Ome 664: Project Procurement & Contracting: Lecture 7: Contract Management and Control

OME 664: PROJECT PROCUREMENT
& CONTRACTING
Lecture 7: Contract Management and Control
08/28/21 1
Introduction
• The aim of contract management is to maximize
operational and financial performance at in the
project while reducing financial risk.
• Organizations encounter an ever-increasing
amount of pressure to reduce costs and improve
company performance.
• Contract management proves to be a very time
consuming element of projects, which facilitates
the need for effective contract control system.
08/28/21 2
Introduction
• Procurement contract control is carried out by
both a buyer and a seller to ensure that each
part meets the respective contractual
obligations.
• It involves
1.Monitoring, control and evaluation of the
Contractor's performance
2.Evaluation of the quality and quantity of the
products/ services and works delivered/
become accepted
3.Identification and handling of risks
08/28/21 3
Introduction cont..
• The seller is concerned with creating
deliverables, that match agreed specifications,
managing communication with the buyer,
managing the budget and managing risk.
• The buyer is concerned with communicating
with the seller, payment schedules, timely
quality reviews of deliverables, and risk
management.
• To successfully conduct contract control, a
monitoring system must be in place.
08/28/21 4
Introduction cont..
• Contract monitoring system is the structure,
policies, and procedures used to ensure that the
objectives of a contract are accomplished and
vendors meet their responsibilities.
• An effective contract monitoring system
mitigates risk, with risk defined as the
probability of an event or action having an
adverse effect on a project
• Effective control system follows four steps:
08/28/21 5
Step 1. Establish Performance Standards
• Refers to a precise, explicit statement of
expected results from a product, service,
machine, individual, or project.
• A standard is any guideline established as the
basis for measurement.
• Standards are created when objectives are set
during the procurement planning process.
• It is usually expressed numerically and is set for
quality, quantity, and time.
Step 2. Measure Actual Performance
• Supervisors collect data to measure actual
performance to determine variation from
standards.
• Sources of information might include, production
tallies, inspection reports, sales tickets, personal
observation, statistical reports, oral and written
reports or Management by Walking Around.
Step 3. Compare Measured Performance Against
Established Standards
• Comparing results with standards determines
variation. Some variation can be expected in all
activities and the range of variation - the
acceptable variance - has to be established so
that operations continue as long as they fall
within the prescribed control limits.
• Deviations or differences that exceed this range
would alert the contract manager to a problem
Step 4. Take Corrective Action
• The project manager must find the cause of
deviation from standard.
• Then, he or she takes action to remove or
minimize the cause.
• If there is variation immediate corrective
action should be taken to get performance
back on track or apply changes to the
contract id need be or terminate the
contract.
Evaluation of the Contractor’s performance
• Throughout the duration of execution of the
contract the Project Manager (or the Engineer)
must monitor and control the Contractor's
performance,
• That is, whether the Contractor is executing his
works based on the terms of the contract and
Plans that were developed and agreed upon
with the Contracting Authority during the
planning phase of the Project.
08/28/21 10
Evaluation cont…
• More specifically, the Project Manager (or the
Engineer), in order to evaluate the Contractor's
performance, must check that the Contractor:
• Observes the agreed baseline schedule or any
approved revisions thereof;
• Uses the proper resources which he had included in
his tender and Resource Plan;
• Refrains from making and claiming liquidated
damages for expenses that are not provisioned in
the contract and not covered by the Project budget;
• Observes the agreed Quality Plan and performs the
proper quality controls of his deliverables that are
specified in it;
08/28/21 11
Evaluation cont..
• Applies the procedures provisioned in the Issue
Management Plan to settle issues arising during the
execution of the contract;
• Sees to the observance of the Change Management
Plan and the enforcement of the applicable
procedures in each case;
• Enforces the procedures provisioned in the Risk
Management Plan to identify, assess and handle the
risks that may appear during the execution of the
contract;
• Implements the provisioned communications based
on the Communication Plan and submits the
Progress Reports provisioned in the contract;
08/28/21 12
Evaluation cont..
