Successful Contract Management

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A PRACTICAL GUIDE TOSUCCESSFUL CONTRACT MANAGEMENT

December 2009

Technology and Outsourcing Group


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Taylor Walton Technology & Outsourcing Group - Successful Contract Management

CONTENTS

1. PURPOSE OF THIS GUIDE.....................................................................................................1

2. INTRODUCTION.......................................................................................................................2

3. MANAGEMENT OF CONTRACT START UP..........................................................................5

4. ADMINISTRATION OF THE CONTRACT................................................................................8

5. MANAGEMENT OF CONTRACT PERFORMANCE..............................................................11

6. CONTRACT VARIATIONS.....................................................................................................15

7. SYSTEMS AND PROCEDURES............................................................................................18

8. MANAGEMENT OF CONTRACT DISPUTES........................................................................20

9. RECORD KEEPING ...............................................................................................................26


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Taylor Walton LLP 2009

1. PURPOSE OF THIS GUIDE

This guide is for anyone who has responsibility for managing contracts. It is from the pointof view of a buyer or customer. The guidance is generic that is, its principles are intendedto be applicable to all contracts, although it is likely to be of more relevance to major andcomplex service contracts.

The guide provides best practice tips and guidelines so that you can:

actively monitor and control all aspects of the relationship between the serviceprovider/contractor and your organisation; and

ensure the delivery of a cost effective and reliable service at an agreed price andstandard.

From our experience and those of our clients, the worst way to manage a contract is simplyto leave it to take its course. It will inevitably go wrong and leave an incomplete audit trail.

The guidance in this document should provide you with the know-how to:

manage the contract "start up" effectively and to provide a checklist to assist withunderstanding the contract;

manage the process relating to unresolved issues;

administer the contract effectively;

undertake performance management;

negotiate contract variations; and

manage contract disputes.

This guide does not cover the process of creating a commercial arrangement and assumesthat:

the reader is familiar with procurement procedures and principles;

the contractual requirements have been carefully determined and documented;

the contract to be managed is well constructed;

the service provider has been carefully selected and their tender properly evaluatedbefore contract signature.

For contract management to be successful, it is crucial that the above foundations are inplace.


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2. INTRODUCTION

2.1 What is contract management?

Contract management is the process that enables both parties to a contract to meet theirobligations in order to deliver the objectives required from the contract. It also involves

building a good working relationship between the customer and the service provider. Itcontinues throughout the life of a contract and involves managing proactively to anticipatefuture needs as well as reacting to situations that arise.

One of the key aims of contract management is to obtain the services as agreed in thecontract and achieve value for money. This means optimising the efficiency, effectivenessand economy of the service or relationship described by the contract, balancing costsagainst risks and actively managing the customer and service provider relationship.Contract management may also involve aiming for continuous improvement in performanceover the life of the contract.

2.2 Getting the contract right

This guide concerns customer activities following the signature of a contract, not theprocurement process that leads up to the signing of a contract. However, as mentionedpreviously, the foundations for contract management are laid in the stages before contractsignature, including the procurement process. The terms of the contract should include anagreed level of service, pricing mechanisms, service provider incentives, contract timetable,means to measure performance, communication routes, escalation procedures, changecontrol procedures, agreed exit strategy and agreed break options, and all the other formalmechanisms that enable a contract to function.

The above mentioned formal contract aspects form the framework around which a goodrelationship can grow. If the contract was poorly constructed, it will be much more difficult tomake the relationship a success. The contract negotiation process must take account of therequirements for contract management. It is vital to build a contract that not only identifiesclearly the obligations of the service provider (and indeed the customer), but also enables aproductive relationship built on good communication and mutual trust. While the contractmust be built on a firm formal and legal foundation, it should not be so restrictive that itprecludes flexible, constructive management of the relationship between the customer andthe service provider.

2.3 Critical success factors

In our experience, the following factors are essential for good contract management:

Good preparation: An accurate assessment of needs helps create a clear output-based

specification. Effective evaluation procedures and selection will ensure that the contractis awarded to the right service provider.

The right contract: The contract is the foundation for the relationship. It should includeaspects such as allocation of risk, the quality of service required, and value for moneymechanisms, as well as procedures for communication and dispute resolution.

Single business focus: Each party needs to understand the objectives and business ofthe other. The customer must have clear business objectives, coupled with a clearunderstanding of why the contract will contribute to them; the service provider mustalso be able to achieve their objectives, including making a reasonable margin.

Service delivery management and contract administration: Effective governance willensure that the customer gets what is agreed, to the level of quality required. The


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performance under the contract must be monitored to ensure that the customercontinues to get value for money.

Relationship management: Mutual trust and understanding, openness, and excellentcommunications are as important to the success of an arrangement as the fulfilment ofthe formal contract terms and conditions.

Continuous improvement: Improvements in price, quality or service should be soughtand, where possible, built into the contract terms.

People, skills and continuity: There must be people with the right interpersonal andmanagement skills to manage these relationships on a peer-to-peer basis and atmultiple levels in the organisation. Clear roles and responsibilities should be defined,and continuity of key staff should be ensured as far as possible. A contract manager (orcontract management team) should be designated early on in the procurementprocess.

Knowledge: Those involved in managing the contract must understand the business

fully and know the contract documentation inside out ("intelligent customer" capability).This is essential if they are to understand the implications of problems (or opportunities)over the life of the contract.

Flexibility: Management of contracts usually requires some flexibility on both sides anda willingness to adapt the terms of the contract to reflect a rapidly changing world.Problems are bound to arise that could not be foreseen when the contract wasawarded.

Change management: Contracts should be capable of change (to terms, requirementsand perhaps scope) and the relationship should be strong and flexible enough tofacilitate it.

