Contract Management In Construction Industry- Eng. Salim Zid , PMP

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8 أغسطس 2005
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Contract Management In Construction Industry
Eng.Salim Zid,PMP

Published in World of Engineering Magazine, Issue 61 June 2011.

The contract is a mutual business agreement recognized by law under which one party undertakes to do work (or provide a service) for another party for another party for a previously agreed sum of money.
Parties to the contract
The Employer /Client: who establishes the form of contract and the general conditions. The Engineer :who can have the following three roles esigner,Arbitrator,and Project Manager. The Contractor: who executes the work.
The owner has the sole power to decide what type of contract should be used for a specific facility to be constructed and to set forth the terms in a contractual agreement. It is important to understand the risks of the contractors associated with different types of construction contracts.
Lump Sum Contract, In a lump sum contract, the owner has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher markup in order to take care of unforeseen contingencies.
Unit Price Contract, In a unit price contract, the risk of inaccurate estimation of uncertain quantities for some key tasks has been removed from the contractor.
Cost Plus Fixed Percentage Contract, For certain types of construction involving new technology or extremely pressing needs, the owner is sometimes forced to assume all risks of cost overruns. The contractor will receive the actual direct job cost plus a fixed percentage, and have little incentive to reduce job cost.
Cost Plus Fixed Fee Contract, Under this type of contract, the contractor will receive the actual direct job cost plus a fixed fee, and will have some incentive to complete the job quickly since its fee is fixed regardless of the duration of the project.
Cost Plus Variable Percentage Contract, For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its own estimate, the contractor is allowed a variable percentage of the direct job-cost for its fee.
Target Estimate Contract, This is another form of contract which specifies a penalty or reward to a contractor, depending on whether the actual cost is greater than or less than the contractor’s estimated direct job cost.
Guaranteed Maximum Cost Contract, When the project scope is well defined, an owner may choose to ask the contractor to take all the risks, both in terms of actual project cost and project time. Any work change orders from the owner must be extremely minor if at all, since performance specifications are provided to the owner at the outset of construction. The owner and the contractor agree to a project cost guaranteed by the contractor as maximum. There may be or may not be additional provisions to share any savings if any in the contract. This type of contract is particularly suitable for turnkey operation.
Contract Management
Construction contracts are fundamentally different from major service contracts. There are various types of construction contract.The choice of contract depends on the basis of pricing and the contract strategy that best meets the project objectives.The various types offer different ways of handling pricing, risk transfer responsibility for performance, cost certainty, and complexity.,
The main customer-side roles involved in handling construction contracts are the project manager and the project sponsor.The project manager manages the contract on behalf of the customer, co-ordinating the design and construction and managing claims and disputes in an impartial manner. On large-scale projects, the project sponsor fulfils a higher level, less hands-on role, overseeing the project manager and monitoring budgets (among other duties).
Contract management activities can be broadly grouped into three areas. Service Delivery Management, Relationship Management, and Contract Administration.
The knowledge of both the customer’s and the provider’s business, the service being provided, and the contract itself.
Managing service delivery means ensuring that what has been agreed is delivered, to appropriate quality standards. The contract should define the service levels and terms under which a service is provided. Service level management is about assessing and managing the performance of the service provider to ensure value for money.
Quality metrics will have to be created that allow the quality of service to be assessed, even in areas where it is hard to quantify. Benchmarking, or comparing performance across different organisations and providers, is another useful way to gauge improvements or pricing levels.
Managing risk is another important aspect of managing service delivery. Business continuity plans and contingency plans help prepare the customer organisation for the situation where the provider cannot deliver.
As well as the contractual and commercial aspects, the relationship between the parties is vital to making a success of the arrangement.
In long term contracts, where interdependency between customer and provider is inevitable, it is in the interests to make the relationship work. The three key factors for success are trust, communication, and recognition of mutual aims. The three primary levels of communication in a contractual arrangement are operational, business and strategic.
Plan Contracting
The plan contracting process prepares the documents needed to support the request seller responses process and select sellers’ process. The main Tools and Techniques are Standard Forms , Construction trade organizations, professional societies, and large owner organizations generate standard forms of contracts for use in contract development. Sample organizations that make standard formats available include the Associated General Contractors (AGC), the American Institute of Architects (AIA), and the Construction Owners Association of America (COAA) At the international level, the International Federation of Consulting Engineers(FIDIC) has developed a series of contractual standard forms that is being used globally
Contract Statement of Work , it describes the facilities to be constructed in sufficient detail to allow potential bidders of the work package to determine if they are capable of providing the required construction services. The SOW will address the nature of the facilities, the needs of the owner and the expected contract form. In addition, the SOW will describe special, requirements, if any, including collateral services, performance reporting, post project operational support, and/or specific content and format requirements. In cases where a turn-key or design-build contract type is used, the owner will provide the functional and aesthetic requirements of the facilities they envision in a Statement of Requirements (SOR). In addition, the SOW may solicit potential bidder input to propose solutions for certain problems The SOW and associated tender documents should be clear, concise, and specific about the contract requirements.
Contract Administration
Contract administration is concerned with the mechanics of the relationship between the customer and the provider, the implementation of procedures defining the interface between them, and the smooth operation of routine administrative and clerical functions.
The importance of contract administration (both customers’ and providers’ procedures) to the success of the contract, and to the relationship between customer and provider, should not be underestimated.
Contract administration will require appropriate resourcing. It may be that the responsibility falls on a nominated individual. If not, and the responsibility is shared across a contract management team, it is important that all members of the team deal promptly with contract administration tasks, particularly during the early stages of implementation.
Elements of Contract Administration
The procedures that combine to make up contract administration are as follows: contract maintenance and change control, Charges and cost monitoring , Ordering procedures , Payment procedures , Budget procedures , Resource management and planning, and management reporting.
Contract Maintenance
Contractual relationships evolve and must respond to changes in the business environment. It follows that the contract document itself must be capable of evolving efficiently and effectively, through formal change control procedures and by mutual consent, in response to changing requirements. Even in good relationships, conflicts over detail (project deadlines and so on) do occur.
Keeping the contract documentation up to date is an important activity, but it should not be a burden.The effort required may be reduced by ensuring that the contract is sufficiently flexible to enable changes to the requirement and pricing mechanism within agreed parameters without needing to change the contract documentation.
Procedures should be established to keep the contract documentation up to date and to ensure that all documents relating to the contract are consistent, and that all parties have a common view. Applying document management principles involves:
• identifying all relevant documentation
• Change control procedures, and ensuring no changes are made without appropriate authorization.
• recording the status of documents (current/historic, draft/final)
• ensuring consistency across documents.
The contract manager acts as the interface between the service provider and the rest of the organisation in handling requests for incorporating new requirements into the service contract. A preliminary investigation into the new requirement, possibly with the assistance of the service provider, will usually be required to determine whether it should go forward in the formal change control procedure.
It is particularly important that additional demands on the service provider should be carefully controlled. In many cases orders for products or services may only be submitted through the contract manager. In other cases, especially where budgets are devolved, business managers may have authority to submit orders within specified budgetary and technical constraints.

