BY KRISHNA PRASAD JP

M.Tech, 2ND sem , CTMROLL NO : 151560

NATIONAL INSTITUTE OF TECHNOLOGY WARANGAL

EFFECTIVE CONTRACT MANAGEMENT

ABSTRACTIn today’s difficult and uncertain economic environment, organizations have placed cost savings high on their agendas. The pressure from organisations in both the public and private sector to reduce costs and improve financial and operational performance have resulted in recognition of significance of effective contract management which led to adoption of more formal and structured contract management procedures and increase in the availability of software applications.

However, without an ECM program savings will be captured but not realised. The benefits of ECM do not end with cost savings. Also effective contract management optimises the efficiency, effectiveness and economy of the service or relationship described by the contract, balancing costs against risks and actively managing the customer–provider relationship.

INTRODUCTIONAccording to Indian contract act, it is defined as an agreement which is enforceable by law. It creates legal obligation between parties.

When it comes to construction, contracts are at the heart of everything the company does

Contract management: Contract management is the process that enables both parties to a contract 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.

PROBLEM STATEMENT• Decisions are not taken at the proper time thus allowing potential risks to appear.• The contractor executes the project based on the understanding that he has formulated

himself regarding the contract requirements, without realising the actual goals and results expected from the execution of the project

• The project implementation described in the contract is underestimated by the contractor both in terms of time and human resources required, leading eventually to deviations from the initial planning and possibly to exceeding the initially estimated budget

• The project is implemented at a slow rate• The opportunities to improve value for money are lost• The handling of problems that arise during the execution of the contract is not conducted

timely and effectively, which usually leads to tension between the contracting authority and the contractor

• Communication between the contracting authority and contractor is limited, increasing the possibility for misunderstandings, misinterpretations and the drawing of incorrect conclusions

• The contractor's performance is not evaluated throughout the execution of the contract thus not allowing for actions to be taken to increase the performance and effectiveness of the contract.

OBJECTIVE

• The objective of the study is to implement effective contract management(ECM) in construction projects in order to avoid the above quoted problems as well as to improve profits of the organisations and to realize the same. Exploring the potential benefits of the available softwares in market so as to implement ECM with ease.

LITERATURE SURVEY•

Importance of contract management

CONTRACT MANAGEMENT LIFECYCLE

Contract Management Issues

Procurement Stage

•Resourcing

•Planning & Development

•Developing Tools

•Integrate Management aspects in the contract

•Key Performance Indicators

• Defining Governance Responsibilities

Execution Stage

•Managing Performance

•Managing Relationships

•Managing Changes

•Managing Contingencies

•Managing Documents and records

•Executing Governance Responsibilities

Service Delivery

• Managing Performance

• Managing Relationship

• Managing Changes

• Managing Contingencies

• Managing Documents and Records

• Delivering Governance Responsibilities

Contract Management Issues

Contract Closure• Managing Compliance

• Maintaining Relationships

• Documenting Changes

• Regularizing Contingencies

• Saving Documents for Asset Management

• Informing the Management of the closure

Components of ECM

Upstream activities: Preparing the business case and securing management approvalAssembling the project teamDeveloping the contract strategyRisk assessmentDeveloping contract exit strategyDeveloping a contract management planDrafting specifications and requirementsEstablishing the form of contractEstablishing the pre-qualification, qualification and tendering proceduresAppraising suppliersDrafting ITT documentsEvaluating tendersNegotiationAwarding the contract

Downstream award of contract Changes within the contractService delivery managementRelationship managementContract administrationAssessment of riskPurchasing organisation’s performance and effectiveness reviewContract closure

FACTORS AFFECTING SUCCESS OF ECM

ECM will be successful if • the arrangements for service delivery continue to be satisfactory to both

parties, and the expected business benefits and value for money are being realised.

• the expected business benefits and value for money are being achieved.• the supplier is co-operative and responsive.• the organisation understands its obligations under the contract.• there are no disputes.• there are no surprises.• a professional and objective debate over changes and issues arising can be

had.• efficiencies are being realised.

