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
Article
originally appeared in: 