Proactivity: Good contract management is not reactive, but aims to anticipate andrespond to business needs of the future.

2.4 What can go wrong and why?

If contracts are not well managed from the customer side, any or all of the following mayhappen:

the service provider is obliged to take control, resulting in unbalanced decisions that donot serve the customers interests;

decisions are not taken at the right time or not taken at all;

new business processes do not integrate with existing processes, and therefore fail;

people (in both organisations) fail to understand their obligations and responsibilities;

there are misunderstandings, disagreements and underestimations;

too many issues are escalated inappropriately;

progress is slow or there seems to be an inability to move forward;

the intended benefits are not realised; and

opportunities to improve value for money and performance are missed.


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Ultimately, the contract becomes unworkable.

There are several reasons why organisations fail to manage contracts successfully. Somepossible reasons include:

poorly drafted contracts;

inadequate resources are assigned to contract management;

the customer team does not match the provider team in terms of either skills orexperience (or both);

the wrong people are put in place, leading to personality clashes;

the context, complexities and dependencies of the contract are not well understood;

there is a failure to check service provider assumptions;

authorities or responsibilities relating to commercial decisions are not clear;

a lack of performance measurement or benchmarking by the customer;

a focus on current arrangements rather than what is possible or the potential forimprovement; and

a failure to monitor and manage retained risks.


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3. MANAGEMENT OF CONTRACT START UP

After a contract has been signed there are a number of matters that should be addressedto provide the foundation for successful contract management. An early step is to ensurethat sufficient resources and senior management support are available to manage thecontract. It is equally important to understand both the contract provisions and contractual

relationships at the outset. In the case where the contract manager has been involved inearlier procurement phases, we expect that the contact manager will already haveknowledge of issues relevant to implementation.

The following checklist should assist the contract management team with providing a betterunderstanding of the contract and can be used as a basis for developing an effectiveworking relationship with the service provider.

3.1 Analyse the contract and agree the service provider's understanding of the contract

Identify deliverables and how their achievement will be measured.

Ascertain timeframes, particularly any critical deadlines.

Understand payment arrangements, including links between payments andperformance.

Identify the roles and responsibilities of both parties and allocate responsibilities withinthe customer organisation.

Confirm agreement with the service provider, especially in relation to any sensitivematters.

We expect that many customers may have certain procedures that must be followed before

and during contract negotiation and prior to execution of contracts. The procedures mayvary depending on the contract terms, the service provider and project type.

3.2 Gain an understanding of the background to the contract and the relationship thathas been developed with the service provider

Discuss the relationship that has developed with the service provider over thepreceding phases of the contracting cycle.

Meet with the service provider as necessary to further develop the relationship andaddress issues that may impinge on effective contract management.

3.3 Establish any required systems for monitoring and reporting, protocols forcommunication and recordkeeping arrangements

Establish contract management or data collection systems or processes (this is furtherdiscussed in section 7.

Draw up a monitoring plan or checklist covering key timelines, critical deliverables andperformance reporting priorities.

Develop any procedures or protocols.

Establish recordkeeping arrangements.

3.4 Obtain or confirm licences in relation to intellectual property that have not alreadybeen obtained


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Ensure that relevant confirmation has been obtained.

Confirm all documentation is up-to-date.

Store evidence of these matters appropriately.

3.5 Brief any team members or stakeholders

Set out meeting arrangements for the life of the contract.

Confirm stakeholder involvement and their requirements for information.

Set up and/or brief any committees or working groups.

Brief any members of the contract management team regarding their roles andresponsibilities.

3.6 Management of unresolved issues

In many instances, not all issues are resolved at the time of contract signature. These needto be addressed in a timely way during contract start up. These issues can create problemswhen managing a contract if not properly dealt with at the correct time.

In situations where there are issues that have not been fully resolved at contract signature,the contract manager should:

identify and record any agreements or arrangements made by the parties relating tothis when the contract was negotiated;

identify and record aspects of the contract which have been potentially left for futuredevelopment; and

identify and record aspects of the contract which will be subject to some other process,for example, third party approvals.

The detailed review of the contract at contract start up may also identify issues that requireclarification or elaboration in the contract. It is important to address any such issuespromptly. This may require a contract variation or exchange of correspondence. Contractvariations are discussed at section 6.

3.7 Transition

For some contractual arrangements there will be a transition phase. The duration of thisphase can range from a few days to several months. The objectives of this phase are to:

ensure a smooth transition to the new service provider by minimising the risk of areduction or loss of services and the impact on end-users and other stakeholders;

establish relationships and systems and procedures that will be used during the life ofthe contract, and

complete the transfer of information and/or assets to the new service provider.

For straightforward contracts there may be a number of one-off tasks that need to beappropriately planned and resourced. In complex contractual arrangements the transitionphase may require a detailed plan or some other formal documentation to ensure all


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relevant matters are considered and addressed. The way the customer manages thetransition phase will generally be an indication to the service provider about the way thewhole contract will be managed. If, for example, the customer adopts a lenient approach inrespect of the non-achievement of transition targets, theservice provider may take this as a signal of how the customer will deal with underperformance generally.

3.8 Post- transition review

At the end of the transition phase it is important that a formal assessment is undertaken ofoverall contract performance. The extent and method adopted will depend on thecomplexity of contract deliverables and how important the results of the transition are to thesuccess of the contract over its life. For example, where the transition is being used tofinalise details of contract deliverables and performance measures, the outcome of thetransition will dictate the final form of the contract and how it will operate in practice.

The post-transition review should also be used to review the customer's contractmanagement arrangements, including resource requirements.

3.9 Governance arrangements

There is no one prescribed governance structure for managing the contract/relationship.The structure depends largely on the size and scope of the deal and the organisationalstructure of both the customer and service provider. The names of the groups/committeeswithin the governance structure are also deal or client specific.

