Understanding Contract Management

    • What is contract management?

    • The contract management lifecycle: Pre-Signature Stages

    • The contract management lifecycle: Post- Signature Stages

    • The types of construction contracts

    • The key elements of a construction contract

    • The key clauses of construction contract

    • The common pitfalls of contract management

    • The key tips for contract mangement

What is contract management?

Contract management is the process of managing a legally binding agreement between two or more parties for a set duration of time. It is the process of managing deliverables, deadlines, contract terms and conditions while ensuring contract obligations are being met.

The aim of contract management is to:

  • Establish and meet agreed project specifications (deliverables, payment terms, responsibilities etc.)

  • Manage necessary changes through contract variations 

  • Deal with claims or disputes 

  • Close out the contract in an orderly manner

Contract lifecycle: Pre-signature

Initiation

This is the first phase of the contract lifecycle. In this phase a need for a contract is identified and the contract request is initiated. It will involve identifying key stakeholders, establishing roles and responsibilities, gathering requirements and creating the scope of the agreement. 

Writing

In this next phase, the contract needs to be written. The key consideration in this step is to create a clear draft version of the contract. It is important to be clear and pay attention to specific wording as any ambiguity can leave contracts up for interpretation and may create further risk. 

Negotiating

Here both parties will view the drafted contract and highlight any changes that should be made. It is important to negotiate this and liaise with legal stakeholders if required. The drafted contract will then get edited to reflect outcomes of any negotiations and produce the final version.

Approval

Once both parties are satisfied with the contract's terms and conditions, obligations, and responsibilities, all parties will sign the final version accordingly.

Contract lifecycle: Post-signature

Execution

Once a signature is obtained, it is time to execute the contract. Contracts are distributed, stored and executed by both parties. In order to execute, parties should acknowledge key responsibilities, obligations, milestones and deliverables.

Tracking

 In this phase the focus is shifted towards tracking performance across the delivery of the agreement and audit for any discrepancies against the contract. This includes tracking the costs, performance, compliance and risks to enable quick communication and resolutions over issues.

Reporting

In this phase it is important to consider the contracts lifecycle and report all activity and performance. Reporting on this regularly will give stakeholders up-to-date insight on the progress, costs, and any issues that might arise. A contract software system generates custom reports or dashboards which can be useful when managing multiple contracts over multiple periods.

Renewal

Now the contract lifecycle is complete. Both parties will determine if renewing the contract is beneficial for either to continue or not. This involves weighing up various factors such as progress, communication, costs and quality. Instead of going through the cycle again, they might just renegotiate terms and continue another agreement.

Types of construction contracts

Design and Build Contract

Used for project delivery where both the design and the construction is supplied by the Contractor. This is usually issued to the Tier 1 companies who would then engage subcontractors.

Time and Materials

This contract requires a client to pay for a contractor's time and money spent on materials. They usually specify an hourly rate plus a markup for materials. This type of construction agreement is often used in cases where the scope of work or project duration is uncertain — or where changes are likely to occur during the project.

Sub Contracts

These are agreements between the main contractor and subcontractors that are hired to perform only specific tasks within a construction project.

Measurement Contract

Used in projects where the scope of work is reasonably well-defined but cannot be quantified accurately until the work is completed, such as roading projects involving major excavation works. Once the work is completed the exact quantity of work under each bill of quantities (BOQ) item will be remeasured.

Cost-Plus Contract

An agreement to reimburse a supplier for expenses plus a specific amount of profit, usually stated as a percentage of the contract's full price.

Lump Sum Contract

An agreement where the supplier performing the work agrees to complete the project for a fixed amount.

Standard Construction Contract (SCC)

Suitable for smaller, less complex projects. It might only involve two parties, the client and the contractors.

NZS 3910

Provides a standard form of general conditions of contracts to incorporate into construction contracts. Contracts based on this standard will be comprehensive but at the same time easy to understand and will reflect fair-risk allocation between the parties.

Key elements of a construction contract

  • Are a standardised set of terms and conditions that governs the rights, obligations and responsibilities of the parties involved, in NZ this is the NZS 3910. It allows for quicker contract establishment and includes contractor and buyer obligations, compliance, insurances, and outlining the procedures for change orders, dispute resolution, and termination.

  • Contains terms and conditions that are unique to the particular transaction/agreement. This might include customised terms such as delivery schedules or payment terms, procedures for amendments or unforeseen events, or performance indicators. This is a good opportunity to tailor the contract to better suit specific needs and circumstances and reflect internal policies and procedures

  • Outlines the specific tasks, responsibilities, timelines and deliverables agreed upon. It will provide a clear understanding of what is expected, how it will be accomplished and what resources are required, and the duration of the project.

  • Details the technical requirements or standards the deliverables or works are expected to meet. It defines the products used, the quality standards, the performance criteria or any other specific technical details of the project design. This will also outline details that cannot be written in the drawings section and will be useful in the case of a dispute to show the intended design. 

