CONTRACT MANAGEMENT

1. CONTRACT MANAGEMENT 8/27/2014 1

2. Terminology • Agent: a person/group officially authorized to make decisions and represent their firm. • Arbitration: Settling of a dispute by a third party who renders a decision. • Bid: tender, offer, proposal to purchase a certain item. • Breach of Contract: to violate a law by an act or omission or to break a legal obligation. • Contract: an agreement entered into by two or more parties and the agreement can be enforced in a court of law. • Customer is used to denote the buying organization, normally a government department or other public body. • Intelligent customer denotes a capability of the customer organization in understanding both customer and provider businesses fully.

3. End user: the people who actually use the service • Force Majeure Clause: a provision in a contract that excuses the parties involved from any liability or contractual obligations because of acts of God, wars, terrorism, etc. • Infringement:a violationof someone’s legally recognized right. • Provider: the company providing services under the contract. • Partnership and ‘partnering’ : denote a long term arrangement between a public sector department and a private sector company. • Liquidated Damages: an amount specified in a contract that stipulates the reasonable estimation of damages that will occur as a result of a breach of contract. • Negligence:the failure to exercise one’s activity in such a manner that a reasonable person would do in a similar situation.

4. Noncompete Clause: a covenant providing restrictions on starting up a competing business or working for a competitor within a specified time period. • Nondisclosure Clause: a covenant providing restrictions on a certain proprietary information such that it cannot be disclosed without written permission. • Nonconformance: performance of work in such a manner that it does not conform to contractual specifications/requirements. • Penalty Clause: an agreement or covenant, identified in financial terms, for failure to perform. • Privity of Contract: the relationship that exists between the buyer and seller of a contract. • Procurement: the acquisition of goods or services. • Termination/Termination Liability: an agreement between the buyer and the seller as to how much money the seller will receive should the project be terminated prior to the scheduled

5. completion date without all of the contractual deliverable being Completed. • Waiver: an intentional relinquishment of a legal right. • Warranty: a promise, either verbal or written, that certain facts are true as represented. Contract Management is more comprehensive than/includes Procurement Management

6. Introduction The main areas covered are: • managing service delivery • managing the relationship, • contract administration, • seeking performance improvements, • managing changes. Long-term service contracts Short-term service contract

7. What is contract management? 1. It is the process that enables both parties to meet their obligations in order to deliver the objectives required from the contract. It also involves building a good working relationship between customer and provider (Buyer/Seller). 2. It is the art and science of managing a contractual agreement throughout the contracting process. The central aim of contract management is to obtain the services as agreed in the contract and achieve value for money by: - Optimizing the efficiency, effectiveness and economy of the service or relationship described by the contract, 8/27/2014 7

8. - Balancing costs against risks and actively managing the customer–provider relationship - Aiming for continuous improvement in performance over the life of the contract. Contract Management Processes consist of the following activities: ● Presales Activity ● Bid/No Bid Decision-Making ● Bid/Proposal Preparation ● Contract Negotiation and Formation ● Contract Administration ● Contract Closeout 8/27/2014 8

9. Overview Contract management activities can be broadly grouped into three areas. • Service delivery management ensures that the service is being delivered as agreed, to the required level of performance and quality. • Relationship management keeps the relationship between the two parties open and constructive, aiming to resolve or ease tensions and identify problems early. • Contract administration handles the formal governance of the contract and changes to the contract documentation.

10. Getting the contract right The concern is on customer activities following the award of a service, not the procurement process that leads up to the award of contract. The terms of the contract should include an agreed level of service, pricing mechanisms, provider incentives, contract timetable, means to measure performance, communication routes, escalation procedures, change control procedures, agreed exit strategy and agreed break options, and all the other formal mechanisms that enable a contract to function.

11. Construction contracts Construction contracts are fundamentally different from major service contracts. There are various types of construction contract. The choice of contract depends on the basis of pricing and the contract strategy that best meets the project objectives, risk transfer, responsibility for performance, cost certainty, and complexity.

12. Critical success factors • Good preparation. • The right contract. • Single business focus. • Service delivery management and contract administration. • Relationship management. • Continuous improvement. • People, skills and continuity. • Knowledge. • Flexibility. • Change management. • Proactivity. 8/27/2014 12

13. What can go wrong, and why? • The provider is obliged to take control, resulting in unbalanced decisions that do not serve the customer’s interests • Decisions are not taken at the right time – or not at all • New business processes do not integrate with existing processes, and therefore fail • People (in both organizations) fail to understand their obligations and responsibilities • There are misunderstandings, disagreements and underestimations; too many issues are escalated inappropriately • Progress is slow or there seems to be an inability to move forward 8/27/2014 13

14. The intended benefits are not realized • Opportunities to improve value for money and performance are missed. Why organizations fail to manage contracts successfully: • Poorly drafted contracts • Inadequate resources are assigned to contract management • The customer team does not match the provider team in terms of either skills or experience (or both) • The wrong people are put in place, leading to personality clashes • The context, complexities and dependencies of the contract are not well understood 8/27/2014 14

