CONTRACT ADMINISTRATION Introduction Contract Administration involves activities perform by the employers officials after a contract has been

awarded, to determine how well the employer and the contractor perform to meet the requirements of the contract. It includes all dealings between the employer and the contractor from the time the contract is awarded until the work has been completed and accepted or the contract terminated, payment has been made, disputes have been resolved and the contract properly closed out. As such, contract administration constitutes primary part of the procurement process that assures the employer gets what he paid for. Scope and Objectives of Contract Administration The objective of contract administration is to successfully complete the procurement of a particular works, goods or services by assuring the Employer receives the required works, goods or services on time, in the right quantity, of the right quality, and the contractor properly compensated, protecting the rights of both parties and also ensuring the obligations of the parties are met. It helps wise expenditure of public funds. Activities of Contract Administration Activities of Contract Administration include the development of contract administration plan of which initial activities forms a primary part. Those initial activities include start-up conference with the contractor, identifying critical areas for contract monitoring, effective contract control, setting up contract files, etc. Performance monitoring, quality assurance, inspection and acceptance, contract modifications, identifying data deliverables, progress monitoring including handling unacceptable performance, dealing with delays, dispute resolutions, risk management, payments to the contractor, termination of contract, managing contract closeout are other key activities of Contract Administration. Also, evaluating the contract results is a very important activity. If the evaluation discloses a systematic problem, recommending corrective action which should be taken for avoiding similar problems in future is also a part of contract administration. Features of Different Types of Contracts There are three types of contracts, basically varied with the method of payments. a) Lump sum (Fixed Price) b) Unit rate (Admeasurement or Remeasurement) c) Cost Reimbursable

Lump Sum Contract in this type the contractor undertakes to carry out all the works shown on the drawings for a pre-agreed sum. This type contracts are normally used for small, short duration, well defined and detailed works or building constructions which are not subject to large quantity variations or conditions of high risks. Also this type may also be suitable for larger works of longer duration, such as industrial plants, normally following two stage bidding procedure with designs prepared by the successful bidder. Bidding documents for this type normally consists of ITB, conditions of contract and contract data, technical specifications, well defined drawings, activity schedule and form of bid, contract agreement and securities. BOQ is not normally given. The payment schedule is normally a proportion of the contract price related to progressive stages of completion. Unit Rate Contract This type is the most common in general use in public sector for construction of infrastructure projects of both large and small. Bidders are invited to quote unit rate for carrying out the employers estimated quantities of work to be performed. These unit rates are inclusive of all related inputs and overheads plus profit. During the contract execution, quantities of work completed satisfactorily are measured periodically as a basis of payment. The bidding document for this type of contract consists of ITB, conditions of contract and contract data, technical specifications, a detailed bill of quantities, drawings with sufficient details, form of bid, contract agreement and securities. Cost Reimbursement Contract In this type contractor is periodically reimbursed with contractors actual cost for measurable inputs such as labour, materials, equipment, etc., together with a fee to cover associated costs for overheads, management and profits. This fee may be a fixed fee, a percentage of measured costs or a variable fee which increases if savings materializes or reduces with cost overruns compared with the estimate. This type is more suitable in emergency situations or works with great uncertainty. Relevant Laws and Legal Provisions A contract is an agreement between parties which is binding in law. Furthermore the rights and obligations of the parties under a contract may be enforced by the courts. The courts may compel performance of contractual obligations by the party in default or, more commonly, may award damages for breach of contract. Applicable law will determine to what extent the parties are bound to carry out their contractual obligations. In Sri Lanka the applicable law is always Sri Lankan law. For a contract to be formed four basic elements must be present - offer, acceptance, consideration and the intention to create legal relations. In procurement, tender notice or request for proposal by the employer can be considered as an invitation to offer. Bid or II

proposal submission by the bidder can be considered as the offer. Letter of acceptance issued by employer to the successful bidder is the acceptance. Depending on the procurement type, parties are named differently. In works contracts, the contract is formed between employer and the contractor, whereas in goods supply contracts, parties are purchaser and the supplier. In consultancy, the parties are client and the consultant. Employer, client or the purchaser has a binding contract with the contractor, consultant or the supplier after signing of the agreement. But, especially in works contracts, the Engineer has a procedural relationship with the contractor, for which the authority is derived from the Conditions of the Contract. Roles and Responsibilities of the Contract Administration Team The first pre-requisite for the successful completion of a contract is the selection of a suitable contractor and a knowledgeable contract administrator. The role of the contract administrator is very similar to the role played by the Engineer in a civil works contract. The primary responsibility of a contract administration team is to monitor the contractors progress and performance to ensure that goods and services provided are conforming to the contract requirement. Other responsibilities are making payments consistent with the contract requirements and exercising remedial actions as appropriate where a contractors performance is deficient. Some times this may lead to terminating the contract, if necessary, which includes determining breach of contractual provisions. But, before initializing termination actions, contract administration team should take documenting efforts to correct the breach. Another responsibility is resolving disputes in a timely manner. Others include identifying the need for changes and arranging for their implementation in the contract. Contract administration team should maintain appropriate records wherever necessary. Finally, responsibility of managing close-out of the contract also lies with the contract administration team. Evaluating the contract results is very important. If the evaluation discloses a systematic problem, contract administration team should recommend corrective action to be taken in future contracts to eliminate the problem. Critical Areas of Contract Administration Each type of contract has typical contract administration problems associated with it. For example, supply contracts mostly associated with delays in supplies and wrong products delivered to the stores.

