CONTRACT MANAGEMENT

Assignment Number 1
Submitted to:
Prof. Khem Nath Dallakoti
Department of Civil Engineering
Institute of Engineering, Pulchowk Campus
Submitted by:
Arpan Bahadur Singh
Roll No. 068/MSG/803
And
Saphal Lamichhane
Roll No. 068/MSG/817
MSc in Geotechnical Engineering
IOE, Pulchowk Campus

January 09, 2012

Table of Contents
Title

Page No.

1. Introduction
2. Contract
2.1
Types of Contracts

3.
4.
5.
6.
7.

2.2
Terms of Payment in Contract
2.3
Contract Standards Commonly Used in Nepal
Rationale of Contract Management
Objectives of Contract Management
Limitations of Contract Management and the Risks Involved
Contract Management Scenario in Nepal: The Authors Perspective
Conclusion

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1
2
5
6
7
10
11
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1.

Introduction:

Contract management is a multifaceted process whose primary objective is the successful

implementation of a contract agreement. In general it is bound by the clauses of the contract and
consequently the abiding law of the country in which the contract is being implemented, but the
steps taken, the decision made and the modus operandi adopted for the implementation of the
contract depends entirely on the management or individuals who are responsible for contract
management.
According to ANAO Contract Management Better Practice Guide 2001, Contract Managment is
The process that enables both parties to a contract to meet their obligations in order to deliver
the objectives required in the contract. It covers transition and implementation, ongoing day-today management, evaluation, and succession planning.
Contract management or contract administration is the management of contracts made with
customers, vendors, partners, or employees. Contract management includes negotiating the terms
and conditions in contracts and ensuring compliance with the terms and conditions, as well as
documenting and agreeing on any changes or amendments that may arise during its
implementation or execution. It can be summarized as the process of systematically and
efficiently managing contract creation, execution, and analysis for the purpose of maximizing
financial and operational performance and minimizing risk.
Common commercial contracts include employment letters, sales invoices, purchase orders, and
utility contracts. Complex contracts are often necessary for construction projects, goods or
services

that

are

highly regulated,

goods

or

services

with

detailed

technical

specifications, intellectual property (IP) agreements, and international trade.

2.

Contract:

To understand contract management, we have to first understand what a Contract is. A contract
is a legal written agreement between two or more parties. Moreover, according to the Brittanica
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Concise Encyclopedia, a contract is Agreement between two or more parties that creates for
each party a duty to do something (e.g., to provide goods at a certain price according to a
specified schedule) or a duty not to do something (e.g., to divulge an employer's trade secrets or
financial status to third parties). A party's failure to honour a contract allows the other party or
parties to bring an action for damages in a court of law, though arbitration may also be pursued
in an effort to keep the matter confidential. In order to be valid, a contract must be entered into
both willingly and freely. A contract that violates this principle, including one made with a legal
minor or a person deemed mentally incompetent, may be declared unenforceable. A contract also
must have a lawful objective.
In general any understanding between two or more parties can be considered a contract, hence it
can be in written form or it can be oral, but to maintain legitimacy and to be able to executionable, the contract must be in writing and be guided by certain clauses to which all the parties
agree. Contracts can be made for any type of work in general, but here our focus will be
explicitly on those contracts which involve civil engineering works.
2.1

Types of Contract:

There are different ways to form a contract based on need of client and quality of work required
and depending upon the circumstances. There is no universal way to form a good contract but
each of the following types must be selected considering it own strengths and weakness. The
following types of contract strategies can be selected for a construction contract:
2.1.1

Conventional Contract

2.1.2

Turnkey (package deal) Contract

2.1.3

Management Contract

2.1.4

Target cost Contract

2.1.5

The Force Account

2.1.6

BOOT Contract

2.1.1

Conventional Contract

This type of contract employs Consulting Firms or Engineers to design, supervise the
construction process. The actual construction is undertaken be the contractor usually under
unit rates and sometimes under lumps sum mode of payment. It is widely used type of
contract and is well understood by all the parties. The main benefit of this type of contract is
that the design risk is taken by the consultant and construction risk is taken by the
contractor. It creates a good competition in tendering process and the final cost of the project
is well known in advance with less chance of change of cost. But the weakness of this type
of contract is design is completed in advance so is relatively inflexible.
2.1.2

Turnkey (package deal)

In this type of contract a single contractor is appointed to design, construct/erect, supply

equipment and plant required and maintain to a given maintenance period of the project to
the satisfaction of the client. The project will be handed out to the client to turn the key and
begin use of the new project. The project performs rapidly as the design and construction
responsibility are of single entity as there is no conflict of responsibility. The cost of the
project is not overrun since fixed price is offered in the initial period. But on the other hand
the cost of the project might be significantly higher than conventional method of contract.
This type of contract is very flexible once it is awarded.
2.1.3