15. There is a failure to check provider assumptions • Authorities or responsibilities relating to commercial decisions are not clear • A lack of performance measurement or benchmarking by the customer • A focus on current arrangements rather than what is possible or the potential for improvement • A failure to monitor and manage retained risks (statutory, political and commercial). 8/27/2014 15

16. Plan Procurements: • Defining the need for the project • Development of the procurement statement of work, specifications, and work breakdown structure • Preparing a WBS dictionary, if necessary • Performing a make or buy analysis • Laying out the major milestones and the timing/schedule • Determining if long lead procurement is necessary • Cost estimating, including life-cycle costing • Determining whether qualified sellers exist • Identifying the source selection criteria • Preparing a listing of possible project/procurement risks (i.e., a risk register) • Developing a procurement plan • Obtaining authorization and approval to proceed

17. Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications: • Design Specifications: physical characteristics. • Performance Specifications: measurable capabilities. • Functional Specifications: description of the end use of the item.

18. Factors involving the make or buy analysis: The make decision ● Less costly (but not always!!) ● Easy integration of operations ● Utilize existing capacity that is idle ● Maintain direct control ● Maintain design/production secrecy ● Avoid unreliable supplier base ● Stabilize existing workforce The buy decision ● Less costly (but not always!!) ● Utilize skills of suppliers ● Small volume requirement (not cost effective to produce) ● Having limited capacity or capability ● Augment existing labor force ● Maintain multiple sources (qualified vendor list) ● Indirect control

19. Procurement risks as identified in the ABB Project Management Manual ● Contract and agreements (penalty/liquidated damages, specifications open to misinterpretation, vague wording, permits/licenses, paperwork requirements) ● Responsibility and liability (force majeure, liability limits for each party, unclear scope limitations) ● Financial (letters of credit, payment plans, inflation, currency exchange, bonds) ● Political (political stability, changes in legislation, import/export restrictions, arbitration laws) ● Warranty (nonstandard requirements, repairs) ● Schedule (unrealistic delivery time, work by others not finished on time, approval process, limitations on available resources) ● Technical and technology (nonstandard solutions, quality assurance regulations, inspections, customer acceptance criteria) ● Resources (availability, skill levels, local versus external)

20. The procurement plan will address the following questions: • How much procurement will be necessary? • Will they be standard or specialized procurement activities? • Will we make some of the products or purchase all of them? • Will there be qualified suppliers? • Will we need to pre-qualify some of the suppliers? • Will we use open bidding or bidding from a preferred supplier list? • How will we manage multiple suppliers? • Are there items that require long lead procurement? • What type of contract will be used, considering the contractual risks? • Will we need different contract types for multiple suppliers? • What evaluation criteria will be used to score the proposals?

21. Conducting the Procurement: • Evaluating/confirming specifications (are they current?) • Confirming qualified sources • Reviewing past performance of sources • Reviewing of team or partnership agreements • Producing the solicitation package A typical solicitation package would include: ● Bid documents (usually standardized) ● Listing of qualified vendors (expected to bid) ● Proposal evaluation criteria (source selection criteria) ● Bidder conferences ● How change requests will be managed ● Supplier payment plan

22. Points of proposal evaluation scoring for awarding a contract to bidders: • Understanding of the requirements • Overall bid price • Technical superiority • Management capability • Previous performance (or references) • Financial strength (ability to stay in business) • Intellectual property rights • Production capacity (based upon existing contracts and potential new contracts)

23. Request Seller Responses: There are three common methods for acquisition: • Advertising: sealed bids, no negotiations. • Negotiation ● Request for information (RFI) ● Request for quotation (RFQ) ● Request for proposal (RFP) ● Invitation for bids (IFB) • Small purchases (i.e., office supplies)

24. Selecting Appropriate Sellers: • Evaluation criteria: time, cost, expected management team of the project, and previous performance history • Contract award strategy: price-based/best-value. • A negotiation process: 3 major factors of negotiations: ● Compromise ability ● Adaptability ● Good faith Negotiations should be planned for: • Develop objectives (i.e., min-max positions) • Evaluate your opponent • Define your strategy and tactics • Gather the facts • Perform a complete price/cost analysis • Arrange “hygiene” factors

25. There are certain basic elements of most contracts: • Mutual Agreement: There must be an offer and acceptance. • Consideration: There must be a down payment. • Contract Capability: The contract is binding only if the contractor has the capability to perform the work. • Legal Purpose: The contract must be for a legal purpose. • Form Provided by Law: The contract must reflect the contractor’s legal obligation, or lack of obligation, to deliver end products.

26. The two most common contract forms are: • Completion Contract: definitive end product. • Term Contract: a specific “level of effort”. The type of contract selected is based upon the following: ● Overall degree of cost and schedule risk ● Type and complexity of requirement (technical risk) ● Extent of price competition ● Urgency of the requirements ● Performance period ● Contractor’s responsibility (and risk) ● Contractor’s accounting system (is it capable of earned value reporting?) ● Concurrent contracts (will my contract take a back seat to existing work?) ● Extent of subcontracting (how much work will the contractor outsource?)

