Contract management plays a crucial role in the procurement process, as it helps ensure compliance, mitigate risks, and optimize supplier relationships. By effectively managing contracts, organizations can maximize the value of their procurement activities and minimize potential issues. In this guide, we will explore the key benefits and importance of contract management in procurement and provide insights on how to implement effective practices.
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What is Contract Management?
Contract management refers to the process of managing contracts throughout their lifecycle, from creation and negotiation to execution and renewal. It involves ensuring that all parties involved in the contract fulfill their obligations and that the terms and conditions of the contract are adhered to. Effective contract management involves activities such as contract drafting, negotiation, monitoring, and performance evaluation. It helps organizations maintain transparency, accountability, and efficiency in their procurement processes.
Importance of Contract Management in Procurement
In the realm of organizational operations, procurement plays a vital role in acquiring goods, works, and services for various purposes. It constitutes a significant proportion of an organization’s or nation’s annual budget or expenditure. In fact, approximately 60-70% of expenditure flows through the procurement process, encompassing a wide range of items such as goods, works, and services, including both consulting and non-consulting services. To ensure the smooth execution of procurement contracts, these agreements include specific clauses that outline reporting procedures and sanctions for non-compliance. This emphasis on the importance of contract management highlights the fundamental role it plays in monitoring and enforcing minimum standards within contract performance management, underscoring its importance in achieving value for money in the procurement system.
It is crucial to remember that a supplier relationship extends beyond a mere contract. Instead of treating it as something to be hurled across the table during a divorce, we should focus on establishing effective pre-nuptial arrangements that foster a strong and successful partnership.
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The Role of Contract Management in the Procurement Cycle
Contract management holds a significant position within the procurement cycle, often regarded as the fifth stage in certain settings. This critical phase demands utmost attention, as poor management can lead to numerous issues. Contract management entails overseeing the entire lifecycle of contracts, including creation, execution, and analysis, with the ultimate goal of optimizing operational and financial performance within an organization.
Key Aspects of Effective Contract Management
Effective contract management and processing within an organization should encompass several key aspects. These include defining the scope of the work being performed, ensuring timely execution of the process, clarifying the roles and responsibilities of all involved parties, and establishing clear guidelines for the necessary reviews to be conducted.
Understanding Value for Money in Procurement
Value for money is a crucial procurement principle that emphasizes the efficient utilization of resources. It has garnered significant attention within the industry, often raising the fundamental question of whether value has been truly achieved. However, this question often remains unanswered as immediate measurement of value can be challenging.
Value for Money (VFM) refers to the utility obtained from each purchase or expenditure. It goes beyond simply considering the lowest purchase price (economy) and takes into account the highest level of efficiency and effectiveness achieved through the purchase. In essence, it entails obtaining the true value of what is being acquired.
The Role of Contract Management in Achieving Value for Money
Contract management plays a vital role in ensuring that both parties adhere to the terms outlined in the contract. In certain organizations, a dedicated contract manager takes sole responsibility for overseeing contracts with vendors, aiming to achieve maximum satisfaction and successful project outcomes. Contract management serves as the cornerstone of a procurement process, determining its efficiency and effectiveness. It also serves as the foundation for delivering value. Without a robust contract management process in place, an organization may incur significant costs, hindering the attainment of value for money. While contract management applies to goods, works, and services, active engagement in contract management is particularly crucial during works-related projects.
Contract Management is at the heart of every procurement process. It determines how successful a procurement process is or would be if well managed by both parties.
The Role of Contract Management in Contract Execution
Let’s take a typical scenario of a contract management and their role during contract execution of a project.
In a procurement process, a construction contract (project) is granted to a construction company by the procurement entity. The project details are clearly outlined in the tender documents, ensuring that deliverables are well-defined and documented. Both parties reach a mutual understanding of the entire project. Once all the necessary documentation is completed, a contract is signed, encompassing all the terms and conditions in a clear manner. This sets the stage for the subsequent phase known as contract execution, where contract management takes center stage.
