#3 Project Procurement & Contract Administration

Project Procurement & Contract
Administration
Melkamu Kena (PhD)
+251967632015
melkamukena48@gmail.com
➢ Contract Administration
➢ Elements of a Contract
Contract Administration ➢ Types of contracts
➢ Settling Contractual Disputes
What Is Contract Administration in Project Management?
▪ Project management is a complex and challenging

process, with many different sites, stakeholders, and
phases to consider.
▪ In order for any project to be successful, the
implementation of a contract administration process is
essential.
▪ What Is Contract Administration in Project Management?
2
▪ Contract administration is the process of managing and

fulfilling the terms and obligations of a contract between
two parties – the client and the service provider.
▪ This process is critical in ensuring that both parties comply
with the agreed-upon terms and conditions, thus reducing
the risk of disputes and conflicts.
▪ In project management, contract administration involves
creating and maintaining a document that outlines the
details of the contract, including scope, project
deliverables, timelines, and payment terms
3
▪ To effectively administer contracts, project managers need

to have a thorough understanding of the project’s details
and the client’s expectations.
▪ They also need to ensure that the project team fully
comprehends the contract requirements to avoid
misunderstandings or non-compliances.
▪ It’s essential to track progress throughout the project,
ensure deliverables are provided as agreed, and monitor
any changes in scope or timelines
4
Benefits of Contract Administration in Project Management
▪ Improved communication and collaboration

▪ Reduces legal and financial risks
▪ Allows for better budgeting and cost control
▪ Improves project oversight and management
▪ Enhances customer and stakeholder satisfaction
5
Elements of a Contract
▪ Contracts are legally binding agreements between two or

more parties, and are at the centre of every professional
relationship.
▪ Whether it’s a renewal, lease agreement, or a new sales
deal, a contract will set the conditions and agree on terms
for the parties involved.
▪ Whether a contract is 100 pages or 10 pages, to be a
legally binding agreement, it must contain these six
essential elements:
o Offer; Acceptance; Awareness; Consideration;
Capacity; Legality
6
a) Offer
▪ All contracts start with an offer. One party requires
something from the other.
o The other party has the resources to fulfil it for an
exchange in value.
▪ This results in ‘the offer’, which defines the
responsibilities of each party.
▪ Offer must also demonstrate an exchange of value.
o That value can be money, or it can relate to a desired
action or outcome.
7
a) Offer
▪ Technically, an offer does not exist until it is received by
the requesting party (the offeree).
▪ After the offer has been received, it can still be revoked,
altered, or terminated at any time before acceptance.
▪ The offeree is also free to extend a counter-offer.
▪ When a counter-offer is made, the original offer is
terminated, and the parties are now in the process of
bargaining for a new desired outcome.
8
b) Acceptance
▪ The second element of a contract
▪ The definition of contract acceptance has long been
disputed, but formally, a contract is considered to have
been accepted when it has been signed.
▪ Any conditional acceptance or the negotiation of
additional terms is a counter-offer, which is seen as a
rejection of the original agreement as it starts the process
again.
9
c) Awareness
▪ For a contract to be legally binding, both parties must
know that they are entering into a new agreement.
▪ Sometimes termed a meeting of the minds, the parties
must come together, recognize that the contract exists and
agree to be bound by the contractual obligations.
▪ If awareness cannot be established, then the contract can
be voided.
▪ If a party signs the contract under duress or can prove
fraud, misinterpretation or undue influence, the contract is
rendered invalid.
10
d) Consideration
▪ The purpose of a contract is based on what it provides.
For contractual purposes, contracts are not considered
binding unless something of value is exchanged between
the parties.
▪ Property, services, and insurance are all considered
contractual considerations.
▪ It's important to remember that there doesn’t need to be
an exchange of money for contractual consideration to be
valid.
▪ Although, a one-off or recurring payment is classed as a
consideration.
11
e) Capacity
▪ Contracts can be daunting, especially when signing on
behalf of a company.
▪ That’s why only parties that can demonstrate legal
capacity before they sign enter a new contract.
▪ Legal capacity is when the parties indicate that they
understand the contract's obligations, terms, and
consequences before they sign.
▪ If it is found that a party lacks the capacity, the contract will be
void. Instances of lacking capacity are if the signing parties are
considered minors, under the influence of drugs or alcohol, or if
the contract was signed under threats.
12
f) Legality
▪ All contracts are subject to the laws of the jurisdiction in
which they are signed and must abide by these to justify
sufficient legality.
▪ Several things can make a contract illegal, including
agreements that:
▪ Violate public policy: Agreements must be legal within
federal, state, and local law ordinances.
▪ Are made under misleading circumstances: This includes
agreements made under duress or based on fraud or
misrepresentation.
13
f) Legality
▪ Involve illegal activities: Agreements cannot require either
party to do something that is against the law.
▪ Involve a person who lacks the capacity to sign a contract:
Agreements cannot involve a minor or person who is
mentally unsound.
o Any contract that is deemed illegal is void and
unenforceable.
▪ Additionally, if a contract is impossible to fulfill due to
circumstances beyond the control of the parties involved, it
may be considered a force majeure event.
14
Types of contracts in project management
▪ In project management there are three primary types of

