CONTRACTING AND
CONTRACT MANAGEMENT
COMPILED BY Dr Irvine
Introduction
• For enterprise business, procurement lies at the heart of the organization’s
actions and purpose.
• Companies need to purchase materials, supplies and services cost-
effectively and reliably.
• For sellers who provide products or services, knowing that the buyer will
fulfill their end of the bargain — including paying invoices and abiding by
all agreed-upon terms and conditions — is crucial.
• Procurement contracts—often called purchase contracts—are contracts that
establish a legally binding relationship between buyers and sellers that
protects both entities throughout the procurement process.
Introduction
• Contract management in Procurement is used to manage end-to-end
contracting with your suppliers, customers and other third parties.
• The Contract management process includes a contract request or
initiation, authoring, negotiation/redlining and approval stages,
execution and signature as well as obligation monitoring, renewals,
amendments and expiration.
• For some organisations, part or all of procurement contract management
can be quite manual and this can impact supplier management
efficiency. During the pandemic this was particularly the case for
organizations who were not easily able to access or create contracts
electron
What are the Key Steps of Contract Management for Procurement?
1. CONTRACTING VERSUS CONTRACT
MANAGEMENT
• Contracting
• refers to the process of engaging in a contractual agreement with one or more
parties.
• This agreement takes place upon the selection of a company’s suitable supplier.
• Contract management
• refers to the process that ensures all parties comply with the terms and
conditions as well as obligations agreed upon in a contract.
2. THE CONTRACTING PROCESS
(CONTRACT MANAGEMENT STAGES)
• These stages include:
1. PRE-CONTRACTUAL STAGE
1.1. Basic design and engineering
• This stage includes the activities which are required to arrive at a technical spec for the
project.
• It also involves determining the feasibility of the project, and its detailed description.
• In other words, determine what is needed and expected from the contractor in terms of
what the project or job should be like or look like.
1.2. Bidding
• Floating the tender to the market through a competitive bidding process to select the
suitable contractor or service provider who can deliver the project.
2. THE CONTRACTING PROCESS
(CONTRACT MANAGEMENT STAGES)
2. CONTRACT NEGOTIATION STAGE
• Take place once the best 2 or 3 candidates from the competitive bidding process are selected.
The following activities are carried out:
2.1. Contract negotiation and closure
• Takes place with the suitable or selected candidate.
• Negotiation will be centered on the price and other KPI
2.2. Contract execution
• Involves discussion on the following aspects:
2.2.1. Detailed project engineering
• Contractor’s execution of the stated technical and functional specs
2. THE CONTRACTING PROCESS
(CONTRACT MANAGEMENT STAGES)
2.2.2. Subcontracting and procurement
• Agreement with subcontractors and materials suppliers should be determined
and finalised
2.2.3. Project execution
2.2.4. Testing and delivery
2.2.5. Maintenance and guarantee period
3. POST-CONTRACTUAL STAGE
• Involve the management of aspects related to the post-project delivery.
• It includes, claims disputes and other satisfaction and dissatisfaction aspects related to
the project.
• Post-contractual stage management may result in contractor/supplier and service
provider retention.
3. PROBLEMS IN CONTRACT MANAGEMENT
• There are various problems which may affect the effective management of a
contract. Among the main include:
1. Misalignment of objectives between client and contractor
2. Parties lacking sufficient knowledge and expertise
3. Lack of adequate contract management structure
4. Inefficient decision-making
5. Frequent scope and planning change
6. Misunderstanding of obligations agreed upon
7. Payment problems
8. Political pressure/influence
4. PERSPECTIVES ON CONTRACT MANAGEMENT
• There are four main contract management perspectives. These include:
1. The dyadic perspective
• Contract parties are limited to the buyer and the seller.
2. The supply-chain perspective
• Contract parties involve additional external stakeholders needed to contribute to the completion
of the project (e.g., subcontractors, suppliers etc.).
3. The value-chain perspective
• Similar to the SC perspective. However, it takes place internally, meaning, it is the commitment
of internal stakeholders to comply with the contractual obligations.
4. The network-perspective
• Contract parties involve multiple internal and external stakeholders needed to contribute to the
completion of the project (e.g., subcontractors, suppliers, employees, employers, customers and
end-user etc.).
5. CONTRACT MODELS
• These involve the following:
1. Construction-only contract
• Contractor constructs the project in accordance with the design (functional and technical
specs) provided by the client.
2. Design and construct (D&C)
• Contractor designs and provides, in accordance with the client’s requirements (functional and
technical specs).
3. Contract for engineer-procure-construct (EPC)
• The contractor delivers the project or works turnkey (ready for immediate use).
4. Design-build-finance-maintain (DBFM) contract
• Contractor completes the work or project at his/her own risk and gets paid after delivery.
5. Design-build-maintain-operate (DBMO-plus) contract
• Contractor completes and operates the work or project at his/her own risk and gets paid
based on actual performance.
6. PRICING AND PAYMENT MECHANISMS IN
CONTRACTS (PRICING)
• Some of the main Pricing aspects involve the following:
1. Fixed price contract
• The client orders the contractor to perform the required activities at a fixed price; and
have the work completed and delivered at a predetermined date.
2. Cost-reimbursement contract
• Wages and salaries
• Percentage for general overhead (costs not directly related to the production of goods
or services, but are necessary for the operation of a business; e.g., rent, utilities,
advertising etc.) and profit, etc.
6. PRICING AND PAYMENT MECHANISMS IN
CONTRACTS (PAYMENT)
• Some of the main Payment terms aspects involve the following:
1. Milestone payments
• A certain percentage payment is made based on the deliveries made for each project planning stage.
• While the remaining percentage is paid in full upon completion of the project.
• In other words, when specific significant steps in the work or project have been met or completed.
2. Bank guarantee
• Advanced payments are typically covered by a bank Guarantee in which the contractor’s bank
guarantees to the buyer that the contractor will meet its contractual obligation.
3. Performance bond
• Written guarantee from a third-party guarantor
4. Performance guarantee
• The contractor guarantees the actual output or outcome of the work to be delivered
5. Liquidated damages
• Sum that will be paid in case the contractor fails to deliver works according to the client’s specs
END OF THE PRESENTATION
