Pitfalls of contract management

Today, with the increased business activities, both the public and private sector depend heavily on contracts. In simple terms a contract is a binding legal obligation between two or more parties. Although the purpose of such an agreement can be trade, employment or a specific service, it essentially involves the principles of offer, acceptance and consideration. 

Whatever the purpose, managing contracts successfully is a challenging task. Failure to do so may result not only in financial losses but also failed development activities and losses to human lives in certain occasions.

The International Association for Contract and Commercial Management (IACCM) is a professional organisation dedicated to promote the international standards and practices for defining and managing trading relationships. According to a recent survey by them, 40% of the contracts have failed to deliver the expected financial results. Accordingly, IACCM has identified ten underline causes. This article is about those pitfalls and what we should do in order to improve the situation.

Let us discuss those pitfalls in detail.

1. Lack of clear scope and goals

The scope and the goals of the contract should be clear to all parties involved in a contract. If the end result is not clear we are going nowhere. When the scope and goals of a contract is not clearly defined there will be much confusion. 

If we take a construction contract for example many variations to the initial scope of the work will occur. Each party will have to get the help of arbitrators and adjudicators to solve their disputes provided they do not opt to go to the court. Sometimes solving such disputes will be an additional cost while consuming each parties’ valuable time. Therefore, the scope and goals of a contract should be clearly defined at the onset and parties involved should deeply study the contents of the contract before coming to agreement.

2. Late involvement of contract team

Sometimes the legal and contract experts do not involve at the correct time of negotiating and planning of the deal. The result would be wrong form of contract which does not reflect the relationship expected. In addition this will be a cause for extended lead time. Therefore, they should involve early so that the contract is formed appropriately and re-works are avoided during the latter stages.

3. Failure to engage stakeholders

It is very important to consider stakeholders of a contract. Most of the public sector contracts have an impact on certain segments of the society. Sometimes, we consider stakeholders as an unnecessary obstacle to our work. We realise their potential only when they interfere with our work due to misaligned interests. These forces can be a real obstacle to the contract. 

If these people are not happy about the contents of the contract or the way public money is spent, their influence may strong enough even to stop the contract. Therefore, it is very important to identify the interests of the stakeholders. We should negotiate with them collaboratively to increase the mutual trust. We should focus on the stakeholders not only during the execution of the contract but from the planning stage.

4. Protracted negotiations

At present most of the negotiations are of hostile nature. Parties are often fighting with each other over prices and conditions related to risks. Rather than focusing on innovative ideas these hot dialogues undermine mutual trust.  Not only that these prolonged negotiations lead to rush decisions adversely affecting all parties. If we can create a less competitive atmosphere there will be more innovative ideas and better opportunities.

5. Contract terms and negotiations focus on risk allocation

Most of the contracts focus on reactive strategies rather than being proactive. Often contract terms and negotiations focus on how to react when something goes wrong. In fact, we should think about how to avoid such mistakes during the planning stage. Then only will the contracts result in value creation and innovation.

6. Contracts lack flexibility

If the contracts are unable to deals with today’s constant change, expected results will not be delivered. Therefore, a good mechanism for performance management is vital. Instead of blaming each other after things have gone wrong, this mechanism should be able to deal with the required changes smoothly. 

7. Contracts difficult to use or understand

One European specialist has said that contracts are often written by lawyers for lawyers in the expectation of litigation. To such a level contracts are difficult to understand unless you are an attorney. Therefore, contract documents should be easy to understand. If users find it easy to grasp the contents they will realise that contracts are vital tools for achieving business goals.

8. Poor handing over from deal team to implementation team

In general various stages of contracts are handled by different teams. After the deal is finalised by negotiating team it is handed over to the implementing team. If we take a construction contract for instance procurement team will hand over the work to a different team who will supervise the construction activities. 

If handing over between the two teams is not properly done, many downstream problems will arise. Sometimes, parties involved will not clearly understand their commitments and obligations. Therefore, appropriate documentation and constant communication between the two parties will ensure a clear and precise hand over.

9. Limited use of contract technology

Compared with other business activities contract management still do not deploy appropriate technology. Most of the processes are still done manually. Inefficiency and loss of quality in performance, analysis and reporting are still widespread. 

If modern technology is used for contract management activities to the level it is used by other business activities it will mainly improve the communication among all parties involved and members of their teams. The result will be improved processes like timely approvals, proper controls and alerts on milestones whether the actions are due or overdue.

10. Weak post award process and governance

When the post award process and governance is weak, it will create repetitive issues and errors, causing value loss. Hence, investing in robust post-award processes and governance is very important.

According to the findings of IACCM aforementioned pitfalls have caused organisations average value erosion of 9.2% of their annual revenue. Sri Lankan private and public sector organisations may also be facing above discussed pitfalls with regard to contract management. Hence, it will be worthwhile to look at their contract management processes to identify such issues and improve the situation. 

As clearly pointed out by IACCM avoiding such pitfalls to the best possible level will save the organisations from financial detriments.

(The writer is a Chartered Civil Engineer. He has obtained his BSc Engineering degree from the University of Peradeniya and possesses an MBA obtained from the commonwealth of learning.)