A common structure is for the establishment of a hierarchy of working groups/committeeswith representatives from the service provider and the customer, whose roles and remit areclearly spelt out to ensure progress is reviewed through plenty of interaction. There willusually be committees at executive, service management, operational/project managementlevels.

The parties need to understand and comply with the governance arrangements and inparticular the following issues should be considered:

the time frames for establishing the meetings of the committees;

the agenda for each meeting and the timing for the distribution of that agenda prior tothe meeting with any reading material;

the role of the chairperson;

the process for documenting the minutes of the meetings. All actions, responsibilitiesand accountabilities should be tracked and managed if the contract is to be managedeffectively; and

notification to the other party of any change in the committee representatives.


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4. ADMINISTRATION OF THE CONTRACT

Contract administration is an integral and important element of contract management andoverlaps with monitoring and performance assessment. It encompasses various activitiesthat need to be completed on a day-to-day basis, including:

developing and maintaining contact details of key people involved in the contract;

understanding the notice provisions;

scheduling meetings and other actions required by the contract delivery andacceptance of the goods or services;

making payments;

maintaining complete records for the contract itself; and

establishing and maintaining contract documentation.

4.1 Contact details

To assist the overall management of long term contracts, there can be benefits inmaintaining up-to-date records of key personnel, stakeholders, end-users and/or expertsand their contact details. This can assist in facilitating communications between the partiesparticularly where there are changes in personnel or where personnel are geographicallydispersed.

4.2 Notice provisions

Although notice provisions are not the most glamorous or exciting of clauses, it is often

important to determine at what time notification is considered to have been given orreceived. Therefore, the following essentials of a notice provision should be wellunderstood:

the place at which notice is to (or may) be served;

the method by which it is to (or may) be served; and

where and when service is deemed to take place.

4.3 Scheduling meetings

For most contracts, meetings and particular actions will need to occur at specific timesthroughout the life of the contract. It is an important element of contract administration thata schedule of meetings for parties to the contract, end-users and stakeholders isestablished in advance, giving the time, place and purpose of the meeting. The scheduleshould also list any planned reviews or other key actions.

4.4 Delivery and acceptance

Delivery refers to receipt of the contracted supplies into the customer's possession asspecified under the contract. Particular care must be taken with phased delivery. If aservice provider fails to deliver supplies by the delivery dates or to the delivery pointspecified in the contract there may be consequences for the service provider under thecontract. The contract manager should ensure that various requirements regarding risk ofloss or damage to the goods or services are carried out in accordance with the contractprovisions. The contract manager should ensure that, prior to goods or services being


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delivered, appropriate risk management measures are put in place in relation to thesecurity and storage of goods or services. Where appropriate, the contract manager shouldalso ensure that appropriate insurance coverage for the goods or services has beenarranged.

"Acceptance" is the term used to describe the procedure by which the customer determines

whether the goods or services meet contract requirements. In many contracts, acceptanceof the contract deliverables will occur periodically throughout the life of the contract. Inservice contracts, services may be delivered on a continuing basis.

On delivery, goods or services need to be inspected or reviewed and, where necessary,tested against the standards specified in the contract, before formal acceptance under thecontract is completed. In the case of goods the process of inspecting or testing the contractdeliverables is easier to apply than it is for services. In the case of services, performancemeasures such as service levels and compliance with reporting requirements may be partof the acceptance process.

Generally, the contract should set out the process for acceptance. This will usually require

the service provider to provide the contract deliverables in the form specified by thecontract. This may include providing a formal document to the contract manager andsupporting evidence, such as the results of an acceptance testing, that the goods orservices meet the contract requirements. The contract will usually set out a period in whichthe customer is able to decide whether to accept or reject the goods or services.

4.5 Payments

Contract payments should only be made in accordance with the provisions of the contract.Before payments are made evidence is required that the appropriate representative of thecustomer has certified that goods and services have been received and have met therequired standard of performance.

It is also important that payments for satisfactory performance are made in line with thetimeframes set out in the contract. Payments for satisfactory performance should not bedelayed because this can undermine the relationship with the service provider.

Payments should be made following receipt of a correctly rendered invoice or otherstatement of expenditure. All necessary authorisations and approvals should have beenobtained prior to making payment.

4.6 Contract documentation

It is important that the most up-to-date version of the contract incorporating any variationsis formally evidenced in writing and appropriately stored. This provides the basis for making

payments and the ongoing management of the contract.

It is likely by the contract management phase that a system for maintaining documents forthe particular contract will already have been established. If this is not the case, arecordkeeping system containing all appropriate documentation should be established inaccordance with the customer's recordkeeping policy and practices. If a system alreadyexists it should be reviewed to ensure that it is appropriate to the contractual arrangement.Any additional recordkeeping requirements should be identified and any gaps indocumentation addressed.

The following case study highlights a situation where good recordkeeping paid off.


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5. MANAGEMENT OF CONTRACT PERFORMANCE

Performance management involves:

performance monitoring collecting data on performance;

performance assessment deciding whether performance meets the customer'sneeds; and

taking appropriate action such as understanding and extending features of goodperformance, correcting areas of under performance; or amending contractrequirements to meet changing needs.

Performance management must be undertaken throughout the life of the contract and forall contracts, whether straightforward or complex. Along with performance indicators andstandards, arrangements for monitoring and assessment should have been set out andagreed in the contract along with action that would result from non performance.

Clear links should have been established in the contract between payments forperformance and the effect of non-compliance or under performance on those paymentsand the intent to invoke service credits/rebates contained in the contract if necessary.

The performance monitoring and assessment arrangements should also have beenreviewed at the contract start-up stage and any necessary plans, tools or systemsdeveloped.

