Contract Management Guide - CIPS

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  • Contract Management Guide

  • Contract Management Guide

    2

    Introduction and scope 3Definition 3Importance of contract management 3Activities 4Upstream or pre-award activities 4Downstream or post award activities 26Acknowledgements 36Bibliography 36

  • Introduction and scopeThis guide is intended to cover all thoseactivities associated with contractmanagement from the establishment ofthe business case and the confirmationof need, through contract administrationand relationship management to thereview of contract performance. Theactivities themselves are divided into twodistinct but interdependent phases,upstream and downstream of the awardof the contract.

    The guide is generic in that its principlesare intended to be applicable to allcontracts from a simple order, throughframework contracts to complexconstruction or service contracts, and itshould be seen as equally applicable tocontracts in the private as well as thepublic sector.

    DefinitionContract life cycle management is theprocess of systematically and efficientlymanaging contract creation, executionand analysis for maximising operationaland financial performance andminimising risk.1

    There are a number of other definitionsof contract management, the majority ofwhich refer to post-award activities.Successful contract management,however, is most effective if upstream orpre-award activities are properly carriedout.

    Importance of contract managementOrganisations in both the public andprivate sectors are facing increasingpressure to reduce costs and improvefinancial and operational performance.New regulatory requirements,globalisation, increases in contractvolumes and complexity have resulted inan increasing recognition of theimportance and benefits of effectivecontract management.2

    The growing recognition of the need toautomate and improve contractualprocesses and satisfy increasingcompliance and analytical needs has alsoled to an increase in the adoption ofmore formal and structured contractmanagement procedures and an increasein the availability of softwareapplications designed to address theseneeds.

    It is worthwhile noting that contractmanagement is successful if: the arrangements for service delivery

    continue to be satisfactory to bothparties, and the expected businessbenefits and value for money arebeing realised

    the expected business benefits andvalue for money are being achieved

    the supplier is co-operative andresponsive

    the organisation understands itsobligations under the contract

    there are no disputes there are no surprises a professional and objective debate

    over changes and issues arising can behad

    efficiencies are being realised.

    3

    1(Aberdeen Group)2(Aberdeen Group)

  • ActivitiesThe foundations for effective andsuccessful post-award contractmanagement rely upon careful,comprehensive and thoroughimplementation of the upstream or pre-award activities. During the pre-awardstages, the emphasis should be focusedon why the contract is being establishedand on whether the supplier will be ableto deliver in service and technical terms.However, careful consideration must begiven to how the contract will work onceit has been awarded. The organisationshigh-level requirements should becarefully researched so that there isclarity of purpose from the outset. Thiswill help to ensure clarity in all aspectsof the procurement process.

    Management of contracts, particularlypartnerships, requires flexibility on bothsides and a willingness to adapt theterms of the contract to reflect changingcircumstances. It is important torecognise that problems are bound toarise which could not be foreseen whenthe contract was awarded.

    Finally, it may not be necessary to followevery activity for every contract -particularly in the case of small, simpleorders - but it is advisable to read thewhole guide and to apply the adviceprovided under each stage asappropriate to the particular contractualcircumstances.

    Upstream or pre-award activitiesa) Preparing the business case andsecuring management approval

    All contracts are predicated on the needto obtain management commitment andapproval at the appropriate level. Thisinvolves the formulation of a soundbusiness case aligned to the organisationscorporate and functional strategies.

    The business case sets out the policy,business and contract objectives and theissues that affect the decision and theinvestment. It should seek to establishthat the proposed contract will meet theneed, that it is achievable and affordable,and it should address the followingissues: the outcome(s) of the contract critical success factors the possible alternatives, including

    existing contracts the risks including the extent and

    where they may fall identification of any contingent needs

    and ramifications of proceeding timescale.

    The business case should be preparedwith the involvement of thestakeholders, including where and ifpossible, the end users.

    It should be signed off by the sponsor orpatron.

    The business case is a workingdocument and should form the basis ofthe post-implementation review andused as a management tool to ensurethat the original outcomes and benefitshave been achieved. 3

    4

    3 (OGC ContractManagement)

  • If the project is large, complex and inparticular, innovative in nature, themarket should be approachedconcurrently with the preparation of thebusiness case, firstly to alert them to thepotential need and secondly to takesoundings on such issues as feasibility,capacity, capability, approach and levelof interest.4

    b) Assembling the project team

    The need to assemble a team to managea contractual procurement programmewill be determined not only by the scale,nature, complexity and significance ofthe procurement and the necessary skillsand experience but also by the extent towhich it is considered appropriate,beneficial or a requirement to complywith organisational policy to involvestakeholders in the project.

    Factors to be considered whenassembling the team are: the nature of the project the nature of the work environment

    and the management style of the team communication internally and

    externally.

    In addition to procurement, the projectteam may be drawn from any and alldisciplines within the organisation asappropriate and relevant. The followingare examples; design, research anddevelopment, production, quality control,logistics, marketing and sales, legal,finance and human resources. Theproject team may also advantageouslyinclude representatives of the end users,whether internal or external, andrepresentatives of disciplines within

    supplier organisations such as design,production, production planners andlogistics.

    Clearly, these individuals and groups willnot need to meet all the time but,depending on the size and complexity ofthe project, there may well be a coregroup that meets regularly and this willbe the project team. Others will then becalled on as and when required.

    In addition to the need to identify thenecessary technical skills, knowledgeand experience with the appropriatelevel of authority required of themembers of the team, the importance ofthe ability of team members to worktogether effectively and the significanceof the role of the project leader shouldbe recognised.

    These aspects are beyond the scope ofthis guide, but it is considered advisableto devote time to studying the manybooks available on the topics ofmotivation, leadership, power, influenceand group working, particularly if thesize, timescale and complexity of theprocurement project are significant.5

    c) Developing contract strategy

    The strategy relating to a particularcontract should accord with theorganisations overall procurementstrategy.

    The development of a contract strategy isdesigned to establish the form of theprocurement and provide assistance indetermining the formulation and awardof the contract and the style and type of

    5

    4 (OGC ContractManagement)5 (For examplesee HandyUnderstandingOrganisations)

  • management to be adopted for thesubsequent service delivery, relationshipmanagement and contractadministration.

    There are many references these days topartner rather than suppliers shouldthis be captured here?The latter aims can be characterised bythe need to address understanding,measurement and communication post-contract award. A successful contractmanagement strategy should achievebenefits by: managing the organisations own

    responsibilities during the contract ensuring the supplier meets the

    minimum performance criteria, such ascompliance

    allowing the achievement of bothshort and long term supplierperformance improvement throughdeveloping effective supplierrelationships.

    In developing the contract strategy, thefollowing issues need to be addressed: nature, scale and significance of the

    need to the organisation value of need type of specification - input or output complexity of the need including

    innovation level attractiveness to the market market capacity timescale and phasing level of understanding of the need by

    stakeholders and potential suppliers.

    The use of supplier positioning matriceswill also assist in determining thecontract strategy, the nature of anynegotiations that may need to be

    conducted and the form of the supplierrelationship following the award ofcontract. Possible supplier relationshiptypes range from the spot buy throughcall-off contracts, fixed contracts andstrategic alliances, to long termpartnerships. Issues of relationship stylesuch as adversarial, partnership, hands-on or pro-active should also beconsidered.6

    Concurrently with determining thecontract strategy, consideration shouldbe given to the evaluation strategy whichsets the direction