation can take days, or even weeks. What’s more, if teams are
working from different versions, the wrong decisions could be implemented. Any
of those scenarios could lead to increased risk, missed deadlines, mistakes and
even litigation.
Compliance: Details laid out in the contract are non-negotiable obligations. From
a legal standpoint there may be regulatory or compliance issues that must be
followed to the letter. Failure to comply can have serious legal and/or financial
consequences.
Benefits of Contract Management
Contract management improves communication, response time, goal alignment,
transparency and accountability. These and other project performance metrics can be
tracked and improved with good contract management:
Efficiency: Contract management streamlines adherence to the contract and can
lower business costs. All necessary documents can be found and accounted for
in one place, offering increased transparency for team members from different
departments, as well as contractors working offsite. The addition of automation
makes documents and changes more accessible, which can, in turn, reduce
response time to changes, additions or challenges. Positive experiences relating
to contractual agreements may lock in better raw material pricing and availability
as well as service costs down the line.
Risk reduction: Important business objectives and goals are identified when a
contract is written. A good contract management process sets expectations
around those priorities and ensures commitments in the contract are met. The
benefit works all around, holding organizations to performance clauses, and
providing vendor compliance. Regulations are in a continual state of change, and
staying on top of them means constant oversight to ensure your projects stay in
compliance. Tracking assets, obligations and provisions is a must to mitigate the
risk of financial loss. The tracking element provided by a contract management
tool constantly gauges performance and compliance in real-time.
Relationship building: A positive contract experience creates lasting business
partners with vendors and subcontractors. Particularly in the construction
industry, finding good help is paramount for future projects.
Tracking and documentation: Contract management tools organize and
centralize documents and processes making business insight and analytics
more accessible. Standardized reporting and record-keeping results in accuracy
and visibility, which, in turn, creates actionable insights. When contracts are
managed with transparency, projects are less likely to get stuck because of an
unknown challenge or compliance issues.
Benefits of Contract Management Software
From contract development to project completion, full project lifecycle oversight is a
clear choice to maximize performance and revenue. Contract management software
takes the process a step further, providing automation, a single source of truth and a
real-time view of day-to-day activity.
Once a contract is approved, it needs to be accepted and signed by numerous parties.
Signatures get complicated when more than one is needed, potentially from all around
the country, or even the world. Contract management software provides an electronic
signature tool that solves this tedious problem, expediting execution.
Following contract execution, efficient management of the contract can significantly
enhance the results of the project. Software solutions can build the terms of the
contract into business rules that assure compliance — whether adhering to required
timing, payment terms, change management processes or even providing visibility to
performance en route to achieving predetermined incentives.
In order to truly leverage the benefits, contract management software would include:
Procurement planning: Tools to evaluate and manage potential clients and
vendors should be intuitive. Software must offer parameters to choose
opportunities that are in line with your company’s values and services.
Vendor and bid management: Individual contracts inside the umbrella contract
are equally important. Software offers the ability to choose and review vendors
and contractors based on predetermined qualities and previous work experience.
Budget and cost control: Staying within a predetermined budget is a must-have
of a contract management program. Software adds evaluation of value, progress,
completion, and forecasts for the future.
Change management: If things change over time within the contract, revisions
should be noted, approved and shared with the team quickly. Contract
management software can also calculate effects on cost and scheduling.
Field progress management: Contract management software goes beyond the
contract, tracking what’s happening in the field, communicating change and
progress, and reporting issues instantly. This real-time access helps the team
determine alternative actions and make decisions proactively.
Administration: Communication and collaboration are key elements of a
successful contract and project. Clients, customers and contractors can stay on
the same page regarding all documentation and change around meetings, action
items, responsibilities, progress and status.
Compliance: A contract management software solution notes important
information and tracks it along the lifecycle of the project, creating alerts to the
appropriate people when a breach is suspected. A real-time overview allows you
to be proactive before a problem presents itself.
Documentation and audit trails: Contract management software allows all team
members to literally be on the same page as changes are made. Budgets,
timelines, goals, audits, and other documentation are all updated and accessible
in real-time. Having access to all aspects of project changes as they are
happening in a single-source-view means timely reactions, positive outcomes,
reduced risk and fewer complications that could result in missed deadlines,
mistakes and even litigation.
Data solutions clear the way for improvements to overall contract and project
organization with automated procedures and notifications. A solution that can
effectively head off problems provides a competitive advantage and improves overall
project performance.
A contract management solution should seamlessly integrate with other project
management systems, like project portfolio management and project controls. Software
that manages the entire lifecycle of your project can provide resources for all team
members, no matter their specific roles. The benefit of that unified view is invaluable to
the team, the process, and the bottom line.
