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The Contract Management process unpacked

30 October 2017

Contract management (CM) is the process of identifying and managing high risk activities that are inherent in complex strategic contracts. CM is integral to the procurement process that aims to minimise business risks and maximise benefits by ensuring contractual obligations are fulfilled. The three main elements to ensure that CM succeeds within an organisation are properly documented CM processes, staff trained and skilled in CM, and a system to facilitate the process and maintain records.

Additionally, the roles and responsibilities of contract managers, contract administrators, and contract owners or end users (such as engineers, line managers, and others) must be clearly defined to ensure that the CM function operates optimally within an organisation.

With these three elements in place, you will have the foundation of your CM system. The key objectives of which are:

·         Managing contracts in a uniform manner.

·         Creating a repository of good contracts for use in similar circumstances in future.

·         Improving the quality of contract management.

·         Fulfilling all contractual obligations including transformation and developmental targets.

·         Ensuring that contractual risks are properly identified, assessed and managed.

·         Identifying and realising cost saving opportunities.

·         Enhancing administrative efficiency.

·         Improving internal and external stakeholder relationships that have a direct impact upon the performance of the contract.

·         Ensuring proper planning prior to contract finalisation.

Understanding the CM team roles

The importance of having properly trained and skilled staff to manage contracts cannot be over-emphasised. A review of the relevant contract management skills, competencies and qualifications (on a skills matrix) of your team must be conducted to give you a global view of their strengths and potential weaknesses. The three main roles within this function are: contract manager, contract administrator, and contract owner (or, as commonly referred to, the end user). Each of these positions have distinct roles and responsibilities.

The contract manager provides inputs to the buyer in drafting the bid documents and the contract. This is done together with other relevant stakeholders such as legal, financial, safety, environmental and other advisors. The contract manager also develops a contract management plan (see below) to monitor performance and compliance with conditions of contract including supplier development commitments. They manage any risks that may arise during the term of the contract and ensures that communication is maintained between all parties. The contract manager mediates conflicts of interest between the parties and facilitates their resolution. They also manage the budget and maintain financial control while working with the contractor for continuous improvement. It is up to them to manage changes or variations to the contract and impose penalties for the contractor’s poor performance. Given this, and their various other responsibilities, we recommend that the contract manager work with the contract administrator to keep a record documenting significant events and changes.

The contract administrator has various duties such as: conducting the verifications before payment is effected; capturing all the relevant contract data onto the software system; creating the financial information (contract value, budget, cost variations, cost centre) on the system based on the terms of the contract; monitoring actual spend against the contract; and reviewing invoices and produce monitoring and payment reports. This is – as the name indicates – an administrative role, but a crucial one. Documenting processes, steps and milestones is an important aspect of successful CM.

The contract owner (or end user) identifies the business need and compiles the business case, including the specifications for whatever is required. The contract owner assesses risks throughout the lifecycle of the contract. They also validate and sign all the contractors’ invoices to prove receipt of goods/ services.

Planning phases

A thorough contract planning phase facilitates the transition from the tender phase to the CM phase. The contract manager must ensure that all objectives of the contract are achieved such as risk mitigation, stakeholder management, and value maximisation. All stakeholders will need to be identified and their inputs obtained to manage the contract throughout its lifecycle.

The contract management plan details the contract structure, measurement, administration, review and risk management. This plan is especially essential when the contract is of a strategic nature or long-term, if the consequences of contract failure will have adverse consequences for the organisation, and if the contract contains complex terms and conditions.

Implementing a risk register

Risk management is another vital aspect of CM. Risk categories include product risk, process risk, financial risk, counter party risk, and legal risk.

We recommend not only completing risk assessments on all of these elements, but also that the results of these risk assessments be documented in a risk register. The three-step process of risk management must be carried out by the contract manager, with support from the other roles as required. The three steps are risk identification, assessing the potential impact of the identified risks, and identifying steps to mitigate and manage the risks.

Finally, the following risk factors must be addressed: the complexity of procurement and the contract duration, experience of staff resources to implement CM, the contract value, the strategic nature of the acquisition and impact if it fails, and the complexity of the payment method.

When contracts are managed effectively in the above ways, you can expect delivery of goods/services at the agreed quality, quantity, price, as the first benefit. Effective CM also enables spin-off benefits, such as:

·         Process and/ or technology improvements at the supplier’s company, leading to a reduction of costs that flows to their key customers with long-term contracts;

·         Continuity and security of supply of important strategic goods/services without which the business will not be able to operate optimally;

·         Reduced poor contract performance, faster response times to instance of poor contract performance; and through this

·         Minimised future risks and increased accountability from all parties.

 

Contributed by: Ashney Chetty (BA LLB, MCIPS)- a Senior Associate at Bespoke Group. She has more than 20 years’ experience in SCM, working in senior executive roles both in the private and public sectors

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