FOREIGN TRADE UNIVERSITY

CONTRACT MANAGEMENT

MsC. Bui Thi Bich Lien

Lecturer, Department of Business and International Trade, FTU
Email: [email protected]

Mobile phone:
0987 708 807
 Course Content

Introduction to Contract
1 Management 6 Pre-Qualifications suppliers

General Matters in Contract

2 Management 7 Managing Risks

Contract Management Team

3 Formation 8 Tender Evaluation

Developing a Contract
4 Management Plan 9 Administration of Contract

5 Relationship, Disputes and

Supply Information 10 Termination
 COURSE OBJECTIVES
❖To appreciate the fundamentals & role of contracts
in supply chains
❖To evaluate the effectiveness of a contract
management team
❖To be able to draft a contract management plan
❖To define the role of Procurement in contract
management
❖To identify and alleviate risks in contracts
 READING MATERIALS

Compulsory reading
❖Course Manual: Contract Management (VLI), 2021
❖Logistics Knowledge Co., “Contract Management in
Supply Chain”, 1st e, 2012.
Optional readings
❖The World Bank (2018), Contract Management
Practice
❖ Vibe Ulfbeck, Alexandra Andhov, and Katerina
Mitkidis (2019), Law and Responsible supply chain
management – Contract and Tort interplay and
overlap
 Optional readings
❖ Ang, S. H., Kotler P., Leong, S. M. & Tan, C. H. 1999, Marketing
Management – an Asian perspective, Prentice Hall Inc, 2nd
edition, New Jersey.
❖ Christopher, M & Peck, H. 2003, Global Marketing,
Butterworth-Heinemann, 2nd edition, Oxford.
❖ Dwyer, F.R. & Tanner, J.F. 2002, Business Marketing –
Connecting strategy, relationships, and learning, McGraw Hill
Inc, 2nd edition, New York.
❖ Green, C. M. & Keegan, J. W, 2003, Global Marketing, Prentice
Hall Inc, 3rd edition, New Jersey.
❖ Lovelock, C. & Wirtz, J. 2004, Services Marketing – People,
Technology, Strategy, Prentice Hall Inc, 5th edition, New
Jersey.
 Chapter 1: Introduction

T h e Prevalence of Contracts

❖ All companies will have contracts with

external parties in the cours e of d o in g
business.
❖ A s contracts are prevalent in all
businesses, the p ro pe r m a n a g e m e n t of
contracts is a n important area of concern
 1. A glance of Supply Chain
In supply chain, contracts entered include:
➢ Purchase of goods & equipment
➢ Warehousing
➢ Carriage of goods
➢ Agency agreements
➢ Marketing agreements
➢ IT services
➢ Other outsourcing services
 2. What is a contract
❖What is a Contract?
▪ Legally enforceable promise made between parties
▪ Agreement that binds parties to contract
▪ Parties can take action in court to force other party
to perform their side of the agreement
▪ Legally bound to carry out the duties & obligations:
➢ Doing acts for the other party
➢ Not doing something
➢ Giving rights

▪ Contracts can be written, verbal or behavior

Agreement vs. contract
 Definition of contract
❖A contract can be defined as “an agreement
enforceable at law, made between two or more
persons, by which rights are acquired by one or
more to acts or forbearances on the part of the
other or others”.
William Anson
 Is this a contract?
❖You order a book of Amazon.com. Your credit card is
charged, but no book ever shows up.
▪ Was there a legally enforceable contract?
❖If you sit down in a restaurant and order a meal,
you imply a promise to pay for the food. The
restaurant service it to you on the basis of that
promise. Is this a contract?
❖Last year, your spouse promised you an iPhone for
your birthday. However, she/he gave you his/her
old broken basic cell phone.
▪ Was there a legally enforceable contract?
Elements of a contract
Offer
 Offer
❖An offer is an invitation to make a contract