• Though the Contractor's performance evaluation is an
ongoing process, which takes place throughout the
duration of the contract, it is recommended that a
Contractor's Performance Evaluation Report is drafted
once all of the contractual obligations of the latter have
been completed so that the Contracting Authority have
gained a more complete picture that will help it in
formulating a more objective judgment.
• This Report may be prepared for all contracts irrespective
of value or only for those with value above a limit, as well
as it may be drafted only by the Project Manager (or the
Engineer) or by a competent Committee based on what is
provisioned in the Regulations which every Contracting
Authority is required to apply
08/28/21 13
Contractor’s Performance Evaluation Criteria in a
supply contract
1. Timely delivery
2. Response of the products to the quantitative and
qualitative requirements described in the contract
3. Delivery services (transportation, packaging)
4. Suitability and adequacy of technical means of
support
5. Cooperation with Contracting Authority
6. Submission of documented request for extension
of contractual time
7. Breach of other terms of the Contract by the
Contractor
08/28/21 14
service contract
1. Quality of deliverables (e.g., completeness, practicality,
clarity, expandability, user friendly, parameterising) or
service rendered (e.g., reliability, functionality, safety,
environmentally friendly, end user satisfaction, timely
provision, etc.)
2. Organization and function of project team - Staff
suitability, adequacy and behavior
3. Cooperation and communication with Contracting
Authority and the other stakeholders
4. Effectiveness in Project management
5. Planning and achievement of time goals
6. Suitability and adequacy of technical means of support
7. Submission of documented request for time extension
8.08/28/21
Breach of other terms of the Contract by the Contractor15
public works contract
1. Quality of materials based on laboratory testing and measurements of
the technical specifications
2. Response of Contractor to the Engineer's and supervisors' written
instructions
3. Response/ compliance of the Contractor to the provisions of the
contract regarding the management of safety issues for the personnel
and passers by/ visitors
4. Timely completion of the contract
5. Organization and planning
6. Suitability and adequacy of personnel and mechanical equipment
7. Cooperation and coordination with subcontractors
8. Submission of documented requests for time extension and
observance of deadlines when submitting claims with respect to the
terms of the contract.
9. Submission of documented and non exaggerated claims for liquidated
damages
10. Breach of other terms of the contract by the Contractor
08/28/21 16
Contractor’s Performance Evaluation Criteria in an
Engineering Consulting Services contract
1. Completeness, compatibility with legislation and relevant
standards, applicability/ feasibility, precision and
correctness of design elements
2. Response/ compliance of Contractor with Engineer's
written instructions
3. Timely completion of the contract
4. Organization and planning
5. Suitability and adequacy of personnel & office
equipment
6. Cooperation and coordination with the Services
7. Submission of documented requests for time extension
and observance of deadlines when submitting the claims
8. Submission of documented and non exaggerated claims
for liquidated damages
9.08/28/21
Breach of other terms of the contract by the Contractor17
Components of an Effective Contract Monitoring System
• Effective contract monitoring is accomplished through the application
of numerous monitoring methods that are tailored to a particular
contract.
• Some monitoring methods may be appropriate for most contracts (i.e.,
performance measures, scheduled programmatic reports), while other
methods are appropriate for a smaller number of contracts (i.e., on-site
visits, customer satisfaction surveys). The components used to monitor
a contract are dependent on numerous factors, especially the
complexity of the contracted service, the contract amount, and the risk
if the work is not performed adequately
• Projects can mitigate the risks associated with contracting out services
by developing an effective contract monitoring system.
• Project managers should assess the complexity of the contracted
service, the contract amount, and the risk if the work is not performed
adequately when deciding what components are necessary.
• The components of an effective contract monitoring system are
detailed below.
08/28/21 18
Components of an Effective Contract
Monitoring System cont..
1. Training in Contract Monitoring
• Training in contract monitoring increases the
likelihood that individuals will monitor contracts
reliably by giving them the appropriate
background knowledge related to contracts.
