Effective Contract Management in Construction

The construction industry is a labyrinth of contracts, regulations, timelines, and budgets. This article will delve into the importance of contract management in construction whilst attempting to simplify and summarise the process.

The Significance of Contract Management in Construction

Contracts are the backbone of construction projects-defining roles, responsibilities and expectations for all parties involved, including owners, contractors, subcontractors and suppliers. 

Key components of effective contract management

1. Pre-Contract Phase

Before contracts are inked, the pre-contract phase lays the groundwork for effective management:

Step 1: Needs Assessment

• Project requirements and objectives need to be identified.
  

Step 2: Form of Contract Assessment

• A decision will need to be made whether a standard form contract or bespoke contract meets the project needs.
• An assessment of the project risks needs to be made and the party who will bear the risk. Risks need to be assessed and allocated effectively.
• Assess whether any special terms are needed to modify the terms of the standard form of contract where a standard form of contract is used. This may not be recommended but some instances may require these.
  

Step 3: Market Research

• Particularly in private procurement, market research will be required to identify potential contractors and suppliers.
  

Step 4: Budgeting and Price Strategies

• Develop a detailed budget for the project as well as detailed anticipated contract pricing.
• Consideration needs to be given to the project pricing strategy. This will be either Lump Sum, Re-measurable, Reimbursable, Cost Plus, etc. This depends on a number of factors including the status of how defined the scope of works is at the time of going to the market and the desired risk allocation. 

2. Contract Creation

Once the pre-contract phase is complete, contract creation takes centre stage:

Step 1: Legal Review

• By this stage, a form of contract has already been decided upon.
• Legal Review will assist in ensuring that the contract complies with the relevant laws and regulations.
• Furthermore, Legal Review will identify any legal risks and assist in ensuring steps are taken to avoid or mitigate these risks prior to signing the agreement.
  

Step 2: Scope Definition

• Every contract is recommended to seek unambiguity in terms of the deliverables from the parties to the contract.
• The scope of work should precisely define the project scope, deliverables and specifications.
• Any timelines and interactive work between various service providers should be properly defined.
  

Step 3: Terms and Conditions

• All the terms of the contract data where standard forms of contract are used should be properly and completely populated.
• The payment terms, practical completion or sectional completion dates and selected dispute resolution mechanisms should be properly detailed.
  

Step 4: Roles and Responsibilities

• The roles and responsibilities of the parties are usually captured well in standard form contracts where lots of research has been done on the risk allocation between parties by industry experts.
• In the event that a bespoke contract is used, this analysis must be done and properly captured in the contract.

3. Contract Execution

With contracts in place, the execution phase requires meticulous management:

Step 1: Documentation

• It is recommended that a detailed record of all contract documents which includes all the supporting references including the scope of works, pricing document, project schedule, communications and changes to the contract are kept safely.
  

Step 2: Monitoring

• A contract should be used as a reference tool to ensure compliance and performance against the agreed standards or metrics.
• The terms of the contract should be followed in meeting a party's obligations and this includes the important notification and claim clauses which impact the project's critical path.
• The contract should be monitored for compliance with obligations and also the scope of work, schedule and other documents included in the contract.
  

Step 3: Communication

• Maintain clear, open and transparent communication with all stakeholders.
• Communicate project risks early to avoid or mitigate project schedule slippage or additional costs.
• Certain provisions of the contract may stipulate how certain communications need to be addressed, for example, technical queries or contractual notifications. 
  

Step 4: Resolution of Dispute

• Project role players should attempt to pursue a path of dispute avoidance instead of expensive and time-consuming dispute resolution.
• Issues and conflicts should be addressed fairly and promptly.
• Dispute resolution clauses are a necessity but sometimes may result in expensive and lengthy disputes.
  

4. Contract Performance

Continuous monitoring and management during the construction phase are vital:

Step 1: Schedule Management

• The project schedule is a vital tool for ensuring that the project is delivered on time.
• The works should be managed with a close eye on the project's critical path. 

Step 2: Quality Control

• The works should be executed in line with the specified quality standards.
• In some instances, the quality standards are based on legal requirements. A clear understanding of these is imperative to ensure project success and avoid reworks that will lead to delays.
  

Step 3: Change Orders and Contract Instructions

• The contract will have important terms and conditions. Ensure that these are managed according to the terms of the contract and the required time frames are adhered to in order to avoid time barring.
• These should be handled systematically and promptly to avoid disputes and delays.
  

Step 4: Cost Tracking and Management

• Manage the costs of the project closely to avoid over expenditures and prevent cost overruns.
  

5. Contract Closure

As the project concludes, contract closure becomes the final piece of the puzzle:

Step 1: Final Inspection

• The contract will usually lay down the requirements for final inspection. For example, notify the principal agent that the works are ready for final inspection. The principal will either issue a list for practical completion or a practical completion certificate signalling that the project scope has been delivered.
  

Step 2: Practical Completion

• This signals that the project scope requirements have been met successfully and the project is fit for use.
• The contractor's obligations are met at this stage, barring final completion requirements which include defects liability and snagging issues.
• The terms of the contract will specify the procedural requirements in this regard.
  

Step 3: Project Documentation

• The contractor should compile all necessary documentation which will include quality control packs, user manuals and warranty information for handover to the employer.
  

Step 4: Final Completion

• This signifies that the contractor has met all obligations including the defects liability period. 
  If there are any outstanding retentions that are due to the contractor, at this stage it is usually settled with the contractor.
  

Step 5: Final Accounts and Settling all payments.

• All final accounts should be finalised and signed by the parties.
• All outstanding payments and invoices should be settled.
  

Step 6: Lessons Learnt

• To improve the performance of future projects, analyse the project performance and identify key areas for improvement.
  
  

Conclusion

Effective contract management is the cornerstone of successful construction projects. It mitigates risks, controls costs, ensures timely delivery and facilitates high-quality standards. The contract may be managed by a dedicated resource or department. It is recommended that it should be used as a reference tool for the entire project team. Whilst this article provides a summary, by following a structured approach, from pre-contract planning to contract closure, contract management is more efficiently and effectively navigated, resulting in better outcomes for all stakeholders.

Bilaal Dawood
Head: Membership Services