Professional Documents
Culture Documents
com
TOPIC FOUR
CONTRACT MANAGEMENT
A contract management plan, such as the one used in major project-type contracts, is intended to
do the following:
• To give a background to the contract and highlight the key points of the contract. Thus,
it serves as a quick reference guide for those who were not greatly involved in the pre-
contract award stage and do not need to know the details of the contract.
• To define those who are involved in managing the contract and their responsibilities,
and the policies and procedures that must be complied with.
• To provide the basis against which the contract performance will be managed.
• To highlight the key risks and the risk management strategies.
The contract management plan should also incorporate any lessons learned from similar
contracts that are underway or have been completed. It is advisable to talk to managers of such
contracts to learn what problems they encountered and what/how they would have done to
prevent them or reduce their impact on the contract.
The contract management plan will cover the following elements:
• General contract and supply strategy information.
• Policies and procedures to be adhered to.
• Contract schedule – which is the basis for managing timeliness.
• Contract budget – which is the basis for managing costs
• Quality plan – that is for managing quality.
• Establishing relative priorities of time, cost and quality.
Indeed, risk analysis and the development of a „risk register‟ is another key part of the
contract management planning process. This will be discussed later.
The various key terms must have been defined in the contract itself. However, it is wise to
draw attention to them in the contract management plan.
Different types of information should be included in the contract management plan. These are
as hereunder:
Definitions: Terms may be open to different interpretations. In the construction industry,
for example, „completion date‟ when not explained could mean any of the following:
• The date the building can be used.
The background information serves as reference guide for those people that are involved in
the contract management process. However, those people were not involved in the pre-
contract process. The information should include:
• The main reasons behind the contract.
Contract x
Buyer‟s contract management team list
Supplier details: All important information on the supplier should be recorded. The
information includes:
• The name of the supplier.
• Addresses of his locations involved in delivery of the contract.
• The names and addresses of the supplier‟s key members of staff. The key staff may
include the contract manager, quality and technical manager. Guidance should be given
on which individuals to be contacted and on what issues. A table like the one bellow can
provide such information.
Contract x
Supplier‟s contract management team list
Partnering information: When the buying and selling organization intend to work on the basis
of partnership, a copy of the partnership charter or mission statement should be included within
the plan. This will enable the members of the contract management team to study it and conduct
their activities accordingly. Details of the partnership steering team or committee should also be
included when it is deemed to be appropriate.
Contract scope: The scope of the contract should be summarized in the plan. There is also
need to include the „internal scope‟. The internal scope includes all the activities that need to
be undertaken by the buying organization in order to implement the contract successfully. The
internal scope may include the following:
• Preparation and issue of final design drawings.
• Scheduled review meetings with the supplier.
The key provisions of the contract: The full contract document may run into tens of hundreds
of pages. Most of the contract management team members will have no need to know the full
details of the contract. They should, however, be aware of the key provisions of the contract.
These key provisions should be kept in mind when what management activities are required and
how they should be conducted.
Separation of duties: As a matter of principle, the procedure of the buying organization should
require that certain functions are carried out by different individuals. As noted elsewhere, this
practice will reduce/minimize the opportunity for unethical practices. The separation of duties
is illustrated on the table below.
Contract x
Separation of duties
Activity
Certifying that the products have been supplied or the services have been Technical function
provided to specification.
Delegation of authority: it has been noted earlier that the contract manager cannot do everything
himself. Hence, he needs to delegate certain functions to others. Authority may be delegated
according to the position of the officer to whom it is delegated.
Communication policy: A communication policy should be prepared whenever
communication threatens the success of the contract. The policy will define the routes
communication should take for the different types of message. For example,
In partnership relationship where the threat resulting from poor communication is less, the team
members and others may be allowed and encouraged to contact the personnel of the supplier.
Contract management plan should specify:
• The reports which are required.
• The content the reports must include.
• The format of presentation.
• The officer who will be responsible for producing the reports.
• The frequency they are required.
• To whom they should be distributed.
