Wednesday, April 6, 2011
Contract Management / Contract Administration
The concept of contract management or contract administration is to ensure that the other party to the agreement meets all the obligations of the terms and conditions agreed upon and that you meet your obligations. Even with the simplest form of contract (a purchase order) may require some administration such as expediting to get delivery, return of non-conforming or defective products or service, and management of what may be required to make payment. In many contracts the Buyer’s sole obligation may be to make payment.
The more the Buyer has to provide deliverables, or provide reviews or approvals the more you must manage those commitments as failing to provide them or failure to provide them in a timely manner can create claims for additional performance time and additional cost resulting from not meeting your obligations.
Depending upon what you are buying, the Supplier you are dealing with, and the relationship you have with the Supplier, the scope of contract management that is required will vary. On one end of the scale contract management may be simply filing the contract away and only going back to it when there is a problem or dispute. That type of relationship may exist when you have a long-term relationship with the Supplier, and they consistently meet all the requirements, especially quality requirements. At the other end of the scale would be dealing with a potential problem supplier in which this is the only relationship you have with them and what you are buying has a critical schedule, a number of deliverables, the activity frequently changes and the purchase involves significant potential risks. A good example of the former would be a contract to purchase standard goods or services from a high quality supplier who consistently meets their obligations. A good example of the latter could be the purchase of construction of a new building needed to manufacture a new product or provide new service.
Contract Management is the process of managing all of the events that occur between the parties to the contract from the execution of the Agreement through the final completion of all obligations of the parties under that Agreement.
Contract Management activity should start as early as the bid/proposal process in which performance issues and risks are identified and a plan is established that defines how those performance issues and risks will be managed. The tasks involved in Contract Management can be performed by many people on the team, but there needs to be strong coordination and communication between the team members to ensure that actions and communications with the Supplier / Customer are consistent and reflect the team’s position. In major purchases there can be a multitude of activities that occur, and daily administration of the contract and timely updating of other team members is required for successful management of the program!
THE CONTRACT MANAGEMENT HEADSET
Negotiation is not a point in time task to be completed. Negotiation is an on-going process that starts with the initial meeting or discussions with the customer or supplier and continues through the process until the last warranty obligation under the agreement is met and all other obligations of the parties are compete. We call much of the activity that occurs after the negotiation of the agreement to be supplier or customer management. The more appropriate title should be “managing performance and the on-going negotiation process”.
How well you manage the basic process and the changes that will occur throughout will determine how costly or profitable the relationship will be. How well you are able to document the activities that occurred will determine how successful you will be in either initiating or defending a claim. If you are on the Selling side everyone on the team should know that their goal is not to maintain the margin, it is to improve it. On the Buying side your goal is to insure that “you get what you have paid for”, which means to maintain the margin status quo.
BUILDING THE “CONTRACT FILE
A complete, accurate contract file is needed to manage changes in personnel, temporary absences, claims, negotiations and the potential lawsuits that may occur. The contract file will consist of the legal documents which comprise the agreement plus:
· Any documentation needed to be maintained under the contract;
· All supplier, customer correspondence including letters, minutes of meetings, records of conversations, phone calls etc.;
· All change requests, correspondence, back up data, disposition and revised documents;
· All technical information relating to the Agreement including the engineers notebooks, technical reports, files, copies of inspection and test reports, logs maintained, and any other pertinent data;
· Other records which show performance such as payment requests and records of disbursements, copies of required insurance policies,
· Delivery and acceptance reports.
The actual contract portion of the contract file will consist of the contract itself; all of the contract appendices, attachments, exhibits, schedules, all documents incorporated by reference in the contract, and all approved amendments or changes to the contract. It is important to maintain and document the various changes and keep all copies of all items from a historical perspective as the question of what were the applicable documents were at a specific point in time may be the difference between being successful or not in the event of a problem or claim.
In the contract file it is important that all data be properly maintained as reference to the actual contract portion will only provide half of the information needed in the event of a problem. To resolve a dispute you may need to refer to correspondence, logs, notebooks and any other documents which will allow you to properly reconstruct the events in question and determine which party took what actions and who is responsible for what items, activities, charges, or payments.
WHAT HAS TO BE MAINTAINED, WHY, AND FOR HOW LONG?
All of the contract file should be maintained either as a single contract file or in separate locations as long as it will be properly maintained and the information, if required, will be easily accessible. The contract file needs to be maintained as both a history of the Agreement and as a legal record of the events that occurred during the Agreement.
If a customer or supplier brought a claim against you two years after the completion of an agreement, (and in many locations they would have two years because of the statute of limitation on contracts) the parties who would have to manage and negotiate the claims would need access to those records and those records have to be sufficiently organized so as to allow for easy fact finding.
Frequently the parties who were involved in the Agreement may no longer be available to provide the information. Those who assume the responsibility for managing or closing any disputes must be able to rely upon those records to re-construct the events that occurred in deciding how to respond to the actions at hand. As with all other records they must be maintained as long as obligations exist plus normal retention periods for legal and tax documents (usually seven (7) years for tax reasons).
