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20050314 tips on contract management

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  • 1. Technical SeminarTips on Contract Management14 March 2005Speaker : Ms Lily Heo 1
  • 2. Contents• General understanding of contract• Common Types of Contract Strategies• Cost Control• Management of Variation and Claim• Performance Monitoring• Contract Completion and Closure 2
  • 3. What is a Contract?• Established where there are commitments and agreements to buy and sell.• Represents the total legal obligations originated from agreement between parties. 3
  • 4. Elements of Contract• Mutual assent evidenced by offer and acceptance• Consideration and form - supported by something of value in exchange• Competent parties – must be capable of contracting but not a minor, mentally ill, intoxicated person• Legality of purpose 4
  • 5. Why Contract is Important• Failure to comply with agreed terms will be a breach of contract• Either party may claim for damages• Parties will rely on the contract provisions in the event that dispute is put to court proceedings 5
  • 6. Contract Documents• Tender Documents: • Instructions to Tenderers • Specification, General / Specific Requirements • Conditions of Contract• Contractor’ Proposal s • Form of Tender & Appendix • Bill of Quantities • Drawings• Letter of Acceptance / Purchase Order 6
  • 7. Key Terms in a Contract• Definitions • Contract Prices• Parties, roles and • Payment Term responsibilities • Indemnities, warrants• Specifications / Statement and insurance of Work • Liquidated Damages• Confidentiality • Defect Liability Period• Intellectual Property Rights (IPR) • Termination• Regularity issues eg. • Disputes and Arbitration safety, environmental, • Force Majeure statutory requirements 7
  • 8. Factors on Contract Strategy• Project Timeline• Price Certainty• Quality Level• Design involvement• Apportionment of Risk• Project Complexity• User of Contractor’ Expertise s• Involvement of Client 8
  • 9. Contract Strategy• Turnkey Arrangement (Design & Build) • One single contractor is appointed to undertake the entire project including design and provision of equipment and subsequent implementation • Advantage : • Maximum responsibility on one contractor • Should achieve a timely completion due to total ownership • Disadvantage : • No wayout when the work is underway • Limited choice of supplier base may increase the project cost 9
  • 10. Contract Strategy (cont’ d)• Traditional Client-coodinated Arrangement • Client takes responsibility for appointing different specialist consultants / contractors for individual work packages (eg. architect, E&M contractor, building contractor etc.) • Advantage : • Better value of money • Maintain high degree of discretion on selecting contractors • Disadvantage : • Require a lot of resources to develop specifications and selection of consultants / contractors • Require resources for co-ordinating various consultants / contractors 10
  • 11. Contract Strategy (cont’ d)• Partial Turnkey • A hybrid or halfway between full turnkey and client- coordinatd arrangement • Client undertakes the responsibility for the organising of a number of work packages eg. design package, independent to implementation packages • Advantage : • Client owns greater responsibility for particular parts • Disadvantage : • With greater responsibility on particular area, client will share risk of delays and cost overrun • More effort on managing contractors 11
  • 12. Contract Strategy (cont’ d)• Management Contracting • Developed in construction industry • Client appoints an independent design team called “Professional Team” led of architect or Project Manager and the main contractor, “management contractor” for the organisation and supervision of work for the project • Advantage : • Achieve cost economies and save time by integrating design team and management contractor • Disadvantage : • Risk of cost underestimation by the design team 12
  • 13. Cost Control• Cost control program provides a systematic forum for reducing the total project cost, without affecting quality.• Three aspects of cost control program : • Cost reduction – effort to trim the costs eg. select alternative material / method / process • Cost avoidance – effort to prevent any cost increase via value analysis, negotiation etc. • Cost containment – hold costs within certain target limit via value analysis, negotiation etc. 13
  • 14. Selection of Pricing Method• Fixed Price Contract : • Firm fixed price • Fixed price with adjustment / escalation • Fixed price with incentive• Cost Reimbursable Contract : • Cost plus incentive fee • Cost sharing • Time and material contract • Cost plus fixed fee 14
  • 15. Selection of Pricing Method (cont’d) Buyer Risk Contractor Risk• Fixed Price Contract : • Firm fixed price • Fixed price with adjustment / escalation • Fixed price with incentive• Cost Reimbursable Contract : • Cost plus incentive fee • Cost sharing • Time and material contract • Cost plus fixed fee 15