5.1 Monitoring

Monitoring focuses on collecting and analysing information to provide assurance to thecustomer that progress is being made in line with agreed timeframes and towards providing

the contract deliverables.

Information provided by the service provider for monitoring purposes should be reviewedand audited, as necessary, to ensure its accuracy and reliability. It can also often be testedthrough consulting end-users regarding the goods and services they have received.

While the broad arrangements for actual monitoring over the life of the contract shouldgenerally have been set out in the contract itself, they may need further or more detailedexplanation at contract start-up or during the transition in phase. The level and formality ofany approach to monitoring needs to be governed by the complexity of the contract and/orthe degree of risk involved. In some cases the approach to monitoring may be set out in achecklist, in others, a plan setting out detailed monitoring arrangements may be needed.

It is important to focus monitoring activity on key deliverables - very detailed monitoring canbe costly and can unduly shift the focus away from achieving contract outcomes. This maymean establishing priorities for what will be measured at specific time intervals. Collectingtoo much information is also costly and the customer may not have the resources toanalyse it to assess performance adequately.

Having a systematic approach to monitoring, which includes the sort of information requiredand when it is required, can assist in identifying any potential problems and allow earlyremedial action to be taken. It also allows timely reporting to senior management and otherstakeholders. Obtaining relevant information and data may need to be supported bymanagement information systems or data bases. Some information may be able to beprovided electronically.


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It is important to collect and analyse all relevant information needed to assessperformance. After analysing the information, feedback should be provided to the serviceprovider in a professional and constructive manner (and in line with any communicationsprotocol that exists). This is discussed further in the section below dealing withperformance assessment (section 5.2).

The following case study discusses a situation involving too many performance indicators.

Case Study: Too many performance measuresAn organisation had specified comprehensive performance information to be provided under thecontract. The service provider fully complied with the requirement. Each month the contractmanager received by email a report of nearly 100 pages of detailed statistics on all aspectsof the contract for the previous month. After the first few months, the report was only usedas the basis for authorising payments. It was not useful for a higher level assessment ofperformance or of potential problems, as it contained so much information, with no analysisor indication of whether corrective action had been taken on any service shortfalls. Thecontract manager negotiated the addition of appropriate management summaries to givean understanding of the overall performance and evidence of effective management bythe service provider.

Details of areas that need to be monitored could include:

specific goods or services provided on time to the required quality;

user satisfaction;

performance against contract requirements; and

invoicing and payments.

In addition to data collected for the purpose of measuring performance, assessment of aservice providers performance can also be assisted by other information sources such asrecords or minutes of meetings and discussions, reports from third parties, stakeholder,end-user and client surveys, site visits and observations, complaints, reported delays andthe need for contract variations.

5.2 Performance assessment

Performance assessment is undertaken on the basis of information collected during themonitoring process. It is important that during this process feedback is provided in relationto good and poor performance, and that any performance problems are addressedpromptly.

The basis for performance assessment, that is, indicators with related targets, andstandards should have been set out in the contract. Where performance information isdifficult to establish at the contract development stage, it may require further developmentover the life of the contract. The contract provisions should have been framed to allow this.Developing indicators further during contract management can draw on actual resultsachieved, research and feedback from stakeholders.

For performance management to be most effective, responsibility needs to be sharedbetween the service provider and the customer. From the customer's point of view, theprimary responsibility for performance rests with the contract management team. It is intheir interest to work actively and positively with the service provider to achieve outcomesin a "value for money" way. Performance management should ensure that standards and

targets are met on time and within budget. It should also contribute to, not distract from, theservice provider delivering contract outcomes.


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Revisions will need to be made if:

data being collected is not providing adequate information to assess performance;

performance measures have not been fully developed; or

performance measures are found not to be suitable for the particular contract.

It is important not to change arrangements to mask poor performance by the serviceprovider or a lack of skill by the customer. Judgement will need to be exercised todetermine whether changes or reinterpretations are needed.

Contract managers need to have assurance that the information used to assessperformance, and to make or withhold contract payments, is accurate. This material willalso be used to keep senior management and other stakeholders informed regardingprogress. Inaccurate information may mean that an actual understanding of performance isnot being obtained and/or poor performance is being masked.

Once information is collected it should be analysed to allow an assessment of specific orrelated matters. For example, under performance may trigger the application of servicecredits or some similar action. Satisfactory performance may trigger payments of regularfees or milestone payments. It is possible at this stage that technical advice may be neededto assess particular aspects of performance, for example, compliance with specifiedstandards for construction work, or whether IT systems deliver the required functionality.

Reports provided to senior management and other stakeholders should be a balancedaccount of performance achieved and any identified shortcomings. If there are identifiedshortcomings, proposed action and a timeframe to address them should be included inreports to senior management.

Honest and balanced feedback should be provided to the service provider. Whereperformance is satisfactory or above standard, positive feedback to the service providercan be beneficial to maintaining the relationship. It is also at this stage that any bonus orincentive payments linked to performance should be made in line with contract provisions.

In cases where performance problems have been identified they should be dealt withpromptly. This means discussing the issues with the service provider in a professionalmanner as soon after they arise as possible. When performance problems are addressedas a normal part of contract management, it should not have an ongoing negative impacton the relationship between the customer and the service provider.

In some cases, informal remedial action may need to be undertaken. In other cases, moreformal action for under performance may need to be taken and this is discussed in thesection below.

5.3 Under performance

In many cases contracts are completed without problems but contract managers need to beprepared to address any problems promptly as they arise in accordance with agreedprocedures. Many contract performance problems can be avoided by managing therelationship well. Under performance can be minimised by having a performance regimethat allows prompt and ongoing feedback, particularly in relation to critical timeframes ordeliverables. The contract manager needs to be aware of any signs of potential underperformance and be able to address them, to the extent possible, before they becomeserious. Addressing under performance in this way can avoid the problem worsening

and/or the service provider being confronted by a problem that the customer has known


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about for a period of time. Providing the service provider with early warning may mean thatit is easier to address the issues at low cost and with minimal disruption.