III

The following areas should be specifically addressed in the contract administration; performance, quality, on time delivery and delays, modifications to the contract, disputes between contracting parties, payments and budgetary control, etc. Periodic reviews should be carried out to check the contractors performance in the areas of costs, schedules and technical activities. Critical activities should be identified before hand and monitor their actual completion dates with the programmed dates. In the post award conference all schedules of deliverables should be detailed and finalized. Post Award Activities Once the contract is awarded, the Procuring Entity shall immediately start engaging in the post award activities. One such activity is start-up conference with the contractor. This will be attended by the members of the Contract Administration Team and their counterparts in the contractors staff. The post award conference provides an opportunity to identify and resolve any existing or potential problems. Issues relating to the contract such as reporting, time-lines, and dispute resolution, as well as any problems or misunderstandings, should also be clarified at this time. This conference is not to re-negotiate contract terms. Other key post award activities are identifying the critical areas for contract monitoring, effective contract control and setting up the contract files. Control and Monitoring of Contract Performance For contract control, performance plan should be developed. In the performance plan, critical components which need to be monitored closely are marked. It also should be included with how they should be monitored, who does the monitoring and when the monitoring of each activity will commence. The critical function of managing the contract is through effective documentation. Therefore maintaining contract files is very essential. These files should contain the signed contract, bonds and insurances, notice to proceed, documents relating approvals submitted by the contractor, documents for performance monitoring, change orders, documents relating to inspection and acceptance, also documents relating to stop or suspend work and contract closeout. This file will provide a basis for settling claims and disputes should they arise in administrative or court actions. The contract administration file should be retained throughout the contract term and all subsequent extensions/renewals, as well as during the final payment period and warranty period. Receipt, Inspection and Acceptance Procuring entity has the right to inspect before making the payments to the other party. Cost of inspection, allowance for testing place of inspection, time of inspection should IV

be clearly mentioned in the bidding document. Inspections can be carried out before or during the process of manufacturing, at the pre-shipment or post-shipment, and after arrival or installation at site. Acceptance entitles the contractor to payment and limits the procuring entitys right to seek remedies if defects are found at a later stage. Contract Modifications / Variations While it would be ideal for the original contract to accurately anticipate and provide provisions for all situations that might occur as contract is being performed, additional needs, changing conditions, unanticipated situations, and innumerable other factors may arise that give cause to modify the contract. Careful consideration as to the nature of the modification and the terms and conditions of the original contract will determine the appropriate action to be taken to successfully execute a change to a contract. There are basically two ways to modify a contract. One is by a bilateral amendment, in which all parties to the contract agree that a modification is necessary because the scope of work, the term of the contract, or some other provision of the contract needs to be altered. The second is the right to unilaterally modify the contract. In this case, terms and conditions in the original contract set forth the situations under which the Procuring Entity may exercise a right to modify the contract without the contractors consent. The clause in the Condition of Contract provides the Procuring Entity with the right to modify the contract without the contractors consent. In this situation, the work required of the contractor must be within the scope of the original contract. Price Adjustment clause sets forth the ways that the contract price may be modified if contract clauses that provide for price adjustments are exercised in the contract. Besides the above clauses, there are other clauses in some contracts which give the Procuring Entity the right to direct performance in exchange for adjustment in price, or time for performance, or both. For example, if the site is not handed over on agreed date, the contractor is entitled to an equitable contract adjustment, in price, time, or both. Handling of Contractual Delays Any contract may encounter unforeseen or uncertainty elements. However attempts are made to predict the future condition, the delay is unavoidable. Sometimes, delays cause the failure of the entire project. It is also a reason for increased cost. Delays may be due to fault of employer, contractor or neither of above two parties. Examples for delays due to employers action are delay in handing over of site or delays in design, etc. Lack of materials or mismanagement at site causes delays from contractors inaction. Unforeseen and unusual V