  • 16. Value Analysis / Engineering• Value Analysis and Value Engineering are used interchangeably• Value Analysis focuses on existing products and systems and co-ordinates all functions in an operation to reduce overall cost of the production• Value Engineering analyses the functional requirements of a new design / product / procedures used in production in order to achieve the lowest cost without loss of performance, quality and reliability 16
  • 17. Definition of Variations• It is an “alteration or modification of the design, quality or quantity of the Works” specified in the contract• A variation has only limited scope and can’ be used t to change the essence of the contract 17
  • 18. Cause of Variations• Inadequate design work• Changes of mind or requirement after the contract has been signed• Change in the method of performing work• Unforeseen circumstances eg. Change in technology 18
  • 19. Impact of Variation• Increased cost• Increased time necessary to complete which will affect : • Insurance • Preliminary • Additional consultancy cost • Other expenditure or financial loss eg. Loss of potential rent. 19
  • 20. Cost of VariationThe cost of the variation may be calculated by : • An agreed price • Measurement and valuation by a Quantity Surveyor (QS) in accordance with Bill of Quantities or Daywork Schedule etc. 20
  • 21. Variation = ClaimVariation is an alteration of the works whether by wayof addition, modification or omissionClaim refers to additional monies sought by thecontractor. It can be made for the payment ofdamages due to the buyer’ breach of contract, that sconstitutes delay completion of work. 21
  • 22. How to Minimise Variation & Claim • To include a clause covering variations to minimise the risks associated with cost and time within the contract • To ensure a good contract management / project management system embedded with contract • To maintain open and clear communication 22
  • 23. How to Deal with Them• All reasonable efforts should be made to avoid variations• Variations should be subject to a clearly defined procedures within the contract• When unavoidable, variations and claims should be negotiated 23
  • 24. Assessment during Negotiation • What will be the possible outcome ? • Will the result affect the relationship ? • Is there sufficient time for the negotiation ? • Are we clear of what to be achieved ? 24
  • 25. Some Negotiation Techniques• Opening – avoid making the opening bid• Testing – get information on counterpart’ position s• Active listening• Use silence to encourage more information flow• Keep concession for trading / exchanging• Try avoiding excessive conflict• Prepare persuasive and logical arguments• Focus on interests, not positions• Invest in options for mutual gain 25
  • 26. Negotiator Style• Logical Negotiator – provides factual arguments• Relationship Negotiator – focus on relationship• Intuitive Negotiator – led by intuitions• Tough Negotiator – result oriented and unconcerned 26
  • 27. Common Dispute Settlement Methods • Arbitration – both parties present their cases to arbitrator(s) who will then decide how the case should be settled. The decision is binding and is enforceable through the courts. Unlike litigation, the arbitration cases are private. They can be less costly and be handled quickly. 27
  • 28. Common Dispute Settlement Methods(cont’ d)• Mediation – With the aid of a mediator who will listen to and question each side to lead a settlement. A mediator does not make a binding decision.• Re-negotiation – Both parties place all difference on the table for re-negotiate the contract• Litigation – If unable to resolve, a party may sue for damages suffered as a result of contract breach. It will then be decided in the courts according to the law. It will take a lot of time and cost. 28
  • 29. Performance Monitoring• Establish performance monitoring system in contract • Define stakeholders • Agree evaluation criteria and measurement method / key performance indicator (KPI) • Determine whether KPI will be associated with incentive payment • Agree impact of the measurement result 29
  • 30. Contract Closure• Contract is considered completed when the required certificates have been issued by the client : • Completion Certificate – when the work is substantially completed • Taking Over Certificate – when the plant has passed test • Acceptance Certificate – when the performance test has been passed • Final or Maintenance Certificate - at the end of defects liability period 30
  • 31. Tips to Those who ManageContracts• Clear understanding of contract itself including specification, performance measures and all contractual terms• Access to management information that details how the contractor is performing• Establish contract management framework eg. meeting and reporting interval• Effective teamwork and relationship management 31
  • 32. Reference• Study Guide – Project Management and Contract Management for Purchasing and Supply, The Chartered Institute of Purchasing & Supply• The C.P.M. Study Guide, National Association of Purchasing Management (currently called Institute for Supply Management)• Building Services Procurement, Christopher Marsh 32