  • Shows the specification and scope of work section in a graphic form. For example, this could include the engineering drawings, architectural plans or material lists. This is usually the preferred method for understanding how and where to deliver as it provides clarity on the physical aspects of the project.Item description

  • This section will provide a detailed breakdown of all associated costs. It will include unit prices and quantities of materials, taxes or fees, progress payment schedule, advances and payment bases. It will describe the work included and how it will be measured and paid. 

  • A payment schedule is a timeline of the payments to be made throughout the lifetime of a project. Typically in construction contracts contractors are not paid out a lump sum payment for the work provided, and instead receive payments at certain intervals throughout the project. Breaking payments down into these intervals ensures contractors are paid in a timely manner and allows for a smoother project delivery.

Key clauses in a construction contract

  • Scope of Work: The specific tasks and responsibilities of the contractor.

  • Payment Terms: The agreed-upon payment schedule, methods of payment, and any conditions related to payments.

  • Timeline: This specifies the start date, completion date, and any milestones or deadlines for different project phases.

  • Change Orders: Provisions that address any modifications or additions to the original contract scope, cost, or timeline.

  • Insurance and Liability: This covers the insurance requirements for both the contractor and the property owner, as well as how liability will be handled.

  • Termination Clause: The conditions under which either party can terminate the contract.

  • Dispute Resolution: The process for resolving any disagreements or disputes that may arise during the project.

Common pitfalls in contract management

  • Impact:

    It can be difficult gathering all the requirements and articulating it in a contract/statement. If it is not clear this can lead to agreement inefficiencies where deadlines or expectations are not met and could be damaging on reputation.

    Best Practice:

    If this is not recognised it may lead to future contracting models issues. Involving as many internal stakeholders as possible, will enable a clearly defined scope and ensure understanding is met.

  • Impact:

    It might not be clear who has authorisation responsibility or what the obligations stakeholders might have within the agreement. Can damage internal/external relationships with miscommunication and uncertainty.

    Best Practice:

    Have internal staff aware of an upcoming contract early and keep open communication lines at all times.

  • Impact:

    Can result in significant delays, non-compliance or missed revenue opportunities. Run the risk of having sub-optimal contract terms, lead to assumptions, or negotiations being focussed on the wrong terms/clauses.

    Best Practice:

    Avoid standard contract templates and involve a legal team from the initiating or authoring stage.

  • Impact:

    Predicting a close date for negotiations is often impossible. Can result in forgoing revenue opportunities when the negotiation process is drawn out, missing certain clauses or leaving clauses in from standard contract templates.

    Best Practice:

    Build internal stakeholder consensus on the terms and clauses, avoid standard contract templates and encourage face-to-face meetings.

  • Impact:

    Often there are multiple contracts to manage at once. Poor systems can result in losing sight of responsibilities, obligations, milestones and deliverables. Also may cause time delays and inaccuracies in drafting, approving and tracking performance of the contract.

    Best Practice:

    Investing in a contract management software will save time and effort through a contracts lifecycle.

  • Impact:

    Failing to properly document key aspects of the contract, such as amendments, change orders or correspondence can be detrimental in the event of a dispute.

    Best Practice:

    Have up to date, accurate records of all activity within the contract. A contract software management software will assist with this.

  • Impact:

    Can lead to inadequate performance, quality issues and missed deadlines if other suppliers or vendors are not managed carefully.

    Best Practice:

    Establish clear expectations, monitor supplier performance and address issues promptly.

  • Impact:

    Sometimes the scope of the work expands beyond the original agreement. Without proper documentation and approval can lead to increased costs, delays and resource constraints.

    Best Practice:

    If there are any scope changes make sure this is documented clearly and agreed upon by all parties.

  • Impact:

    Having no provisions for unexpected or unpredictable events can be damaging on the relationship and costs. Ensuring you have clauses for unexpected events is a way to mitigate the risk of sudden increase in costs that could be liable for.

    Best Practice:

    Ensure special conditions push the need for flexibility as a way to manage the risk, rather than increasing risk

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Key tips for contract management

  • Centralise and standardise agreements - Have a location where you store contracts so that you can use them as a template for new opportunities that arise. 

  • Tracking - Your contracts need to be easily accessible to fulfil your contractual obligation. Having contract management software can help you do this. This will save a lot of time and effort when drafting, searching, tracking and auditing contracts.

  • Visibility - It is important to involve key team members across legal, HR, or senior management  to provide further perspective and clarity on the agreement as a way to ensure compliance and reduce any risks. 

  • Communication -  Being able to discuss any issues or changes to the project early to the owner or relevant suppliers will allow for quicker resolutions

  • Contract management software (CMS) - Save yourself time and streamline the process through using a CMS system, benefits include:

    • Process Improvement

    • Storage in one place

    • Increased accessibility

    • Better version control

    • Approval workflows

    • Multiple templates available

    • Risk Mitigation

    • Contract Visibility

    • Integrate Collaboration

    • Manual tasks are error-prone

    • Stay on top of milestones and deadlines

    • Save Time and Money