Management Contract

In this type of contract an external organization or Management Contractor is appointed by

the client which forms member of the client team and manages and co-ordinates with the
client in design and construction phases of the project. The project is constantly being
coordinated by the management contractor. Better planning can be done. Construction and
design can be well overlapped to form a good schedule from start of the work. The main
weakness of this type of contract is that management contractor takes responsibility only for
his professional negligence but the greater risk is exposed to the client. Final price of the
project is unknown for a long period of time.
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2.1.4

Target Cost Contract

In this type of contract the contractor is paid the actual cost of the project plus with
contractors fee. This actual cost is monitored and agreed during the execution. Target cost
for the project is set and the difference between final actual cost and final target cost is
shared by the client and the contractor as defined by the incentive mechanism which is set
earlier. The client has more flexibility in changing the design and cost of proposed change
are evaluated and checked with the targeted cost for better decisions. Though the targeted
cost is fixed in the beginning, but the final cost cannot be predicted.
2.1.5

The Force Account

In this system the owner designs, constructs the project on his own. The workforce is solely
paid and managed by the owner. The owner has to construct the works using his own tools,
staff, equipment etc. He is himself responsible for procurement, logistics, supervision,
scheduling, testing, inspections etc. In this system the owner has direct control of day to day
operations hence the cost of project is also controlled. But this creates high staffing
requirements and full responsibility and risk must be beard. This system is only suitable for
small projects as it overburdens the owner.
2.1.6

BOOT Contract

BOOT means Build Own Operate Transfer. It is a concession contract. That is it gives
concession to the builder for building the project. Concession is in the form of revenue
which is generated during the own and operation period. After the concession period is over
the builder handovers the project to the rightful authority. This type of project is typically
suitable when the owner has limited resources, investment and the project is viable and in
condition to produce good returns. The concession period should be sufficient to allow the
promoter to recover his investment and make intended profit but not to allow overcharging
users in monopolistic position.

2.2

Terms of Payment in the Contract

The following are the various types of contracts for execution of civil engineering works:
2.2.1 Item rate contract
2.2.2 Percentage rate contract
2.2.3 Lump Sum contract
2.2.4 Labour contract
2.2.5 Materials supply contract
2.2.6 Piece-Work agreement
2.2.7 Cost plus percentage rate contract
2.2.8 Cost plus fixed fee contract
2.2.9 Cost plus fluctuating fee contract
2.2.10 Target contract

2.2.1

Item rate contract: For this contract, contractors are required to quote rates for
individual items of work on the basis of schedule of quantities furnished by the clients
department.

2.2.2

Percentage rate contract: In this form of contract, the clients department draws up the
schedule of items according to the description of items sanctioned in the estimate with
quantities, rates, units and amounts shown therein.

2.2.3

Lump sum contract: In this form of contract, contractors are required to quote a fixed
sum (lump sum amount) for execution of a work complete in all respects i.e., according
to the drawings, design and specifications supplied to them with the tender within the
specified time.

2.2.4

Labour contract: This is a contract where the contractor quotes rates for the item work
exclusive of the elements of materials which are supplied by the clients Department.

2.2.5

Materials supply contract: In this form of contract, the contractors have to offer their
rates for supply of the required quantity of materials, inclusive of all local taxes, carriage
and delivery charges of materials to the specified site within the time fixed in the tender.

2.2.6

Piece-Work agreement: As the name signifies the piece-work agreement, it is that for
which only a rate is agreed upon without reference to the total quantity of work to be
done or the quantity of work to be done within a given period.

2.2.7

Cost plus percentage rate contract: In tendering for work on a Cost Plus basis, the
contractor is paid the actual cost of the work, plus an agreed percentage in addition, to
allow for profit.

2.2.8

Cost plus fixed fee contract: In this type of contract, the contractor is paid by the owner
an agreed lump-sum amount over and above the actual cost of work.

2.2.9

Cost plus Fluctuating Fee contract: In this type of contract, the contractor is paid by the
owner the actual cost of construction plus an amount of fee inversely variable according
to the increase or decrease of the estimated cost agreed first by both the parties

2.2.10 Target Contract: This is the type of contract where the contractor is paid on a cost-plus
percentage work performed under this contract. In addition, he receives a percentage plus
or minus on savings or excess effected against either a prior agreed estimate of total cost
or a target value arrived at by measuring the work on completion and valuing at prior
agreed rates.
2.3