CRITICAL SUCCESS FACTORS (CSF’S)

• 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 • Flexibility

EXPERIMENTATION

ESSENTIAL TOOLS FOR ECM

Classification of Contracts

classifying the contracts strategy and execution plan for contracts

a contract with low sensitivity and low spend (i.e., “Frequent” contracts) will require only basic contract management. This means that the organization’s focus for this contract should be on contract administration and supplier performance. On the other hand, if an organization has outsourced activities that are key to the organization’s daily operations (a “Tough” contract), then the organizations focus should include contract administration, relationship management, risk migration, strategy, innovation and development of the supplier

PARETO CHART

• A Pareto chart, also called a Pareto distribution diagram, is a vertical bar graph in which values are plotted in decreasing order of relative frequency from left to right. Pareto charts are extremely useful for analyzingwhat problems need attention first because the taller bars on the chart, which represent frequency, clearly illustrate which variables have the greatest cumulative effect on a given system.

• The Pareto chart provides a graphic depiction of the Pareto principle, a theory maintaining that 80% of the output in a given situation or system is produced by 20% of the input.

• 80 percent of problems come from 20 percent of causes

The Pareto chart is one of the seven basic tools of quality control. The independent variables on the chart are shown on the horizontal axis and the dependent variables are portrayed as the heights of bars.

ABC ANALYSIS

• Inventory optimization is critical in order to keep costs under control within the supply chain.

• ABC analysis is an inventory categorization method which consists in dividing items into three categories, A, B and C: A being the most valuable items, C being the least valuable ones. This method aims to draw managers’ attention on the critical few (A-items) and not on the trivial many (C-items).

A-items are goods which annual consumption value is the highest. The top 70-80% of the annual consumption value of the company typically accounts for only 10-20% of total inventory items. (tightly control)B-items are the interclass items, with a medium consumption value. Those 15-25% of annual consumption value typically accounts for 30% of total inventory items.(moderately control)C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items. (negligible)

KRALJIC PORTFOLIO PURCHASING MODELThe model involves four steps:

• Purchase classification.

• Market analysis.

• Strategic positioning.

• Action planning.

Purchase classification

Strategic items (high profit impact, high supply risk).These items deserve the most attention from purchasing managers.

Options include developing long-term supply relationships, analyzing and managing risks regularly, planning for contingencies, and considering making the item in-house rather than buying it, if appropriate.Note that step 3, below, provides detailed options for the best purchasing approach for these items, after considering other factors.Leverage items (high profit impact, low supply risk).Purchasing approaches to consider here include using your full purchasing power, substituting products or suppliers, and placing high-volume orders.Bottleneck items (low profit impact, high supply risk).Useful approaches here include over ordering when the item is available (lack of reliable availability is one of the most common reasons that supply is unreliable), and looking for ways to control vendorsNon-critical items (low profit impact, low supply risk).Purchasing approaches for these items include using standardized products, monitoring and/or optimizing order volume, and optimizing inventory levels.product purchasing classification

matrix

MARKET ANALYSISHere, you investigate how much power your suppliers have, and how much buying power you have as their customer. A good way of doing this is to use Porter's Five Forces analysis.

STRATEGIC POSITIONING Exploit – Make the most of your high buying power to secure good prices and long-term contracts from a number of suppliers, so that you can reduce the supply risk involved in these important items. You may also be able to make "spot purchases" of individual batches of the item, if a particular supplier offers you a good deal.

Balance – Take a middle path between the exploitation approach and the diversification.

Diversify – Reduce the supply risks by seeking alternative suppliers or alternative products.

ACTION PLANSFinally, develop action plans for each of the products and materials you need on a regular basis according to where those items are placed in the Purchasing Portfolio Matrix.

KEY PARAMETERS FOR ECM

RISK MANAGEMENTRisk is defined as the chance of Something happening that will have an adverse impact upon objectives . It is measured in terms of consequence and likelihood.

overview of the risk management process

A systematic methodology for identifying, assessing, treating and monitoring risks is a must in order to have ECM , the risk management process should be applied to each step of the contract management lifecycle. A comprehensive approach to risk management considers risk treatments both actively (designing and implementing controls to prevent the risk events occurring) and re-actively (to mitigate the consequences should the risk events actually occur).

Risk management, through structured decision making and a comprehensive analysis of business processes, provides opportunities for innovation and enhanced outcomes.

STEP ONE: ESTABLISH CONTEXTensuring the contract is understood, by all parties, in the overall context of the organisation , that is:• the outputs that the contracted services support;• the critical success factors to the delivery of the outputs; and• the internal input necessary for the delivery of the outputs.