At the early stages of under performance, agreeing informal remedial action will often bethe best approach. Such action could include replacing or using additional personnel,reporting back more frequently on progress, modifying processes or systems or clarifying

the customer's requirements.

Depending on the seriousness of the under performance, the action taken may need to bemore formal and could include:

withholding payments until performance returns to an acceptable level;

involving senior management from both parties in formal discussions or writtencommunications;

developing strategies to address the problem and formally documenting them, andtracking whether they are working in practice; and

implementing other formal mechanisms included in the contract.

The following case study discusses a situation involving "hidden" under performance.

Case Study: Hidden under performanceAn organisation had contracted out a help desk function for services to staff. The contractspecified expected resolution times for calls logged with the help desk. The monthlyperformance indicators showed satisfactory performance, but the annual staff satisfactionsurvey showed a marked drop in satisfaction with resolution times.

The contract manager investigated and found that the service provider was using thecontractually specified measure of resolution time, based on when the call was logged in aregister by the help desk. However, the service provider had been encouraging staff to logrequests to an e-mail address. When the help desk was busy, there could then be a long delaybefore the emails were entered into the help desk register. The automated reporting systemused the date of entry to the register as the start time not the time the email arrived. Thismeant delays experienced by the help desk clients were not properly reflected in reports onperformance.

Taking this into account showed significant under performance.

The contract manager treated this as two areas of under performance:

The service provider was obliged to improve resolution times to those specified, which

meant some increase in staffing of the help desk.

It appeared there was either deliberate or inadvertent manipulation of the performancemeasure. This was a breach of a contract provision specifying a high level of professionalcare and conduct. Given the ambiguities of the cause of the concern and the otherwisesatisfactory service, the contract manager handled the problem with a personal discussionwith the service provider, expressing the customer's disappointment with the incident. Thiswas followed up with correspondence setting out the key facts and expectations for thefuture.

Comment: Under performance issues sometimes do have ambiguities about underlyingcauses and intentions. It is still important to act to avoid a continuation of problems. Failingto do so can be seen as de-facto agreement to a situation.


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6. CONTRACT VARIATIONS

6.1 Introduction

Provisions to allow and regulate contract variations should be a standard feature of allcontracts. The ability to vary the contract should be directed or controlled by the customer

and should only occur in defined circumstances. It is accepted practice for the variationmechanism to provide for variations to be agreed between the customer and the serviceprovider in writing through a formal amendment of the contract. (In technology contracts,the variation mechanism is usually called a "change management process", "changecontrol procedure" or something similar).

In some circumstances it is possible to inadvertently amend a contract by oral agreementor conduct, even where there is a contract provision expressly requiring a formal process tobe followed. It is therefore important that those involved in managing and administering thecontract do not agree to informal contract amendments.

Variations should be undertaken in line with the change management process (see section

6.2).

The reasons for the variation should be clearly documented. Variations should not be usedto mask poor performance or serious underlying problems and the effect on originaltimeframes, deliverables and value for money should be assessed. If the effects aresignificant, senior management and other stakeholders may need to be consulted and/oradvised.

Changes to contractual arrangements have the potential to affect the scope and viability ofthe contract for either or both parties and making substantive variations to a contract mayrequire the same degree of input and effort involved in developing the original contract.They should therefore be planned accordingly. Customers should be alert to the risk thatmultiple changes made to a contract over a period of time may shift the overall allocation ofcontract risk or transfer particular risks to the customer. It is important to analyse allconsequences of a proposed contract amendment and make sure there are no unintendedeffects of the change.

For public sector projects, contract managers also need to ensure that the contractvariations are not of such a level that they significantly change the contract requirementand/or substantial parts of the original transaction. If this is the case, it may be necessary toundertake another procurement process because the revised arrangements aresubstantially different to those selected through the original procurement.

6.2 Change management process

There are a variety of issues that should be considered in any change managementprocess to ensure that it is effective.

Three key areas for consideration are:

the need for change impact reports;

the pricing principles that will apply to the change; and

the service provider's obligation to undertake the change.


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6.3 Change impact reports

Before any change request can be properly considered, the customer and the serviceprovider must understand the implications of the proposed change. To facilitate this, thechange management process may require the service provider (who will normally be in thebest position to assess the likely impact of a change) to prepare an impact report. Ideally,

the impact report will present a full description of the change, including how the change isto be implemented and, to the extent relevant, detail:

the feasibility of the change;

the likely effect of the change on the ability of the service provider to meet itsobligations under the contract;

any cost implications of the change;

any consequential material impact of the change;

where appropriate, acceptance testing procedures and acceptance criteria for theproposed change; and

any other information likely to be of relevance.

6.4 Pricing principles

It is often useful for the change management process to specify how any costs associatedwith the change will be allocated between the customer and the service provider.

Ordinarily, the customer should be required to pay for a change only to the extent that thechange cannot reasonably be considered as within the scope of the existing agreement.

Where a change falls outside the scope of the existing agreement, the changemanagement process may detail the principles that will determine the price to be paid bythe customer. For example, the change management process may stipulate that the pricefor any change should be:

reasonable;

competitive; and

no higher than the price at which a customer would be able to procure similar productsor services from another service provider.

The change management process may enable the customer to request the service providerto provide an auditor's certificate, confirming that the pricing of any change complies withthe pricing principles.

6.5 Service provider's obligation to undertake the change

An otherwise detailed change management process will be of little value if, even once theprice to be paid by the customer has been determined, the service provider can simplyrefuse to implement the customer's change request.

