Chapter Nine

Contract Administration
 Chapter Objectives
By the end of this session, the participants should
be able to:
• Define contract review and Award;
• understand the purpose of conducting a review
prior to award;
• Identify the requirements for Award;
• Analyze the process of contract review and
award;
 Chapter Objectives…
• Define contract finalization;
• Synchronize the process of contract finalization
and issuance;
• Identify the elements to be negotiated before
contract;
• Analyze contract preparation, review, signature,
and filing;
• Understand the basic structure of a contract;
• Clarify terms and conditions of a contract;
 Chapter Objectives…
– Define contract management;
– Synchronize the process of contract management;
– Identify the contract file and documentation;
– Explain contract performance monitoring methods
and control points;
– Understand dispute management and resolutions;
– Clarify financial management of contract;
– Analyze contract completion and closeout;
 Introduction
• Contract administration begins when the contractor
has been selected and the procurement contract
signed.
• The topic includes the organizational dimension to
contract administration
• Some of very important contract terms to be found
in the contract are: payment and monitoring;
performance; the resolution of disputes; contract
modification, termination, breach; and
recordkeeping.
 Introduction…
Why Contract Administration?
Who does administer a procurement contract in
your organization?
 Introduction…
• The contract will clearly specify the roles and
responsibilities of both the supplier and the
client
• Successful contract management requires
– flexibility and understanding each other.
– not a constant referral to contractual clauses.
– Often-additional value can be obtained by building a
sound commercial relationship with a supplier.
• Buyers should ensure that they fulfil their own
contractual obligations.
 Process of contract review and award
• The contract review and award process follows
different stages of review in the public
procurement process.
1. Preparation of award recommendation document
– The procurement officer is responsible to prepare
an award recommendation document, based on an
evaluation report .
 Contract Management
• “Contract” may be defined as “a promise, or a
set of promises, the breach of which gives rise
to remedy, or the performance of which the
law in some way recognises as a duty.”