Types of Contract
In this article, we’ll define the three basic contract types and provide examples to help
you understand when you’d use each of them.
1. Fixed Price Contract (FP)
2. Time and Material Contract (T&M)
3. Cost Reimbursable Contract (CR)
Fixed Price Contracts
These are also known as Lump Sum contracts. The seller and the buyer agree on a fixed
price for the project. The seller often accepts a high level of risk in this type of contract.
The buyer is in the least risk category since the price the seller agreed to is fixed. Be
sure this type of contract has fully detailed specifications, checklists, and project scope
statements from the seller's side, which the buyer will use.
With this type of contract, sellers may try to cut the scope to deliver the projects on time
and within budget. If the project is finished on time with the desired quality, the project
is over for that contract. However, if the project is delayed and there are cost overruns,
then the seller will absorb all the extra costs.
Below are a few types of fixed-price contracts:
Fixed Price Incentive Fee (FPIF)
Although the price is fixed, the seller is offered a performance-based incentive. The
incentive can be dependent upon one or more project metrics such as performance,
cost, or time.
Fixed Price Award Fee (FPAF)
If the performance of the seller exceeds expectations, an additional amount (i.e., 10%
of the total price) will be paid to the seller.
Fixed Price Economic Price Adjustment (FPEPA)
The fixed price can be re-determined depending on the market pricing rate.
Cost Reimbursable Contracts
What do you do when the scope of the work is not clear? A fixed-price contract is out of
the question since you are not sure what the project will require. Here’s where you’d use
a cost-reimbursable contract.
A cost-reimbursable contract—also known as a cost disbursable contract—is used when
the project scope is uncertain, or the project is high risk. The buyer pays all costs, so the
buyer bears all the risk. Under a cost-reimbursable contract, the seller works for a fixed
time period and raises the bill after finishing the work—a fee that represents the profits
for the contract. The fee may be dependent on selected project performance or other
metrics.
A major drawback of this type of contract is that the seller can raise an unlimited or
unknown amount which the buyer is compelled to pay. This is why cost reimbursable
contracts are rarely used. Below are a few types of cost-reimbursable contracts:
Cost Plus Fee (CPF) or Cost Plus Percentage of Costs (CPPC)
The seller will get the total cost they incurred during the project plus a percentage of
the fee over cost; this is always beneficial for the seller.
Cost Plus Fixed Fee (CPFF)
The seller is paid a fixed amount that is agreed upon before work commences. The
cost incurred on the project is reimbursed on top of this, regardless of project
performance.
Cost Plus Incentive Fee (CPIF)
A performance-based incentive fee will be paid to the seller over and above the actual
cost they have incurred on the projects. With this type of contract, the incentive is a
motivating factor for the seller to meet or exceed the project’s performance metrics.
Cost Plus Award Fee (CPAF)
The seller will get a bonus amount (the award fee) plus the actual cost incurred on
the projects; this type of contract is very similar to a CPIF contract.
Time and Material Contracts or Unit Price Contracts
Unit price contracts are what we usually call hourly rate contracts. This type of contract
is a hybrid of a cost-reimbursable and fixed-price contract. For example, if the seller
spends 1,200 hours on a project at $100 an hour, the seller will be paid $120,000 by the
buyer. This type of contract is common for freelancers, and the main advantage of this
contract type is that the seller makes money for every hour spent working on the
project.
What are the Elements of a Legally Binding Contract in
Project Management?
The elements of a legally binding contract in project management are the same as
those for any other type of contract. However, in the context of project management,
additional elements may be specific to the nature of the project being undertaken. Here
are some of the critical elements of a legally binding contract in project management:
1. Scope of Work: The scope of work defines the specific tasks or deliverables expected
to be completed under the contract. It should be clearly defined and agreed upon by
both parties.
2. Project Timeline: The timeline specifies the start and end dates of the project, as well
as any critical milestones along the way. It should be realistic and achievable.
3. Payment Terms: The terms outline the amount and timing of payments made to the
contractor for their work. It should be unambiguous.
4. Change Management: The change management process outlines how changes to the
scope, timeline, or budget of the project will be managed. Both parties should agree
upon it.
5. Risk Management: The risk management plan outlines how risks associated with the
project will be identified, assessed, and mitigated. It should be regularly reviewed and
updated.
6. Confidentiality and Intellectual Property: The contract should include provisions to
protect the confidentiality of project-related information and any intellectual property
developed during the project.
7. Termination: The contract should include provisions for termination, including the
conditions under which either party can terminate the contract.
All of these elements are critical to a legally binding contract in project management. By
ensuring that they are clearly defined and agreed upon by both parties, the contract can
ensure that the project is completed successfully and to the satisfaction of all parties
involved.