Accordingly, the change management process may provide that the service providercannot unreasonably refuse (either directly or indirectly) a change requested by thecustomer. Unreasonable grounds for refusing a change might include:

demanding unreasonable charges for the change;


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imposing unreasonable conditions for undertaking the change; or

refusing to include the change under the agreement despite the subject matter beingreasonably related to or connected with the services.

Impact reports, pricing principles and the service provider's obligation to undertake thechange are just some of the matters that need to be considered in any changemanagement process to ensure that it is effective. A carefully drafted change managementprocess can mean the difference between the system/services that a customer wanted onday one, and the system/services that a customer discovered it needed during the term ofthe contract.

6.6 Contract variations checklist

Key issues to consider in managing contract variations include:

following the procedures required by the contract;

assessing the reasons for the proposed variation and whether these may indicate anemerging or actual performance problem;

assessing the impact of the proposed variation on the contract deliverables, particularlywhether the variation or the work it represents is actually required and whether it waspart of the original contract deliverables;

determining the effect the proposed amendment will have on contract price;

considering the authority for making the variation;

properly documenting details of the variation and its impact;

meeting any reporting requirements such as updating the customer's contract register(see next section).


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7. SYSTEMS AND PROCEDURES

7.1 Introduction

The sections above relate to the management of individual contracts. However, whenlooking at contract management across all contracts a customer may have with its different

service providers, the maintenance of a contracts register and the use of electronicsystems are initiatives which may assist customers in more effective contract management.

7.2 Contract register

In our experience, customers have generally found it beneficial to maintain a contractregister that contains details of all its contracts. A contract register can be maintainedcentrally. Alternatively, details can be input remotely by individual work areas. The contractregister could also consist of a number of sub registers maintained by business orgeographically-based work areas that collectively represents the customer's contractregister.

Contract registers should be used to monitor contract end dates so that the customer ismade aware of opportunities to exercise contract extensions in a timely manner.

Effective contract registers are likely to have the following characteristics:

the register will contain all relevant contract details and be configured to be able toproduce reports that can be used to meet the customer's management and reportingresponsibilities;

responsibility for maintaining the register will be clearly assigned to an individual(s) orwork area(s);

formal procedures will be established for maintaining the accuracy and completeness ofthe register. These procedures will provide for a reconciliation or cross-check betweenthe register and the customer's financial management information system. Theprocedures should also provide for a periodic quality assurance review of the register;

the automation, to the extent feasible, of the input of data that will limit, or eliminate themultiple input of data into different systems, assist in improving consistency andreducing the incidence of human error;

the provision of links to individual contracts, subject to security and confidentialityconsiderations;

system access controls designed to ensure unauthorised staff do not have access to,and cannot amend or alter, contract details; and

the periodic review by internal audit or other review mechanism.

7.3 Electronic systems

Electronic systems can be used to assist in the development and management ofcontracts.

There are advantages to using electronic contract management systems, for exampleconsistency, efficiency and timeliness. These systems are useful in managing theadministrative aspects of contracting and can be particularly useful in organisations that are

geographically disparate. These can range from reasonably simple systems holding dataabout key aspects of contracts entered into including critical dates, to sophisticated


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proactive electronic contract management systems. These may be off the shelf systems orsystems that are specifically designed for the customer. Developing and implementingthese systems can be costly so it is important to understand the level of functionality thatmay be necessary for a particular customer's requirements and the benefits likely to berealised through the use of them.

Electronic systems can assist in ensuring that contract managers also have access to themost recent standard contracts and forms, policies, advices and contract managementassistance. They can also facilitate awareness of new and emerging issues, potential risksand how to manage them. Electronic systems can also provide a contract managementhelp desk for the provision of information and advice. The easy availability of informationencourages better decision-making and improved contract management. It can alsoprovide a forum for communication between contract managers in the customerorganisation, enabling them to be aware of other contracts being managed by thecustomer, to ask questions of other contract managers in the customer organisation and toshare tips and lessons learned.


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8. MANAGEMENT OF CONTRACT DISPUTES

8.1 Introduction

Whist a sound understanding by both parties of their contractual responsibilities andprofessional relationship management should reduce the potential for disagreements and

disputes to arise over the life of the contract, they can still occur.

As a general rule, a disagreement becomes a dispute when it is not possible for the partiesto resolve it without resort to a formal resolution mechanism. Generally, what a dispute isand when it is deemed to have occurred is defined in the contract, often in a disputeresolution clause.

Many disagreements and disputes arise when the parties cannot agree on issues related tothe interpretation of contract provisions, such as the definition of deliverables, howperformance standards are met and/or the effect of unexpected events. Thesedisagreements may be of a minor nature which can be and are readily resolved. However,it is important that any possibility of dispute or an actual dispute be recognised at an early

stage and addressed as quickly as possible. Avoiding the escalation of disagreements canimpact on contract deliverables and reduce the costs to both parties.

Most commercial contracts include a dispute resolution mechanism which provides a multilayered process involving a number of dispute resolution mechanisms. An example wouldbe a process involving the following:

an attempt is made to resolve the dispute by negotiation perhaps by involving seniormanagement representatives identified within the contract and within a specifiedtimeframe, for example, 20 days;

if the dispute cannot be resolved by negotiation, then the parties may agree or the

contract may provide for an alternative dispute resolution process to attempt to resolvethe dispute. An alternative dispute resolution process is one that does not involvecommencement of proceedings that are finally determinative, namely court proceedingsor arbitration. Instead a dispute resolution clause could provide for processes such asmediation or expert determination. The requirement for an alternative dispute resolutionprocess can be mandatory or the contract can provide that the parties may agree tosuch a process; and

if the parties do not agree to an alternative dispute resolution process or the alternativeresolution process does not achieve a resolution of the dispute, then the contract canprovide for the parties to then refer the dispute to court proceedings or arbitration.