Other policies and procedures: There are many other policies and procedures which are
relevant to contract management. These would normally be standardized so that the firm has got
standardized organizational and functional procedures. Hereunder is a list of some of the policies
and procedures:
Introduction
A schedule that indicates the activities and their completion date is necessary when on time
delivery is important. The schedule will allow the organisation to identify any slippage or failure
to complete an activity on time and take corrective action. The contract schedule may have been
the result of a number of possibilities:
The supplier may have submitted a schedule before the award of contract. He may now
be obliged to follow the schedule. In this case, there is no need to develop a schedule
after the award of the contract.
The supplier may be required by the contract to submit a schedule within a certain
number of weeks of contract award.
The last case may be expected when the purchase is complex and there is uncertainty at the
tender stage as to exactly how the work will be carried out. Indeed, where the activities of the
supplier are greatly dependent on interaction with the buying organisation, it is a good idea to
develop the plan together.
Even when one is working to the schedule prepared by supplier, one should be aware of the
basics of preparing a schedule so that one can assess whether it is realistic and sufficiently
detailed for one‟s needs.
The preparation of a schedule is based on „bottom up‟ process. This means that the schedule is
developed based on estimates for how long individual activities will take. The advantage of this
approach is that the schedule is based on sound understanding of what is involved and how long
it will realistically take. An activity may not be completed on the desired completion date. In that
case, adjustments may be required to be done.
List all activities involved and indicate how they relate to each other
It is advisable to prepare such schedule together with the supplier in order to ensure that
both organisations „buy in‟ to the result.
The network of activities shows all the activities that are required to be completed to achieve the
end result and how they interrelate. In order to understand what activities must be undertaken, it
is advisable that one establishes what are called milestones. Milestones are key achievements
under the contract; they are the result of a series of related activities.
Milestones should receive significant management attention. They might include the following:
The deliverables against which stage payments can be made to the supplier.
Completion of design.
Shipment.
Completion of installation.
There are a number of ways which can be used in order to identify the activities which are
necessary to achieve the milestones and complete the contract. One of the ways is to work
backward from the milestones to the activities; indeed, what needs to be done to deliver the
milestone? Another way is to develop a list of activities based on a similar contract.
Brainstorming can be used in conjunction with any of these approaches or on its own as a third
alternative.
Activities must be defined in such a way that they result in an output and provide for meaningful
measurement and contract control. If the activities are too few and broad, it will be difficult to
measure the level of implementation and to identify where problems exist. This may result in late
identification of problems. If there are too many and detailed activities, on the other hand, it will
result in putting in disproportionate effort in measuring the progress. Indeed, the level of detail
required will differ with the nature of the project, i.e. whether it is straightforward or complex,
and the importance of identifying delays at an early stage. Activities might, for example, relate to
approximately to a person-week of effort.
When the activities have been identified and listed, each one of them should be considered in
turn and the following questions asked:
Why do we need to do this activity? Asking this question will help to identify any
unnecessary activities. It will also identify what must happen when the activity is
complete. As such, this question helps to identify the downstream activities that depend
on it.
What needs to have been done before this activity can take place? This question identifies
the upstream activities on which a particular activity is dependent. It will also help to
identify activities which were missed out when preparing the original list.
Knowledge of the upstream and downstream dependencies for activities enables them to be
arranged visually in a network to show the dependent relationships. The flow chart below shows
part of a network for a contract to supply, ship, offload and install a large piece of equipment.
Activity 35 Activity 36
Final
Pack and
assembly
and test ship
Activity 50
Offload
equipment
Activity 45
Activity 44
Crane
Arrange
delivered to
crane hire
site
for
This network shows that, for example, Activity 36 cannot start until Activity 35 is complete and
that Activity 50 cannot start until both Activity 36 and Activity 45 are complete.
When the activity network has been drawn up, it should be checked to ensure that the logic is
sound, that the contract scope is covered and that there is sufficient detail to control the contract
against.