❖Example:
▪ Displaying a take it or leave it to contract online
▪ Bidding on eBay
▪ Putting a price tag on an item in a store

❖Offers can go back and forth (but don’t have to)

until 100% offer is accepted
 Acceptance
❖The point at which one party agrees to the other
parties offer
❖Examples
▪ Clicking that you accept the online contract
▪ Winning an eBay auction
▪ Buying the item from the store
 Validity of acceptance
❖It must take place while the offers is still in
force
❖It must be on the same terms as the offer
❖It must be unconditional
❖It must be communicated to the offeror
Consideration
 Consideration

❖Generally, courts will only enforce a contract if both

sides are getting something

❖What each side gives the other is called

“consideration”
 Consideration and gifts
❖In contract law consideration is concerned with the
bargain of the contract. A contract is based on an
exchange of promises.
❖Each party to a contract must be both a promisor and a
promise. They must each receive a benefit and each
suffers a detriment. This benefit or detriment is
referred to as consideration
❖Consideration must be something of value in the eyes
of the law. This excludes promises of love and
affection, gaming and betting etc. A one-sided promise
which is not supported by consideration is a gift. The
law does not enforce gifts unless they are made by
deed
Requirements
❖Oral or writing???
▪ Every contract will reflect the process of creating an
agreement through the exchange of offer and
acceptance, much of which takes place orally.
▪ Some types of Oral contracts are enforceable but
some require written evidence for this to be legally
enforceable.
▪ The writing does not have to be in any particular
form
▪ Modification: Once a contract has been created, any
change to the substance of the agreement, T&C, is
in effect a new contract
 3. Types of business relationship
Impact of Biz Relationships on Contract
❖Transactional
➢ Short term
➢ Arm’s length
❖Administered
➢ Part of a larger system in managing activities
❖Corporate
➢ Vertical integration
➢ Long term
 4. Types of contract
❖Fixed – price contracts: price is fixed during the
contract duration
▪ Firm fixed price (FFP)
▪ Fixed price incentive fee (FPIF)
▪ Fixed price with economic price adjustments
❖Cost reimbursable contracts
▪ Cost plus fixed fee (CPFF)
▪ Cost plus incentive fee (CPIF)
▪ Cost plus award fee (CPAF)
❖Time and material contracts: hybrid contract.
 Fixed price contract
➢ Under the lump sum agreement, the contractor agrees to
perform all work at a fixed price
Cost estimate= $100,000
Fee= $10,000
Price= $110,000
➢ FPIF: Seller shall be paid an incentive of $5,000 if the
contract is fulfilled before the target end date
➢ FPAF: award amount has a fixed maximum cap → seller
shall be paid an award of $500 for each day that the job
is finished prior to the target end date. The maximum
limit of the award is $5,000
❖Firm fixed price (FFP): is the vanilla version of
Fixed price contract. It doesn’t include any award
or incentives
▪ When the scope is well known. A fixed price will
be paid to the vendor on the agreed upon terms.
▪ Example: buyer will pay$100,000 for a service to
be provided by the seller for a duration of 12
months.
 Cost Plus contract
➢Under a cost-plus fixed fee contract, the contractor is
reimbursed for all direct allowable costs plus an
additional fixed amount to cover overhead and profit.
➢Cost estimate = $100,000 (allowable costs will be
reimbursed)
▪ Fee = $10,000
▪ Target Cost = $110,000
▪ If the project ends up costing $200,000, the price
to the client is $210,000
❖CPFF: the seller is paid the cost involved in
accomplishing the work and a fixed fee on top of it.
▪ Example: buyer will pay for all costs plus a fee of
$10,000
❖CPAF: seller is paid the costs involved and an award
fee based on buyer’s evaluation of seller’s
performance. The award has a fixed maximum cap
▪ Example: buyer will pay for all costs plus an award
fee of maximum $10,000 based on seller’s
performance.
❖CPIF: the seller is paid the cost involved and an
incentive fee if buyer’s set goals are met