Before deciding on an appropriate mechanism, it is necessary to understand each of thecomponents that are available to constitute the mechanism.

Dispute resolution processes may be negotiation, facilitative or determinative or, in somecases, a combination of these.

In facilitative processes the impartial person involved in the dispute (a dispute resolutionpractitioner) assists the parties to identify the disputed issues, develop options, consideralternatives and endeavour to reach an agreement about some issues or the wholedispute. The most common example of a facilitative process is mediation.

In determinative processes the dispute practitioner evaluates the dispute and makes adetermination. Examples of a determinative processes are arbitration, expert determination

and court proceedings.


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The following descriptions of the processes should not be taken as the only descriptions ofthe processes. Often the names attached to the processes will mean different things todifferent people.

8.2 Negotiation

Negotiation is the most commonly used method of resolving all types of disputes. In itssimplest form it is the process of counterparties discussing the issues with each other andseeking a mutually acceptable outcome through discussion, without the assistance of otherpersons. This is particularly suitable if the customer wishes to maintain an ongoingrelationship with the other party to the dispute. A successful negotiated compromise canassisting strengthening the business relationship.

Best practice is that parties should negotiate in "good faith", keep an open mind, be willingto consider options for resolution of the dispute put forward by the opposing party and alsobe willing to put forward options for the resolution of the dispute themselves.

Essential or core components of this concept in a business context include some

fundamental tenets like creating a climate of trust, respect, flexibility, confidentiality and awillingness to do the right thing by each other.

It is imperative that persons conducting the negotiations actually have authority to resolvethe dispute, so that approval from the negotiators superior officer does not have to besought before an outcome can be achieved.

While the contract may not set out specific procedures with respect to how negotiations areto be conducted, consideration should be given as to whether the contract should addressthe following issues:

the party claiming that there is a dispute must give the other party notice of the dispute

including full details of the issue in dispute and any other incidental matters such aswho is authorised to negotiate with respect to the issues in dispute. The notice shouldalso refer to the negotiation period specified in the contract; and

whether any communications arising under the clause should be declared to beexpressly "without prejudice". This is to ensure that negotiations can be conducted infull confidence that anything said/written in the course of the negotiations will not beused in court proceedings in the event negotiations fail.

Negotiations to resolve a dispute may be conducted at various levels between thecustomer and the service provider. If a dispute arises, the customer's contract managermay seek to resolve the dispute quickly through discussions with the service provider'srepresentative for the contract. If the dispute cannot be resolved at that level, the dispute

may be escalated to persons higher up in their respective organisations. Further escalationmay follow to the heads of the respective organisations (for example, CEO of therespective businesses), if considered necessary or appropriate.

In our experience, the following factors must normally be present for negotiations to besuccessful:

the parties must be in communication with one another and be willing to continue thesecommunications;

participants in the negotiations or their representatives must have authority to settle;

the problem must directly concern the parties in question and not involve third parties;and


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the parties must want to negotiate or at least be willing to do so, and must consider thatthe particular dispute involves an issue that is in fact negotiable.

It may be appropriate to develop a "negotiation directive" prior to commencing negotiationswith the contractor which outlines:

the issues to be negotiated and the authority of the customer's contract manager;

the aims, objectives and constraints of the negotiation;

the policy objectives which are to be maintained during the negotiation;

the likely objectives and approaches of the service provider with whom the negotiationis taking place;

definition and commitment of the resources available including financial and technicaladvice;

clearly defined optimum, acceptable and fall-back positions; and

checks to ensure that both negotiating parties have the necessary legal authority to actwithin the scope of their stated or perceived instructions.

8.3 Mediation

Mediation involves an independent and impartial third party who is appointed as the disputeresolution practitioner (the mediator) and who facilitates the resolution of the disputebetween the parties. The parties agree on the resolution and there is no decision imposedon the parties by the mediator. This is the reason why mediation can also be used by the

customer to preserve and continue existing relationships with the other party to the dispute.Mediation is, at its most basic level, an enhanced method for the parties to negotiate aresolution. It is an appropriate option where:

direct negotiations have failed;

direct negotiations may be difficult; or

there are multiple parties.

The main feature of mediation is that it is a voluntary process and a defining characteristic

is that the mediator and the parties will agree before they begin that the process is withoutprejudice and that nothing said or produced during the process will be divulged to the Courtin any subsequent proceedings if no settlement is achieved in mediation. This enhancesthe effectiveness of a process where parties can feel ready to divulge relevant facts orinterests, and an organisation is protected from expenditure or resources aroundchallenges to the processes and the outcome.

It should be noted that the legal doctrine around the limits of confidentiality has not beenfully tested by the courts. In general terms parties must reach an agreement on the level ofconfidentiality, and sign an agreement to this effect prior to the commencement of theprocess. The mediator will not disclose any information for any reason unless specificallyagreed by all parties. Any records, reports, or other documents received by the mediatorwhile serving in that capacity will be confidential and will be returned to the parties at theconclusion of the process, and mediator notes will be destroyed at the end of themediation.


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Information disclosed or documents produced or brought into existence by the parties in thecourse of the mediation are not disclosed by the parties for any reason unless specificallyagreed by all parties or required by law.

Mediation can be more difficult where there are issues of legal precedent or where there

are significant disputes of fact. In both instances, there is less scope for negotiation unlessboth parties are willing to compromise. Mediation may be appropriate in the followingcircumstances:

the parties wish to engage in free and open discussion and are willing to disclosepositions and interests and seek an expeditious solution at an early stage;

the parties would like to maintain their commercial relationship;

there are economic and financial factors which make mediation desirable. This wouldinclude the cost of proceeding to litigation and also the amount of the claim which isdisputed; and

the nature of the dispute and the availability of an appropriate mediator make itappropriate for mediation.