Contract Standards Commonly Used in Nepal

Like most countries, Nepal too has its standards and specification when it comes to procurement
works. The standard documents to be followed are issued by the Government of Nepal, Public
Procurement Monitoring Office. These documents include all the standard procedures to be
followed as well as the General Conditions of Contract (GCC), the Conditions of Particular
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Application (COPA) on the other hand are formulated as per the specific requirements of the
contract and/or the project proponents. These standard bidding documents act as guide for the
procurement of civil works, goods, consulting services and prequalification procedure. The
nature of works may vary from small scale construction to large infrastructure projects.
Moreover the legal aspects of these procurement procedures are as the Public Procurement Act
2063 and Public Procurement Rules 2064. These standard bidding documents can be used for
procurement of works amounting upto Nrs 500 million for National Competitive Bidding (NCB)
or International Competitive Bidding (ICB).
For procurement works involving larger amounts, ICBs are preferred and while doing so the
most popular and widely used standard documents used are those issued by FIDIC (Fdration
Internationale Des Ingnieurs-Conseils, French for the International Federation of Consulting
Engineers). Located at the World Trade Center in Geneva, Switzerland, FIDIC and run mostly by
volunteers, FIDIC is well known in the consulting engineering industry for its work in defining
Conditions of Contract for the Construction Industry worldwide. There are various editions of
the standard documents issued by FIDIC including FIDIC 99, In Nepal also, almost all of
the Large ICB contracts follow FIDIC.
3.

Rationale of Contract Management

Contract management is indispensible for any engineering/ procurement project. The importance
of contract management as a phase of the project life cycle is often a neglected issue and
consequently receives the least management effort and attention. When we delve deeper into this
matter we find that in any engineering project, the contract management phase consumes the
maximum time as well as expenses. In a typical engineering project, time wise the contract
management phase takes up around 80-90% of the overall time, while expenditure wise this
phase take up around 95% of the total project expenses.
Moreover, the importance of contract management is that it is during this phase that the output of
the whole project occurs, the main construction works in case of a civil contract- the tangible
output of any construction project.
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Agency planning for the management of the contract commences in the procurement planning
phase and continues right through evaluation and contract negotiation. Throughout this period
consideration is being given to the requirements of how the contract will be managed based on
consideration of the value, complexity, strategic importance, risk, the general market maturity
and the selected supplier capability.
Irrespective of the type of Contract, all engineering contracts require contract management
of some sort. Contract management is the last phase in the procurement life cycle. The five
phases of the procurement life cycle model are as follows:
Planning

Requesting and

Evaluation

Contract

Contract

receiving orders

of offers

award

Management

Various activities take place in the Contract management phase of the procurement life cycle.
The activities and processes involved in contract management are:

Service delivery management

Relationship management

Contract administration

Service Delivery Management:

Service delivery management is concerned with ensuring the service is being fully delivered as
agreed, to the required level of performance and quality. In practice this means having a well
structured service level schedule or service level agreement, with clearly defined performance
targets and measures combined with regular reporting.
Relationship Management:
Relationship management is focused on keeping the relationship between the two parties open
and constructive, resolving or easing tensions and identifying problems early. It is important for
both parties to understand and agree the appropriate type of relationship model for the particular
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contract, recognizing it will not be the same for all agreements. A lack of understanding and
agreement on the type of relationship model can often result in frustration through the respective
parties expectations not being met. When establishing a relationship management model
towards the partnership end of the continuum, the following factors should be considered:

the need to ensure that the relationship is championed at senior levels in both
organisations

recognising that the attitudes and actions of senior management will set the tone of the
relationship. The message comes from the top

ensuring that governance arrangements are equitable and relationships are peer to peer. If
not, imbalances will occur

there should be a place for long-term strategic issues to be considered as well as the more
day-to-day service delivery aspects. These are best separated to avoid urgent and pressing
matters constantly swamping the longer view

roles and responsibilities should be clear and staff involved in managing the relationship
need to be suitably empowered

escalation routes should be understood and used properly encourage an approach that
seeks to resolve problems early and without escalating up the management chain
unnecessarily

Contract Administration:
Contract administration covers the formal governance of the contract and changes to the contract
document. It is concerned with the mechanics of the relationship between the buying agency and
the supplier. This includes the development and implementation of procedures covering the
administrative and clerical activities. Good contract administration is important for the successful
management of any contract. Contract administration also requires appropriate resourcing, and as
part of the contract management planning both the agency and the supplier need to consider the
level of resourcing required for the particular contract. Procedures should be in place for the
management of the main contract management activities. These may include:

contract variations, including change control

cost monitoring

ordering procedures, e.g. ordering of hardware

payment procedures

management reporting

These procedures are normally documented in the contract management plan.

4.

Objectives of Contract Management

The objectives of contract management can be summarized as:

That contractual risk is minimized.

That continual improvements are required from the contractual relationship.

That acceptable and agreeable monitoring is in place.

That Best Value is sought after.