• Many of the topics that should be included in
contract monitoring training are included in the
list of components of an effective contract
monitoring system.
08/28/21 19
2. Written Policies and Procedures
• Written policies and procedures serve as a guide
to projects and their personnel in ensuring a
consistent, high-quality contract monitoring
process.
08/28/21 20
3. Contingency Plans
• Projects without contingency plans risk interruption
of services when vendors default on their
obligations and may pay additional costs for taking
back services.
A number of options are available for a default
contingency plan:
1. contracting with the next lowest bidder from the
original solicitation;
2. using another current vendor;
3. delivering the service in-house
08/28/21 21
4. Communicating Clear Expectations to Vendors
• Creating a detailed Statement of Work, having
performance measures in the contract
• Holding a post-award meeting with the vendor
contribute to the vendor’s understanding of what is
required under the contract. By clearly stating
contract requirements and performance goals, the
project reduces the potential for poor performance.
• A post-award meeting allows staff that may not
have been involved with the procurement process
to answer questions that the vendor might have
and clarify technical aspects of the contract.
08/28/21 22
5. Contract Administration Plan
• A contract administration plan is a cursory view
of planned and completed activities and can be
utilized throughout the contract period as a
status report.
• It should detail the methods that the project will
use to monitor the vendor and the individuals or
offices that will be responsible for the
monitoring.
08/28/21 23
6. Organized Contract Files
• Files should be organized so that someone could
reconstruct and understand the history of the
contract in the absence of the contract
administrator.
• Contract files should hold all the information
necessary to know what was expected and
received under the contract.
08/28/21 24
7. Payments Linked to Satisfactory Performance
• For contracts that involve monthly or quarterly
payments, projects should require a vendor to
submit programmatic reports in advance of or
concurrent with its invoices.
• The programmatic reports should be directly
related to the terms of the contract.
08/28/21 25
8. Regular Programmatic Reports from Vendor
• The contract should require the vendor to
provide specific programmatic information on a
scheduled basis to determine if performance
measures are being met.
• Programmatic reports should require
information related to the performance
measures (outputs and outcomes) in the
contract, as well as any other deliverables.
08/28/21 26
9. On-Site Monitoring
• Project officials should conduct random
inspections of vendor records and the delivery of
services to ensure all terms of the contract are
being fulfilled.
• On-site monitoring visits are most effective when
based on a specific methodology or a checklist of
review tasks.
• On-site monitoring visits may not be necessary
for all contracts.
08/28/21 27
10. Use of Incentives and Consequences
• Performance reinforcements, such as incentives and
consequences for poor performance, are helpful in
obtaining optimal performance from the vendor.
• Financial incentives can be one of the most effective
methods of inducing a vendor to perform a desired
service, while consequences for poor performance
written into a contract provide projects with the
ability to take disciplinary action against a vendor
that fails to comply with contract terms.
• Projects should establish reasonable damages based
on reasonable standards. If either is unreasonable, it
is likely to limit competition and lead to vendors
charging higher amounts to cover the greater risk.
08/28/21 28
11. Access to Records/Right to Audit Clauses
• Projects have a responsibility to verify the
information that the vendor reports to them and
to ensure that funds are expended properly.
• The contract must include an agreement that the
project has access to and can audit those records.
08/28/21 29
12. Measuring Customer Satisfaction
• Utilizing methods to measure customer
satisfaction helps to improve vendor
performance because the feedback can be used
to notify the vendor when specified aspects of
the contract are not being met.
• In addition, project officials can use the
information as a source of past performance
information for subsequent contract awards.
08/28/21 30
13. Dispute Resolution Procedures
• The project should have procedures in place for the
monitoring officials to notify the project’s
procurement office if a dispute arises.
• Project officials should provide notification of
problems and a timetable for resolution to the
vendor in written form.
• If problems are not resolved, the project manager
should notify the legal officer and consider taking
actions to compel the vendor to adequately comply
with contract terms (i.e., financial consequences,
contract cancellation).
