Many people assume that managers of all levels are well-versed in effective contract management techniques. But contract management can actually be a career–there’s even an International Association for Contract & Commercial Management, the IACCM.
How would you define contract management? Here’s how one IACCM member described it:
Contract Management at its best is about managing risk, and managing relationships. At its simplest, a contract is a document describing a relationship between two parties, what each of them agree to do, and who carries the risk if things don’t turn out as planned. Contract Management is about managing that relationship, and those risks, to ensure that both parties get the result they originally wanted. Everything such as cash flow, revenue, obligations management, and all other areas around this, flow from this simple premise.
So simply put, contract management is about defining resources, relationships and risk.
Best use of contract management in construction projects
One of the many (countless, if you asked us) valuable services that your construction management team provides is expertise in using contracts to manage construction projects. Contracts are notoriously difficult to read and understand, which is why lawyers make a comfortable living doing those things for us.
A contract is the document that expresses the results of negotiation between the various stakeholders in a given project. It lays out rules and responsibilities and defines risk. According to the World Economic Forum, negotiation and coordinating with others are two of the ten top skills needed to thrive in 2020–and negotiation and coordination also happen to be top skills in contract definition and management. Add clarity, comprehensiveness and scope, and you’ve got yourself an excellent contract.
An exhaustive construction contract can include up to ten different documents, all of which define responsibilities and risk regarding different aspects of the project. Here are a few examples:
- A Construction Contract Agreement is between the general contractor and owner or developer. Most contracts that define the basic project delivery system or contractor agreement fall under the categories of:
- lump sum or fixed price contracts,
- cost plus contracts,
- time and materials contracts
- guaranteed maximum price contracts.
Learn about the essential differences between project delivery strategies here.
- A Scope or Statement of Work (SOW) spells out exactly who agrees to do what, and which techniques and materials they’ll be using.
- Project Duration or Construction Schedule, which may be updated as work progresses.
- General Conditions, which breaks down shareholder rights and responsibilities and addresses how any potential disputes would be settled.
Any construction project unfolds in phases: conception, design, pre-construction, construction procurement (securing materials, equipment and work teams), building, and delivery/post-construction. Contracts cover pretty much all of them, and can be broken down into pre-award and post-award contract development. The pre-award, or bidding stage, is the more critical phase here. As expressed by the Chartered Institute of Purchasing and Supply, “The foundations for effective and successful post-award contract management rely upon careful, comprehensive and thorough implementation of the upstream or pre-award activities.”
Once a bid has been accepted, work on a construction project begins in earnest. In complex projects, contract changes are going to happen, and they’ll need to be managed (construction management team to the rescue!). Ideally, how this process takes place should already be spelled out in the original documentation.
Your construction management team knows how to formulate, fine-tune and interpret all of the essential contracts you need for the different phases of your project. This expertise is invaluable when it comes to minimizing risk and maximizing satisfaction of all parties involved.