STEP TWO: ASSESS RISKSIn this step the organisation needs to:• identify all non-trivial business risks (risk identification);• analyse those risks (risk analysis); and• design treatments that reduce the risks to an acceptable level (risk treatment design).RISK IDENTIFICATIONThere are at least two levels of risk associated with contracted service delivery:• contract risk—the risk associated with the delivery of the service; and• contract management risk—the risk associated with the management of the contract.RISK ANALYSISOnce the organisation has identified the contract risks, they need to be analysed. The criteria should be established on an escalating scale (low to high risk) against which the impact can be assessed.RISK TREATMENT DESIGNThe final step in risk assessment is to design appropriate risk treatments for the identified risks. The treatment options available to an organisation range from accepting the risk (where it cannot otherwise be cost-effectively managed), controlling the risk, through to transferring at least some of the risk

outline of the risk assessment phase of the risk management process

STEP THREE: IMPLEMENT TREATMENTSThis requires organisations to establish a plan for implementing any new treatments, additional controls, or modifications to existing controls arising from the risk assessment phase. The implementation plan should address contract risk management policies andprocedures if they do not already exist.

STEP FOUR: MONITOR AND REVIEWThe objective of the final step in the risk management process is to monitor the risks and the effectiveness of the controls over time to ensure changing circumstances do not alter risk priorities or weaken the operation of controls.

THE APPLICATION OF RISK TO CONTRACT MANAGEMENT:Risks associated with the transition phase, ongoing management, and succession phases of the contract management lifecycle should be considered against the various steps in the framework for risk management.

PERFORMANCE MANAGEMENT• It is a systematic approach which improves the goals through an ongoing process of establishing strategic

performance objectives ,measuring performance ,collecting ,analysing ,reviewing and reporting performance data.

Measure: it involves defining necessary perspectives for performance management based on the balanced scorecard (BSC) concept, and setting the objectives of performance. after this step, it deducts success factors, sets the target of performance and measures the data with assessment of measurable index.

Store: it is a step where loading of performance data into data warehouse takes place .it defines fact table and dimension table former contain measured data latter contains descriptive information about fact and it sets link for every table.

Analyse: it is a step where multi-dimensional analysis applying OLAP with performance and related stored data in DW takes place.Report: it is a phase of creating appropriate pages from result of previous step using table and picture. information will be analysed by user through interaction with system and it displays its report to screen.Use: this is used for problem solving and decision making with analysed data.

RELATIONSHIP MANAGEMENTA successful relationship must involve the delivery of services that meet requirements. The commercial arrangement must be acceptable to both parties – offering value for money for the customer and adequate profit for the provider.

The three key factors for success are:• mutual trust and understanding• openness and excellent communications• a joint approach to managing delivery.There must be mutual trust between customer and provider if the relationship is to work

Establishing relationship management structuresSenior Management Support; Peer to Peer communication; separation of roles; Defined roles and responsibilities; escalation paths

Understanding one anotherObjectives and expectations; future plan and directions; concerns about wider relationship; Opinion surveys

Establishing and using communication channelsFormal and informal contact points; horizontal and vertical communications; documenting verbal communication

Relationship management and succession planningMonitoring the Relationship

CHANGE MANAGEMENT

• Changes are almost inevitable during the period of a contract, particularly in the case of large, complex construction and service contracts.

• During the lifecycle of any project, it is likely that a number of changes will occur, requiring proper management.

• Changes may be contemplated at the time of procurement and provided for in the contract, or not contemplated during procurement but seen as desirable or necessary alterations to services or the contract.

• Good change management processes incorporate the following features:– Appropriate protocols are in place to manage change

– Appropriate staff have the authority to request and authorise changes

– Potential changes are assessed thoroughly by suitably experienced personnel, having consulted with all relevant stakeholders

– Changes are appropriately prioritised and their implementation is properly resourced

– The implementation of changes is controlled and tested

– Changes are appropriately documented

– Changes do not compromise value for money outcomes

SERVICE DELIVERY MANAGEMENT

• This activity is concerned with the fundamental aspect of contract management, that of ensuring that theactual service provided by the supplier is in accordance with the agreed standards and prices. The ability to measure the performance of the supplier – sometimes called vendor rating - and to provide feedback is critical to successful contract management and supplier development.

