Contract management

Chapter objectives
 By the end of the session, participants should be able to:
 Explain the meaning of a contract
 Outline and explain the elements of a contract
 State reasons why organizations fail to manage contracts successfully
 Outline the roles and responsibilities of the different stakeholders in contract management
 Describe the contract amendment and termination
 Explain the various contract types

Introduction

 "contract meaning" in procurement perspective

 From a procurement perspective, a "contract" means an agreement between a procuring and disposing
entity and a provider, resulting from the application of the appropriate and approved procurement or
disposal procedures as the case may be, concluded in pursuance of a bid award decision of a contracts
committee or any other appropriate authority.

 What constitutes a contract?

 The essential elements in a contract include:
 Agreement between parties
 Intention to enter into a legally binding agreement.
 Both parties must provide a consideration.
 Parties must be of legal capacity.

 Definition of a contract
 Almost all the transactions that occur in the business world are governed by a contract is some shape
or form. Generally, a contract has been defined as a legally binding written agreement that allocates the
obligations, risks and rewards of a transaction between the parties involved in public procurement.

 Definition of contract management

 Contract management is the process that enables both parties to a contract meet their obligations in
order to deliver the objectives required from the contract.
 It also involves building a good working relationship between the buying organization and provider.
 It continues throughout the life of a contract and involves managing proactively to anticipate future
needs as well as reacting to situations that arise.

 Why contract management?

If contracts are not well managed from the customer side, any or all of the following may happen:
 The provider is obliged to take control, resulting in unbalanced decisions that do not serve the
customer's interests.
 Decisions are not taken at the right time - or not taken at all.
 People (in both organizations) fail to understand their obligations and responsibilities.
 Progress is slow or there seems to be an inability to move forward
 The intended benefits are not realized;
 Opportunities to improve value for money and performance are missed;
 Ultimately, the contract becomes unworkable.

 Reasons why organizations fail to manage contracts successfully

 Poorly drafted contracts;
 Inadequate resources are assigned to contract management;
 The customer team does not match the provider team in terms of either skills or experience (or both);
 The wrong people are put in place, leading to personality clashes;
 Authorities or responsibilities relating to commercial decisions are not clear
 A lack of performance measurement or benchmarking by the customer;
 A failure to monitor and manage retained risks (statutory, political and commercial).

 Tools of contract management

 Copy of the bidding documents,
 Contract,
 Contract implementation plan
 Contracts committee decisions related to the contract
 User department reports,
 Terms of reference and or bills of quantities related to the contract
 Payment vouchers
 Procurement file and contract management file

 Contract documents
The documents forming the contract must be interpreted without disregarding the following aspects:
 Agreement,
 Any letter of bid acceptance,
 The provider's bid, as amended by any clarifications,
 Special conditions of contract,
 General conditions of contract,
 Statement of requirements,

 Components of a contract management plan

 As a tool of contract management, the plan ought to capture the following issues:
 General contract and strategy information (definitions, roles/responsibility, scope, provisions).
 Policies and procedures
 Contract schedule (time)
 Contract budget (cost)
 Quality plan (quality)
 Priorities: time, cost and quality.
 Actual works, services, supplies completed
 Payments for reimbursable
 Payment due to sub-contractors
 Copy of original invoice

 Roles and responsibilities of the different stakeholders in contract management

 User department
 Controlling performance of provider.
 Nominates contract supervisor and monitor progress and execution of contract.
 Informs ao in writing of appointed supervisor
 Prepare and submit periodic performance reports
 Provider/ contractor
 Deliver requirements of the contract in agreed timeframe
 Proposes how to provide service
 Deliver service to tor
 Delivering goods to specification
 Meeting user requirements
 Developing and implementing agreed procedures and providing information.
 Procurement and disposal unit (pdu)
 Monitoring payments.
 Monitoring progress of work to ensure milestones agreed are achieved.
 Submitting reports to cc, ao
 Assess quality and cost of service.
 Assess properness of service.
 Supervising and evaluating of contracts
 Supplier appraisal
 Accounting officer
 Approves the contract management budget.
 Processing payments to provider
 Overall implementation of the contract
 Contract supervisor
 Manages day-to-day technical supervision, managing obligations and ensuring provider performs
contract.
 Inspection and testing of components
 Seek authority for extensions, variations and suspension.
 Issue certificates for contract performance
 Politicians
 Approving policies
 Approving budget and procurement plan.
 Monitoring implementation of programs
 Evaluating performance against approved work plans and procurement plan.
 Communicating variances to technical staff