Allocating responsibilities
Once the network of activities has been worked out, the responsibility of carrying out each
activity should be allocated. This will definitely identify whether it is the responsibility of the
buyer or supplier to carry out an activity. The buyer and supplier should also identify the specific
individuals within their respective organisations that are to be responsible. Such selection of
individuals should be based on understanding of the skills, qualifications, experience and
competences necessary for such activities.
The timescale for each activity should be estimated. Some of the activities are not dependent on
resource availability and have fixed (or nearly fixed) durations. Cases in point are the time it
takes for cement to cure and the time it takes certain authorities to approve designs. However, the
duration of most activities are dependent on the level of resources assigned to them.
Assumptions can be made at this stage about the kind and amount of resources that should be
assigned to specific activities and, therefore, what the timescales will be. Later on, resource
levels or quantities may be adjusted if the original resource assignments do not result in an
acceptable completion date.
Since the interrelationship and timescales are known, the schedule can be plotted using a Gantt
chart. The main benefit of constructing a Gantt chart is that the critical path can be identified.
The critical path consists of all the activities that will result in a delay to the schedule if they are
delayed. In the chart below, it can be seen that there is a period of 2 working days (excluding
weekends) between the end of Activity 3 and the start of Activity 6. This is known as „float‟. It
means that Activities 1, 2, and 3 can start late by two days in total without affecting the
completion date which is determined by activity 6.
One can also see that any delay in Activities 4 and 5 will delay the commencement of Activity 6
and, hence, delay the overall end date. Therefore, activities 4, 5 and 6 are critical path activities.
Unless some corrective action is taken, any delay to the critical path activities will delay the
contract completion date. The critical path represents the shortest possible completion time based
on the network logic and resource assumptions. The degree of float, or lack of it, is equivalent to
the degree of schedule risk.
A Gantt chart
1 Activit
0%
2 y1 0%
3 Activit 0%
4 y2
0%
5 Activit
0%
6 y3
Activit
y4
Activit
y5
Activit
y6
Identifying the critical path and the amount of float requires a „forward pass‟ and a „backward
pass‟ to be taken through the network of activities.
A forward pass through the network identifies the earliest start date of each activity. One must
move forward through the network from starting activities towards the final activity. The process
is as follows:
1. There is need to identify the starting activities, i.e. those that are not dependent on any
preceding activities and can therefore be started without delay.
2. Next, identify activities that are directly dependent on the starting activities.
3. The earliest start date of these activities is the earliest finish date of the relevant activities
on which they depend.
DARE ES SALAAM DODOMA MWANZA
MOB: +255-710-302814 MOB: +255-710-302816 MOB: +255-710-302815
„ +255-767-235965 „ +255-755-829991 „ +255-767-682753
Email: kpsdsm@gmail.com Email: kpsdodoma@gmail.com Email: kpsmwanza@gmail.com
Website: www.kps.co.tz Instagram/Twitte: kps_Tanzania Facebook Page: KP PROFESSIONAL SERVICES-KPS
15 BY ABUBAKARI MRISHO, CPSP (T), 0717 58 14 04, mrishoabuu27@gmail.com
4. The earliest start date of all subsequent activities is determined in the same way, i.e. using
the earliest finish date of the preceding activities.
While the forward pass through the network identifies the earliest starting dates for each activity,
the backward pass through the network identifies the latest possible starting dates for all
activities in relation to a given end date. The process in this case is as follows:
1. Identify the final activity to be performed and by which date it needs to be completed.
2. The latest finish date of the activities immediately preceding the final activity is the same
as earliest start date of the final activity, this having been identified in the forward pass.
3. The latest start dates of these activities are the latest finish date less the activity duration.
4. The latest date of all activities is calculated in the same way as one move from the final
activity through the network to the starting activity.
The first attempt at producing the schedule may not result in an acceptable completion date. Very
often the schedule will need to be compressed, i.e. reduce the time taken to have the whole
project completed in as short a time as possible. The focus on reducing the schedule should start
with the critical path activities. Any reduction in the duration of these activities will reduce the
overall schedule by a corresponding amount.
