Contract Management

S I VA S U B R A M A N Y A M

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 Objective

TO BE UPDATED

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What is a Contract

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 AN AGREEMENT ENFORCEABLE BY
LAW IS A CONTRACT

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 Types of Contracts
• Purchase order for products purchases, including, equipment, spares

• Work orders covering Supply, Installation, Testing & Commissioning (SITC)

• Rate Contract

• Service Contract

• Annual Maintenance Contract (O&M and FMS)

• Works Contract

• Consultancy Contract

• Software Agreement

• Licensing Agreement

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 Statutory provisions of a Contract
Statutory Provisions Governing Purchase Transaction

• The Indian Contract Act 1872

• India Sale of Goods Act 1930

• Arbitration and Conciliation Act 1996

Government Contracts, including those for Defence Procurement, are governed by the same law, which are applicable
to private contracts.

Constitutional Provisions

• All contracts shall be made by an authority empowered to do so by or under the orders of the President in terms of
Article 299 (1) of the Constitution of India

• All the contracts and assurances of property made in the exercise of the executive power of the Union shall be
executed on behalf of the President. The words “for and on behalf of the President of India” follows the designation
appended below the signature of the officer authorized in this behalf.

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 Tenets of a Contract

Parties to a Contract Stages of a Contract Contract Management Life Cycle

• Buyer • Offer • Contract Awareness

• Supplier / Suppliers • Acceptance • Negotiation

(under Consortium / JV
• Free Consent • Risk Management
agreements)
• Consideration • Conflict Resolution

• Lawful Object

NEEDS UPDATION

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 Principles of a Contract
• The terms of contract must be precise, definite and without any ambiguities.

• The terms of a contract, including parties, scope, specifications and objectives should be clearly articulated

• The contract should contain the mode and terms of payment

• Contract should be definitive: timelines, including any conditions for extensions should be clearly stated

• Warranty clauses should be incorporated in every contract and stipulate any security / financial guarantees required

• Price Variation Clause to be provided only in long-term contracts, where the delivery period extends beyond 18
months

• Clauses covering Force Majeure, Assignments and Fore-closure are required

• Service contracts should cover SLAs and Penalties thresholds

• Suitable provision for settlement of disputes to be incorporated

Note:

Standard forms of contracts should be adopted wherever possible, if not, legal and financial advice should be taken in
drafting / responding / proposing amendments to any specific clauses

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 Essentials of a Contract
Contract Acceptance

• Contract is deemed to come in to force with the acceptance of the tender, as per mutually agreed terms and conditions
contained in the Tender Enquiry and the Supplier’s offer

• Acceptance of the same is to be conveyed by the supplier within seven days of receipt of the supply order

• If the contract is not received within the stipulated period, the supply order is deemed to have been fully accepted by the firm

When does a contract come into effect

The Effective date of the Contract is the date on which the last of the following conditions is complied with :-

• Date of signing the contract

• Performance Bond is furnished by the SELLER in requisite format

• Receipt of Bank Guarantee for advance payment to be issued by SELLER

NEEDS UPDATION

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 Contractual Obligations
• Scope

• Responsibilities

• Payment

• Delivery

• Quality

• General obligations

NEEDS UPDATION

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Contract Management

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 Contract Management
Definition

Contract life cycle management “is the process of systematically and

efficiently managing contract creation, execution and analysis for
maximizing operational and financial performance and minimising risk”

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 Effective Contract Management: Pre-award

Pre-award activities:

• Define the outcome(s) of the contract & identify critical success factors

• Alternatives, including any existing contracts / concurrent contracts

• Identifying risks including the extent and where they may fall

• Identify contingent needs & and ramifications

• Timescale

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 Effective Contract Management: Team

Assembling a Project Team:

• Nature of the project

• Nature of the work environment

• Management style of the team

• Communication: internal and external

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 Effective Contract Management: Strategy
Contract Strategy:

• Managing the organisation’s own responsibilities during the contract

• Ensuring the supplier meets the minimum performance criteria, such as compliance

• Allowing the achievement of both short and long term supplier performance improvement through developing
effective supplier relationships

A Successful strategy should cover:

• Business Aims (Enzen & Customer)

• Critical success factors (Enzen & Customer)

• Objectives & priorities: direct and implied

• Service Level Agreements

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 Effective Contract Management: Risk
Definition: the probability of an unwanted outcome happening

Risk Management

• Analysis:
Identifying all the potential issues that can go wrong with an activity and then estimating the probability of
each happening

• Assessment:
Likely impact of a risk on the organization

• Mitigation:
responsibility for managing and mitigating them should be allocated

Risk is about asking the ‘what if’ and either costing it or monetising it.

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 Effective Contract Management: Changes
Changes are almost inevitable during the period of a contract, particularly in the case of
large, complex projects and service contracts … if effectively managed, can be an
opportunity to improve the contract outputs

Changes to a contract could be owing to:

• Scope creep, scope change or de-scope

• Engineering changes

• Extension of timelines (Time and Material contracts)

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 Effective Contract Management: Price Variation
Price Variation Clauses (PVC):

• Used in settling claims between purchaser and supplier for variation in the basic price of raw materials from the period of tendering till the date of
delivery.

• These clauses are widely accepted by the industry and purchasing organizations, since they give variations on both sides, either upwards or
downwards.

• By substituting the prices of raw materials in the given formulae appropriately the percentage variation over quoted price can be worked out
mathematically.

PVC covers:

• Metals: Copper, Iron & Steel, etc.

• Commodities: including Oil (transformers & gensets), Gas (turbines) & Coal (power generation)

• Labour

• Parts (mostly covers electronic parts and End of Life service for components)

Linked to published indices (LME) or Industry body published rates (IEEMA)

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 Effective Contract Management: Exit

It is important to identify the circumstances under which early contract exit

may be required or indeed desired, while drafting the contract

• Early exit (owing to performance or not honouring obligations)

• Fore-closure owing to objectives being met or not possible to meet

• Assignment: obligations of contract assigned to 3rd party completely

• Novation: used during M&A

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Successful Contract Management

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 Contract Management is successful when:

• The arrangements for service delivery continue to be satisfactory to both parties

• Expected business benefits and value for money are being realised

• Supplier is co-operative and responsive

• 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.

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 Successful Contract Management

NEEDS UPDATION

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Q &A

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