 Record keeping and reporting

 Copy of request/specifications from provider.
 Copies of delivery schedules
 Copies of delivery certification.
 Documents of any negotiations
 Email message related
 Contract management reports.

 Monitoring contracts performance

 Contract monitoring is a regular process of evaluating provider performance based on measurable
service deliverables and verifying provider compliance with the terms and conditions in the contract.
 The purposes of monitoring are to:
 Improve program performance through early identification of questions and issue resolution
 Identify potential problems that may require additional scrutiny
 Evaluate provider performance to ensure there is a reliable basis for validating service deliverables,
and
 Assure that financial documentation is adequate and accurate so that costs will not be questioned later
on.

 Contract amendments
 An amendment to a contract, on the other hand, refers to a change in the terms and conditions of an
awarded contract.
 The amendment to the contract should be prepared by the procurement and disposal unit.
 A contract amendment should not be issued to a provider prior to-
 Obtaining approval from a contracts committee;
 Commitment of the full amount of funding of the amended contract price
 A contract amendment for additional quantities of the same items should use the same or lower unit
prices as the original contract.
 No individual contract amendment should increase the total contract price- by more than fifteen
percent of the original contract price.
 Where a contract is amended more than once, the cumulative value of all contract amendments should
not increase the total contract price by more than 25 percent of the original contract price.

 Contract termination
 Where the contract manager or a procurement and disposal unit believes that a contract should be
terminated, they should submit a recommendation for termination with a copy of the contract to a
contracts committee.
 A recommendation for termination of a contract should state:
 The name of a provider and the procurement reference number;
 Reasons for the termination;
 The actions taken to avoid termination, where applicable;
 The contractual grounds for the termination;
 The costs, if any, resulting from the termination; and
 Any other relevant information.

 Types of contracts
 Lump sum contract
 Time based contracts
 Admeasurements
 Percentage contracts
 Cost reimbursable contracts.

A) lump sum contracts:

 A lump sum contract is used where the content, duration and outputs of the procurement are well
defined.
 A lump sum contract may include either, fixed prices or price adjustment and interim or stage
payments.

B) time based contracts:

 A time-based contract is used where the scope and duration of the procurement requirement is difficult
to define.
 Payment for a time-based contract is based on agreed hourly, daily, weekly, or monthly fees for either
nominated personnel or a certain type of personnel.

C) ad measurement contract:
 An admeasurements contract means a re-measurement, unit rate or bill of quantities contract and
should be used for works-
 Which are not well defined;
 Which are likely to change in quantity or specification; or
 Where difficult or unforeseen site conditions, such as hidden foundation problems, are likely.

D) percentage based contract

 A percentage-based contract is used where it is appropriate to relate the fee paid directly to the
estimated or actual cost of the subject of the contract and should clearly define the total cost from which
the percentage is calculated.
 A bidder is required to indicate his or her fee rate as a percentage of the total cost of the requirement.

E) cost reimbursable contracts

 A cost reimbursable contract shall be used for emergency works, where there is insufficient time to
fully calculate the costs involved; or
 When the scope of work is not well defined or subject to change
 Cost reimbursable contract; seller’s costs are reimbursed, buyer bears highest risk (cost increases).
 Two main types of cost reimbursable contract are; cost plus fixed fee and cost plus incentive fee.