Investigating whether certain tasks which are carried out sequentially can be done at the
same time.
Increasing the number of hours worked per day (e.g. pay overtime).
If the schedule is created by using a computer software application, it is easy to understand the
effect of shortening or lengthening an activity. The computer will automatically recalculate the
impact on the overall schedule.
When the value of the contract is high, one should expect an appropriate cost-related supply
target. When there are no such targets, procurement experts have got the responsibility of
ensuring that the costs are properly controlled. Cost performance needs to be properly managed
in accordance with an agreed budget.
The agreed budget consists of the payments which should be made to the supplier in accordance
with the contract, contingency allowance and man hour budget. These three represent the total
financial provision likely to be required.
When there is only one straightforward purchase order, there may be only one single payment for
the full order value. In case of high value contracts, the situation will be more complex. There
might be a number of stage payments, each of which is subject to a certain retention. In this case,
a „payments schedule‟ that clearly shows the sums of money that should be paid on certain dates
is likely is likely to be necessary. The finance function can use this schedule to manage the cash
flow position and, thus, ensure that funds are available to meet the payments.
Certainly, the payments schedule will have to be updated, where applicable, to reflect any
approved variations to contract and changes in invoices submission dates which may result from,
for example, schedule delays.
The “reason for payment” column might include entries for each stage payment, any approved
variations to the contract, and the release of retention monies.
The “original” budget will be the total of the “total amount payable” column at the contract start.
This will obviously exclude any variations to contract that may subsequently be added as
variations will represent approved amendments to the original budget.
Contingency allowance
It may not be possible to eliminate all risks associated with the contract. Some of the risks that
materialise may have some cost implications. Therefore, the contingency allowance will be
necessary. The uncertainty will be greatest at the beginning of the contract, which may
sometimes require the contingency allowance to be quite a significant amount.
In principle, the contingency allowance should be based on an estimate of the financial impact of
the identified risks that has been prepared by people with the appropriate expertise. The „contract
risk register‟ will contain a list of all the risks that have been identified. This register should be
used to prepare the contingency allowance. A sample contingency budget sheet is shown below.
The above form provides for two subsequent revisions to be made to the original provisions.
Reason for modifying the original provision may include the following:
A risk may not materialise. In this case the provision can be reduced to zero.
The assessment of the financial impact of a risk may change.
New risks may be identified.
A risk may occur and result in an actual cost
It is necessary to support each contingency provision with the documentation that gives the
rationale behind the amount of the provision, and any subsequent revisions to it.
If the buyer is reasonably familiar with the type of contract concerned, a less time consuming
alternative to identifying contingency against specific risks is to set contingency levels in line
with past experience.
As the contract progresses, risks will pass and the uncertainty will become less. The level of
contingency in the contract budget can be reduced accordingly.
This covers the cost of the time that your company‟s personnel will need to spend on managing
the contract. Companies will usually have a “man-hour rate” for professional and non-
professional staff, or for different levels of staff within the organization. These different rates
need to be taken into account.
Total man-hour costs can be established by multiplying the number of hours by the appropriate
man hour rate. A sample man-hour budget form is shown below.
The key information from the payments schedule, contingency budget, and man-hour budget
should be incorporated into the overall contract budget. This budget will give one an overview of
all expected costs. An example is shown below which provides for subsequent amendments to
the “original budget” and the tracking of forecast costs to completion.
Contract X budget
Cos Descriptio Origin Approve Curr Commit Payme Addition Antici Varia
t n al d ent ments nts al pated nce
cent budget variation budg Made made forecast final to
re s/ et costs cost curre
claims/ (e.g. nt
transfers pending budg
variation et
s/claims
145 Equipmen
6 t purchase
145 Shipment
6
145 Installatio
6 n
145 Commissi
6 oning
Sub-total
211 Contract
1 manageme
nt hours
221 Discipline
0 hours
Sub-total
800 Contingen
1 cy
Grand
total
In the case of low risk items such as off-the-shelf or standard items, the supplier can generally be
relied upon to manage quality according to his own quality management systems. In this case,
the buyer need not involve himself in assuring the quality of the product or service being
supplied.