That services are provided by the vendor in accordance with their contracts.

That quality services and products are provided in a timely manner.

That the financial implications of any failure to perform are been taken into consideration
and appropriate action taken.

That financial penalties are raised against the vendor for any failure to deliver as per the
contractual obligations.

However, all contract management operations aim at achieveing success, a successful contract
management is defined as existing when:

the arrangements for service delivery continue to be satisfactory to both client and
service provider (consultant, contractor)

expected benefits and value for money are being realized

the provider is co-operative and responsive

the client knows its obligations under the contract

disputes are rare

there are no surprises for either party

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5.

Limitations of Contract management and the Risks Involved:

The limitations of Contract management is that while it covers all the facets of contract including
technical, financial, legal etc., the human side of management is always an uncertainty. Although
there are provisions for unforeseeable conditions in the contract (Force majeure), it cannot
always deals with the human difficulties associated, like you cannot guarantee that all the parties
will lawfully and ethically stick to the contract, and some it is likely that some of the parties may
try to ill-construe the contract. Also the generic risks related to contract management include:
a failure to put in place an effective contract management plan, which may result in the contract
being poorly managed
the agency and supplier not having a common understanding of the type of relationship the
agency is seeking, which may cause frustration for both parties
a failure to document and formalise changes to the contract document properly, which may
result in misunderstandings and contractual disputes
insufficient time and effort put into the contract review, which may result in a poorly analysed
decision to either extend an existing agreement or re-tender
6.

Contract Management Scenario in Nepal: The Authors Perspective

Contract management becomes difficult when uncertainties and risks are involved. An unsteady
government and a weak implementing agency further exacerbate the situation. This is exactly the
current case in Nepal. Almost all major construction contracts are facing difficulties in
implementation. In the backdrop of the current socio-political scenario, the power relationship
between project proponents, the state and the local communities has dramtically changed. The
constant bandas, hadtaals, and taalabandis by the locals as well as their incessant demands as
well as the lack of commitment from the statess side has left almost of the major development
construction projects in a lurch.
Also the quality of contractors and their commitment towards contract execution is also
becoming questionable. The selection criteria of choosing Contractors/consultants in Nepal have
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cost as one of the threshold criterion, and although this would be of no problem if all the
contractors were committed to a certain level of professionalism and quality, sadly this is not the
case in Nepal these days. The low bidding contractors get the contracts, and sometimes the bid is
so low that they are not able to provide quality works and instead look for ways to further extend
the contract and instead focus on claims and disputes. The lack of proper expertise and
experience on the client's side is also to be blamed in some of the instances, whereby the contract
management is not able to produce the desired efficacy.
Almost all of the major projects which are expected to change the economic as well as social
standard of Nepal is facing scrutiny. Projects such as Mid-Marsyangdhi HDE, Melamchi Water
Supply Project have showed typical problems of contract disputes and projects such as Arun III
was not able to take all the stakeholders into account and also faced problems due to political
instability and weak control mechanism of state. It is not till all the stakeholders of contract
honestly abide by their responsibility and perform duty as expected can we acheive any success
in completion of these development projects. The examples we set today will also guide our days
to come.
7.

Conclusion

Contract management is the most important phase of any procurement project, as it involves the
amalgamation of different resources at the maximum level. An efficient and effective contract
management is thus indispensible for the successful implementation of any project. Different
procurement projects (involving different types of contract) require different modes of contract
management, which may involve different steps as per the requirement. Standards are followed
all through the different phases of the procurement cycle, right from the preparation of the
contract to its execution; also adherence to laws and conditions of contract are important all the
leaving room for certain flexibility while executing contract. Nevertheless disputes are common
in contracts, It is said that in case of a dispute a contract doesnt usually means what you think it
means but it means what a Judge think it means. So, foresight is necessary before entering in any
types of contract. Contract management is this process of foresighting and making choices as
required by the condition so as to reduce disputes and clearly define goals, define individual
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responsibilities and as a future reference in case of confusion while performing duties. Although
it is said that there is no such thing as a perfect contract, proper and efficient contract
management is the best way of ensuring one to get as close to it as possible.

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Reference:
Industry Capability Network. (n.d.). Understanding public sector procurement processes:
Contract management, Booklet 6. New Zealand: ICT.
Contract management [online search] (cited n.d.). Available:<http://wiki.answers.com>
What is a contract [online search] (cited n.d.). Available:<http://answers.com>
What is contract management [Home Page of Purchasing Procurement Center] [online] (cited
n.d.). Available:<http:// purchasing-procurement-center.com>
Contract management [online search] (cited n.d.). Available:<http://indiastudychannel.com>
Dallakoti, K.N. (2011). Lecture notes on contract management. Construction management and
methods (Part-1).

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