27. Some Terminology found in contracts • The target cost or estimated cost • Target or expected profit • Profit ceiling and profit floor • Price ceiling or ceiling price • Maximum and minimum fees • The sharing arrangement or formula • Point of total assumption

28. A wide variety of contractual arrangements: • Cost-plus percentage fee • Cost-plus fixed fee • Cost-plus guaranteed maximum • Cost-plus guaranteed maximum and shared savings • Cost-plus incentive (award fee) • Cost and cost sharing • Fixed price or lump sum • Fixed price with re-determination • Fixed price incentive fee • Fixed price with economic price adjustment • Fixed price incentive with successive targets

29. Fixed price for services, material, and labor at cost (purchase orders, blanket agreements) • Time and material/labor hours only • Bonus-penalty • Combinations • Joint venture

30. There are generally five types of contracts: 1. Fixed-price (FP), or lump-sum, 2. Cost-plus-fixed-fee (CPFF), or cost-plus-percentage-fee (CPPF), 3. Guaranteed maximum-shared savings (GMSS), 4. Fixed-price-incentive-fee (FPIF), 5. Cost-plus-incentive-fee (CPIF) Other types of contracts that are not used frequently: 1. The fixed-price incentive successive targets contract 2. The fixed-price with re-determination contract 3. Cost (CR) and cost-sharing (CS) contracts

31. Incentive Contracts The fixed-price-incentive-fee (FPIF) contract is an example of this. The essence of the incentive contract is that it offers a contractor more profit if costs are reduced or performance is improved and less profit if costs are raised or if performance goals are not met. Cost incentives take the form of a sharing formula generally expressed as a ratio. In the FPIF contract, the contractor agrees to perform a service at a given fixed cost. If the total cost is less than the target cost, then the contractor has made a profit according to the incentive-fee formula. If the total cost exceeds the target cost, then the contractor loses money.

32. Contract administration • contract maintenance and change control, • charges and cost monitoring, • ordering and payment procedures, • management reporting, and so on. Its importance should not be underestimated. All parties understand who does what, when, and how. The contract documentation reflects the arrangement, and changes to it carefully controlled.

33. Contract Administration Cycle The functions of the corporate administrator include: ● Change management ● Specification interpretation ● Adherence to quality requirements ● Inspections and audits ● Warranties ● Performance reporting ● Records management ● Contractor (seller) management ● Contractor (seller) performance report card ● Documenting seller’s performance (for future source selection teams) ● Production surveillance

34. ● Approval of waivers ● Breach of contract ● Claims administration ● Resolution of disputes ● Payment schedules ● Project termination ● Project closure The order of precedence specifies that any inconsistency in the solicitation of the contract shall be resolved in a given order of procedure such as: A. Specifications (first priority) B. Other instructions (second priority)

35. C. Other documents, such as exhibits, attachments, appendices, SOW, contract data requirements list (CDRL), etc. (third priority) D. Contract clauses (fourth priority) E. The schedule (fifth priority) The changes handled by the contract administrator: ●Administrative change: ●Change order ●Contract modification ● Undefinitized contractual action ● Supplemental agreement ● Constructive change

36. Typical causes of constructive changes include: ● Defective specification with impossibility of performance ● Erroneous interpretation of contract ● Over inspection of work ● Failure to disclose superior knowledge ● Acceleration of performance ● Late or unsuitable owner or customer furnished property ● Failure to cooperate ● Improperly exercised options ● Misusing proprietary data

37. Reasons for termination for convenience of the customer: ●Elimination of the requirement ● Technological advances in the state-of-the-art ● Budgetary changes ● Related requirements and/or procurements ● Anticipating profits not allowed Reasons for termination for default due to contractor’s actions: ● Failure to make delivery on scheduled date. ● Failure to make progress so as to endanger performance of the contract and its terms. ● Failure to perform any other provisions of the contract.

38. Contract Closure ● Documented verification that the output was accepted by the buyer ● Debriefing the seller on their overall performance ● Documenting seller’s performance (documentation will be used in future source selections when evaluating contractor’s past performance) ● Identifying room for improvement on future contracts ● Archiving all necessary project documentation ● Performing a lessons-learned review ● Identifying best practices

39. Contract Management and Claim Management This is a tool for managing and dealing with suppliers, contracts, variation orders, and accounts. Also the Contract Management and Claim Management have modules in instruction of bonds, insurances, and warranties. You can also accredit the proposal documents, contract, variation order documents, and default lists (in MS-Word or MS-EXCEL) to contracts. Reports in the projects status’s about the supplier, contract status report, difference of orders and causes, invoice ledgers and compilations, project status etc strengthen the Contract Management and Claim Management. Photo documentation can be a qualified structure where the categories are defined to the user

40. (like General, Work Progress, Defaults, etc), and can be chosen from and sorted according to multiple criteria. The module invoices permits the input of normal invoices as well as cumulative (interim), partial-final and final statements. The Contract Management and Claim Management takes note the chances to go into contract risks (expected variation orders, variation of quantities, claims at hand, assessment of excluded risks) which will be summed together through the commitment values so it can be alerted on time of a possible over costing.

41. Contract Management