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L8_PROJECT CONTRACT Management.ppt

  1. Contract Procurement Management Dr. M.K. Mlela
  2. Agenda • Contract and Contract Management • Contract Management Life cycle • Key Elements of Contract Management • Issues involved in managing contracts
  3. What is a Contract ? • A contract is an agreement between two or more people that is legally binding. A contract can be verbal or written. • The contract, in terms of enforceability, includes an offer and an acceptance, has consideration for the exchange, clearly sets out the terms of the agreement without ambiguity and is signed by the involved parties who have the proper capacity to enter into the contract
  4. Contract Management  Contract management is the process which ensures all parties to a contract fully meet their obligations, in order to satisfy the operational objectives of the contract and the strategic business goals of the customer.
  5. Why Contract management ? Risk is the chance of an event occurring that would cause actual project circumstances to differ from those assumed when forecasting project benefits and costs. Effective contract management incorporates identifying, monitoring and managing all risks and opportunities over the life of the project contract to achieve project objectives and value for money outcomes. Risks not identified cannot be proactively managed. They can be very damaging. Risks cannot be correctly identified unless there are clear project objectives that provide an unambiguous description of success for the project.
  6. Contract Management Life Cycle • Procurement Stage • Execution Stage • Service Delivery Stage • Closing Stage
  7. Contract Management Issues Procurement Stage • Resourcing • Planning & Development • Developing Tools • Integrate Management aspects in the contract • Key Performance Indicators • Defining Governance Responsibilities Execution Stage • Managing Performance • Managing Relationships • Managing Changes • Managing Contingencies • Managing Documents and records • Executing Governance Responsibilities
  8. Contract Management Issues Service Delivery • Managing Performance • Managing Relationship • Managing Changes • Managing Contingencies • Managing Documents and Records • Delivering Governance Responsibilities Contract Closure • Managing Compliance • Maintaining Relationships • Documenting Changes • Regularizing Contingencies • Saving Documents for Asset Management • Informing the Management of the closure
  9. Procurement Process The foundations for effective contract and performance management are typically set during the procurement planning process; Sound contractual basis for effective contract management is incorporated in the contract; There is adequate knowledge transfer from the procurement team to the contract management team; The contract management strategy for the project is in place as soon as practical after the contract is executed.
  10. The relationship between contract management and the procurement process Procurement process Contract management Expressions of interest Request for Tenders Contract execution Financial close Transfer of accountability to the contract director Appointment of contract management team Planning, information collection and analysis Development of tools and processes, including monitoring and reporting requirements Further development of tools and processes
  11. Contract Management Team • Small team • Skills need to cover  Project Management  Technical  Financial  Legal • Authority to negotiate Effective contract risk management requires the dedication of appropriate financial resources and experienced personnel to the establishment of a contract risk management strategy during the procurement phase of the project and the maintenance of that strategy throughout the project lifecycle.
  12. Ideal Contract Allocation of risk Service requirements Value for Money Mechanisms Procedures for contract management
  13. Service Level The Contract should set out clearly the expected performance and Quality Who is responsible for what needs to be clear, both mutual and individual Flexibility especially in early stages of long term contracts Enter into mutual Service Level Agreements
  14. Developing a contract management strategy Step 1: Develop a plan Step 2: Develop and implement tools and process Start during the procurement process Step 3: Establish a system of ongoing contract management and review Collect, analyze and manage information Incorporate contract management requirements into development of request for tenders
  15. Key Elements of effective Contract Management i. Planning, Information Collection and Analysis ii. Contract Administration iii. Performance Reporting and Monitoring iv. Relationship management, dispute resolution and issue management v. Governance, probity and compliance vi. Knowledge and Information management vii. Change management viii. Contingency Planning ix. Ongoing Review x. Contract Management Training
  16. Key Elements of effective Contract Management I. Planning, Information Collection and Analysis  Contract management personnel understand the legislative, regulatory and commercial context of the project.  All the key risks of the project are identified and are updated as necessary over time.  The likelihood of each risk materializing, and its potential consequences and impact on project objectives have been assessed.  Possible controls and mitigations for each risk have been identified, assessed and implemented.  Interdependencies between risks are understood.  Potential changes in the project’s risk profile over its lifecycle have been considered, planned for and responded to.  Good contract management is not reactive, but aims to anticipate and respond to business needs of the future.
  17. Procurement team Contract documentation Advisors Other information sources Step 1: Information collection Step 2: Analysis and management of information Step 3: Implementation and evolution of contract management tools and processes Risk analysis for contract performance Identify need for additional information Contract documentation Contract documentation Contract documentation Information Collection and Analysis Information Sources • the business case for the project • project risk analysis conducted by the procurement team for the purpose of developing the contractual allocation of project risk between the parties • the project contract documents • associated financial, structural and organizational details • interviews with the procurement team and their advisers • existing risk management tools within the organization
  18. Key Elements of effective Contract Management II. Contract Administration • Contract administration requires an understanding of the legal documentation for the project and also:  the commercial intent of the parties  the operating, industry and community issues associated with service provision  the legislative and regulatory context in which the project operates • It is the best practice to prepare a comprehensive Contract Administration Manual that enables the Project Director to understand the key contract provisions and the environment in which the contract must be administered, which will specify:  What needs to be done, by whom and when ?  How will employer’s role be performed ?  What are the ramifications of any non-performance or default by either party and how these should be addressed ?