Contract risk management

Chapter objectives
By the end of the session, participants should be able to:
 To explain the concept of risk and discuss the various risks in contract management
 To explain ways of identifying risks in contact management
 Discuss ways of managing risks in procurement and disposal contracts

Introduction
 A risk is something that may happen and if it does, will have a positive or negative impact on the
procurement.
 Risk is a major component of our environment, human beings surrounded by innumerable risks from
birth to death.

 Contract risks
 Change in contract conditions to allow more time and/or higher prices for the supplier/bidder;
 Product substitution or sub-standard work or service not meeting contract requirements;
 Lack of proper reporting and record keeping of changes in contract.
 Poor provider performance or, worse, allocation or loss of supply.
 Unsound contracts heavily biased in provider's favor.
 Unproductive use of human resources.
 Insufficient 'internal challenge' of specifications and decision making.
 Vulnerability to internal and external fraud.
 Unethical behavior or incompetence.
 Non-compliance with regulatory requirements.

 Managing contract risks

 Risk management is the identification, assessment, and prioritization of risks followed by coordinated
and economical application of resources to minimize, monitor, and control the probability and/or impact
of unfortunate events or to maximize the realization of opportunities.
 For the most part, these methods consist of the following elements, performed, more or less, in the
following order.
 Identify, characterize, and assess threats
 Assess the vulnerability of critical assets to specific threats
 Determine the risk (i.e. The expected consequences of specific types of attacks on specific assets)
 Identify ways to reduce those risks
 Prioritize risk reduction measures based on a strategy

 Risk management process

The process of risk management consists of several steps as follows:
 (1) establishing the context
 Identification of risk in a selected domain of interest
 Mapping out the following: the social scope of risk management; the identity and objectives of
stakeholders; the basis upon which risks will be evaluated, constraints.
 Developing an analysis of risks involved in the process.
 Mitigation or solution of risks using available technological, human and organizational resources.

 (2) identification
  After establishing the context, the next step in the process of managing risk is to identify potential
risks. Risks are about events that, when triggered, cause problems. Hence, risk identification can start
with the source of problems, or with the problem itself.
 Source analysis: risk sources may be internal or external to the system that is the target of risk
management. Examples of risk sources are: stakeholders, employees of a pde, weather etc...
 Problem analysis: risks are related to identified threats. For example the threat of losing money, the
threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist
with various entities, most important with shareholders, customers and legislative bodies such as the
government.

 (3) assessment
 Once risks have been identified, they must then be assessed as to their potential severity of loss and to
the probability of occurrence. These quantities can be either simple to measure, in the case of the value
of a lost building, amount of money, time etc.

 (4) potential risk treatments

 Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of
these four major categories:
 Avoidance (eliminate, withdraw from or not become involved)
 Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
 Retention (accept and budget)

 Principles of risk management

 The following are principles of risk management: risk management should:
 Create value
 Be an integral part of organizational processes
 Be part of decision making
 Explicitly address uncertainty
 Be systematic and structured
 Be based on the best available information
 Be tailored
 Take into account human factors
 Be transparent and inclusive
 Be dynamic, iterative and responsive to change
 Be capable of continual improvement and enhancement

ETHICS AND INTEGRITY IN PUBLIC PROCUREMENT

INTRODUCTION TO ETHICS
Ethics: is the study of what is right or wrong in human conduct.
 Ethics is also known as moral principles that govern a person's behavior or the conducting of an
activity.
 In summary, ethics is concerned with the moral principles and values which govern our beliefs, actions
and decisions.

WHAT IS INTEGRITY
 The quality of being honest and having strong moral principles. Not corrupt or biased.
 Integrity: is doing the right things. Even when no one is a watching.
 When we say that a person has integrity it means that person we are referring to is honest and has
consistency of character.
 CONSEQUENCES OF ETHICS
A CONSEQUENCE is the outcome of any act. Doing good with proper reasoning (being ethical) has many
positive consequences like
 Safeguarding the society.
 Feeling good.
 Creating credibility.
 Satisfying basic human needs etc.
 However, being unethical has many negative consequences like
 Loss of trust.
 Nepotism.
 Corruption.
 Crimes etc.

