Five Steps Towards Better Contract Management
Many in the oil and gas industry see contract management as something of a dark art, but a reluctance to engage with this practice is leading to firms losing out in a big way.
The reality is that contract management is not only easy to implement, but it is also fundamentally important in ensuring that work is carried out properly and that all parties involved are properly looked after along the way. By being skeptical about contract management, firms are doing themselves, their staff, and their clients a disservice, and a great deal of money and time is being lost throughout the industry.
Contract management can be defined as the process of systematically and efficiently managing contract creation, execution and analysis for the purpose of maximising financial and operational performance and minimising risk. Put more simply, contract management is about protecting commercial interests.
Where contract management is absent or ineffective, projects are at risk of falling into dispute. A recent study found that the leading causes of disputes on projects in Europe, USA and Asia are:
• Failure to administer contracts correctly
• Poorly drafted, incomplete or unsubstantiated claims
• Errors and omissions in the contract documents
• Failure to understand or comply with contractual obligations
• Failure to make interim awards on extensions of time and compensation
In our work, we come across these symptoms of poor contract management all the time, and it is heartbreaking to witness. After all, costly losses and disputes can be easily avoided by following a few simple steps to better contract management.
1. Understand your contract
Contract interpretation is the first and foremost step towards successful delivery of a project.
It is the contract manager’s job to gain a firm grasp of a company’s rights, obligations and entitlements as detailed in a contract, in order to ensure that a robust, consistent and coherent interpretation of their obligations is adopted.
The contract manager will assist in the preparation of contractual and commercial correspondence with the owner and subcontractors, focusing on the performance obligations of all parties, along with the company’s entitlements to extension of time and additional reimbursement.
2. Implement effective change management procedures
A change can be defined as an alteration or a modification to pre-existing conditions, assumptions or requirements set out within the contract; a variation or modification to the original contract parameters.
This might be due to a change in:
• the specification of the work
• the quantity of the work
• the character of the work
• the conditions in which the work is carried out
• the timing or sequence of the work
The contract will set out a procedure that all parties comply with, so that contractors are entitled to a variation to the contract and receive additional compensation where necessary.
A typical change management procedure involves notifying the owner of the change within seven days, and providing an estimate within 21 days. These notices must be issued in a specific manner, giving the owner the opportunity to take an alternative approach or mitigate the problem.
Contractors must comply with this procedure to avoid being time-barred and losing their entitlement. The role of the contract manager is to ensure compliance, and to prevent the project owner from “hiding behind” the contract.
A skilled contract manager will have a deep understanding of the procedures that help to identify and particularise changes, and they will be adept at notifying key individuals of these changes to ensure compliance with the contract.
3. Identify and particularise any claims you may have contemporaneously!
Contrary to what some firms and owners would have you believe, “claim” is not a dirty word.
Pursuing a claim is an entitlement under the contract, and claims in themselves should not be contentious. The manner in which you pursue a claim can be viewed as contentious, but careful identification and recording of claims is vital to avoiding disputes.
The role of the contract management team is to administer the claim process from inception to final agreement, to help ensure that:
1. Claims are identified in a timely manner
2. Compliant notices are issued
3. Claims are particularised, evidenced and quantified sufficiently
4. The change is evaluated correctly (and in each monthly application for payment).
5. The required ongoing records are raised and maintained
6. Agreement is reached with the owner
4. Implement delay trackers and monthly schedule slippage analyses
We were recently engaged by a major EPC contractor to oversee a major oil and gas project. Our client’s work was being delayed by the work of a preceding contractor and we implemented procedures to ensure that our client’s interests were protected, and that risks were mitigated.
The proactive nature of our work on this contract was vital. Unfortunately, most contractors work retrospectively when it comes to managing delays, but by waiting until the end of the project firms can leave themselves in a position of considerable weakness.
In the case described above, the delays to the project were not the fault of our client, but the delays put our client in the position of expending considerable additional time and effort to protect its interests.
We ensured that the delays were tracked across the course of the project, so that records were available to demonstrate our client’s entitlement throughout.
5. Deal with issues as the projects proceeds.
In addition to delay related items, contractors also face considerable risk from failing to contemporaneously administer the change and claim management provisions of the contract.
Time and time again, we see contractors providing insufficient substantiation to evidence change requests and claims. They fail to take action as the work unfolds, instead hoping that a deal can somehow be done at the end of the project, but rarely does this work in favour of contractors.
We were involved in an arbitration between a contractor and a subcontracted platform fabricator in which the claim was for 60 per cent of the original EPC sum, extending to some tens of millions.
Our involvement was to evaluated the owner’s counter claims, provide a reasonable evaluation of the variations, and to give evidence at the oral hearings. The dispute lasted 29 months, and the subcontractor was finally awarded less than 10 per cent of its claim.
The case provided a number of valuable learning points about dealing with issues as they arise. It highlighted the importance of proper contract administration and compliance with change and claim procedures, and the necessity to avoid parties becoming entrenched by managing owner expectations.
The dispute in question, like so many we come across, was 95 per cent about the facts of the matter and only five per cent about the law. As such, it all came down to ensuring that clear communication with the owner on commercial matters was regular and consistent, while making certain that relevant project contemporaneous documentation was kept.
Contract management plays a crucial role in the successful and profitable delivery of major projects, but it is not rocket science. By following the steps described above, all firms can manage risks, identify opportunities, and maximise their commercial leverage.