POTENTIAL BENEFITS OF AVAILABLE SOFTWARES

List 1. EasyBuild2. Eque2 EVision3. Explorer Eclipse4. GenieBelt5. Goldenseal by Turtle Creek Software6. INAXUS7. Jonas Premier8. Knowify9. Pro DBX10. RENOMii

EasyBuildEasyBuild is a construction ERP solution that can easily oversee construction projects from end-to-end. On the contract end, EasyBuild offers a customer relationship management (CRM) and document management module built right into the system, so that workers can attach notes and contracts with clients. The construction software also allows subcontractor document management. Each of these contract management systems are easily searchable; you won’t ever lose your contracts in your sea of contacts.

Pros: Document scanning software, high-quality debtor reporting, and the software acts as a complete end-to-end solution.Cons: Only runs on Windows, only available in English, and a limited number of reviews, so there isn’t a lot of customer feedback for this software just yet.Price: Starts at £1,750 (about $2,500) per license.

Eque2 EVisionEVision bills itself as construction accounting software, but it’s much more than that. The product is based off of Microsoft Dynamics NAV, Microsoft’s ERP system for small and mid-sized businesses, so it integrates with all of your Microsoft products. One cool feature that EVision offers is embedded reporting. I talked with Chloe Leigh, EVision’s marketing director, who explained, “Embedded Excel reporting tools allow you to create and deliver reports in your own format and are directly linked to source data.” For construction companies with lots of interconnected data that are tied to contracts, this organizational tool definitely stands out.

Pros: The whole system covers everything from project management to cost control. Users can easily run reports and find out which contracts affect the operational and financial health of their construction company.Cons: Pricey, to the point where small and midsize companies may do better with a cheaper option.Price: Starts at £50,000 (about $72,000).

Explorer EclipseExplorer Software document management of this construction management software is excellent. The end result is pretty cool; documents are tagged with Optical Character Recognition(OCR) and GPS tagging so users can tag, file, store, and find important documents easily—regardless of if they were initially electronic or not. As an important addition feature, when documents are updated, all related items are updated as well. Explorer Software is an awesome option for heavy construction, general contractors, specialty contractors, sub-trades, architects, and engineers.

Pros: Full ERP solution; Explorer Software doesn’t rely on plugins to function well.Outstanding customer service and in-depth reporting features.Cons: Requires an extra spend for the document manager and business analytics units. Website is incredibly opaque to new buyers looking for information.Price: Starts at $19,000 and scales with the number of users and units.

GenieBeltGenieBelt stands out as a personal favorite of mine because they have a free version, are extraordinarily easy to use, are consistent in offering high-quality customer support, and are hell-bent on reforming construction. They are more focused on the middle and smaller range of construction businesses, claiming that they’re best for companies between 5 and 299 contractors. For contract management, their document management system automatically creates a new folder for each project served. The system provides a full audit trail and differing permissions levels, so everyone involved in the project stay informed.

Pros: Intuitive for all users, easily track contracts with a Gantt layout, full-featured mobile app for iOS and Android, well priced. Reviewers tend to be happy with the overall product.Cons: Isn’t a full ERP solution, meaning that it’s missing some features found on other options in this review (ex: accounting) nor does it offer the functionality to sync with third-party solutions.Price: Starts at £20 (about $30) a month and scales with project size.

Goldenseal by Turtle Creek SoftwareIf your construction business is on the smaller end, consider Goldenseal. The software’s database manages the existing status of your contracts and continually updates it. You can use Goldenseal to not only balance your contracts with your clients, but also with your subcontractors and heavy-machine rentals. The software is integrated with accounting and estimating features. While it’s not a complete construction ERP software, Goldenseal will definitely get the job done at a cheaper price point than any other solution on this list.

Pros: Reviewers rave about their satisfaction with the software, excellent software option for companies with a limited budget, provides full construction management functionality.Cons: Website is off-putting and software start-up can take a while.Price: Fixed at $295 to $695 for a single user and $995 to $2,195 multi-user.