contracts.
▪ Depending on the type of project you’re creating an
agreement for and how payment will occur, one of these is
the best starting point for drawing a legal framework of
the working relationship.
o Fixed price
o Cost reimbursable ( or Cost Plus )
o Time and Material contracts.
15
1) Fixed price (FP) Contracts

▪ Fixed price contracts are useful when the scope of the
project is clearly defined and easy to understand.
▪ Since the parameters of the project are clearly outlined
from the outset, the seller or supplier can provide a
definitive price quote for the work.
▪ As the name suggests, the price is fixed and cannot be
altered (without making formal contract amendments)
once the buyer agrees to the terms and conditions.
16
1) Fixed price (FP) Contracts

▪ FP contracts can be beneficial to the seller if they can
complete the work outlined in the contract for less
▪ However, in a FP contract the supplier is assuming cost-
related risks because they cannot increase their prices if
unexpected expenses crop up over the course of the
project
▪ FP contracts are considered lump sum contracts because
there is one price to be paid upon project completion. There
are a few types of FP contracts, including:
▪ Firm fixed price contract; Fixed price incentive fee;
Fixed price with economic price adjustment
17
Fixed price (FP) Contracts
a) Firm fixed-price contract

▪ A firm fixed-price contract has no price adjustments
because parties cannot make any changes unless there is
a mutual agreement to alter the pricing scope.
▪ This contract benefits the buyer because the price cannot
change even if unprecedented costs arise or the seller
requires extra resources.
▪ A project manager may prefer a firm fixed-price contract
when purchasing or acquiring commercial equipment,
machinery and products with precise specifications and a
fixed-price.
18
b) Fixed-price incentive fee contract

▪ The fixed-price incentive fee contract combines a general
fixed-price contract with an incentive fee.
▪ This contract has a fixed-price limit and the seller can
only execute the contract's specifications within that price
limit.
o If the project exceeds the price limit, the seller handles
all costs beyond the agreed price.
▪ The seller receives a bonus or incentive for completing the
task on time or surpassing metrics agreed upon by both
parties.
▪ Such a contract motivates the seller to complete work faster and
reduces the risk of a seller working longer or requiring more time for
project completion.
19
c) Fixed-price with economic price adjustments contract

▪ A fixed-price with economic price adjustments (FPEPA) is a
contract type where buyers pay a fixed-price to a seller.
o This contract also allows pre-defined adjustments to
the price of the contract.
▪ The change might be because of inflation rates on specific
products.
▪ Project managers might use FPEPA to execute contracts
in various countries and make transactions in different
currencies
20
2) Cost reimbursable (CR) contracts

▪ A CR contract is often the best choice when there’s little
information for all parties starting out on a project.
▪ For example, if it’s a research or development initiative,
the CR model removes the need to set fixed rates for
work that is difficult to predict or foresee. Instead, the
buyer fronts the costs for whatever materials, products
or labor is necessary to see the project through to
completion.
▪ The responsibility falls solely on the buyer, guaranteeing
the supplier that all material costs plus a fee for their
services will be covered.
21
2) Cost reimbursable (CR) contracts

▪ In the case of CR contracts, the buyer needs to closely
monitor the expenses of the project
o because there is no obligation on the part of the seller
or supplier to keep costs down to stay within a budget.
▪ All costs incurred within the scope of work fall on the
buyer. The various types of CR contracts are:
o Cost-plus fixed fee; Cost plus incentive fee; Cost
plus award fee (CPAF)
22
Cost Reimbursable (CR) contracts
a) Cost-plus fixed fee