Change control
Change control procedures should be included in the contract.The respective roles and responsibilities of both parties in the change control process must be clearly identified, along with the procedures for raising, evaluating, costing and approving change requests.
However, flexibility needs to be built into this procedure to deal with issues such as emergencies.A change control procedure should provide a clear set of steps and clearly allocated responsibilities covering:
• requesting changes
• assessment of impact
• prioritisation and authorisation
• agreement with provider
• control of implementation
• documentation of change assessments and orders.
Management Reporting
Requirements for service performance reports and management information should have been defined before and during contract negotiations, and confirmed during the transition period of the contract. Information may be required about all performance measures or only about exceptions – that is, instances when performance differs from what was expected. Exception reporting’ minimises the time the customer needs to assess performance and ensures attention is focused on areas that need it most. Information from the provider about service performance may be sent to each business unit or to a central point – probably the contract manager – for distribution. The contract manager may be required to provide additional quarterly or annual reports on the service to customers. During the early stages of the contract the contract manager should ensure that all information flows between the provider and the customer organization and between various internal groups, are identified and tested.
Asset Management
In many cases day-to-day management of assets will be carried out by the provider, but the contract manager should ensure that:
• the organisation’s asset register is kept up-to-date
• any third party use of assets is recorded
• upgrades and replacements are planned and budgeted for.
The contract manager will be responsible for liaison with the provider on administration, upkeep and maintenance of assets. Contract Administration is a two-way process which ensures that both the buyer and seller adhere to the requirements in their contract. Construction projects are multi-layered hierarchies and have numerous buyers and sellers, with many of the project stakeholders serving in both capacities. This includes the contractual relationships between the owner’s representative(s) and the general/ prime construction contractor, and, the general/prime contractor and their subcontractors and suppliers.
The Main Inputs are :Contract ,Contract Management plan ,Selected Sellers,etc.While the tools contain Contract Change Control System and Claims Administration. The most important output is Contract documents.
Finally, Contract closure is complex process in management processes because that is mean we are in the final stage in the project and we must finalize all claims and deliverables which the contract signed to finish it.

The End


Construction Extension to the PMBOK Guide 3rd Ed. Second Edition , 2007 Project Management Institute, Inc.

PMBOK Guide 4th Ed, PMI publication

Construction Communication , by Stephen Emmitt, Christopher Gorse,Blackwell publication

Principles for service contracts Contract management guidelines, Crown Copyright 2002.

Project Management for Construction by Chris Hendrickson, Department of Civil and Environmental Engineering, Carnegie Mellon University. Version 2.2 prepared Summer, 2008.​


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