At CorGuv we specialise in Forensic Audits of Contracts. We have the results of scores of audits at our finger tips and have seen much value leakage and a general reduction in the quality of Contract Management over the last 30 years. In our blog/articles, we have argued that poor Contract Management is costing companies much in both. The links to these articles follow:
We have summarised our observations on the wide range of contracts we have audited. That value leakage is occurring in almost all cases; largely due a lack of resources, co-ordination, commercial skills and discipline, and robust internal control processes. Our view is that his could be corrected by a focus on Contract Management and that this would be a very cost-effective activity in reducing the 9% leakage being lost from poorly managed contracts.
To put it another way, Internal Controls (Delegation of Authorities, POs, Tender Rules) are there, but are not being applied properly or, in many cases, being ignored in the post-award implementation of contracts. There are a number of organisations (Operations, Finance, Contracts etc.) none of whom cooperate effectively in managing contracts. The result is that everyone imagines that someone else is performing important commercial roles.
In this article, we address what Contract Management is and why it is important in stemming wastage.
To start with let’s have a look at the functions included in Contract Management . . . . .
Contract Management functions broadly divide themselves into Operational and Commercial. Here we include examples of what these might be. There will different views on the detail and we include examples here only for illustrating the main categories of activity.
Typically, Operational Management involves the day-to-day management of activities as follows: HSE, Mobilisation, Working Relationships, Scope & Change Management, Quality, Technical Performance, Improvements, Service Delivery, Invoice Checking, Budgets.
Operational management is usually performed well or, at least, adequately. Often the individuals responsible are Engineers or Operations/Asset Managers. Their main interest is in ensuring the job gets done. Often there appears to be a conflict between this and the time and effort required to manage the commercials side of the contract which often seems an unnecessary burden. Generally operations staff assume that commercial issues are handled by Contracts or Finance!
Commercial Management divides itself into Pre-award and Post-award functions.
Typical Pre-Award Functions: Contract Strategy, Tendering, Contract Drafting and/or Negotiation, Finalisation & Award.
Most of the effort of Contract Advisors go into this phase with advice from operations departments. Once the contract is awarded, it is handed over to Operations staff to manage.
Typical Post-Award Functions: Audit Program, Contract Change Management, Compliance with Internal Controls & Authorities, Invoice structure & management, Legal, Statutory Compliance, Commercial Management, Business Processes, Contract Documentation, Compliance with T&Cs, Commercial & Ethical Relationships, Close-out & Lessons Learnt.
Notice that the post-award commercial functions are a longer list. Further, they are the functions that detect value leakage, recover monies, and provide the lessons learnt which will improve future contracts.
In our experience, Contracts Advisors usually move on to develop new contracts once award is achieved. They implicitly assume that the post-award phase is managed by operational departments or by Finance. And yet, Operations Staff implicitly assume that Contracts/Finance are looking after the commercial issues!
So each silo tends to assume that the other is performing the role. In one extreme case, a huge contract had not had a single amendment issued for 5 years and all activity had, in effect, been undertaken on a single source basis with not internal checks at all. The overall effect is that no-body performs effective post-award commercial management. In fact, in many of the organisations we have come across, no-one is even aware that it is necessary. Given the number of activities that need co-ordinating, is it any surprise that there is value leakage from most contracts and that, lacking feedback from experience, that contract quality has degraded over the years?
So it would be useful to do it well. So let’s try and define it . . . . .
What is Contract Management?
There are many definitions but we offer one here:
Contract management is the management of contractual agreements made with customers, vendors, employees, and other third parties for the purpose of maximising financial and operational performance, and minimising risk and cost. Towards this objective, it should co-ordinate business leaders, operational departments, accounts payable, contract advisors, internal controls, as well as clients, partners, subcontractors, suppliers.
Essentially, it is about ensuring that the necessary operational and commercial management activities are taking place and that internal control is implemented effectively to support the objectives of the contract. It should be performed by staff who are skilled in the commercial aspects of the contracts. Every Contract is different so every contract needs somebody to perform the role of Contract Management. Contract Management is a role and not a person. It can be performed by central teams and not necessarily a dedicated person.
In our practical experience, performing Contract Management will pay for itself 10-20 times over and a good portion of this will be in cash. The remainder being, the benefits of on-going improvement in the contract life-cycle.
Our next article will expand on how Contract Management might be cost effectively implemented.
We invite your thoughts and comments on our observations . . . . . . . . . .