Overview of Contract Management

What is it

Contract management encompasses every stage of the acquisition process from confirming the original need for an item or a service through to supplier relationship management and reviewing and managing performance against the contract.

Contract management is the engine that drives true value across the supply chain. Contract management is about developing strong relationships with suppliers so that they not only meet the terms of the contract, but move beyond fulfilling the basic needs into exceeding expectations and making constant improvements along the supply chain.

Effective contract management requires dedicated and skilled professionals who will create strong relationships and apply constant focus to ensure contracts are fully implemented.

Importance of contract management  

Organisations in the public and private sectors are facing increasing pressure to reduce costs and improve financial and operational performance. Technical innovations, new regulatory requirements, globalisation, increases in contract volumes and complexity have all resulted in an increasing recognition of the importance and benefits of effective contract management

This has led to recognition of the need to automate and enhance contractual processes to satisfy increasing compliance and analytical needs. There is an expanding supply of software tools designed to address these needs, leading to the adoption of more formal and structured contract management procedures.

Some Indicators of successful contract management are:

• contractual obligations are satisfactory to and fully understood by both parties
• expected benefits, efficiencies and value for money are being realised
• there are no disputes and unexpected events can be effectively managed
• the supplier is co-operative and responsive
• good relationships exist between both parties
• in the event of a contractual issue this is handled in a professional and objective manner

Objectives of contract management  

Shown below are some of the fundamental objectives of effective contract management

• to manage all aspects of the contract relationships effectively
• to ensure efficient delivery of goods & services, to achieve value for money
• to achieve maximum supplier performance & seek continuous improvements
• to manage financial, supply, legal and commercial risks effectively 
• to explore further supply market opportunities/ developments

Supplier relationships

Contractual obligations commit both the procuring entity and the supplier to a formal relationship for a specified period of time. Accordingly, it is important to make the relationship work effectively by developing mutual trust and understanding, creating an open and constructive environment and contributing to the joint management of contract implementation. It is the role of the procurement professional to develop and foster this crucial relationship.

As this relationship develops the supplier may be more willing to be proactive and innovative in proposing improvements and savings, in sharing problems and concerns and more willing to become a potential long-term partner.

Through ongoing communications and discussion, the procuring entity will benefit by gaining a greater understanding of the strengths and weaknesses of the supplier and will be able to allocate appropriate resources to the contract management team.

This relationship will operate through four operational elements of the contract management process. These are shown in the graphic below with indicative tasks:

Management of contracts requires flexibility by both parties and a willingness to adapt the terms of the contract to reflect necessary changes. It is important to recognise that problems are bound to arise which could not have been foreseen when the contract was originally awarded.

Contract management strategy/plan

The basis for successful contract management relies upon the development of a contract management strategy/plan, this will provide the framework upon which fulfilment of the contract can be effectively managed.  This should include careful consideration of:

• the organisation’s strategies and policies
• rationale and objectives of the procurement transaction
• defined needs (including quality and quantity)
• stakeholder expectations
• supplier’s capacity and capability
• contract management resources (team)
• identifying contract exit plan
• how the contract will actually be implemented once it has been awarded.

Contract activities identified in the strategy/plan may be divided into two phases: upstream and  downstream of the contract being awarded.

Contract management cycle

Details of the principal steps in the CIPS contract management cycle are set out in the diagram below and some indicative upstream and downstream contract management activities are shown in the table following:

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Table 1 – Upstream & Downstream Contract Management Activities

1. Upstream activities

• organisational approval for procurement
• contract strategy & procurement method
• risk assessment
• contract management plan
• specifications & requirements
• form of contract
• pre-qualification & tendering rules
• supplier appraisal
• drafting/issuing tender documents
• tender evaluation
• negotiation
• award of contract

2. Downstream activities

• contract amendment
• relationship management
• contract administration
• monitoring contract performance
• assessment of risks
• resolution of contract issues
• contract review & closure

Contract management team

The scale of the resource needed to manage a contract effectively depends on the scale, nature and complexity of the procurement and the necessary skills and experience that are considered appropriate.

 The team may range from the procurement practitioner only, for a simple contract, to a team comprising end users, engineers, quality controllers, designers, IT specialists for a much more complex contract. Alternatively, there may be a core team of the procurement practitioner and the end user with a remit to call upon other technical support, if required.