However, when the level of risk is big, such as when new technology is involved and a new
supplier is being used, the buyer will want to influence the management of quality. Hence, a
quality plan should in most cases have been agreed upon and incorporated into the contract.
When it is not possible to finalise the quality plan prior to contract award, the development of a
complete quality plan should be an early deliverable within the contract and its submission
treated as a milestone.
The quality plan is the prime document for managing quality. It spells out how the quality
performance (i.e., the technical specification will be achieved. The quality plan should include
the following:
It is necessary to update the quality plan to reflect any contract variations that result in changes
or additions to the specifications.
COMMUNICATING PRIORITIES
The bases against which the key areas of project-type contract management are managed have
now been explored. The areas are time, cost and quality. It is necessary to identify the relative
priority of these areas so that effort can be devoted accordingly. This is because resources are
likely to be constrained.
When managing risks, most effort should be devoted to those risks that could have biggest
negative impact on whichever of time, cost and quality. Hence, such area where biggest impact is
likely is given highest priority. Indeed, the „risk register‟ identifies such risks and the likely
impact they will have.
Difficult decisions have to be made when problems arise. For example, when there has been an
omission in the technical specification, rectifying it may involve additional cost and a delay to
delivery. An alternative may be to do nothing, in which case quality will be compromised.
Usually, contract changes will involve trade-off between time, cost and quality. Cases in point
are:
The contract manager needs to be aware of the relative priority of time, cost and quality in the
contract management plan in the day to day decision-making. For example, if it is clear that on
time delivery is of paramount importance, buyers might treat expediting against the contract
schedule as a high priority. If no guidance has been given, the buyers may well give less
attention to expediting and focus more on lower priority areas.
Some contract managers resist having to choose between time, cost and quality because they feel
that everything is important. May be they believe that anything that is not identified as being the
highest priority will not be given adequate attention. This view is not helpful when resource
allocation decisions have to be made. Indeed, in the absence of guidance on the relative priorities
either from the contract management plan or the contract manager, the buyers will have to make
their own judgement.
The contract manager or the contract team members can use the position of the product or
service on the supply-positioning model to help establish the relative priorities.
The further a purchase is positioned to the right hand side of the supply-positioning model, the
higher is the expenditure, and therefore, the higher the priority that will be given to cost. The
further the purchase is positioned to the top of the model, the greater is the risk. If the cause of
the high risk is quality-related, quality will have a higher priority than delivery. However, if the
high risk position is delivery-related, time will have a higher priority than quality. If both
delivery and quality are the cause of high risk position, both will have a high priority.
The supply positioning model
Impact/supply
Opportunity/risk
Rating
Expenditure
Routine items should require minimal effort as both risks and costs are low. There are
generally no strong priorities for routine items, so little contract management effort
would be expected for such contracts which can generally be managed by exception.
Leverage items should not require significant contract management effort as risks are
low. Instead, there will be a focus on any aspects of the contract which can have an
impact on cost, such as specification changes or exchange rate movements if the latter
have not been protected against.
Bottleneck items are high risk and require one‟s full attention. Such contracts should
therefore be reviewed frequently and in some detail so that any unwanted events are
identified at an early stage.
Critical items are similar to bottleneck items except that the significant cost of critical
items will justify an even more rigorous approach to contract management.
In conclusion, let it be pointed out that when the contract management plan is complete, it
should be validated before it is signed-off by the contract manager. The validation should
involve ensuring that
Once completed, the plan should be used. As the contract progresses, circumstances will change.
Identified risks will pass. Unforeseen risks may occur and be identified. This may result in some
changes. Critical path activities may be completed early and other activities my run late,
resulting in a new critical path. Thus, the focus of the plan will change as the contract progresses.
Therefore, the plan must be regularly reviewed or updated and communicated to the team.