▪ Costs plus fixed fee (CPFF) or Cost Plus Percentage of
Costs (CPPC) means buyer will pay the seller back for the
costs involved in doing the project work, plus an agreed
amount (or fixed fee) that buyer will pay on top of that.
▪ Though the seller receives the authorized cost, they also
get fixed-fee reimbursement calculated as a part of the
initially expected project costs.
▪ Only when the project scope changes, this cost can
change. Project managers use this contract when the
project costs are challenging to estimate.
23
b) Cost plus incentive fee

▪ A cost-plus incentive fee is a method that gives an
incentive for the seller to keep the production cost as low
as possible.
▪ Project managers might use the cost-plus incentive fee
contract to share the financial risk of a project between a
buyer and seller.
▪ Typically, every cost-plus incentive fee contract includes
details such as the project's target cost, base pay for the
contractors, a method for calculating incentives and
minimum and maximum contractor pay.
24
c) Cost plus award fee (CPAF)

▪ A cost-plus award fee is a method in which sellers recover
the actual cost of completing a project and receive a fee
based on performance.
▪ Buyers agree to pay a fee based on their evaluation of the
seller's performance.
▪ The bulk of the seller's payment depends on fulfilling
technical or subjective performance goals already outlined
in the agreement.
25
3) Time and Material Contract

▪ The time and material contract is used when the company
is unaware of the number of labour hours and materials
required for project completion.
o Typically, these contracts are risky for buyers because
they do not know how much they might pay for the
project.
▪ To reduce unexpected costs, many buyers set a maximum
number of work hours.
▪ The time and material contract might be used for hiring
experts and project the number of employees contracted
for a specific time.
26
Settling Contractual Disputes
▪ While the exact process may differ, the following general

steps can guide parties in resolving their contract
disputes:
a) Review the contract
▪ Thoroughly examine the contract to understand the
disputed terms, obligations, and potential remedies
available.
b) Communicate with the other party
▪ Open up the floor for an honest and frank conversation
with the other party to clarify misunderstandings,
address concerns, and attempt to resolve the dispute
amicably.
▪ This could involve face-to-face meetings, emails, or formal written
communications.
27
c) Mediation and negotiation

▪ If direct communication fails to solve the dispute, parties
may consider engaging in mediation or negotiation.
▪ Mediation involves the assistance of a neutral third party
who facilitates discussions and helps parties reach a
mutually acceptable resolution.
▪ Negotiation involves direct discussions between the
parties involved to find a middle ground and resolve the
dispute without litigation.
28
d) Arbitration
▪ In some cases, contracts may include arbitration clauses
that require parties to resolve disputes through arbitration
rather than via litigation.
▪ This involves submitting the dispute to an impartial
arbitrator or panel, who then make a decision that the
parties involved must abide by.
29
e) Litigation
▪ If all other methods fail or are not viable options, parties
may choose to pursue litigation by filing a lawsuit in a
court of law.
▪ Litigation can be a lengthy and costly process, but it
allows for a resolution through a judgment rendered by a
judge or jury.
30

#3 Project Procurement &amp; Contract Administration

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

#3 Project Procurement &amp; Contract Administration

Uploaded by

Copyright:

Available Formats

Project Procurement & Contract

What Is Contract Administration in Project Management?

▪ Project management is a complex and challenging

What Is Contract Administration in Project Management?

▪ Contract administration is the process of managing and

What Is Contract Administration in Project Management?

▪ To effectively administer contracts, project managers need

Benefits of Contract Administration in Project Management

▪ Improved communication and collaboration

▪ Contracts are legally binding agreements between two or

Types of contracts in project management

▪ In project management there are three primary types of

Types of contracts in project management

1) Fixed price (FP) Contracts

Types of contracts in project management

1) Fixed price (FP) Contracts

Fixed price (FP) Contracts

a) Firm fixed-price contract

Fixed price (FP) Contracts

b) Fixed-price incentive fee contract

Fixed price (FP) Contracts

c) Fixed-price with economic price adjustments contract

Types of contracts in project management

2) Cost reimbursable (CR) contracts

Types of contracts in project management

2) Cost reimbursable (CR) contracts

Cost Reimbursable (CR) contracts

a) Cost-plus fixed fee

Cost Reimbursable (CR) contracts

b) Cost plus incentive fee

Cost Reimbursable (CR) contracts

c) Cost plus award fee (CPAF)

Types of contracts in project management

3) Time and Material Contract

Settling Contractual Disputes

▪ While the exact process may differ, the following general

Settling Contractual Disputes

c) Mediation and negotiation

Settling Contractual Disputes

Settling Contractual Disputes

You might also like

#3 Project Procurement & Contract Administration

#3 Project Procurement & Contract Administration