▪ An example: buyer will pay for all costs plus an

incentive fee of $5000 if the product, service or
result is delivered 2 weeks early
 Time and materials contracts
❖This type of contract is typically used to contract
labor especially when the scope of work is not clear.
❖Time means the seller is paid on per hour basis and
material means seller is paid for the equipment,
machinery, raw materials, and office spaces being
utilized.
▪ Example: buyer will pay $30 per hour plus
material cost.
 Discussion
❖What are the mains risks and advantages of each
contract types?
 Fixed price contract
▪ Seller has a strong incentive to control cost
▪ Risk is with seller, so requires less effort for
keeping track
▪ Seller can quote less initially to get contract but
the change requests can be very expensive later in
the project
▪ The scope needs to be clearly defined and the
statement of work should have all the details
 Cost reimbursed contract
❖Seller can quote less fee as the cost is covered by the
buyer
❖All seller invoices must be audited by the buyer
increasing the overall buyer efforts
❖Seller may not focus on cutting costs since they are
reimbursable so this can turn out to be costly for
buyer
 Time and materials contracts
❖Scope need not be finalized before the contract is
awarded
❖May prove out to be costlier for larger projects
❖Seller’s work needs to be monitored timely
increasing the overall buyer efforts.
 Types of contracts
❖ Letter contracts: preliminary written contractual instrument that
authorizes the contractor to begin performing
❖ Dealer’s agreements: this is an agreement or contract,
expressed or implied, oral or written, which grants the dealer to
purchase, sell distribute or service supplier’s good
❖ Service agreement: used mainly for services such as janitorial,
landscaping etc.
▪ Master service agreement: maintenance of capital
equipment
▪ Professional service agreements: contracts for legal, audit,
etc.
▪ Maintenance agreements: for preventive maintenance or
repair
▪ Performance-based agreements: contracts for which
outcomes or timelines are specified
 Types of contracts
❖Licensing agreements: examples of licenses include
software, patents, technology (use of processes)
copyrights, & General (use of logos, brands)
▪ Most software company license the use with
limitation and may include updates
❖Master purchase agreements: used in connection
with purchase of computers, office supplies and
MRO supplies. Negotiated in advance.
❖Construction contracts: include project based
performance guidelines. Clauses covers, safety,
payment, penalties etc.
❖ Void contract: a void contract is the contract that has no legal
effect at all. “A contract which ceases to be enforceable by law
becomes void, when it ceases to be enforceable by law”
❖ Express contract: contracts formed with the words spoken or
written, in an express contract
▪ Ex: A tells B on phone that he wants to buy his car for Rs
80,000 and B accepts the offer on phone, this is an express
contract.
❖ Implied contract: when the offer and acceptance is made by
acts or conducts of the parties, it is an implied contract.
▪ Ex: A, a coolie in uniform takes up the luggage of B at
railway station and B allows him to do so, then the law
implies that B will have to pay for the services of A. This is
an implied contract.
 When drafting be sure to
❖Include all the terms
❖Don’t be afraid of creative solutions
❖Use specific binding language
❖“shall” not “will”
▪ X shall pay Y $10
▪ Y shall wash X’s car
❖Not:
▪ X will pay Y $10
▪ Y will wash X’s car
 Typical types of contracts in business
❖ Types of contracts vary depending on the correlation
between Buyer and Seller. The Kraljic model is often
used in this topic.