INAXUSINAXUS is targeted at civil and infrastructure construction, though it also focuses on oil and gas, manufacturing, and power generation. The construction ERP solution is well-known within Asia and the Middle East, and it’s working to get a foothold in Europe and the Americas. With that said, it’s earned its popularity in the Far East. This complete software offers flexible contract features, such as version control and document search. When I spoke with Andrea Lopez, the head of marketing, she stressed, “[Our contract management system] enables proactive tracking, avoids delays on project deliverables, and speeds up project tasks. [Our] workflows also have a proper escalation matrix and approvals for an efficient and effective project management throughout the project course.”

Pros: Offers consulting and personalized customer support and regularly conducts “surprise” audits, so you never need to worry about compliance issues.Cons: With so many ways a company can use this product, INAXUS can quickly get too heavy and features go unused.Price: Variable based on project.

Jonas PremierBecause Jonas is located on the cloud, it’s able to provide its users with unlimited storage space for their contracts. They also integrate seamlessly with Microsoft Word, Outlook, and Excel, allowing users to create their own custom forms and push them directly into the program. They’re focused specifically on general contractors, so if your construction company needs a program with a greater scope, Jonas is definitely not for you.

Pros: Great customer service, unlimited storage, and super easy to use. It also has a great mobile app and syncs with Microsoft Project, Quickbooks, and more!Cons: Training delays when users can start using the product and some documents require manual sorting.Price: $6,500 one time training fee, $150 per user per month, and $25 per APP user per month.

KnowifyCommercial subcontractors need construction management software too, and that’s where Knowifysteps in. The fully-functional software seems to have thought of everything to become one of the best contract management software for construction. Its contract functionality allows users to quickly submit and electronically sign change orders, while also managing all maintenance and accounting materials in one place. Knowify is great for subcontractors who want a no-nonsense approach to bidding, contract management, change orders, and project management

Pros: Offered at a great price point, mobile timesheets, and free training.Cons: If you don’t have Quickbooks, you won’t be able to take advantage of all of Knowify’s accounting features.Price: Starts at $68 a month and scales up with the number of users.

Pro DBXPro DBX is a great contract management software option for all-sized business. The software offers digidocs—a system that keeps all contracts and forms immediately available and searchable online. Pro DBX also allows users to track their materials with GPS, take inventory and cover purchase orders, manage payroll and timecards, and offers task management capabilities

Pros: With an emphasis on CRM and reputation management, this system is great for construction companies looking to make the sale.Cons: Doesn’t have as robust project management or change management features as other software options on this list.Price: Starts at $15 per user per month (with a minimum of $150 per month purchase) and scales up based on your company’s needs

RENOMiiRENOMii is largely used by small and medium-sized homebuilders—though subcontractors can easily use this software to manage commercial contracts. Where RENOMii really shines is with change-order requests. The system tracks the status of the request and automatically adds all approved change orders to the running total contract cost, so they eliminate cost and time negotiations RENOMiialso offers unlimited free cloud storage and outstanding user permission customizations. Its emphasis on clear communication does not go unnoticed by its users, who tend to cite communication improvement as RENOMii’s greatest ROI.

Pros: Excellent communication features, allows users to quickly address change-order requests, and keeps all areas of the business—from time cards to project management—in line.Cons: Users need to create new projects for every contract and relationship which can quickly get clunky.Price: $399CAD per year (or about $280USD) or $43CAD per month (or about $30USD).

If we could implement the above methods/ procedures in contract management system then the efficiency, effectiveness and economy of the service can be enhanced.

Relationship could be improved, balancing costs against risks could be reduced and can actively manage the customer–provider relationship. Effective Contract management aims for continuous improvement in performance over the life of the contract.

Advantage of available softwares can be taken which in turn reduces the time as well as improves efficiency of the construction project

Recommendations & Scope for future study

Recommendations

• As the above suggested methods necessitates the investment of money and time from the design team as well as management team ,there might me constraints to implement but if implemented savings can be realised.

• Since effective contract management is complex ,many softwares are available with potential benefits at reasonable cost (some are for free also) so can be made use of those , to enhance the construction projects overall performance.

• Design alternatives are properly assessed and most feasible one is selected ,as infeasible would result in adverse results to project .

Scope for future study

• Effective contract management has a lot of scope ,as it helps in realising the captured savings , and hence results in increased profits for the organisation.

• Further study can be done in using the softwares available and identifying their potential benefits and selecting the best which would give better results and versatile in nature .

• Existing methods could be optimised by rectifying the defects /limitations if any so that efficiency and effectiveness of it can be improved and hence improving effective contract management.