08/28/21 31
13. Closeout Procedures
• Formal, written closeout procedures are
recommended at the completion stage of the
contract so that important elements are not
overlooked.
• The use of a checklist of closeout procedures
helps to assure that all actions have been
completed such as ensuring all state property
properly returned, all deliverables have been
met, final payment made etc.
08/28/21 32
14. Post-Contract Review
• At the end of a contract period, projects should
evaluate the vendor’s performance and their
own method of monitoring the vendor.
• Projects should consider conducting a
programmatic review and a financial audit.
08/28/21 33
Managing time, cost, quality and risk
Referred to as Three-dimensional approach
• Time, cost and quality can be seen as three
constraints within which the contract needs to be
delivered.
• Changes in one constraint may necessitate
changes in another to compensate.
• The Contract Manager should be mindful of how
any change in one constraint could impact the
others and affects the contract risks.
08/28/21 34
Managing time, cost, quality and risk
cont.
1. Time control
• An essential part of contract management is
identifying the critical path. The critical path is
the sequence of activities, which add up to the
shortest time possible to complete the contract.
Identifying the activities, the sequencing and
other dependencies, and estimating times for
completion, are the first steps in developing a
robust and realistic schedule for contract
implementation.
08/28/21 35
Managing time, cost, quality and risk cont.
Key factors in time control include:
• Developing a comprehensive, practical and realistic
schedule of key activities (this may include key
deliverables and milestones and projected contract
completion date)
• Undertaking a quality assurance check of the schedule
including identifying any flaws in logic or faulty
assumptions
• Ensuring that the Contract Manager and the contractor
are working to the same schedule
• Implementing an effective tool or system to track and
monitor progress against the schedule
• Ensuring early intervention when a potential or actual
delay is identified
• Implementing appropriate action to mitigate or manage a
delay and recording the decision/s
08/28/21 36
Time extensions
• The Contract Manager will often be required to
decide when it is appropriate to allow a time
extension.
• How the Contract Manager resolves delays will
depend on the facts and circumstances of the delay,
and always based on the contract.
• These could be, for example, a delay that:
1. is due to the vendor being in default (e.g. failing to
carry out its contractual responsibility which
impacts on his ability to progress the work);
2. is due to new or extra work/services not included in
the original scope.
08/28/21 37
2. Cost control
• Managing costs is essential to ensure that the
contract is delivered within the contract price. The
approach to managing costs will depend to some
extent on the nature of the contract. The Contract
Manager should put in place appropriate financial
systems and reporting mechanisms that record the
budgeted costs, track actuals and provide alerts
where there are cost overruns.
• Ideally, the contract management system should be
integrated with the financial management system of
the project as the case maybe.
08/28/21 38
• Price adjustment
• As part of cost control, some contracts allow the
price to be adjusted where, for example, local or
foreign inflation is expected to be high.
• If applicable, the process for adjusting the price is
detailed in the contract, including the appropriate
formula to be applied.
• Contract cost control mechanisms include
monitoring the correct application of price
adjustment provisions, where included in the
contract.
08/28/21 39
3. Quality control
• It is good practice to monitor and assess quality
as the contract is being implemented.
• This ensures that quality is controlled and
consistently delivered. There are many different
types of quality management and control
systems.
• It is important to select an appropriate system or
methodology based on the nature of the
contract. The system should be agreed with the
contractor and put in place before the contract
commences.
08/28/21 40
Causes of Inadequate Monitoring
Inadequate monitoring is often the result of the
following:
1. Poorly established criteria for evaluating vendor
performance;
2. Perception of oversight as a responsibility to
develop a partnership rather than enforce rules,
regulations, or contract provisions;
3. Focus on rules and regulations rather than
outcomes;
4. Failure to conduct follow-up reviews to ensure that
corrective action was taken; and,
5. Failure to identify the risk and level of review
necessary for each vendor.
08/28/21 41
THANK YOU
08/28/21 42

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Lecture 7: Contract Management and Control

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