❖ The Kraljic Model originally used to determine the

appropriate purchasing strategy for each product or
service to support the Buyer in optimizing costs and
risks. Consequently, corresponding types of contracts
come into existence.
We can notice that each quadrant can be treated with not-the-same
relationship, interaction, and contract as well
❖ROUNTINE to apply the SPOT CONTRACT

❖BOTTLENECK to apply the FIXED or TERME

CONTRACT

❖LEVERAGE to apply the FRAMEWORK or CALL-OFF

CONTRACT (also called blanket contract or standing
contract)

❖STRATEGIC to apply the PARTNERSHIP CONTRACT

 5. Contract structure

❖ Articles of agreement
➢ Actual agreement
❖ Recitals
➢ Series of statements setting forward the relevant matters
➢ Facts about the contract
❖ Articles
➢ What the parties agreed to
❖ Contract particulars
➢ Contents eg dates, liability, insurance, amount of damages
❖ Conditions
➢ Define obligations and action in case of disputes
6. Process Leading to a Contract
42

Process leading to a contract

❖Condition to effect
▪ Legal personality and legal capacity
▪ Entire volunteer
▪ Purpose and content of the agreement are not
contrary to the law and/or social ethics
▪ Form of agreement if being required by laws
• Notarization
• Writing
• Authorization
• Signature
• Seal
43

Legal capacity
❖For a contract to be legally valid, the court requires
parties to possess legal capacity
❖A person is considered to have the power if he is
NOT:
▪ A minor
▪ Suffering from mental sickness
▪ Drunk
44

❖Void and null agreement

▪ Against the laws:
▪ Against the principle of agreement: goodwill and
honesty
▪ Formality of the contract
• Authorization
• Signature
• Seal
45
MsC Bui Thi Bich Lien
Case study
❖Mr A leases house from Mr. M in 03 years. After 12
months, Mr. M wants to terminate the contract to
sell it. He said the contract was not notarized so it
was void.
❖Team A: Mr. M to build argument to kick A out
❖Team B: For Company A: build an argument to
continue the contract
7. Applying the Contract
❖ The structure shows the relationship of the employer and
contractor. By defining their rights and liabilities, it assigns
responsibilities for managing key project risks between
them such as the project will run over time, the design will
not work or has mistakes in it or the contract sum will
increase.

❖ Each line on representing a relationship between two

organizations within the overall traditional procurement
route framework represents the use of a different contract.
The contract is only capable of structuring the legal
relationship between the employer and the contractor
 8. Why Manage the Contract?
❖Contracts are often the product of business to
business marketing. Like all marketing consideration,
it becomes necessary to manage the marketing
relationships on top of the binding legal contracts.
❖Well-managed contracts can deliver significant
benefits to an organization. A good management
team should not wait for problems or disputes to
arise in the implementation of the contract before a
decision is taken to intervene to put the matter back
on track.
 2. What is contract management
❖Contract management is the stage of the
procurement cycle during which the goods and
services are delivered in a manner that satisfies the
requirement stated in the Request for Tender (RFT)
or agreed Statement of Work (SoW).
❖Contract management can be defined as “the
process of maintaining control over the contractual
arrangements between a department (purchaser)
and the appointed supplier (contractor) being the
other contracting party by performing the
contractual management or administration activities
commencing at the conclusion of a contract”.
“Alan Harrison”
 Managing a contract
❖Managing a contract means closely following &
monitoring implementation so that you can take
immediate action when problems occur or when
situation change
❖Through good contract management you can avoid
unexpected costs, delays or poor quality

❖Contract administration: the management of all

actions, after the award of a contract, that must be
taken to assure compliance with the contract
 Scope
❖ Scope: Contract management is part of the Procurement
Process. CM focuses on the contract management activities
undertaken during the period from the award of contract to
contract completion. Where applicable, this period includes
the defects liability period and/or warranty period.
❖ With a contract, we manage:

Information flow

Goods flow

Financial flow

Relationship
❖Procurement functions often see their work as
complete once a contract is awarded.

❖Their activities around sourcing strategy, supplier

selection, contract development, and negotiation
are central to their responsibility.

❖But once the contract is signed, too often

procurement washes their hands of it
 Managing a contract
❖The approach should depend on:
▪ The nature of the purchase
▪ The nature of the relationship
▪ The nature of the contract (project or operational)
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