INTERPRETING THE CONTRACT.
Upon assuming the Contract Management function it is important that you familiarize yourself with the detail of the contract. This is important so that you will have a general understanding of the roles and responsibilities that are identified and the familiarity will aid in your being able to interpret the contract when questions arise.
The contract will, in many instances, be made up of multiple documents and when there are multiple documents there is always the potential that some may conflict with each other. The contract should set forth the order of priority or precedence in the event such conflicts arise between the documents. This is especially important where you may have a Request for Proposals which contains one set of requirements, a Proposal which may propose alternative requirements or conditions and take exceptions to the Request for Proposals, and additional documents which seek to clarify the negotiated positions. Depending upon the priority in which these documents are given you may have different interpretations as to what is required.
Normal priorities that should be addressed in the establishment of an order of precedence are:
1. Documents are prioritized by importance.
2. Where multiple documents deal with the same issue, the priority should be in order of time, with the last document agreed in time having the highest priority.
For example if you had a RFP, a Proposal, and Clarifying Addendum to the proposal and wanted to incorporate all, the precedence would be:
First, to the clarifying addendum, second, to the proposal, last, to the Request for Proposals
3. Where multiple formats deal with the same subject matter, such as drawings and specifications, you would normally want the written word (Such as the specifications) to have priority as they would provide the more detailed description of what was intended.
4. Documents that are made part of another document are considered to be complimentary in nature, so they have to be read and interpreted as a whole. For example: An RFP could call for items A, B, &C to be performed. A proposal could call for items D, E, &F to be performed. A clarification could call for items G, H & I to be performed. If all documents were incorporated by reference into the contract, as long as the items are not in conflict with each other and, as long as the language does not specifically exclude any of these, they would be read to be complementary thereby requiring all items A-I to be performed.
MANAGING CONTRACT TERMS AND CONDITIONS
Every contract, complex or simple, has items that need to be administered in order to minimize risk and liability and to try to ensure performance. Throughout the agreement are activities that require performance. If the agreements are properly drafted they will also identify the time period in which performance is required and what happens if these are not performed on time.
One of the first tasks of Contract Management is to review the Contract in detail, understand the tasks, performance, and deliverables required and the time frames for performance and ensure there is a plan to manage the requirements. To manage a contract you need to understand what each of the terms mean, why they are included, what happens if you fail to manage to them. For example you need to understand the impact of a potential of waiver of certain rights.
MANAGING AND UPDATING THE CONTRACT/PROGRAM FILE.
Throughout the process, changes will occur to the various documents by amendments or change orders to the Agreement. A good practice in Contract Management is to maintain two separate copies of each of the documents. The first document should be the untouched or record copy of the document for the files. The second copy should be your working document on which you annotate all of the changes that have occurred and reference the Change Order in which the change was authorized. (E.g. the language change or price change, C.O.#1). In manufacturing changes to the design would have to be noted along with the effectivity date for those changes to have taken place. In those situations it is important that you be able to identify what requirements were in place for each shipment.
If installation or construction is required and drawings exist, an example of this activity would be to mark up the drawings with the change and change order producing a record drawing. Record drawings properly annotated with the changes made can then be used to easily generate “as-built” or “as constructed” drawings that may be a requirement. The practice of maintaining the two separate copies is strongly recommended as the annotated version, if properly recorded, will serve as a quick reference document for finding issues for day-to-day management and eliminates the need to look through and cross reference all changes to determine if the issue at hand has been changed by any of them. The longer the period of the agreement and the more changes which occur, the more valuable this approach becomes as a time saver. The second un-annotated copy serves as the legal record. As it is unchanged you can then, if needed, take and construct the status at a particular point in time, as there may be questions as to what was in effect at a particular date or during a particular period of time.
The person who has the Contract Management function should manage the entire contract file. Receiving and filing copies of all correspondence, documents and records pertaining to the agreement can either accomplish this. An alternative to this can be where there is agreement reached in advance as to who on the team will be responsible for maintaining which specific records and, that upon completion of the project all pertinent records be transferred to a central record keeping location for controlled access by any one needing the records.
DOCUMENTING THE WORK:
Document! Document! Document! Many suppliers suffer from “SML” - Selective Memory Loss. Log all calls and maintain a contract diary keeping track of who at the customer you talked with and reduce all requests, verbal agreements, decisions on schedule, cost, contract terms and conditions, approvals and waivers and work activity, cause & effect and cost of delays, work stoppages, quick turn around activities and premium charges, responsible party. Etc., etc. to writing as soon as possible. Confirm back to the customer and the Supplier our understanding of the discussion.
If periodic review meetings or special problem resolution meetings are held we should publish the minutes of those meetings.
We frequently consider establishing capabilities for the Supplier to talk with us electronically. While this can speed up communication it can also help get the documentation process further out of control. It is important that the discipline be instilled that if electronic messaging is used a copy of each message be provided to the administrator as a matter of course. The same need for discipline applies for written communications. The Contract Manager should have the record copy of all documents.