The Role of Contract Management in Ensuring Project Success
To ensure close supervision and monitoring of work, the organization (Procurement Entity) has established a contract management team, led by the contract manager. The primary responsibility of this team is to oversee the contractor’s adherence to using the appropriate quantity and quality of materials, thereby ensuring the completion of high-quality work. Additionally, the team is tasked with ensuring that project deliverables are achieved in accordance with the contract terms. On a monthly basis, they are required to provide management with progress reports detailing the status of the work.
The Importance of Contract Management in Detecting Issues
During the contract management process, the team discovers that the contractor has been utilizing substandard and low-quality materials. Concerned about this finding, the team approaches the project head or site supervisor to discuss their observations. However, the supervisor fails to provide a satisfactory explanation. In light of this, the team escalates the issue to management, emphasizing the potential risks associated with continuing the project. They recommend putting a halt to the project as the building may not withstand the test of time and could potentially collapse, leading to significant damage. Following the report to management, the decision is made to suspend the project. Subsequent investigations confirm that the materials used were indeed of inferior quality, posing a risk of structural failure that could endanger lives and properties. As a result, the contract is terminated in accordance with the contract clause that allows for such action.
The Consequences of Inadequate Contract Management
Based on the aforementioned scenario, it is evident that the contract management team played a crucial role in ensuring the proper execution of work and achieving value for money. The effectiveness of contract management becomes apparent in detecting errors made by contractors during project implementation. Unfortunately, over the years, insufficient attention has been given to this aspect of the procurement process, allowing contractors to deliver subpar work that deteriorates prematurely, falling short of the expected lifespan of the project. We have witnessed instances of shoddy road constructions where no proper or inadequate contract management processes were established, resulting in roads deteriorating after heavy rainfall. Similarly, buildings have collapsed shortly after construction, undermining the value for money principle in procurement. These unfortunate occurrences highlight the detrimental consequences of lacking or inadequate contract management measures.
Contract management is key to ensuring that that organization achieves value for money in any project.
The Strategic Importance of Contract Management
In contrast, had the Entity not established the Contract Management team to oversee the project, the contractor’s work would have been of poor quality, failing to deliver value for money, as is often observed. The role of procurement has undergone a significant transformation over the years, transitioning from a transactional function to a tactical one, and now to a more strategic function. Procurement now holds the responsibility of creating value and ensuring cost savings. Consequently, it becomes crucial for procurement professionals to pay careful attention to these aspects in fulfilling their duties, allowing them to meet their tasks and obligations within the organization successfully.
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The Role of Contract Management in Ensuring Value Creation
Contract management plays a crucial role in both ensuring and creating value. It is instrumental in promoting efficiency and effectiveness in project execution (particularly for works), while also safeguarding against costs related to acquiring substandard goods. By closely monitoring work progress and adherence to quality standards, contract management ensures that projects are carried out efficiently. Additionally, in the realm of goods procurement, contract management ensures the supply of high-quality products, mitigating the expenses associated with acquiring inferior or inadequate items.
Contract management is key in the procurement process and its time professionals pay attention to it to ensure value for money.
Conclusion
Contract management is an evolving field that requires increased focus to ensure value for money and overall organizational value. It plays a crucial role in cost savings by preventing the need for redoing projects shortly after completion due to depletion or collapse. Going forward, it is imperative for organizations to establish contract management as a dedicated function, with contract managers assuming the responsibility for effective contract management..
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About the Author – Dr Muddassir Ahmed
Dr MuddassirAhmed is the Founder & CEO of SCMDOJO. He is a global speaker, vlogger and supply chain industry expert with 17 years of experience in the Manufacturing Industry in the UK, Europe, the Middle East and South East Asia in various Supply Chain leadership roles. Dr. Muddassir has received a PhD in Management Science from Lancaster University Management School. Muddassir is a Six Sigma black belt and founded the leading supply chain platform SCMDOJO to enable supply chain professionals and teams to thrive by providing best-in-class knowledge content, tools and access to experts.
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