8.4 Expert determination

The expert determination process involves:

use by parties of the services of an independent and impartial third party expert, who ischosen on the basis of their specialist qualification or experience in the subject matterof the dispute, to give an opinion on some disputed issue of fact or law;

the third party expert having an investigative and decision making role; and

the parties agreeing whether or not the experts opinion shall be final and binding orwhether it would be an advisory or recommendatory opinion.

Expert determination is a flexible process as parties negotiate matters such as the structureof the process, the issues to be submitted to the expert, choice of the expert, proceduresfor the expert to receive information and submissions and the use to be made of theexperts opinion.

Expert determination may be appropriate if the dispute could be assisted by a reliableunbiased opinion on a technical issue under the contract, or where the parties have made

an agreement in principle in relation to the issue in dispute but require a precise valuationof certain supplies or work. It is commonly used for international contracts or contracts of atechnical nature, such as large commercial or construction contracts and is more suited todisputes where there is only a single issue to be determined.

An expert is chosen to give an opinion after considering and investigating the differencesbetween the parties. Unlike a mediator, an expert is expected to provide an answer to aparticular matter submitted by the parties and it is generally expected that an expert willreach a decision on the basis of his or her personal opinion and expertise rather than uponthe parties submissions or on the law. The parties agree to accept the opinion as binding.It is up to the parties to agree whether the experts decision is final. However, the opinionmay relate to only one factor in the overall dispute and so a negotiated outcome may stillresult. The expert plays an investigatory, inquisitor role in eliciting further information and

makes a determination as an expert and not as an arbitrator.


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If the parties do not expressly provide otherwise, the experts decision can only bechallenged on limited grounds and cannot generally be appealed. These grounds includefailure to follow instructions, fraud and partiality.

In order to widen the scope for a challenge based on mistake, a clause may provide that anexpert's decision is final and binding "in the absence of manifest error". In the absence of

such wording, an obviously wrong decision is usually not susceptible to challenge unlessthe expert has materially departed from his instructions or exceeded his jurisdiction.Manifest error has been held to mean a "plain and obvious error".

Unless the parties have agreed otherwise, an expert is not required to state the reasons forhis decision.

8.5 Arbitration

The essential feature of most arbitrations is that they are consensual, with the partieselecting arbitration as the manner in which to resolve a dispute. Under arbitration, an"arbitrator" makes decisions which are binding on the parties and it is generally a "win/lose"

solution similar to that of a court outcome. Arbitration, therefore, is the dispute resolutiontechnique which most closely resembles litigation. Thus, arbitration may be moreappropriate when the customer is not concerned with maintaining an ongoing relationshipwith the other party to the dispute. It should be noted that these days the distinctionbetween litigation and arbitration is less clear than previously, particularly in terms of thecosts.

Generally any dispute, whether of law or fact, that can be decided by a court, may bereferred to arbitration. The key features in arbitration include that:

the process is voluntary but adversarial;

the parties agree to an arbitrator who is a neutral third party, and who may havespecialty expertise or experience;

the process leads to a binding decision by the arbitrator;

the process is private, and not open to the general public, or the media, like a courthearing;

the process will be confidential if the dispute resolution clause in the contract states thatthe arbitration proceedings and any information disclosed are confidential and can onlybe used for the purposes of the arbitration;

the arbitration can be formal, like a trial in court with evidence being given on oath andprocedures similar to that involved by the court, or it can be informal (for example,when a decision is given based on agreed facts and papers);

an arbitral award is widely recognised by the courts and internationally (through theNew York Convention, to which the UK is a signatory); and

the awards are only subject to narrow grounds of appeal.

Although parties have considerable freedom in determining the scope and nature of anarbitration, commercial arbitration in England is subject to legislation and court review.Parties have limited rights of appeal to the courts


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The limitation of arbitration is that it can take as long as standard court proceedings, and insome circumstances can cost more because the parties must pay the costs of the arbitratorand the physical venue of the arbitration.

The area where arbitration is most frequently encountered today is in internationalcontracts. This is because where parties are from different countries they often agree to

have the dispute determined in a neutral country rather than submit to the courts of thecountry of one of the parties.

8.6 Litigation

Litigation is the act or process of contesting a lawsuit or seeking redress through the courts.It can be an expensive and time consuming procedure and is generally taken when otheravenues of dispute resolution have not been successful or are not available. Otherapproaches to resolving disputes or contractor defaults should therefore be consideredprior to litigation. Appropriate legal and other professional advice should be obtained priorto considering and commencing litigation.


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9. RECORD KEEPING

The following is a list of documents that may need to be created and retained during thecontract management phase:

Risk assessments

Contract management plan or checklists

Analysis of contract conditions

All substantive communications with the contractor

Evidence of insurances, indemnities, deeds and/or licences required under the contract

Records of briefings of stakeholders and/or management team members

Transition plans

Record of minutes, meetings, discussions relating to the contract

Contract lists, schedules of tasks and meetings

Records of payments

Records of performance reports, analysis, discussions, performance assessments,feedback and of any non-compliance or under or non performance

Variations to the contract

Records of any disputes and related discussions or negotiations

Assistance or expert advice received


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Contact Us

If you wish to discuss the content of this guide or any legal matters relating to commercialcontracts, technology contracts or outsourcing, please contact any of the following members ofthe Taylor Walton Technology and Outsourcing Group.

Dr Sam De SilvaPartner01582 390 [email protected]

Mike PettitPartner01582 390 429

[email protected]

For any dispute related issues please contact:

James CarpenterPartner01582 390 [email protected]

The information in this guide is not intended to constitute professional legal advice and should not be relied uponas such. Specialist legal advice should always be sought for your particular circumstances.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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