ETHICS IN PROCUREMENT
 ETHICS IN PROCUREMENT is the basis on which most of the procurement related principles, such as
fairness, integrity, and transparency, are based.
 Ethical principles require all those involved in procurement to perform their duties with integrity.
 The purpose of ethics in Government procurements is to ensure that decisions are neither tainted nor
appear to be tainted by any question of conflict of interest.
 Procurement should be based on objective criteria.
 Ethics are moral principles that govern or influence a person’s behavior.

 THE MAIN ETHICAL PRINCIPLES IN PUBLIC PROCUREMENT

The main ethical principles in public procurement include the following: -
 Loyalty and respect for rules and regulations
 Integrity and fairness
 Transparency
 Confidentiality
 Avoidance of appearance of impropriety
 Business gifts should not be accepted from current or potential suppliers

 CORRUPTION
 Corruption is the use of public power for private gain.
 It can be in the form of embezzlement, nepotism, over-invoicing, claiming payments for no
goods/services supplied and taking bribes, bid rigging, etc.

 THE EFFECTS OF CORRUPTION INCLUDE THE FOLLOWING: -

 Impairs economic development
 Leads to economic waste, inefficiency and reduction in productivity
 Generates administrative inefficiency and ineffectiveness
 Promotes nepotism
 Frustrates competent and honest suppliers/contractors
 To deter corruption in procurements, the following can be done: -
 Perform internal audit to monitor the procurement process
 Institute checks in the various stages of the procurement cycle
 Enforce procurement regulations
 Disqualify bidders who engage in any form of corruption
 Penalize all those found guilty, blacklist errant suppliers, sanction staff and PDE members by
disciplinary action.

 INTEGRITY IN PUBLIC PROCUREMENT

 In public procurement, the principle of integrity is two-fold. There is the integrity of the procurement
process, and also the integrity of public procurement practitioners (the principal guardians of the
process)
 Integrity translates to reliability. Bidders and all other stakeholders need to have assurance that they
can rely on any information disseminated by the procurement entity, formally or informally.
 The integrity of the procurement process assures confidence in the public procurement process. When
solicitation documents are issued by the procurement entity, the information provided should be
reliable and free of uncertainty or predisposition.

 INTEGRITY OF PUBLIC PROCUREMENT PRACTITIONER

 Practitioners working for the various procurement entities, and other government officials involved in
the public procurement process, must strive for internal (personal) and external integrity (ideally there
shouldn’t be any contradiction between the two). Public procurement practitioners should be
perceived, at all times, as honest, trustworthy, responsible and reliable. They must always have the
“big picture” (purpose of the procurement requirement) in mind and their philosophy must be that of
public servants, in the true sense of the word..
 Public procurement practitioners must ensure that they responsibly manage the public procurement
process within the mandate of the public procurement legal framework and in line with public
procurement principles.

 WHY ETHICS IS IMPORTANT IN PROCUREMENT

 In procurement you purchase goods and services for company you work for, therefore it is very
important that you purchase in the best interest of company, quality and price wise.
 There is a common practice that sometimes people with lower ethical values do purchase goods and
services which are not in the best interest of the company and in turn do take bribes and undercover
money from suppliers.
 Therefore it is very important that the purchasing people have high ethical values. They should not
compromise on quantity and quality for their personal interest.

 In Addition Ethics Is Important In P. Procurement Because Of The Following:

1. SATISFYING BASIC HUMAN NEEDS: Being fair, honest and ethical is one the basic human
needs. Every employee desires to be such himself and to work for an organization that is fair and ethical
in its practices.
2. CREATING CREDIBILITY: An organization that is believed to be driven by moral values is
respected in the society even by those who may have no information about the working and the
businesses or an
3. UNITING PEOPLE AND LEADERSHIP: An organization driven by values is revered by its
employees also. They are the common thread that brings the employees and the decision makers on a
common platform. This goes a long way in aligning behaviors within the organization towards
achievement of one common goal or mission.