  19. Key Elements of effective Contract Management III. Performance Reporting and Monitoring • Performance measures lie at the heart of performance management and it is important that performance measures are linked to strategic objectives, or to desired outcomes. • The employer understands the contractor’s internal operating environment, such as its cash flows. It is through this understanding that the employer can derive an awareness of the private party’s strengths and weaknesses, including financial performance. • The Employer monitors ‘soft’ indicators of the management quality of contractor looking for weaknesses or trends that may provide an early indication of trouble ahead. • The employer regularly reviews the quality of the service as measured against the KPIs and output specifications. • Having assessed the data collected through these monitoring activities, the employer takes appropriate action to mitigate or control any risks that are materializing, and to maximize value for money from the project.
  20. Performance Monitoring The stepped approach to performance reporting: Step 1: Understanding the business • Strategic and Project level requirements • Cash flows, Project costs and debts • Risks Step 2: Analyze the underlying quality of the project • Financial Health • Management Quality • Service Performance Step 3: Reporting requirements • Internal MIS • Senior Management • Government and Parliament Known baseline Compare performance against baseline Monitoring Is the failure a persistent long-term issue? Is the failure because the baseline is no longer appropriate Monitoring Monitoring Performance fails to meet baseline No No Yes Yes (exceptional circumstance Performance Meets baseline
  21. Key Elements of effective Contract Management IV. Relationship Management, Dispute Resolution and Issue management • It is imperative to maintain a strong relationship between the employer and the contractor. Good relationship management enables the parties to anticipate risk events more effectively and deal with those risks that do materialize. • Good communication and a strong relationship are essential, especially if issues arise which go to the heart of the contract’s operation. • It is also important to recognize that disputes and service delivery issues most likely will arise and will need to be appropriately managed. • If the parties have strong dispute and issue management principles and procedures in place, these will help minimize damage to the relationship and assist the parties to achieve success in the project.
  22. Key Elements of effective Contract Management  Relationship Management • Establishing relationship management structures – Senior Management Support; Peer to Peer communication; separation of roles; Defined roles and responsibilities; escalation paths • Understanding one another  Objectives and expectations; future plan and directions; concerns about wider relationship; Opinion surveys • Establishing and using communication channels  Formal and informal contact points; horizontal and vertical communications; documenting verbal communication • Relationship management and succession planning • Monitoring the Relationship
  23. Key Elements of effective Contract Management V. Governance, Probity & Compliance • It is the duty of the employer in ensuring appropriate governance, probity and compliance practices are established within the organization and in its interactions with the contractors and any other government stakeholders. • This assists the employer to comply with relevant laws, regulations, and government policy.
  24. Key Elements of effective Contract Management VI. Knowledge and Information Management • Employer’s ability to successfully manage a contract can depend upon the Project Director having an effective knowledge and information management strategy tailored to the project’s needs. • In a well-managed project, the Project Director ensures the information collected in relation to a project is maintained, periodically reviewed, and organized for easy retrieval and access. These practices assist the employer to comply with:  record-keeping obligations  disclosure obligations, such as those under RTI act  intellectual property laws and confidentiality obligations
  25. Key Elements of effective Contract Management VII.Change Management • During the lifecycle of any project, it is likely that a number of changes will occur, requiring proper management. • Changes may be contemplated at the time of procurement and provided for in the contract, or not contemplated during procurement but seen as desirable or necessary alterations to services or the contract. • In either case, change events are both a source of risk and a potential opportunity to extract additional benefits from the project.
  26. Key Elements of effective Contract Management Change Management Cont.… • Good change management processes incorporate the following features:  Appropriate protocols are in place to manage change  Appropriate staff have the authority to request and authorise changes  Potential changes are assessed thoroughly by suitably experienced personnel, having consulted with all relevant stakeholders  Changes are appropriately prioritised and their implementation is properly resourced  The implementation of changes is controlled and tested  Changes are appropriately documented  Changes do not compromise value for money outcomes
  27. Key Elements of effective Contract Management VIII.Contingency Planning • It may not be possible to fully transfer responsibility for the risk of service delivery failure to the contractor. • If the contractor fails to deliver services according to the requirements of the contract, the employer, and possibly government as a whole, may retain accountability, and potentially face adverse reaction from end users and third parties. • In addition, the contractor’s obligation to provide services may be suspended through the operation of force majeure provisions. If so, the employer may be compelled or subjected to strong pressure to ensure that the public or other third parties are not inconvenienced by a disruption to the supply of those services. • Effective contingency planning is that the employer can react to unplanned events and control the impact of these events on service delivery value for money outcomes.
  28. Key Elements of effective Contract Management IX. Ongoing Review • Contract management processes must change and adapt throughout the lifecycle of a contract, and therefore should be reviewed on an ongoing basis to ensure that management is sufficiently informed of current and emerging risks and issues. • In addition to regular reviews, the impact of the following events should be considered as and when they occur:  divergence between each party’s expectations and actual project outcomes  changes in the project itself through change events, contingency events, or as a result of the project moving from one stage to another in its lifecycle  changes in the external environment in which the project operates.
  29. Key Elements of effective Contract Management IX. Contract Management Training • For contract management to be effective, Project Directors need not only a strong knowledge of the basics, but also a detailed practical understanding of commercial and legal dimensions of contract management. The training will meet this second need. • As this practical understanding is vital to the success of the Project Director, and the contract management team, in implementing effective contract management practices, the training will be mandatory for employer’s personnel involved in the management of projects.