What makes different “a contract “from other

branches of law?
 Differences from Other Branches of Law
 Contract differs from other branches of law in
that:
• Generally, parties themselves are free to set up their own
rules as to what shall or shall not bind them.
• In this respect differs from criminal law where EXTERNAL
law decides on action to be taken.
• In contracts, consequences of breach are decided by the
parties, for example:
i. What liability?
ii. What damage?
iii. Which law governs the contract?
iv. What procedural law to use in the event of dispute?
 The process of contract management
• The contract management is a very crucial step in
the public procurement process and following
different contract administration steps.
1. Enabling contract management
• There should be a shared understanding, and
distribution of responsibilities.
• Systems and procedures should be in place to
monitor and control contract performance.
• The must be a system that would help the buyer
effectively deal with potential changes & disputes.
 Contract filing and documentation
• The contract file should be opened by the
procurement officer.
• The contract should be carefully analyzed,
taking note of the rights and obligations of
each party.
• Any issues requiring clarification or change of
the contract should be fully documented in this
file.
• Although practice may vary among
organizations, the following documents
normally are part of the contract file:
– Original of contract and all amendments
– All related communication with the supplier
(electronic, internal and external correspondence)
– Copy of the winning offer
– Award documents
– Minutes of meetings
– Notes of phone conversations
– Reports
– Proof of receipt of goods
– Proof of payment
– Supplier assessment report
– Acceptance report from requisitioner/client.
• It is important to carefully document contract
performance for the following reasons:
– It constitutes proof of performance.
– It constitutes evidence in the event of disputes.
– Its content forms the institutional memory.
– It is used for audit purposes.
 Contract analysis
• The requisitioner and the procurement officer
should reach agreement on intermediate
performance goals based on contract
performance obligations.
 Pre-performance conference
• For large or complex contracts, to have clear
understanding on the project and joint
administration of the contract.
• The following is considered good practice:
– The meeting should be formal
– An agenda should be distributed in advance;
minutes should be taken and agreed by the
parties.
– Each party should appoint a person who will be
the organization’s official voice during contract
performance.
• The following topics should be covered by the
parties:
– Review the contract terms and conditions and other
key elements and explain who will do what.
– Update the project/program plan with the
involvement of both parties.
– Review the performance assessment plan with the
supplier
– Discuss how and when to measure and report
actual performance
– Clarify any remaining ambiguities and discuss
procedures for managing change and resolving
differences.
– Clarify the communication plan.
 Effective communication
• Successful contract management is based on
an open flow of communication and
willingness to take actions necessary for
correction and improvement,
• It is facilitated by:
– Attitude of teamwork,
– Seeking to get the best results from joint efforts,
– Willingness to discuss problems without
immediate recourse to recriminations.
 – Well organized oral and written reporting system
– Contract performance and progress review
meetings at appropriate intervals.
2. Contract performance monitoring & control
• The responsible procurement officer, or the
requisitioner, monitors performance, collects
information, and measures actual contract
achievement.
• This is essential for effective control.
 Control points
• Observing and collecting information should be
directed at four general control points.
– Cost control
– Schedule control
– Compliance with specifications, terms of reference,
statement of work (quality assurance control)
– Compliance with terms and conditions, paperwork
requirements, and administrative aspects of the
performance.
 Monitoring methods
• There are two different monitoring methods:
direct observation and indirect observation.
Direct observation
• Direct observation means personal, physical
observation.
• The responsible procuring entity’s staff
member, or a field representative, is physically
present at the work site during its performance
to see how it is progressing.
Indirect observation
• Indirect observation refers to testing, progress
reports from many observers, technical
reviews, performance indicators and audits.
• Indirect observation is appropriate whenever
direct observation would provide insufficient
or ambiguous information.
 Force Majeure
 Impediments to performance beyond the
control of the parties not reasonably
foreseeable.
 Excuses performance during period of force
majeure.
 Contract Modification
 Should not be allowed to undermine
[competitive] nature and integrity of the
procurement.
 May be agreed between the parties.
 In works contracts especially, may be ordered
unilaterally by procuring entity as change
order, with corresponding price adjustment
(variation treatment).
 Contract Termination
 Termination for insolvency of the contractor.
 Termination for default (contract breach or
misconduct) after period for curing defect.
 Termination for convenience.
 Contract Close-Out
 Final step in contract administration.
 Importance of documentation.
 All performance matters, claims resolved; all
payments made.
 Process of contract review and award
• The contract review and award process follows
different stages of review in the public
procurement process.
1. Preparation of award recommendation document
– The procurement officer is responsible to prepare
an award recommendation document, based on an
evaluation report .
• The procurement officer makes sure that the
award recommendation documents are written
in:
– Clear,
– Precise and
– Honest manner and
– Reflect all necessary information that lead to the
recommendation of award
• For example:
– Minimum number of valid offers has been
obtained
– If there is no enough bidder, the reasons must be
recorded and explained as part of the award
recommendation quoting the relevant financial
rule.
– Due diligence has been completed ensuring that the
supplier is acceptable and able to fulfill the purchase
order or contract.
– The procurement process and evaluation have been
carried out in a fair and proper manner.
– Other information considered important for the
review has been factored in.
– There is a summary of recommendation for award.
2. Submission of recommendation to awarding
authority
– Minutes should be submitted to the awarding
authority in the organization who should review the
contracts committee recommendations.
3. Rejection/approval of award by awarding
authority
– The awarding authority can reject or approve the
recommendations.
– Where the awarding authority decides not to accept
the advice of the contracts committee, the reasons
should be recorded in writing and forwarded to the
chairperson of the contracts committee.
Contract Finalization and Issuance
• Contract finalization is the process followed by
the procurement officer to form a written
contract with a supplier.
• The purpose of contract finalization is to
ensure that all proper elements are in place to
conclude a written agreement.
• A contract is formed on the basis of an “offer” and
an “acceptance” and in the context of
procurement in the countries public procurement
rules and regulations.
• It is made in a written document, containing the
agreement, and the terms and conditions,
between the public organization and the supplier,
• The Contract has to serve as proof of the
obligation.
• In the public procurement system, contracts
are based on competitive solicitation
processes.
• However, under certain circumstances (e.g.
direct contract, sole source or complex
contracts), in order to proceed to form a
contract with the selected supplier, the
procurement officer may need to clarify and
negotiate terms and conditions.
 Fundamental Principles of Contract
Administration
 Fairness;
 Timeliness;
 Communication;
 Sufficient allocation of resources, including
skilled personnel; and Finance
 Contract administration planning
 Important Provisions of the Contract
 What are most important provisions of the
contract?
– Scope of work;
– Payment provisions;