incidents like heavy rain, tsunami etc can be categorized as incidents which are beyond the control of either employer or the contractor. Delays can be categorized as excusable, non excusable or compensable delays. Excusable delays protect the contractor from sanctions for late performances. Here the employer is responsible for the cost and time delay under the contract. Any delay is considered excusable if it is proved that it caused by incidents beyond the control of the contractor. Excusable delays can be further verified if the factors causing delays are unforeseeable, preventable or able to overcome. Contractor is expected to be familiar with the locality of the contract. But, with the adequate knowledge and experience, still some unforeseen conditions may encounter during performance of the contract. Sometimes delays could be prevented by changing the sequence of work. Examples of causes for excusable delays are state actions like curfew, force majeure situations like war, civil unrests, etc. Non excusable delays are due to fault of the actions of the contractor. No any compensation is granted and the risk shall be borne by the contractor. Examples are lack of cash flow, shortage of resources, lack of equipment, lack of knowledge, etc. When the cause of delay is accepted, it is necessary to assess the impact of the delay to the contractors task. If any item in the critical path is not affected, contractor may not be granted any extension. If the causes for delay is proved beyond the control of the contractor, and if it has an impact to the contract, and if it is proved in accordance with the provisions in the contract, then the contractor should be properly compensated. Techniques for Price Adjustments and Price Fluctuations There is a risk for contractors due to the variations in prices of resources during the performance of the contract. Best method to mitigate the risk is to include price adjustment provisions in to the contract. If price escalation clause is not included in contract, contractors add mark-up at the bidding stage. There is no methodology available to calculate the mark-up exactly. It is only a contractors guess. If price escalation clause is included in the agreement, contractors ignore adding mark-up at bidding stage and the contractor will be paid the price variation during the performance of the contract. In this way, both the contractor and the employer are benefited. There are two methods for price variation reimbursement; Conventional method and the Formula method. In conventional method, fluctuation is paid only for specified inputs. Computations are based on actual quantities used and the price difference of specified resources used during the valuation period. In Formula method fluctuation is paid directly only on major inputs which are computed and indirectly to minor inputs also. Computation is VI

based on value of work done and cost percentage of major inputs. Price variation is calculated using based indices and current indices of those inputs. Construction Claims Claims mean a request, demand, application for payment or notification of entitlement from one party to the other party, rightly or wrongly at that stage. There are three types of construction claims; contractual claims, extra-contractual claims and ex-gratia claims. Contractual claims are made in accordance with provisions in the contract. Examples for contractual claims are claims due to fluctuation of resources, claims due to subsequent changes in legislature, variation orders, etc. Extra-contractual claims have no basis from the contract but entitlement comes from common law. Examples are damages due to breach of contracts or loss of profit due to suspension of works by the Engineer. Ex-gratia payments also have no contractual provisions. If the contractors cost is greater than the payments to be received from the employer, due to various reasons such as risk faced by the contractor is higher than expected, then the employer make higher payment than due. For a successful claim, the party claiming should have entitlement to claim. Also he should inform his intention of claiming. Accurate cost records are very essential to verify the claim. Handling of Disputes A dispute is a different of opinion or disagreement between parties to the contract. The terms of contract, technological issues, character of project personnel, environmental factors are some factors which causes disputes among parties. Varieties of techniques are available for the parties to form settlements without resorting to arbitration or litigation. But always parties should look at the clauses in the contract, what it spells out for settlement of disputes. Conciliation, quasi-conciliation, mediation, private inquiry, adjudication, mini trial are some alternate dispute resolution methods. Adjudication is the method suggested in ICTAD & FIDIC conditions of contracts for dispute settlement. For smaller contract always the parties can seek single adjudicator for dispute resolution when necessary. But in large contracts, there is Dispute Adjudication Board to settle disputes.

VII

If one party is not satisfied with the decision of the adjudicators, then they can go for arbitration. In Sri Lanka, arbitration procedure is spelled out in Arbitration Act no 11 of 1995. The decision given by the panel of arbitrators is final and legally binding. Termination of Contracts A valid contract requires both parties to complete the expected performance, usually contractor performance of services in return for payment by the Procurement Entity. A contract breach is failure of the performance to measure up to specific contract requirements, in terms of quantity, quality, or timeliness. One of the most significant rights often granted by contract is the right to terminate a contract when a party has defaulted in performance. The primary reason to terminate a contract is for failure to perform on time or failure to perform with due diligence. A second reason is usually more difficult to establish. The contractor is entitled to payment up to the date of termination, but only for completed supplies delivered and accepted by the PE. This means that the contractor is not paid for all of its costs of performance, or any at all, if it has not delivered and the PE accepted supplies or deliverables. Contract conditions commonly include a clause that grants a right called a termination for convenience. The clause permits the PE to terminate the contract in whole or in part when the interests of the PE so require. This clause differs from the termination for default clause in that it is not based on defaults by the contractor. A contractor can be performing successfully, and still the PE may want to terminate the contract. For example, a software development contract for an agency or institution would no longer be necessary if the agency or institution were abolished, so the PE would want to terminate the contract. In a termination for default, the contractor is compensated only for supplies and services accepted by the PE. In a termination for convenience, by contrast, the contractor gets the contract price for accepted supplies and services plus costs incurred during performance, a reasonable profit (not anticipated profits), and reasonable settlement costs. Contract Closeout Contract closeout begins when the contract has been physically complete, i.e., all services have been performed and products delivered. Closeout is completed when all administrative actions have been completed, all disputes settled, and final payment has been made. Contract closeout is an important aspect of contract administration.

VIII