CONTRACT MANAGEMENTAssignment Number 1Submitted to:Prof. Khem Nath DallakotiDepartment of Civil EngineeringInstitute of Engineering, Pulchowk CampusSubmitted by: Arpan Bahadur SinghRoll No. 068/MSG/803 And Saphal LamichhaneRoll No. 068/MSG/817MSc in Geotechnical EngineeringIOE, Pulchowk CampusJanuary 09, 2012

Table of Contents

Title

Page No.1. Introduction

12. Contract

12.1Types of Contracts

2

2.2Terms of Payment in Contract

52.3Contract Standards Commonly Used in Nepal

63. Rationale of Contract Management

74. Objectives of Contract Management

105. Limitations of Contract Management and the Risks Involved

116. Contract Management Scenario in Nepal: The Authors Perspective

117. Conclusion

12

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-to-day management, evaluation, and succession planning.

Contract managementorcontract administrationis the management ofcontractsmade 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, salesinvoices,purchase orders, and utilitycontracts. Complex contracts are often necessary forconstructionprojects, goods or services that are highlyregulated, goods or services with detailed technical specifications,intellectual property(IP) agreements, andinternational 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 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 execution-able, 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 ContractThis 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 ContractIn 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.

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 AccountIn 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 contract2.2.2 Percentage rate contract2.2.3 Lump Sum contract2.2.4 Labour contract2.2.5 Materials supply contract2.2.6 Piece-Work agreement2.2.7 Cost plus percentage rate contract2.2.8 Cost plus fixed fee contract2.2.9 Cost plus fluctuating fee contract2.2.10 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.2.2.5Materials 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.2.2.6Piece-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.2.2.7Cost 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.2.2.8Cost 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.2.2.9Cost 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 parties2.2.10 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.2.3Contract 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 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 theInternational Federation of Consulting Engineers). Located at the World Trade Center inGeneva, 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 theConstructionIndustry 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.

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 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 unnecessarilyContract 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 party5. 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-tender6. Contract Management Scenario in Nepal: The Authors PerspectiveContract 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 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. ConclusionContract 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 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.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:What is a contract [online search] (cited n.d.). Available:What is contract management [Home Page of Purchasing Procurement Center] [online] (cited n.d.). Available:Contract management [online search] (cited n.d.). Available:Dallakoti, K.N. (2011). Lecture notes on contract management. Construction management and methods (Part-1).