These must be integrated so that payment is

made as work progresses (particularly for
construction contracts).
 Process of contract finalization and
issuance
1. Contract negotiation
• In a competitive solicitation process it is good
practice to select the appropriate contractual
instrument at the time of the preparation of the
solicitation documents and to include a sample
copy of a contract as an annex to the solicitation
documents.
• Where required, negotiations have the potential to
improve the procurement outcome by reducing
uncertainties, risks and costs.
• The following elements could be negotiated prior
to contract signature:
• Technical aspects
– Warranties, after sale service, life cycle support
maintenance agreements, quality output issues.
• Remedies
– Liquidated damages
• Special terms
– Type of bonds, guarantees, insurance, payment
schedule.
• Management information
– Frequency and content of reports;
– Acceptance criteria for certain milestones.
• Timeframes
– Duration of contract,
– Key milestones,
– Delivery dates,
– Response times.
• Personnel
– Key team members and focal points, subcontracting
arrangements.
 Good practice
Examples of good negotiation practice are:
• Negotiations should not be conducted when
they may distort competition.
• Negotiations should preferably be in writing.
• Where negotiations take place in person, via
telephone, videoconference or at the site of
the supplier or the public organization, a
minimum of two staff members should be
present.
• The members of the negotiation team need to be
selected carefully to combine the right blend of
– negotiation experience and
– contractual, financial and/or technical skills.
• During the negotiation process:
– all procurement officers must ensure no conflict of
interest arises and
– no gifts or hospitality are accepted from the supplier.
 Contract preparation
• Procurement officers are encouraged to refer to
existing templates or model contracts.
• Contractual documents should be based on the:
– Solicitation document and subsequent amendments
and/or clarifications
– Offer from the supplier and any subsequent
amendments and/or clarifications
– Award recommendation
– Recommendations of the contracts committee, if
applicable
– Final decision taken by the awarding authority.
 Contract signature
• Once the contract has been completed to the
satisfaction of the procuring entity:
– the procurement officer should seek all required
internal approvals
– print the required number of copies of the contract
– ensure that all pages are numbered and initialed by
the procurement officer.
• The contract should be signed by an authorized
representative of both the supplier and the
procuring entity
 Contract filing
• The procurement officer should ensure
– The original copy of the contract is filed
– providing a copy to the requisitioning office and
others if necessary.
 Basic structure of a contract
• A contract usually includes the following parts:
– Clear and complete description of the
work/goods/services
– Price, basis of payment; method of payment
– Schedule of activities; delivery date
– Reference to solicitation documents
– Specific terms and conditions
– General terms and conditions
– Other documents may be incorporated as necessary,
e.g. written records of bid conferences, email/mail
correspondence, samples
 Dispute management & Resolution of
Contract Implementation
• It is important to avoid serious contract
disputes and the procuring entity and the
contractor should plan to do so from the
beginning of the procurement process
• Many disputes between the contractor and
the procuring entity can be resolved through
informal means of discussion and negotiation.
• These may or may not require the parties to
amend or extend the terms of the contract.
 Keys to effective dispute resolution

• Before escalating a dispute, consider using the

following keys to effective dispute resolution:
– Recognizing that contract documents are not perfect
– Keeping larger objectives in mind
– Focusing on the facts
– Depersonalizing the issues
– Being willing to make reasonable compromises.
 Importance of Specifying Means of
Settling Disputes

 A good contract should anticipate disputes and

therefore provide:

– Means of settling them;

– Which law should be used to settle them;

– Where they should be settled; and

– Who should settle them.

 Means of Settling Disputes
 Negotiation;
 Mediation;
 Dispute Review Board;
 Arbitration; and
 Litigation.
 Negotiation

 Is the most practical means of settling disputes.

 Used as an on-going process as implementation

issues arise.
 Has the advantage that the parties themselves are
directly involved in settling their disputes.
 Mediation
 Is a form of negotiation but differs in that it is facilitated by a third party.

 The third party is neutral and merely assists in enhancing the

negotiations.

 Though neutral, the third party is not passive—makes suggestions and

generates ideas and options with a view to helping parties reach a

compromise.

 A mediator does not decide.

 Its main advantages are that it helps parties avoid costs and time

associated with arbitration and litigation.

 Dispute Review Board
 This is a dispute resolution mechanism used mainly
in large works contracts.
 It uses qualified independent experts appointed by
the parties.
 Members of the Board carry out site visits and are
able to settle any arising disputes on sight.
 Rationale for using this method is that it avoids
expenses associated with arbitration and litigation.
 The main disadvantage is that the decision of the
board is not binding.
 Advantages are that:
– It is quick;
– It is practical;
– It is fair;
– Because recommendations are made on a
continuing basis, disputes are resolved before
they
get out of hand; and
– Though its recommendations are not binding,
they may be used in arbitral proceedings.
 Arbitration
 It is a method for resolving disputes where the
two parties agree to accept and enforce the
solution that will be indicated by a thirty party,
i.e., the arbitrator.
 Arbitration is considered to be an aggressive
method.
 In order to be enforced it is required that:
– either there is a relevant provision in the
contract or
– that an agreement is signed between the two
parties a posteriori.
 Advantages:
• The parties to the disagreement choose the arbitrator, who
is a specialist on the subject/ topic of the disagreement.
• The process guarantees the resolution of the problem.
 Disadvantages
• A time consuming and high cost process;
• The arbitration decision is binding and cannot be
contested by judicial means;
• The relationship between Contracting entity and
Contractor is ruined;
• The solution that will be adopted depends on a third
party.
 Litigation Through Regular Courts
 Should be the last resort because:
– It is long and time consuming;
– It is expensive;
– It is public nature (exposes parties’ private
commercial interests to the public);
– It is adversarial nature, may create long-lasting
ill-feelings, to the detriment of commercial
interests; and
– Because the judge may not be an expert,
his/her decision may not reflect the true nature of
the issues in dispute.
 Conclusion
 The decision as to how parties should settle
their disputes is a matter of contractual choice.
 It is recommended that they should include in
the contract a provision for settlement of
disputes.
 Unless absolutely unavoidable, methods other
than litigation for settlement of disputes should
be used.